UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission
File Number:
(Exact Name of Registrant as Specified in its Charter)
( State or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) |
Name of each exchange on which registered | ||
The
The
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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| ☒ | Smaller reporting company | |||||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
As of August 13, 2021, the registrant had shares of common stock, $0.0001 par value per share, outstanding.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will” and “would,” or the negative of these terms or other similar expressions intended to identify statements about the future. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements include, without limitation, statements about:
| ● | the risk that Ensysce’s lead product candidate PF614 and PF614-MPAR™ may not be successful in limiting or impeding abuse, overdose, or misuse or providing additional safety upon commercialization; | |
| ● | reliance by Ensysce on third-party contract research organizations, or CROs, for its research and development activities and clinical trials; | |
| ● | the need for substantial additional funding to complete the development and commercialization of Ensysce’s product candidates; | |
| ● | the risk that Ensysce’s clinical trials may fail to replicate positive results from earlier preclinical studies or clinical trials conducted by Ensysce or third parties; | |
| ● | the risk that the potential product candidates that Ensysce develops may not progress through clinical development or receive required regulatory approvals within expected timelines or at all; | |
| ● | the risk that clinical trials may not confirm any safety, potency, or other product characteristics described or assumed in this registration statement/prospectus; | |
| ● | the risk that Ensysce will be unable to successfully market or gain market acceptance of its product candidates; | |
| ● | the risk that Ensysce’s product candidates may not be beneficial to patients or successfully commercialized; | |
| ● | the risk that Ensysce has overestimated the size of the target market, patients’ willingness to try new therapies, and the willingness of physicians to prescribe these therapies; | |
| ● | effects of competition; | |
| ● | the risk that third parties on which Ensysce depends for laboratory, clinical development, manufacturing, and other critical services will fail to perform satisfactorily; | |
| ● | the risk that Ensysce’s business, operations, clinical development plans and timelines, and supply chain could be adversely affected by the effects of health epidemics, including the ongoing COVID-19 pandemic; | |
| ● | the risk that Ensysce will be unable to obtain and maintain sufficient intellectual property protection for its investigational products or will infringe the intellectual property protection of others; | |
| ● | the loss of key members of Ensysce’s management team; | |
| ● | changes in Ensysce’s regulatory environment; | |
| ● | Ensysce’s need for additional financing to fund its operations and research and development; | |
| ● | the ability to attract and retain key scientific, medical, commercial, or management personnel; | |
| ● | changes in Ensysce’s industry; |
| ● | Ensysce’s ability to remediate any material weaknesses or maintain effective internal controls over financial reporting; | |
| ● | the risk that our common stock will be suspended from trading on Nasdaq; | |
| ● | the ability to meet and maintain applicable listing standards of the Nasdaq; | |
| ● | the ability to recognize the anticipated benefits of the Business Combination (as defined below), which may be affected by, among other things, the factors described above; | |
| ● | potential litigation associated with the Business Combination; | |
| ● | other factors disclosed in this registration statement/prospectus; and | |
| ● | other factors beyond Ensysce’s control. |
The foregoing list of forward-looking statements is not exhaustive. These statements speak only as of the date of this report and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The section of this report titled “Section 1A. Risk Factors” identifies important factors that could harm our business and financial performance and cause our actual results to differ materially from those expressed or implied by our forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise, except as required by law.
| i |
Table of Contents
| Page | ||
| PART I. | FINANCIAL INFORMATION | 1 |
| Item 1. | Financial Statements (Unaudited) | 1 |
| Consolidated Balance Sheets | 1 | |
| Consolidated Statements of Operations | 2 | |
| Consolidated Statements of Changes in Stockholders’ Equity (Deficit) | 3 | |
| Consolidated Statements of Cash Flows | 5 | |
| Notes to Unaudited Consolidated Financial Statements | 6 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 35 |
| Item 4. | Controls and Procedures | 36 |
| PART II. | OTHER INFORMATION | 37 |
| Item 1. | Legal Proceedings | 37 |
| Item 1A. | Risk Factors | 37 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 88 |
| Item 3. | Defaults Upon Senior Securities | 88 |
| Item 4. | Mine Safety Disclosures | 88 |
| Item 5. | Other Information | 88 |
| Item 6. | Exhibits | 89 |
| Signatures | 90 | |
| ii |
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Ensysce Biosciences, Inc.
Consolidated Balance Sheets
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Unbilled receivable | ||||||||
| Right-of-use asset | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity (deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other liabilities | ||||||||
| Lease liability | ||||||||
| Notes payable and accrued interest | ||||||||
| Embedded derivative on convertible notes | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 6) | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Preferred stock, $ par value, shares authorized, shares issued and outstanding at June 30, 2021 (unaudited) and December 31, 2020 | ||||||||
| Common stock, $ par value, shares authorized; and shares issued at June 30, 2021 (unaudited) and December 31, 2020, respectively; and shares outstanding at June 30, 2021 (unaudited) and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Ensysce Biosciences, Inc. stockholders’ equity (deficit) | ( | ) | ||||||
| Noncontrolling interests in stockholders’ deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 1 |
Ensysce Biosciences, Inc.
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Federal grants | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss attributable to noncontrolling interests | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share, basic and diluted: | ||||||||||||||||
| Net loss per share attributable to common stockholders, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
Ensysce Biosciences, Inc.
Consolidated Statements of Changes in Stockholders’ EQUITY (Deficit)
(Unaudited)
| Stockholders’ Deficit | ||||||||||||||||||||||||
| Common Stock | Additional | |||||||||||||||||||||||
| Number of | Paid-In | Accumulated | Noncontrolling | |||||||||||||||||||||
|
Shares | Amount | Capital | Deficit | interests | Total | |||||||||||||||||||
| Balance on March 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance on June 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Balance on March 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Settlement of convertible notes | ||||||||||||||||||||||||
| Issuance of common stock for business combination, net of transaction costs | ||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance on June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
Ensysce Biosciences, Inc.
Consolidated Statements of Changes in Stockholders’ EQUITY (Deficit)
(Unaudited)
| Stockholders’ Deficit | ||||||||||||||||||||||||
| Common Stock | Additional | |||||||||||||||||||||||
| Number of | Paid-In | Accumulated | Noncontrolling | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | interests | Total | |||||||||||||||||||
| Balance on December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance on June 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Balance on December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Settlement of convertible notes | ||||||||||||||||||||||||
| Issuance of common stock for business combination, net of transaction costs | ||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance on June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
Ensysce Biosciences, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Accrued interest | ||||||||
| Accretion of discounts on promissory notes | ||||||||
| Change in fair value of embedded derivative | ( | ) | ||||||
| Loss on extinguishment of debt | ||||||||
| Stock-based compensation | ||||||||
| Lease cost | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Unbilled receivable | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued expenses and other liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of convertible notes | ||||||||
| Proceeds from issuance of promissory notes to related parties | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from issuance of common stock for business combination | ||||||||
| Contribution from noncontrolling interest | ||||||||
| Net cash provided by financing activities | ||||||||
| Increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents beginning of period | ||||||||
| Cash and cash equivalents end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Income tax payments | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Fair value of embedded derivative at issuance | $ | $ | ||||||
| Settlement of Convertible Notes into common stock | $ | $ | ||||||
| Deferred transaction costs for business combination offset against additional paid-in capital | $ | $ | ||||||
| Net assets acquired from LACQ | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
ENSYSCE BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Ensysce Biosciences, Inc. (“Ensysce”), along with its subsidiary, Covistat Inc. (“Covistat”) and its wholly owned subsidiary EBI Operating, Inc. (collectively, the “Company”), is engaged in the development of small and large molecule drug delivery platforms targeting pain and cancer markets. The primary focus of the Company is its small molecule program developing abuse and overdose resistant pain technology with a clinical stage program being the abuse resistant, TAAP (Trypsin Activated Abuse Protection) opioid product candidate, PF614. In addition, the Company is developing its MPARTM (Multi-Pill Abuse Resistant) technology for overdose protection which will be applied to the PF614 program. In 2019, the Company commenced development work applying its TAAP and MPARTM technology to a methadone prodrug for use in the treatment of Opioid Use Disorder (OUD). The Company has also developed a delivery platform for large biomolecules utilizing single walled carbon nanotubes (SWCNT) to produce intravenously delivered immunology and gene therapy products.
