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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2021

 

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: 001-38306

 

Ensysce Biosciences, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   82-2755287

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer
Identification No.)

7946 Ivanhoe Avenue, Suite 201

La Jolla, California

  92037
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (858) 263-4196

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class  

Trading

Symbol(s)

  Name of each exchange on which registered

Common Stock, $0.0001 par value per share

Warrants to purchase one share of Common Stock

 

ENSC

ENSCW

 

The Nasdaq Stock Market LLC

The Nasdaq Stock Market LLC

 

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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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  
Non-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 ☐ No

 

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. Yes ☒ No ☐

 

As of November 12, 2021, the registrant had 24,255,786 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 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 35
     
PART II. OTHER INFORMATION 36
     
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 86
Item 3. Defaults Upon Senior Securities 87
Item 4. Mine Safety Disclosures 87
Item 5. Other Information 87
Item 6. Exhibits 88
Signatures 89

 

ii
 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

Ensysce Biosciences, Inc.

Consolidated Balance Sheets

 

   September 30,   December 31, 
   2021   2020 
   (Unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $6,845,672   $194,214 
Unbilled receivable   86,867    - 
Right-of-use asset   31,543    23,538 
Prepaid expenses and other current assets   1,957,226    130,124 
Total current assets   8,921,308    347,876 
Property and equipment, net   -    151 
Other assets   796,423    3,780 
Total assets  $9,717,731   $351,807 
Liabilities and stockholders’ deficit          
Current liabilities:          
Accounts payable  $471,858   $1,724,598 
Accrued expenses and other liabilities   3,730,762    344,792 
Lease liability   31,667    25,500 
Notes payable and accrued interest   2,797,181    4,245,082 
Embedded derivative on convertible notes   -    670,262 
Total current liabilities   7,031,468    7,010,234 
Long-term liabilities:          
Notes payable, net of current portion   2,114,451    - 
Other long term liabilities   957,099    - 
Total long-term liabilities   3,071,550    - 
           
Total liabilities   10,103,018    7,010,234 
Commitments and contingencies (Note 6)         
Stockholders’ deficit          
Preferred stock, $0.0001 par value, 1,500,000 shares authorized, no shares issued and outstanding at September 30, 2021 (unaudited) and December 31, 2020   -    - 
Common stock, $0.0001 par value, 150,000,000 shares authorized; 24,275,541 and 15,768,725 shares issued at September 30, 2021 (unaudited) and December 31, 2020, respectively; 24,255,786 and 15,768,725 shares outstanding at September 30, 2021 (unaudited) and December 31, 2020, respectively   2,425    1,577 
Additional paid-in capital   74,897,406    49,516,337 
Accumulated deficit   (75,005,517)   (55,958,716)
Total Ensysce Biosciences, Inc. stockholders’ deficit   (105,686)   (6,440,802)
Noncontrolling interests in stockholders’ deficit   (279,601)   (217,625)
Total stockholders’ deficit   (385,287)   (6,658,427)
Total liabilities and stockholders’ deficit  $9,717,731   $351,807 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1
 

 

Ensysce Biosciences, Inc.

Consolidated Statements of Operations

(Unaudited)

 

   2021   2020   2021   2020 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2021   2020   2021   2020 
Federal grants  $1,200,816   $827,639   $1,895,907   $3,514,720 
Operating expenses:                    
Research and development   1,714,635    892,991    2,502,232    3,136,207 
General and administrative   16,372,976    339,422    17,257,361    898,470 
Total operating expenses   18,087,611    1,232,413    19,759,593    4,034,677 
                     
Loss from operations   (16,886,795)   (404,774)   (17,863,686)   (519,957)
                     
Other income (expense):                    
Adjustment to initial fair value of debt   (1,325,804)   -    (1,325,804)   - 
Issuance costs for convertible notes   (500,158)   -    (500,158)   - 
Change in fair value of liabilities   1,476,185    2,171,446    2,149,499    1,088,272 
Interest expense   (24,660)   (216,166)   (1,282,820)   (747,530)
Loss on extinguishment of debt   -    -    (347,566)   - 
Other income and expense, net   61,758   -    61,758   - 
Total other income (expense), net   (312,679)   1,955,280    (1,245,091)   340,742 
                     
