SmartKem, Inc. Stock Compensation Disclosure
9. SHARE-BASED COMPENSATION:
On February 23, 2021, the Company approved the 2021 Equity Incentive Plan (“2021 Plan”), in which a maximum aggregate number of shares of common stock that may be issued under the 2021 Plan is 65,000 shares. Subject to the adjustment provisions of the 2021 Plan, the number of shares of the Company’s common stock available for issuance under the 2021 Plan will also include an annual increase on the first day of each fiscal year beginning with 2022 fiscal year and ending on the Company’s 2031 fiscal year in an amount equal to the least of: 1) 65,000 shares of the Company’s common stock; 2) four percent (4%) of the outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year; or 3) such number of shares of the Company’s common stock as the administrator may determine.
At the 2023 Annual Meeting, the Company’s stockholders approved an amendment (the “2021 Plan Amendment”) to the Company’s 2021 Plan, increasing the number of the shares of common stock reserved for issuance under the 2021
Plan from 125,045 shares to 743,106 shares. The Company’s Board of Directors (the “Board”) had previously approved the 2021 Plan Amendment, subject to stockholder approval.
Determining the appropriate fair value of share-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for share options, the expected life of the option, and expected share price volatility. The Company uses the Black-Scholes option pricing model to value its share option awards. The assumptions used in calculating the fair value of share-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, the share-based compensation expense could be materially different for future awards.
For Year Ended | |||
December 31, 2024 | |||
Expected term (years) | 5.73 | ||
Risk-free interest rate | 4.21% | ||
Expected volatility | 50% | ||
Expected dividend yield | 0% | ||
The Company estimates its expected volatility by using a combination of historical share price volatilities of similar companies within our industry. The risk-free interest rate assumption is based on observed interest rates for the appropriate term of the Company’s options on a grant date. The contractual term is 10 years, and the expected option term is lower.
The following table reflects share activity under the share option plans for the year ended December 31, 2024:
| Weighted- | ||||||||||||
Average | |||||||||||||
Weighted- | Remaining | Weighted- | Aggregate | ||||||||||
Average | Contractual | Average | Intrinsic | ||||||||||
Number of | Exercise | Term | Fair Value at | Value | |||||||||
Shares | Price | (Years) | Grant Date | (in thousands) | |||||||||
Options outstanding at January 1, 2024 |
| 70,411 |
| $ | 63.07 |
| 7.28 |
| $ | 33.98 |
| ||
Granted |
| 568,000 |
|
| 6.50 |
|
|
|
|
|
| ||
Exercised | — | — | |||||||||||
Cancelled/Forfeited |
| (18,501) |
|
| 70.00 |
|
|
|
|
|
| ||
Expired |
| — |
|
| — |
|
|
|
|
|
| ||
Options outstanding at December 31, 2024 |
| 619,910 |
| $ | 12.31 |
| 9.06 |
| $ | 3.54 |
| ||
Options exercisable at December 31, 2024 | 279,809 | $ | 17.65 | 8.49 | $ | 19.99 | |||||||
The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of our common stock at the end of the year for those options that had exercise prices lower than the fair value of our common stock.
Stock-based compensation, including stock options is included in the consolidated statements of operations as follows:
Year Ended December 31, | ||||||
(in thousands) | 2024 |
| 2023 | |||
Research and development | $ | 268 | $ | 254 | ||
General and administration |
| 582 |
| 463 | ||
Total | $ | 850 | $ | 717 | ||
As of December 31, 2024, there was $1.7 million of compensation cost related to non-vested stock option awards not yet recognized that will be recognized on a straight-line basis through the end of the vesting periods in June 2027. The
amount of future stock option compensation expense could be affected by any future option grants or by any forfeitures.
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About Stock Compensation Disclosures
Stock-based compensation disclosures detail the equity awards granted to employees and executives — including stock options, restricted stock units (RSUs), and performance shares — along with the valuation methods and assumptions used to expense them. This section reveals the true cost of talent retention and the alignment between management incentives and shareholder interests.
Key signals: total unrecognized compensation expense and its expected recognition period signal future earnings headwinds from already-granted awards. For stock options, examine Black-Scholes assumptions — expected volatility, risk-free rate, and expected term — as understating any of these reduces reported compensation expense. Compare stock compensation expense as a percentage of revenue against peers to assess dilution cost. Watch vesting schedules for acceleration clauses tied to change-of-control events. Performance-based awards with undemanding targets may indicate weak governance. Add back stock compensation to operating cash flow to calculate a more conservative free cash flow figure.