On January 31, 2021, Leisure Acquisition Corp., a Delaware corporation (“LACQ”), entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with Ensysce Biosciences, Inc., a Delaware corporation (“Former Ensysce”), and EB Merger Sub, Inc., a Delaware corporation and wholly-owned, direct subsidiary of LACQ (“Merger Sub”). Pursuant to the Merger Agreement, on June 30, 2021 (the “Closing Date”), Merger Sub was merged with and into Former Ensysce, with Former Ensysce surviving the merger (“Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). In connection with the closing of the Business Combination on the Closing Date (the “Closing”), Former Ensysce became a wholly owned subsidiary of LACQ and the stockholders of Former Ensysce, as of immediately prior to the effective time of the Merger, received shares of LACQ and hold a portion of the shares of Common Stock, par value $ per share (the “Common Stock”), of LACQ.
On the Closing Date, at the effective time of the Merger, LACQ changed its name from “Leisure Acquisition Corp.” to “Ensysce Biosciences, Inc.” Unless the context otherwise requires, “we,” “us,” “our” and the “Company” refer to Ensysce and the combined company and its subsidiaries following the Closing. Unless the context otherwise requires, references to “LACQ” refer to Leisure Acquisition Corp., a Delaware corporation, prior to the Closing.
In
connection with the Business Combination, outstanding shares of common stock of Former Ensysce (including shares resulting from the conversion
of Former Ensysce’s convertible debt prior to Closing) were converted into the right to receive shares of Ensysce at an exchange
ratio of
In
June 2020, the Company commenced an initiative to develop a therapeutic for the treatment of certain coronavirus infections through the
formation of a separate entity, Covistat, Inc., a Delaware corporation. Pursuant to the articles of incorporation, Covistat was authorized
to issue shares of common stock, $par value per share, and shares of preferred stock, $par value per share. Ensysce is a
In March 2020, the World Health Organization declared the outbreak of a respiratory disease caused by a new coronavirus as a “pandemic”. First identified in late 2019 and known now as COVID-19, the outbreak has impacted millions of individuals worldwide. In response, many countries have implemented measures to combat the outbreak which have impacted global business operations. As of the date of issuance of the consolidated financial statements, the Company’s operations have not been significantly impacted; however, the Company continues to monitor the situation. No impairments were recorded as of the balance sheet date as no triggering events or changes in circumstances had occurred as of year-end; however, due to significant uncertainty surrounding the situation, management’s judgment regarding this could change in the future. In addition, while the Company’s results of operations, cash flows and financial condition could be negatively impacted, the extent of the impact cannot be reasonably estimated at this time.
The Company currently operates in one business segment, which is pharmaceuticals. The Company is not organized by market and is managed and operated as one business. A single management team reports to the chief operating decision maker, the Chief Executive Officer.
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NOTE 2 - BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities Exchange Commission (“SEC”). The consolidated financial statements include the accounts of Ensysce Biosciences, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the consolidated financial statements. Operating results for the three and six months ended June 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The interim unaudited consolidated financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited consolidated financial statements for the fiscal year ended December 31, 2020, which may be found in the Company’s Form S-1 registration statement filed with the SEC on August 9, 2021.
Business Combination
The
Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, LACQ
was identified as the acquired company for financial reporting purposes, primarily because the stockholders of Former Ensysce control
the majority of the voting power of the combined company, Former Ensysce’s board of directors comprise a majority of the governing
body of the combined company, and Former Ensysce’s senior management comprise the leadership of the combined company. Accordingly,
for accounting purposes, the transaction was treated as the equivalent of Former Ensysce issuing shares for the net assets of LACQ, accompanied
by a recapitalization. The net assets of LACQ, primarily consisting of cash of $
The
Business Combination triggered the conversion of the 2015 convertible notes, the 2018 convertible notes and the 2021 convertible note
of Former Ensysce into common stock. In connection with the Closing, the 2020 convertible notes were amended to provide for automatic
conversion of the outstanding principal and interest into shares common stock of Ensysce. The Company had recorded $
Liquidity
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business.
The
Company had working capital of $
As the Company’s shares are now publicly traded and the Company therefore has access to its $million share subscription facility in addition to its working capital, the Company believes there is not substantial doubt about its ability to continue as a going concern.
| 7 |
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates and Assumptions
Preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosed in the accompanying notes. Actual results may differ from those estimates and such differences may be material to the consolidated financial statements. The more significant estimates and assumptions by management include, but are not limited to, the expense recognition for certain research and development services, the valuation allowance of deferred tax assets resulting from net operating losses, the valuation of common stock, warrants, options to purchase the Company’s common stock, and the debt with embedded derivative instruments in notes payable.
Cash and Cash Equivalents
For purposes of the consolidated balance sheets and consolidated statements of cash flows, the Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
Concentrations of credit risk and off-balance sheet risk
Cash and cash equivalents are financial instruments that are potentially subject to concentrations of credit risk. The Company’s cash and cash equivalents are deposited in accounts at large financial institutions, and amounts may exceed federally insured limits. The Company believes it is not exposed to significant credit risk due to the financial strength of the depository institutions in which the cash and cash equivalents are held. The Company has no financial instruments with off-balance sheet risk of loss.
Property and Equipment
Property
and equipment include office and laboratory equipment that is recorded at cost and depreciated using the straight-line method over the
estimated useful lives of five to six years. Depreciation expense of $
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company will recognize an impairment loss only if the carrying amount is not recoverable through its undiscounted cash flows and measure any impairment loss based on the difference between the carrying amount and estimated fair value. There were no such losses for the three and six months ended June 30, 2021 and 2020.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to interest rate, market, or foreign currency risks. The Company evaluates all of its financial instruments, including notes payable, to determine whether such instruments are derivatives or contain features that qualify as embedded derivatives. Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract and the features of the derivatives. Bifurcated embedded derivatives are recognized at fair value, with changes in fair value recognized in the consolidated statement of operations each period. Bifurcated embedded derivatives are classified with the related host contract in the Company’s consolidated balance sheet.