Net income (loss)  $(17,199,474)  $1,550,506   $(19,108,777)  $(179,215)
Net loss attributable to noncontrolling interests  $(35,948)  $(20,014)  $(61,976)  $(21,990)
Net income (loss) attributable to common stockholders  $(17,163,526)  $1,570,520   $(19,046,801)  $(157,225)
Net income (loss) per basic share:                    
Net income (loss) per share attributable to common stockholders, basic  $(0.71)  $0.10   $(1.02)  $(0.01)
Weighted average common shares outstanding, basic   24,255,786    15,768,725    18,755,252    15,768,725 
Net income (loss) per diluted share:                    
Net income (loss) per share attributable to common stockholders, diluted  $(0.71)  $0.09   $(1.02)  $(0.01)
Weighted average common shares outstanding, diluted   24,255,786    16,849,422    18,755,252    15,768,725 

 

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’ Equity (Deficit) 
   Common Stock   Additional             
   Number of Shares   Amount   Paid-In Capital   Accumulated Deficit   Noncontrolling interests   Total 
Balance on June 30, 2020   15,768,725   $1,577   $49,406,209   $(57,743,231)  $(1,976)  $(8,337,421)
Stock-based compensation   -    -    51,510    -    -    51,510 
Net income (loss)   -    -    -    1,570,520    (20,014)   1,550,506 
Balance on September 30, 2020   15,768,725   $1,577   $49,457,719   $(56,172,711)  $(21,990)  $(6,735,405)
                               
Balance on June 30, 2021   24,255,786   $2,425   $63,250,511   $(57,841,991)  $(243,653)  $5,167,292 
Stock-based compensation   -    -    24,833    -    -    24,833 
Issuance of warrants   -    -    11,565,472    -    -    11,565,472 
Warrants modification   -    -    56,590    -    -    56,590 
Net loss   -    -    -    (17,163,526)   (35,948)   (17,199,474)
Balance on September 30, 2021   24,255,786   $2,425   $74,897,406   $(75,005,517)  $(279,601)  $(385,287)

 

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’ Equity (Deficit) 
   Common Stock                 
   Number of Shares   Amount   Additional Paid-In Capital   Accumulated Deficit   Noncontrolling interests   Total 
Balance on December 31, 2019   15,768,725   $1,577   $49,337,658   $(56,015,486)  $-   $(6,676,251)
Stock-based compensation   -    -    120,061    -    -    120,061 
Net loss   -    -    -    (157,225)   (21,990)   (179,215)
Balance on September 30, 2020   15,768,725   $1,577   $49,457,719   $(56,172,711)  $(21,990)  $(6,735,405)
                               
Balance on December 31, 2020   15,768,725   $1,577   $49,516,337   $(55,958,716)  $(217,625)  $(6,658,427)
Exercise of stock options   284,825    28    262,834    -    -    262,862 
Settlement of convertible notes   1,357,968    136    5,696,567    -    -    5,696,703 
Issuance of common stock for business combination, net of transaction costs   6,844,268    684    7,694,580    -    -    7,695,264 
Stock-based compensation   -    -    105,026    -    -    105,026 
Issuance of warrants   -    -    11,565,472    -    -    11,565,472 
Warrants modification   -    -    56,590    -    -    56,590 
Net loss   -    -    -    (19,046,801)   (61,976)   (19,108,777)
Balance on September 30, 2021   24,255,786   $2,425   $74,897,406   $(75,005,517)  $(279,601)  $(385,287)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4
 

 

Ensysce Biosciences, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

   2021   2020 
   Nine Months Ended September 30, 
   2021   2020 
Cash flows from operating activities:          
Net loss  $(19,108,777)  $