Between January 2018 and January 2021, the Company entered into a series of notes that were determined to have embedded derivative instruments in the form of a contingent put option. The notes are recognized at the value of proceeds received after allocating issuance proceeds to the bifurcated contingent put option. The notes are subsequently measured at amortized cost using the effective interest method to accrete interest over their term to bring the notes’ initial carrying value to their principal balance at maturity. The bifurcated put option is initially measured at fair value and subsequently measured at fair value with changes in fair value recognized as a component of other expenses in the consolidated statements of operations (see Note 7). The notes and the contingent put option are classified as either long-term or short-term liabilities based on the maturity date of the related loan.
| 8 |
All outstanding derivative liabilities were settled in connection with the conversion of outstanding notes payable on June 30, 2021. Refer to Note 7 for details of the conversion.
Fair Value Measurement
ASC 820, Fair Value Measurements, (“ASC 820”) provides guidance on the development and disclosure of fair value measurements. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
The accounting guidance classifies fair value measurements in one of the following three categories for disclosure purposes:
| Level 1: | Quoted prices in active markets for identical assets or liabilities. | |
| Level 2: | Inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace. | |
| Level 3: | Unobservable inputs which are supported by little or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. |
The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. This determination requires significant judgments to be made by the Company.
ASC 820 requires all entities to disclose the fair value of financial instruments, both assets and liabilities, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of June 30, 2021 and December 31, 2020, the recorded values of cash and cash equivalents, prepaid expenses, accounts payable, and accrued expenses and other liabilities approximate their fair values due to the short-term nature of these items.
The
carrying value of outstanding notes payable approximates the estimated aggregate fair value as the embedded contingent put option is
recognized at fair value and classified with the debt host. The put option allows certain notes payable to be converted into common stock,
contingent upon completion of an equity financing transaction with gross proceeds above certain thresholds. The fair value estimate of
the embedded put option is based on the probability-weighted discounted value of the put feature and represents a Level 3 measurement.
Significant assumptions used to determine the fair value of the put feature include the estimated probability of exercise of the put
option and the discount rate used to calculate fair value. The estimated probability of exercise is based on management’s expectation
for future equity financing transactions. The discount rate is based on the weighted average effective yield of notes payable previously
issued by the Company, adjusted for changes in market yields of healthcare sector CCC-rated debt. As of December 31, 2020, assumptions
included a probability of exercise of the put option of
| 9 |
The following table presents assets and liabilities measured and recorded at fair value on the Company’s consolidated balance sheet as of December 31, 2020. As of June 30, 2021, all contingent put options were settled upon conversion of the notes at the closing of the merger.
| December 31, 2020 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Contingent put option | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The following table summarizes the change in fair value of the Company’s Level 3 contingent put options:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Beginning fair value | $ | $ | ||||||
| Issuance | ||||||||
| Change in fair value | ( | ) | ( | ) | ||||
| Ending fair value | $ | $ | ||||||
See Note 7 for further details on the settlement of the embedded contingent put option.
Federal Grants
In
September 2018, the National Institutes of Health (“NIH”) through the National Institute on Drug Abuse awarded the Company
a research and development grant related to the development of its MPARTM overdose prevention technology (the “MPAR
Grant”). The total approved budget for the initial two-year period was approximately $
In
September 2019, the NIH/National Institute on Drug Abuse awarded the Company a second research and development grant related to the development
of its TAAP/MPARTM abuse deterrent technology for Opioid Use Disorder (“OUD”) (the “OUD Grant”).
The total approved budget for the two-year period was approximately $
The Company concluded the government grants are not within the scope of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), as government entities do not meet the definition of a “customer” as defined by ASC 606, as there is not considered to be a transfer of control of goods or services to the government entity funding the grant. Additionally, the Company has concluded the government grants do not meet the definition of a contribution and is a non-reciprocal transaction, therefore, ASC 958-605, Not-for-Profit-Entities-Revenue Recognition does not apply, as the Company is a business entity, and the grant is with a governmental agency. Revenues from the grants are based upon internal costs incurred that are specifically covered by the grants, plus an additional rate that provides funding for overhead expenses. Revenue is recognized when the Company incurs costs related to the grants. The Company believes this policy is consistent with the overarching premise in ASC 606, applied by analogy, to ensure that it recognizes revenues to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services, even though there is no “exchange” as defined in ASC 606. The Company believes the recognition of revenue as costs are incurred and amounts become due is analogous to the concept of transfer of control of a service over time under ASC 606.
| 10 |
The revenue recognized under the MPAR Grant and OUD Grant was as follows:
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
| MPAR Grant | $ | $ | $ | $ | ||||||||||||
| OUD Grant | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Amounts requested or eligible to be requested through the NIH payment management system, but for which cash has not been received, are presented as an unbilled receivable on the Company’s consolidated balance sheet. As all amounts are expected to be remitted timely, no valuation allowances are recorded.
Research and Development Costs
The Company’s research and development expenses consist primarily of third-party research and development expenses, consulting expenses, animal and clinical studies, and any allocable direct overhead, including facilities and depreciation costs, as well as salaries, payroll taxes, and employee benefits for those individuals directly involved in ongoing research and development efforts. Research and development expenses are charged to expense as incurred. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs associated with the Company’s executive, finance, human resources, compliance, and other administrative personnel, as well as accounting and legal professional services fees.
The Company expenses stock-based compensation over the requisite service period based on the estimated grant-date fair value of the awards using a graded amortization approach. The Company accounts for forfeitures as they occur.
The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. For the three and six months ended June 30, 2021 and 2020, stock-based compensation costs are recorded in general and administrative expenses in the consolidated statements of operations.
Income Taxes
Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company recognizes any interest and penalties accrued related to unrecognized tax benefits as income tax expense.
| 11 |
The basic net loss per share is calculated by dividing the Company’s net loss attributable to common stockholders by the weighted average number of common shares outstanding during the year. The diluted net loss per share is calculated by dividing the Company’s net loss attributable to common stockholders by the diluted weighted average number of common shares outstanding during the year. The following weighted average shares have been excluded from the calculations of diluted weighted average common shares outstanding because they would have been anti-dilutive:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Stock options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Total | ||||||||||||||||
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 31, 2021 and interim periods within that year. Early adoption is permitted. The Company is evaluating the impact of ASU 2019-12 on the consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Topic 470) to address issues identified as a result of the complexity with applying GAAP for certain financial instruments with characteristics of liabilities and equity. The FASB decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock, resulting in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Certain types of convertible instruments will continue to be subject to separation models: (a) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (b) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. For convertible instruments, the contracts primarily affected are those with beneficial conversions or cash conversion features as the accounting models for those specific features have been removed. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives due to a failure to meet the settlement conditions of the derivatives scope exceptions. The FASB simplified the settlement assessment by removing the requirements to (a) consider whether the contract would be settled in registered shares, (b) to consider whether collateral is required to be posted, and (c) assess shareholder rights. The FASB also decided to enhance information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023 and early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. Entities must adopt the guidance as of the beginning of its annual fiscal year and a modified retrospective or fully retrospective transition approach is permitted. The Company is evaluating the impact of ASU 2020-06 on the consolidated financial statements.
| 12 |
NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Prepaid research and development | ||||||||
| Other prepaid expenses | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
NOTE 5 – ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Professional fees | $ | $ | ||||||
| Accrued research and development | ||||||||
| Accrued scientific advisory board fees | ||||||||
| Other accrued liabilities | ||||||||
| Deferred grant revenue | ||||||||
| Total accrued expenses and other liabilities | $ | $ | ||||||
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Litigation
As of June 30, 2021 and December 31, 2020, there were no pending legal proceedings against the Company that are expected to have a material adverse effect on cash flows, financial condition or results of operations. From time to time, the Company could become involved in disputes and various litigation matters that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters. Periodically, the Company reviews the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation. See Note 11 for additional information about legal proceedings.
Lease
During the three and six months ended June 30, 2020, the Company leased office space on a month-to-month basis.
In
August 2020, the Company entered into an agreement to lease office space. The lease commencement date was October 1, 2020 and the lease
will terminate October 31, 2021 with no option to renew. As of June 30, 2021, the future lease payments totaled $
The
Company recognized total rent expense of $
| 13 |
NOTE 7 - NOTES PAYABLE
The following table provides a summary of the Company’s outstanding debt as of June 30, 2021:
| Principal balance | Accrued interest | Unamortized debt discount | Net debt balance | |||||||||||||
| 2020 promissory notes | $ | $ | $ | $ | ||||||||||||
| 2021 promissory notes | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The following table provides a summary of the Company’s outstanding debt as of December 31, 2020:
| Principal balance | Accrued interest | Unamortized debt discount | Net debt balance | |||||||||||||
| 2015 convertible notes | $ | $ | $ | $ | ||||||||||||
| 2018 convertible notes | ( | ) | ||||||||||||||
| 2020 promissory notes | ||||||||||||||||
| 2020 convertible notes | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
The interest expense recognized for notes payable was as follows:
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
| Stated interest accrual | $ | $ | $ | $ | ||||||||||||
| Debt discount amortization | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
2015 Convertible Notes Payable
During
2015, the Company issued certain convertible promissory notes in the aggregate principal amount of $
2018 Convertible Notes Payable
Between
January 2018 and December 2020, the Company received financing totaling $
Additionally,
if there is an initial public offering or reverse merger that results in Ensysce becoming publicly listed, the promissory notes automatically
convert to equity at the lower of $
| 14 |
In
June 2020, the board resolved to extend the maturity of all 2018 convertible notes payable issued in 2018 by
2020 Promissory Notes Payable
During
the year ended December 31, 2020, the Company received financing totaling $
2020 Convertible Notes Payable
During
the year ended December 31, 2020, Covistat received financing totaling $
2021 Convertible Note Payable
In
January 2021, the Company received financing totaling $
2021 Promissory Notes
In
March and May 2021, the Company received financing totaling $
| 15 |
Settlement of Convertible Notes Payable
On
June 30, 2021, the Company consummated the Business Combination with LACQ, which triggered the automatic conversion into common
stock of the 2015 convertible notes payable, the 2018 convertible notes payable, and the 2021 convertible notes
payable. In connection with certain closing conditions, the 2020 convertible notes were amended to provide for automatic conversion
of the outstanding principal and interest into common stock. The modification resulted in a loss on extinguishment of debt of $
The
Company applied ASC 470-20-40-1 to the accounting of the conversion, which requires the accelerated recognition of unamortized debt discounts
as interest expense upon conversion. Accordingly, $
The table below summarizes the conversion of each class of notes payable:
| Immediately prior to merger | ||||||||||||||||||||
| Note series | Principal | Interest | Carrying value of debt converted | Shares of common stock issued | Outstanding debt, June 30, 2021 | |||||||||||||||
| 2015 Convertible Note | $ | $ | $ | $ | ||||||||||||||||
| 2018 Convertible Notes | ||||||||||||||||||||
| 2020 Convertible Notes | ||||||||||||||||||||
| 2021 Convertible Note | ||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||
NOTE 8 - STOCKHOLDERS’ EQUITY
In June 2021, in connection with the Business Combination, the Company amended and restated its Certificate of Incorporation to authorize shares of common stock and shares of preferred stock, both with par value equal to $. As of June 30, 2021 and December 31, 2020, there were shares of preferred stock issued and outstanding.
Common Stock
On June 30, 2021, in connection with the Closing, the following common stock activity occurred:
| ● | shares of common stock were issued to holders of Former Ensysce common stock. | |
| ● | shares of common stock outstanding were assumed by the Company. | |
| ● |
shares of common stock were issued in settlement of $ | |
| ● | shares of restricted common stock were issued in exchange for previously outstanding warrants to purchase Former Ensysce common stock. | |
| ● | ||
| ● |
| 16 |
Warrants
In February 2013, the Company issued warrants to purchase common stock, with a -year life and an exercise price of $per share. In August 2019, in connection with the issuance of convertible debt, the Company issued warrants to purchase common stock, with a -year life and an exercise price of $. As of December 31, 2020, the warrants remained outstanding. On June 30, 2021, the Company issued shares of common stock in settlement of the warrants, with such shares subject to restriction until certain conditions are met.
On
June 30, 2021, as a result of the Closing, the Company assumed a total of warrants previously issued by LACQ.
The warrants provide holders the right to purchase common stock at a strike price of $per share and expire
In 2016, Former Ensysce adopted the Ensysce Biosciences, Inc. 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan, as amended, allowed for the issuance of non-statutory stock options, incentive stock options and other equity awards to Former Ensysce’s employees, directors, and consultants.
In March 2019, Former Ensysce adopted the 2019 Directors Plan, which was amended in August 2020. The 2019 Directors Plan, as amended, allowed for the issuance of shares of Former Ensysce’s common stock pursuant to the grant of non-statutory stock options.
In addition to the 2016 Plan and the 2019 Directors Plan, the Company has two legacy equity incentive plans (the “Legacy Plans”). No additional equity awards may be made under the Legacy Plans and the outstanding options will expire if unexercised by certain dates through August 2024.
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Legacy Plans | ||||||||
| 2016 Plan | ||||||||
| 2019 Directors Plan | ||||||||
| Total options outstanding | ||||||||
On June 30, 2021, in connection with the Business Combination, the Company assumed the 2021 Omnibus Incentive Plan, which was approved by LACQ’s board and subsequently LACQ’s stockholders at a special stockholder meeting on June 28, 2021. The 2021 Omnibus Incentive Plan provides for the conversion with existing terms of the options outstanding under Former Ensysce stock plans and reserves for issuance an additional shares for future awards under the 2021 Omnibus Incentive Plan. No further awards may be made under the Former Ensysce stock plans.