(179,215

)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   151    149 
Accrued interest   336,851    273,069 
Accretion of discounts on promissory notes   945,969    474,461 
Change in fair value of embedded derivative   (673,314)   (1,088,272)
Change in fair value of convertible debt   (1,071,099)   - 
Loss on extinguishment of debt   347,566    - 
Stock-based compensation   105,026    120,061 
Adjustment to fair value of financial instruments   920,718    - 
Issuance of warrants for share subscription facility   11,565,472    - 
Commitment fee for share subscription facility   1,124,292    - 
Warrant modification   56,590    - 
Lease cost   (1,838)   - 
Issuance costs for convertible notes   500,158    - 
Changes in operating assets and liabilities:          
Unbilled receivable   (86,867)   173,552 
Prepaid expenses and other assets   (683,492)   (343,076)
Accounts payable   (1,252,740)   1,161,526 
Accrued expenses and other liabilities   2,500,970    (1,305,740)
Net cash used in operating activities   (4,474,364)   (713,485)
Cash flows from investing activities:          
Purchases of property and equipment   -    (3,689)
Net cash used by investing activities   -    (3,689)
Cash flows from financing activities:          
Proceeds from issuance of convertible notes   5,050,000    1,000,000 
Issuance costs for convertible notes   (500,158)   - 
Proceeds from issuance of promissory notes to related parties   350,000    100,000 
Repayment of promissory notes and accrued interest   (467,774)   - 
Proceeds from exercise of stock options   262,862    - 
Proceeds from issuance of common stock for business combination, net of transaction costs   6,626,312    - 
Repayment of financed insurance premiums   (195,420)   - 
Contribution from noncontrolling interests   -    20 
Net cash provided by financing activities   11,125,822    1,100,020 
Increase in cash and cash equivalents   6,651,458    382,846 
Cash and cash equivalents beginning of period   194,214    341,536 
Cash and cash equivalents end of period  $6,845,672   $724,382 
           
Supplemental cash flow information:          
Income tax payments  $1,600   $1,600 
Supplemental disclosure of non-cash investing and financing activities:          
Fair value of embedded derivative at issuance  $-   $471,758 
Settlement of convertible notes into common stock  $5,696,703   $- 
Net assets acquired in business combination  $1,068,950   $- 
Proceeds from financed insurance premiums  $867,300   $- 
Share subscription facility transaction costs  $12,689,764   $- 

 

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).

 

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 $0.0001 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 0.06585. Immediately following the Business Combination, stockholders of Former Ensysce owned approximately 71.8% of the outstanding common stock of the combined company. In addition, Former Ensysce’s existing options and warrants were exchanged for equivalent securities in Ensysce on their existing terms (with standard adjustments to exercise price and underlying shares, consistent with the foregoing exchange ratio). As of July 2, 2021, Ensysce’s shares of common stock are traded on the Nasdaq Capital Market (“Nasdaq”) under the new ticker symbol “ENSC”.

 

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 1,000,000 shares of common stock, $0.001 par value per share, and 100,000 shares of preferred stock, $0.001 par value per share. Ensysce is a 79.2% stockholder in Covistat, with 19.8% and 1.0% of the shares held by certain key personnel of the Company and an unrelated party, respectively.

 

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.

 

6
 

 

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 nine months ended September 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 $7.8 million and prepaid expenses of $1.1 million, were recorded at historical cost with no goodwill or other intangible assets recorded. The shares and net loss per share prior to the reverse recapitalization have been retroactively restated to reflect the exchange ratio of 0.06585. The financial statements reflect the historical operations of Ensysce.

 

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 $1.2 million of deferred transaction costs, consisting of legal and accounting fees directly related to the Business Combination, which were offset against the proceeds of the Business Combination within additional paid-in capital.

 

Going Concern

 

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 has not generated any product revenue and had an accumulated deficit of $75.0 million at September 30, 2021. There is no assurance that profitable operations will ever be achieved, and, if achieved, could be sustained on a continuing basis. Product development activities, clinical and pre-clinical testing, and commercialization of the Company’s product candidates are necessary to develop the Company’s products and will require significant additional financing. There can be no assurance the Company will be able to obtain such funds. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

 

In December 2020, the Company executed a share subscription facility with an investment group. Under the agreement, the investor agreed to provide the Company with a share subscription facility of up to $60.0 million for a 36-month term following the public listing of the Company’s common stock. The Company will control the timing and maximum amount of drawdown under this facility and has no minimum drawdown obligation. The investor will pay, in cash, a per-share amount equal to 90% of the average daily closing price of the Company’s stock during the 30 consecutive trading days prior to the issuance of a draw notice, which shall not exceed 400% of the average trading volume for the 30 trading days immediately preceding the draw down date. On June 30, 2021, the Company consummated the Business Combination with LACQ, resulting in the Company’s shares becoming publicly listed on Nasdaq on July 2, 2021. Concurrent with the public listing of the Company’s shares, the Company issued to the investor 1,106,108 warrants with a five-year term to purchase common stock of Ensysce at an exercise price of $10.01 per share (Notes 3 and 8). The Company 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 freely tradable common stock of the Company.