Option Activity
During the three and six months ended June 30, 2020, the Company granted stock options to purchase an aggregate of shares of common stock to a member of the board of directors. The options vest over and have an exercise price of $ per share.
| 17 |
The Company recognized within general and administrative expense stock-based compensation expense of $ and $ for the three and six months ended June 30, 2021, respectively. The Company recognized within general and administrative expense stock-based compensation expense of $ and $ for the three and six months ended June 30, 2020, respectively. During the three and six months ended June 30, 2021 and 2020, there was stock-based compensation allocated to research and development expense.
| Weighted average | ||||||||||||||||
| Options | Exercise price | Remaining contractual life | Intrinsic value | |||||||||||||
| Outstanding at December 31, 2020 | $ | $ | ||||||||||||||
| Granted | — | |||||||||||||||
| Exercised | ( | ) | — | |||||||||||||
| Expired / Forfeited | — | |||||||||||||||
| Outstanding at June 30, 2021 | ||||||||||||||||
| Exercisable at June 30, 2021 | ||||||||||||||||
| Vested and expected to vest | ||||||||||||||||
Option Valuation
| Six months ended | ||||
| June 30, 2020 | ||||
| Stock price | $ | |||
| Exercise price | $ | |||
| Expected stock price volatility | % | |||
| Expected term (years) | ||||
| Risk-free interest rate | % | |||
| Expected dividend yield | % | |||
| ● | Expected stock-price volatility. The expected volatility is derived from the historical volatilities of publicly traded companies within the Company’s industry that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term. | |
| ● | Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term due to a lack of sufficient data. Therefore, the Company estimates the expected term for employees by using the simplified method provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. | |
| ● | Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term. | |
| ● | Expected dividend yield. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock. |
The weighted-average grant date fair value of options granted during the six months ended June 30, 2020 was $. There were options granted during the six months ended June 30, 2021.
| 18 |
As of June 30, 2021, the Company had an aggregate of $ of unrecognized share-based compensation cost, which is expected to be recognized over the weighted average period of years.
Shares Reserved for Future Issuance
The following shares of common stock are reserved for future issuance:
June 30, 2021 | ||||
| Stock options outstanding | ||||
| Stock options available for future grant under 2021 Omnibus Incentive Plan | ||||
| Warrants outstanding | ||||
| Total shares of common stock reserved for future issuance | ||||
NOTE 10 - RELATED PARTIES
The
Company paid cash compensation during the three and six months ended
June 30, 2021 of $
The
Company issued a series of convertible notes to the Chairman of the Board as described in Note 7, which totaled $
As
of June 30, 2021 and December 31, 2020, the Company had promissory notes outstanding which totaled $
NOTE 11 - SUBSEQUENT EVENTS
On
July 2, 2021, the Company’s shares became publicly listed on Nasdaq under the ticker symbol ENSC. Pursuant to the
terms of a $ million share subscription facility, the public listing caused the Company to issue to an investor
On July 12, 2021, following the Business Combination with LACQ, the Company’s former financial advisor filed an action against the Company and its Chief Executive Officer alleging that the common stock and warrants issued to the former advisor in satisfaction of its advisory fee should have been registered and immediately tradeable. On August 3, 2021, the parties entered into a settlement agreement whereby the former advisor would have their common stock and the common stock underlying their warrants registered on the Company’s resale Registration Statement on Form S-1 that it filed on August 9, 2021 (the “Resale Registration Statement”). In addition, the warrants would be modified to allow for cashless exercise and to reduce the exercise price from $/share to $/share. In consideration for this, both parties agreed to release the other from any past, present or future claims. In addition, the former advisor agreed to immediately stay the proceedings and inform the Superior Court of a conditional settlement and to dismiss the lawsuit with prejudice five days following the effectiveness of the Resale Registration Statement.
On July 15, 2021, the Company repaid the outstanding 2020 promissory notes and 2021 promissory notes in full.
On
July 22, 2021, the Company engaged consultants to perform certain public and investor relations services in consideration for shares of common stock issuable upon exercise
of
| 19 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis provide information which our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and notes thereto included elsewhere in this report. In addition to historical financial information, this discussion contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Item 1A. Risk Factors.”
References in the following discussion to “we”, “us”, “our” and the “Company” refer to Ensysce Biosciences, Inc. and its consolidated subsidiaries following the Closing of the Business Combination. Unless the context otherwise requires, references to “LACQ” refer to Leisure Acquisition Corp., a Delaware corporation, prior to the Closing.
Overview
Ensysce Biosciences, Inc. is a clinical stage pharmaceutical company seeking to develop innovative solutions for severe pain relief while reducing the fear of and the potential for addiction, opioid misuse, abuse and overdose. We have also incorporated a 79.2%-owned subsidiary, Covistat, a clinical stage pharmaceutical company that is developing a compound utilized in Ensysce’s overdose protection program for the treatment of COVID-19. Our lead product candidate, PF614, is an extended release TAAP prodrug of oxycodone. TAAP modification of prescription drugs removes the ability to crush, chew or manipulate and inject to achieve the medication more quickly than by swallowing. MPAR™ adds a layer of overdose protection to each TAAP product.
Since inception in 2003, we have devoted substantially all our efforts and financial resources to organizing and staffing our company, business planning, raising capital, discovering product candidates and securing related intellectual property rights and conducting research and development activities for our product candidates. We do not have any products approved for sale and we have not generated any revenue from product sales. We may never be able to develop or commercialize a marketable product.
Our lead product candidate, PF614, is in Phase 1b clinical development, PF614-MPAR™ is in Phase 1 clinical development and nafamostat is proceeding towards Phase 2 clinical development. Our other product candidates and research initiatives are in preclinical or earlier stages of development. Our ability to generate revenue from product sales sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. We have not yet successfully completed any pivotal clinical trials, nor have we obtained any regulatory approvals, manufactured a commercial-scale drug, or conducted sales and marketing activities.
We have incurred significant operating losses since inception. As of June 30, 2021, we had an accumulated deficit of $57.8 million. We expect to continue to incur net losses for the foreseeable future, and we expect our clinical development expenses, and general and administrative expenses to continue to increase. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing development activities, particularly if and as we:
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continue preclinical studies and continue existing and initiate new clinical trials for PF614, PF614-MPAR™ and nafamostat, our lead product candidates being tested for chronic pain and infectious disease; |
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advance the development of our product candidate pipeline of other product candidates, including through business development efforts to invest in or in-license other technologies or product candidates; |
| 20 |
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maintain, expand and protect our intellectual property portfolio; |
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hire additional clinical, quality control, medical, scientific and other technical personnel to support our clinical operations; |
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seek regulatory approvals for any product candidates that successfully complete clinical trials; |
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undertake any pre-commercialization activities to establish sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval; |
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expand our infrastructure and facilities to accommodate our growing employee base; and |
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add operational, financial and management information systems and personnel, including personnel to support our research and development programs, any future commercialization efforts and our transition to operating as a public company. |
We expect to incur additional costs associated with operating as a public company, including significant legal, accounting, insurance, investor relations and other expenses that we did not incur as a private company.
We require substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of private and public equity offerings, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. To the extent that we raise additional capital through the sale of private or public equity or convertible debt securities, existing ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our equity holders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations or other strategic transactions with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates, or grant licenses on terms that may not be favorable to us. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.
Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
| 21 |
COVID-19 pandemic Business Update
In March 2020, the World Health Organization declared COVID-19 a global pandemic. To date, our financial condition and operations have not been significantly impacted by the ongoing COVID-19 pandemic. However, we cannot at this time predict the specific extent, duration, or full impact that the ongoing COVID-19 pandemic will have on our financial condition and operations, including ongoing and planned clinical trials and other operations required to support those clinical trials and research and development activities to advance our pipeline. The impact of the ongoing COVID-19 pandemic on our financial performance will depend on future developments, including the duration and spread of the pandemic and related governmental advisories and restrictions. These developments and the impact of the ongoing COVID-19 pandemic on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, our results may be materially adversely affected.
We are continuing to evaluate the impact of the ongoing COVID-19 pandemic on our business and continue to take proactive measures to protect the health and safety of our employees, as well as to maintain business continuity. We believe that the current measures we have implemented with respect to the ongoing COVID-19 pandemic are appropriate, reflecting both regulatory and public health guidance, to maintain business continuity. We will continue to closely monitor and seek to comply with guidance from governmental authorities and adjust our activities as appropriate.
Business Combination Transaction
On January 31, 2021, LACQ executed a definitive merger agreement among it, Merger Sub and Former Ensysce, providing for, among other things, and subject to terms and conditions therein, the business combination between LACQ and Former Ensysce pursuant to the merger of Merger Sub with and into Former Ensysce, with Former Ensysce continuing as the surviving entity and as a wholly-owned subsidiary of LACQ (the “Business Combination”). On June 30, 2021, the Business Combination was consummated. In connection with the Business Combination, the stockholders of Former Ensysce exchanged their interests for shares of the combined company’s common stock at an exchange ratio of 0.06585. Immediately following the Business Combination, the stockholders of Former Ensysce owned approximately 71.8% of the outstanding common stock of the combined company. Former Ensysce’s existing equity incentive plans were terminated; awards issued under the existing equity incentive plans were exchanged for awards issued under the Company’s 2021 Omnibus Incentive Plan, a new equity incentive plan that we and the stockholders adopted in connection with the Business Combination. We received net proceeds of approximately $7.8 million at the closing of the Business Combination and we continue to operate under our management team, led by our Chief Executive Officer Lynn Kirkpatrick. On July 2, 2021, the combined company’s common stock began trading on Nasdaq under the ticker symbol “ENSC”.
Components of Ensysce’s Operating Results
Revenue
We have generated limited revenue since our inception and we do not expect to generate any revenue from the sale of products in the near future, if at all. If our development efforts are successful and we commercialize our products, or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from product sales, as well as upfront, milestone and royalty payments from such collaboration or license agreements, or a combination thereof.
| 22 |
We have received funding under federal grants from the National Institutes of Health (“NIH”) through the National Institute on Drug Abuse (“NIDA”). In September 2018, we were awarded a research and development grant related to the development of our MPARTM overdose prevention technology (the “MPAR Grant”). In September 2019, we were awarded a second research and development grant related to the development of our TAAP/MPARTM abuse deterrent technology for Opioid Use Disorder (“OUD”) (the “OUD Grant”). Grant funds are awarded annually through a Notice of Award which contains certain terms and conditions including, but not limited to, complying with the grant program legislation, regulation and policy requirements, complying with conditions on expenditures of funds with respect to other applicable statutory requirements such as the federal appropriations acts, periodic reporting requirements, and budget requirements.
Operating Expenses
Research and development expenses
Research and development expenses consist primarily of costs incurred for research activities, including drug discovery efforts and the development of our product candidates. We expense research and development costs as incurred, which include:
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expenses incurred to conduct the necessary preclinical studies and clinical trials required to obtain regulatory approval; |
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expenses incurred under agreements with contract research organizations (“CROs”) that are primarily engaged in the oversight and conduct of our drug discovery efforts and preclinical studies, clinical trials and contract manufacturing organizations (“CMOs”) that are primarily engaged to provide preclinical and clinical drug substance and product for our research and development programs; |
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other costs related to acquiring and manufacturing materials in connection with our drug discovery efforts and preclinical studies and clinical trial materials, including manufacturing validation batches, as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services; |
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payments made in cash or equity securities under third-party licensing, acquisition and option agreements; |
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employee-related expenses, including salaries and benefits, travel and stock-based compensation expense for employees engaged in research and development functions; |
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costs related to compliance with regulatory requirements; and |
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allocated facilities-related costs, depreciation and other expenses, which include rent and utilities. |
We recognize external development costs as incurred. Any advance payments that we makes for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are expensed as the related goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered. We estimate and accrue for the value of goods and services received from CROs and other third parties each reporting period based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs.
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We do not track our research and development expenses on a program-by-program basis. Our direct external research and development expenses consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs and research laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. We do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies, and facilities, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to conduct our research and discovery as well as for managing our preclinical development, process development, manufacturing and clinical development activities. These employees work across multiple programs and, therefore, we do not track our costs by program and cannot state precisely the total costs incurred for each of our clinical and preclinical programs on a project-by-project basis.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect that our research and development expenses will increase substantially over the next several years as we continue our existing, and commences additional, planned clinical trials for PF614, PF614-MPAR™ and nafamostat, as well as conduct other preclinical and clinical development, including submitting regulatory filings for our other product candidates. We also expect our discovery research efforts and our related personnel costs to increase and, as a result, we expect our research and development expenses, including costs associated with stock-based compensation, to increase above historical levels. In addition, we may incur additional expenses related to milestone and royalty payments payable to third parties with whom we may enter into license, acquisition and option agreements to acquire the rights to future product candidates.
At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates or when, if ever, material net cash inflows may commence from any of our product candidates. The successful development and commercialization of our product candidates are highly uncertain. This uncertainty is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of the following:
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the scope, progress, outcome and costs of our preclinical development activities, clinical trials and other research and development activities; |
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establishing an appropriate safety and efficacy profile with investigational new drug (“IND”) enabling studies; |
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successful patient enrollment in and the initiation and completion of clinical trials; |
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the timing, receipt and terms of any marketing approvals from applicable regulatory authorities including the FDA and non-U.S. regulators; |
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the extent of any required post-marketing approval commitments to applicable regulatory authorities; |
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establishing clinical and commercial manufacturing capabilities or making arrangements with third-party manufacturers in order to ensure that we or our third-party manufacturers are able to make product successfully; |
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development and timely delivery of clinical-grade and commercial-grade drug formulations that can be used in our clinical trials and for commercial launch; | |
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obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights; | |
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significant and changing government regulation; | |
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launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others; and | |
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maintaining a continued acceptable safety profile of our product candidates following approval, if any, of our product candidates. |
Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.
General and administrative expenses
General and administrative expenses consist primarily of employee-related expenses, including salaries and related benefits, travel and stock-based compensation for personnel in executive, business development, finance, human resources, legal, information technology, and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as insurance costs and professional fees for legal, patent, consulting, investor and public relations, accounting and audit services. We expense general and administrative costs as incurred.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the continued development of our product candidates. We also anticipate that we will incur significantly increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and other employee-related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of that product candidate.
Other income (expense)
Change in fair value of derivative liability
We entered into a series of notes that were determined to have embedded derivative instruments in the form of a contingent put option. The notes were recognized at the value of proceeds received after allocating issuance proceeds to the bifurcated contingent put option. The notes were subsequently measured at amortized cost using the effective interest method to accrete interest over their term to bring the notes’ initial carrying value to their principal balance at maturity. The bifurcated put option was initially measured at fair value and subsequently measured at fair value with changes in fair value recognized as a component of other expenses in the consolidated statements of operations.
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Interest expense
Interest expense consists of interest accrued on our convertible and other promissory notes and the amortization of debt discounts due to embedded derivative instruments in our convertible promissory notes.