 

In September 2021, the Company entered into a $15.9 million convertible note financing agreement with institutional investors, of which, as of September 30, 2021, the Company had drawn $5.0 million. (See Notes 7 and 11 for additional information.) The agreement limits the Company’s ability to execute certain debt and equity financings, including its existing $60.0 million share subscription facility, while the convertible notes are outstanding. Without the availability of proceeds through the share subscription facility, existing cash resources are not sufficient to fund current planned operations. While the Company believes in the viability of its strategy to ultimately realize revenues and in its ability to raise additional funds, management cannot be certain that additional funding will be available on acceptable terms, or at all. The Company’s ability to continue as a going concern is dependent upon its ability to obtain adequate financing and achieve profitable operations. As a result, these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern for a period of 12 months following the date these consolidated financial statements were issued.

 

The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable 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 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 $50 and $151 was recognized for the three and nine months ended September 30, 2021, respectively. Depreciation expense of $50 and $149 was recognized for the three and nine months ended September 30, 2020, respectively. Depreciation expense is classified in general and administrative expense in the accompanying consolidated statements of operations.

 

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 nine months ended September 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.

 

8
 

 

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.

 

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 September 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.

 

Convertible notes

 

On September 24, 2021, the Company issued convertible notes with a face value of $5.3 million. The Company elected the fair value option to account for the convertible notes as it believes the fair value option provides users of the financial statements with greater ability to estimate the outcome of future events as facts and circumstances change, particularly with respect to changes in the fair value of the common stock underlying the conversion option and redemption feature. The Company uses a Monte Carlo model to estimate the fair value of the notes, which relies on unobservable Level 3 inputs. Changes in the fair value of the notes are recognized through earnings for each reporting period. Refer to Note 7 for details of the terms and conditions of the convertible notes.

 

The carrying value of outstanding notes payable at December 31, 2020 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 10% and a discount rate of 42.9%. As noted above, all outstanding derivative liabilities were settled upon the conversion of outstanding notes payable upon the consummation of the Business Combination. Refer to Note 7 for details of the conversion.

 

Warrants

 

On September 24, 2021, the Company issued liability classified warrants in connection with the issuance of convertible notes. The Company uses a Black Scholes model to estimate the fair value of the warrants, which relies on unobservable Level 3 inputs. Changes in the fair value of the warrants are recognized through earnings for each reporting period. Refer to Note 8.

 

9
 

 

The following tables present assets and liabilities measured and recorded at fair value on the Company’s consolidated balance sheet as of September 30, 2021 and December 31, 2020. As of September 30, 2021, all contingent put options were settled upon conversion of the notes at the closing of the Business Combination.

 

   September 30, 2021 
   Total   Level 1   Level 2   Level 3 
Convertible note  $4,233,318   $-   $-   $4,233,318 
Liability classified warrants   620,718    -    -    620,718 
Total  $4,854,036   $   -   $   -   $4,854,036 

 

   December 31, 2020 
   Total   Level 1   Level 2   Level 3 
Contingent put option  $670,262   $-   $-   $670,262 
Total  $670,262   $     -   $      -   $670,262 

 

The following table summarizes the change in fair value of the Company’s Level 3 assets and liabilities:

 

 

   For the nine months ended September 30, 2021 
   Total   Contingent put option   Convertible notes   Liability classified warrants 
Fair value, December 31, 2020  $670,262   $670,262   $-   $- 
Additions   6,333,273    3,052    5,304,417    1,025,804 
Change in fair value   (2,149,499)   (673,314)   (1,071,099)   (405,086)
Fair value, September 30, 2021  $4,854,036   $-   $4,233,318   $620,718 

 

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 $5.4 million ($3.2 million and $2.2 million in years 1 and 2 respectively) of which the Company must contribute $1.1 million in the first year of the grant. In August 2019, the grant was amended such that the approved budget for the two-year period decreased to approximately $5.1 million ($2.1 million and $3.0 million in years 1 and 2, respectively). In June 2021, the Company received a Notice of Award for an additional $2.8 million of funding in year 3 under the MPAR Grant beginning July 1, 2021.

 

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 $5.4 million.