Provision for Income Taxes
We have not recorded any significant amounts related to income tax expense, we have not recognized any reserves related to uncertain tax positions, nor have we recorded any income tax benefits for the majority of our net losses we have incurred to date or for our research and development tax credits.
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or our tax returns. Deferred tax assets and liabilities are determined based on difference between the financial statement carrying amounts and tax bases of existing assets and liabilities and for loss and credit carryforwards, which are measured using the enacted tax rates and laws in effect in the years in which the differences are expected to reverse. The realization of our deferred tax assets is dependent upon the generation of future taxable income, the amount and timing of which are uncertain. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2020, we continue to maintain a full valuation allowance against all of our deferred tax assets based on our evaluation of all available evidence.
We file income tax returns in the United States federal tax jurisdiction and state jurisdictions and may become subject to income tax audit and adjustments by related tax authorities. Our tax return period for United States federal income taxes for the tax years since 2015 remain open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions. We record reserves for potential tax payments to various tax authorities related to uncertain tax positions, if any. The nature of uncertain tax positions is subject to significant judgment by management and subject to change, which may be substantial. These reserves are based on a determination of whether and how much a tax benefit taken by us in our tax filings or whether our position is more likely than not to be realized following the resolution of any potential contingencies related to the tax benefit. We develop our assessment of uncertain tax positions, and the associated cumulative probabilities, using internal expertise and assistance from third-party experts. As additional information becomes available, estimates are revised and refined. Differences between estimates and final settlement may occur resulting in additional tax expense. Potential interest and penalties associated with such uncertain tax positions is recorded as a component of our provision for income taxes. To date, no amounts are being presented as an uncertain tax position.
Results of Operations
Comparison of the three months ended June 30, 2021 and 2020
The following table summarizes the significant items within our results of operations for the three months ended June 30, 2021 and 2020:
| Three Months Ended June 30, | Increase | |||||||||||
| 2021 | 2020 | (Decrease) | ||||||||||
| Federal grant funding | $ | 444,516 | $ | 1,824,681 | $ | (1,380,165 | ) | |||||
| Research and development expenses | $ | 463,219 | $ | 1,404,246 | $ | (887,998 | ) | |||||
| General and administrative expenses | 393,914 | 281,354 | 112,480 | |||||||||
| Other income (expense), net | (544,994 | ) | (845,555 | ) | 300,561 | |||||||
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Federal grant funding
Funding from federal grants for the three months ended June 30, 2021 and 2020 totaled $0.4 million and $1.8 million, respectively, representing a decrease of $1.4 million. Funding decreased by $1.7 million under the MPAR Grant, offset by an increase of $0.3 million under the OUD Grant, due to the timing of research activities eligible for funding. We expect funding from federal grants to increase in the future due to the timing of preclinical and clinical development activities under the grants.
Research and development expenses
Research and development expenses for the three months ended June 30, 2021 and 2020 were $0.5 million and $1.4 million, respectively, representing a decrease of $0.9 million. The decrease was primarily the result of reduced external research and development costs related to preclinical programs for PF614-MPAR™ and Phase 1 clinical trial activities of nafamostat. Ensysce does not currently track expenses on a program-by-program basis. We expect research and development expenses to increase in the future due to planned clinical trials and higher preclinical and clinical development costs for our product candidates.
General and administrative expenses
General and administrative expenses for the three months ended June 30, 2021 and 2020 were $0.4 million and $0.3 million, respectively, representing an increase of $0.1 million. The increase was primarily a result of higher legal and other professional services expenses related to post-Business Combination corporate matters. We expect our general and administrative expenses to increase in the future due to increased director and officer insurance costs and various expenses related to operating as a public company.
Other income (expense), net
Other income (expense), net resulted in expense of $0.5 million for the three months ended June 30, 2021, compared to expense of $0.8 million for the three months ended June 30, 2020. The decrease in net expenses is largely driven by changes in fair value of the derivative liability which provided income of $0.7 million in the 2021 period compared to expense of $0.6 million in the 2020 period. The change resulted from the decreased likelihood of realization of the embedded derivative instrument in convertible notes payable. Interest expense increased $0.7 million in the 2021 period due to the accelerated recognition of $0.6 million of unamortized debt discounts upon the conversion of outstanding convertible notes on June 30, 2021. A loss on extinguishment of debt of $0.3 million in the 2021 period also contributed to the change in other income (expense), net.
Comparison of the six months ended June 30, 2021 and 2020
The following table summarizes the significant items within our results of operations for the six months ended June 30, 2021 and 2020:
| Six Months Ended June 30, | Increase | |||||||||||
| 2021 | 2020 | (Decrease) | ||||||||||
| Federal grant funding | $ | 695,091 | $ | 2,687,081 | $ | (1,991,990 | ) | |||||
| Research and development expenses | $ | 787,595 | $ | 2,243,217 | $ | (1,402,593 | ) | |||||
| General and administrative expenses | 884,386 | 559,047 | 325,259 | |||||||||
| Other income (expense), net | (932,413 | ) | (1,614,538 | ) | 682,125 | |||||||
Federal grant funding
Funding from federal grants for the six months ended June 30, 2021 and 2020 totaled $0.7 million and $2.7 million, respectively, representing a decrease of $2.0 million. Funding decreased by $2.3 million under the MPAR Grant, offset by an increase of $0.3 million under the OUD Grant, due to the timing of research activities eligible for funding. We expect funding from federal grants to increase in the future due to the timing of preclinical and clinical development activities under the grants.
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Research and development expenses
Research and development expenses for the six months ended June 30, 2021 and 2020 were $0.8 million and $2.2 million, respectively, representing a decrease of $1.4 million. The decrease was primarily the result of reduced external research and development costs related to preclinical programs for PF614-MPAR™ and Phase 1 clinical trial activities of nafamostat. Ensysce does not currently track expenses on a program-by-program basis. We expect research and development expenses to increase in the future due to planned clinical trials and higher preclinical and clinical development costs for our product candidates.
General and administrative expenses
General and administrative expenses for six months ended June 30, 2021 and 2020 were $0.9 million and $0.6 million, respectively, representing an increase of $0.3 million. The increase was primarily driven by increases in accounting, auditing, and tax services as well as legal fees related to post-Business Combination corporate matters. We expect our general and administrative expenses to increase in the future due to increased director and officer insurance costs and various expenses related to operating as a public company.
Other income (expense), net
Other income (expense), net resulted in expense of $0.9 million for the six months ended June 30, 2021, compared to expense of $1.6 million for the six months ended June 30, 2020. The decrease in net expense was largely due to changes in fair value of the derivative liability which provided income of $0.7 million in the 2021 period compared to expense of $1.1 million in the 2020 period. The change resulted from the decreased likelihood of realization of the embedded derivative instrument in convertible notes payable. Interest expense increased $0.7 million in the 2021 period due to the accelerated recognition of $0.6 million of unamortized debt discounts upon the conversion of outstanding convertible notes on June 30, 2021. A loss on extinguishment of debt of $0.3 million in the 2021 period also contributed to the change in other income (expense), net.
Liquidity and capital resources
Sources of liquidity and capital
As of June 30, 2021, we had $8.0 million of cash and cash equivalents. Since inception, we have generated limited revenues and have incurred significant operating losses and negative cash flows from our operations, and we anticipate that we will continue to incur losses for at least the foreseeable future. We have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any product candidates for several years, if at all. As of June 30, 2021, we had an accumulated deficit of $57.8 million.
We have funded our operations to date primarily with proceeds from the sale of common equity, funding under federal research grants and borrowings under promissory notes. To fund future operations, we will likely need to raise additional capital. The amount and timing of future funding requirements will depend on many factors, including the timing and results of our ongoing research and development efforts and related general and administrative support. We anticipate that we will seek to fund our operations through public or private equity or debt financings or other sources, such as potential collaboration agreements. We cannot make assurances that anticipated additional financing will be available to us on favorable terms, if at all.
Current remaining funding under two approved federal research grants totals $6.6 million and is expected to be utilized by December 31, 2022. Pursuant to the terms and conditions of the two grants, we are required to submit progress reports to NIDA on an annual basis and a final research performance progress report within 120 days of the performance period end date. Additionally, the grants limit the use of funds to activities that are clearly severable and independent from activities that involve human subjects until the receipt by NIDA of (i) Institutional Review Board (“IRB”) approval, (ii) federal-wide assurance from the Office for Human Research Protections, (iii) a Data and Safety Monitoring Plan, (iv) certification that all key personnel have completed education on the protection of human subjects and (v) a Clinical Trials Dissemination Plan. We must also comply with the data sharing policies of NIDA and the NIH Public Access Policy, that require submission of final peer-reviewed journal manuscripts that arise from the use of grants to PubMed Central immediately upon acceptance for publication.
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Neither grant has to be repaid. To receive the remaining funding for each respective study covered by a grant, we must meet the certain milestones. We have met the required milestones under the MPAR Grant. The remaining milestone under the OUD Grant is identification of a R-methadone-TAAP clinical candidate that meet the specified criteria.
Inventions arising from the research projects funded with the grants are required to be reported to NIDA, per the Bayh-Dole Act (the Patent and Trademark Law Amendments Act), that permits us to retain ownership of the inventions, while also giving NIDA the license to practice the subject invention. In turn, we are expected to file for patent protection and to ensure commercialization upon licensing for the benefit of public health.
Under an agreement established in December 2020, an investor agreed to provide us with a share subscription facility of up to $60.0 million for a 36-month term following the public listing of our common stock. We control the timing and maximum amount of drawdown under this facility and have no minimum drawdown obligation. The investor will pay, in cash, a per-share amount equal to 90% of the average daily closing price of our stock during the 30 consecutive trading days following delivery of a draw notice, which shall not exceed 400% of the average trading volume for the 30 trading days immediately preceding delivery of the draw notice. We must pay a commitment fee to the investor of $1.2 million with $800,000 due on the first anniversary of the public listing date and $400,000 due on the 18-month anniversary of the public listing date. The commitment fee can be paid from the proceeds of a draw against the facility or in our freely tradable common stock. On June 30, 2021, we consummated the Business Combination with LACQ, resulting in the public listing of our shares of common stock on Nasdaq on July 2, 2021. Concurrent with the public listing of our shares of common stock on Nasdaq, we were also required to issue to the investor 1,106,108 warrants with a strike price of $10.01 per share. The number of shares of common stock underlying the warrant as well as the strike price is subject to adjustments for recapitalizations, reorganizations, change of control, stock split, stock dividend, reverse stock splits and certain issuances of additional shares of our common stock.
Cash flows
The following table summarizes our cash flows for each of the periods presented:
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (649,461 | ) | $ | (560,573 | ) | ||
| Net cash provided by financing activities | 8,467,029 | 800,020 | ||||||
| Net increase in cash and cash equivalents | $ | 7,817,568 | $ | 239,447 | ||||
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Operating activities
During the six months ended June 30, 2021 and 2020, we used cash in operating activities of $0.6 million and $0.6 million, respectively, primarily resulting from legal and accounting fees, changes in prepaid expenses and accrued expenses due to the advancement of our product candidates, and the timing of vendor invoicing and payments.
Financing activities
During the six months ended June 30, 2021, net cash provided by financing activities was $8.5 million, primarily consisting of proceeds from the Business Combination. During the six months ended June 30, 2020, net cash provided by financing activities was $0.8 million, primarily consisting of proceeds from the issuance of convertible notes.
Funding requirements
Our primary use of cash is to fund operating expenses, primarily related to our research and development activities. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses.
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. In addition, upon the completion of the Business Combination, we have incurred, and will continue to incur, additional costs associated with operating as a public company, including significant legal, accounting, insurance, investor relations and other expenses that we did not incur as a private company. The timing and amount of our operating expenditures will depend largely on our ability to:
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advance preclinical development of our early-stage programs and clinical trials of our product candidates; |
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manufacture, or have manufactured on our behalf, preclinical and clinical drug material and develop processes for late state and commercial manufacturing; |
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seek regulatory approvals for any product candidates that successfully complete clinical trials; |
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establish a sales, marketing, medical affairs and distribution infrastructure to commercialize any product candidates for which we may obtain marketing approval and intend to commercialize on our own; |
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hire additional clinical, quality control and scientific personnel; |
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expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company; |
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obtain, maintain, expand and protect our intellectual property portfolio; |
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manage the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights, including enforcing and defending intellectual property related claims; and |
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manage the costs of operating as a public company. |
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Going concern
We have generated limited revenues and have incurred significant operating losses since our inception and, as of June 30, 2021, had an accumulated deficit of $57.8 million. We expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future.
Following the completion of the Business Combination and public listing of our common stock on Nasdaq, we now have access to up to $60 million from a share subscription facility entered into in December 2020. Management believes that its existing cash resources and the proceeds available through the existing share subscription facility are sufficient to allow us to fund current planned operations through the next 12 months following the filing of this Quarterly Report on Form 10-Q.
For additional information on risks associated with our capital requirements, please read the section titled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.
Working capital
Because of the numerous risks and uncertainties associated with research, development and commercialization of biologic product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:
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the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical trials; |
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the costs, timing and outcome of regulatory review of our product candidates; |
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the costs, timing and ability to manufacture our product candidates to supply our clinical and preclinical development efforts and our clinical trials; |
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| ● | the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval; | |
| ● | the costs of manufacturing commercial-grade product and necessary inventory to support commercial launch; | |
| ● | the ability to receive additional non-dilutive funding, including grants from organizations and foundations; | |
| ● | the revenue, if any, received from commercial sale of our products, should any of our product candidates receive marketing approval; | |
| ● | the costs of preparing, filing and prosecuting patent applications, obtaining, maintaining, expanding and enforcing our intellectual property rights and defending intellectual property-related claims; | |
| ● | our ability to establish and maintain collaborations on favorable terms, if at all; and | |
| ● | the extent to which we acquire or in-license other product candidates and technologies. |
Critical accounting policies and significant judgments and estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 3 to our unaudited interim consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Accrued research and development expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when it has not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with the service providers and makes adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:
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vendors, including research laboratories, in connection with preclinical development activities; |
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CROs and investigative sites in connection with preclinical studies and clinical trials; and |
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CMOs in connection with drug substance and drug product formulation of preclinical studies and clinical trial materials. |
We based our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and CROs that supply, conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to ou