 

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 September 30,   Nine Months Ended September 30, 
   2021   2020   2021   2020 
MPAR  $1,119,312   $458,883   $1,246,424   $2,853,899 
OUD   81,504    368,756    649,483    660,821 
Total  $1,200,816   $827,639   $1,895,907   $3,514,720 

 

 

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.

 

Stock-based Compensation

 

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 nine months ended September 30, 2021 and 2020, stock-based compensation costs are recorded in general and administrative expenses in the consolidated statements of operations.

 

From time-to-time equity classified awards may be modified. On the modification date, the Company estimates the fair value of the awards immediately before and immediately after modification. The incremental increase in fair value is recognized as expense immediately to the extent the underlying equity awards are vested and on a straight-line basis over the same remaining amortization schedule as the unvested underlying equity awards.

 

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
 

 

Earnings per Share

 

The basic earnings per share is calculated by dividing the Company’s net income or loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. The diluted earnings per share is calculated by dividing the Company’s net earnings attributable to common stockholders by the diluted weighted average number of common shares outstanding during the period, determined using the treasury stock method and the average stock price during the period. A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows:

 

                   
  

Three Months Ended

September 30,

     

Nine Months Ended

September 30,

 
   2021   2020      2021       2020  
Numerator:                          
Net income (loss) attributable to common stockholders  $(17,163,525)  $1,570,520    $ (19,046,800 )   $ (157,225 )
                           
Denominator:                          
Weighted average shares outstanding, basic   24,255,786    15,768,725      18,755,252       15,768,725  
Weighted average dilutive stock options   -    

1,080,697

      -       -  
Weighted average shares outstanding, diluted   24,255,786    16,849,422      18,755,252       15,768,725  
                           
Net income (loss) per share attributable to common stockholders, basic  $(0.71)  $0.10    $ (1.02 )   $ (0.01 )
Net income (loss) per share attributable to common stockholders, diluted   (0.71)   0.09      (1.02 )     (0.01 )

 

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 September 30,   Nine Months Ended September 30, 
   2021   2020   2021   2020 
Stock options   4,444,068    2,647,342    4,516,652    5,851,008 
Warrants   20,019,056    19,755    6,710,625    19,755 
Total   24,463,124    2,667,097    11,227,277    5,870,763 

 

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:

 

   September 30,   December 31, 
   2021   2020 
Prepaid insurance  $984,972   $17,158 
Prepaid research and development   874,865    112,966 
Other prepaid expenses   97,389    - 
Total prepaid expenses and other current assets  $1,957,226   $130,124 

 

NOTE 5 – ACCRUED EXPENSES AND OTHER LIABILITIES

 

Accrued expenses and other liabilities consisted of the following:

 

   September 30,   December 31, 
   2021   2020 
Consultant stock compensation expenses  $2,264,479   $- 
Share subscription facility commitment fees   800,000      
Professional fees   265,450    - 
Accrued research and development   142,897    72,906 
Accrued scientific advisory board fees   60,032    60,032 
Deferred grant revenue   -    159,047 
Other accrued liabilities   197,904    52,807 
Total accrued expenses and other liabilities  $3,730,762   $344,792 

 

Other long-term liabilities consisted of the following:

 

   September 30,   December 31, 
   2021   2020 
Share subscription facility commitment fees  $336,381   $- 
Liability classified warrants   620,718            - 
Total other long-term liabilities  $957,099   $- 

 

NOTE 6 - COMMITMENTS AND CONTINGENCIES

 

Litigation

 

As of September 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.

 

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 $11.50/share to $10.00/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. See Note 11 for additional information.

 

Lease

 

During the three and nine months ended September 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.

 

In August 2021, the Company entered into an amendment of the aforementioned lease, whereby the term of the lease was extended through October 31, 2022 with no option to renew. The amendment resulted in a modification of the lease under ASC 842 and the Company remeasured the lease liability as of the amendment date.

 

As of September 30, 2021, the future lease payments totalled $34,068.

 

The Company recognized total rent expense of $11,781 and $36,058 in the three and nine months ended September 30, 2021, respectively. The Company recognized total rent expense of $10,807 and $26,255 in the three and nine months ended September 30, 2020, respectively.

 

Share-based compensation subject to shareholder approval

 

In July 2021, the Company engaged two consultants to perform certain public and investor relations services in consideration for warrants to purchase 500,000 shares of common stock with a five-year term and an exercise price of $6.28 each, 50,000 shares of common stock each, and 200,000 restricted stock units each. The restricted stock units vest over one year with 50% of the vesting contingent upon certain market conditions. These equity awards are contingent upon shareholder approval of an amended and restated 2021 Omnibus Plan at a special shareholder meeting scheduled to occur in December 2021, whereby the warrants would be replaced by non-qualified stock options with similar terms. As the Company did not identify a grant date for the equity awards as of September 30, 2021, it did not record these instruments in equity and instead recorded a liability and an expense for the estimated value of services received during the period.

 

13
 

 

NOTE 7 - NOTES PAYABLE

 

The following table provides a summary of the Company’s outstanding debt as of September 30, 2021:

 

   Principal balance   Accrued interest   Fair value adjustment   Net debt balance 
2021 convertible notes  $5,300,000    $4,417   $(1,071,099)  $4,233,318 
Financed insurance   676,555    1,759    -    678,314 
Total  $5,976,555   $6,176   $(1,071,099)  $4,911,632 

 

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  $100,000   $28,671   $-   $128,671 
2018 convertible notes   3,500,000    727,905    (783,124)   3,444,781 
2020 promissory notes   100,000    1,694    -    101,694 
2020 convertible notes   700,000    29,726    (159,790)   569,936 
Total  $4,400,000   $787,996   $(942,914)  $4,245,082 

 

The interest expense recognized for notes payable was as follows:

 

   2021   2020   2021   2020 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2021   2020   2021   2020 
Stated interest accrual  $24,660   $101,562   $251,857   $273,069 
Debt discount amortization   -    114,604    945,969    474,461 
Total  $24,660   $216,166   $1,197,826   $747,530 

 

2015 Convertible Notes Payable

 

During 2015, the Company issued certain convertible promissory notes in the aggregate principal amount of $873,000. During 2017 and 2018, all but $100,000 were converted into common shares of Ensysce. The remaining convertible promissory note bears interest at 5% per annum, is due on demand (principal and interest) and is mandatorily convertible at a variable price per share equal to 80% of the price received in certain future equity transactions.

 

2018 Convertible Notes Payable

 

Between January 2018 and December 2020, the Company received financing totaling $3,500,000 under a series of unsecured promissory notes with a stockholder and board member ($2,500,000) and an unrelated party ($1,000,000). The promissory notes mature 24 months from the date of issuance and bear interest at the rate of 10% per annum. The promissory notes, together with all interest as accrued, can be converted into shares of Ensysce’s common stock at the option of the noteholder, at 50% of the price paid per share for equity securities by the investors in a subsequent equity financing of no less than $5,000,000 gross proceeds (the “contingent put option”). The contingent put option is required to be bifurcated from the debt host and measured at fair value with changes in fair value recorded in earnings (see Note 3).

 

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 $0.25 per share or the then-current Enterprise Value per share (the “automatic conversion option”). Enterprise Value per Share is defined as market capitalization, debt and preferred stock less cash and cash equivalents divided by the common stock of Ensysce on the measurement date, not to exceed $55 million. The Company assessed whether the automatic conversion option should be accounted for separately from the debt host and concluded that as the common shares of Ensysce are currently not publicly traded and thus are not considered readily convertible to cash, the automatic conversion option cannot be net settled. Further, the conversion price of the promissory notes exceeded the per share fair value of Ensysce’s common stock on each issuance date and, consequently, no beneficial conversion feature exists.

 

The 2018 convertible notes also include a change in control call option whereby, upon the close of a sale of Ensysce, other than an initial public offering, Ensysce has the right to prepay the promissory notes at 200% of the principal outstanding plus all accrued and unpaid interest. This call option is required to be bifurcated because it is considered to not be clearly and closely related to the debt host. However, the Company has concluded that as of each balance sheet date presented, the exercise of this call option is not probable and thus the call option has a de minimis value.

 

In June 2020, the board resolved to extend the maturity of all 2018 convertible notes payable issued in 2018 by one year. The Company did not incur legal fees or other additional costs to effect the modification. The modification met the criteria to be classified as a troubled debt restructuring under ASC 470-50. The effective interest rate was recalculated to reflect the modified expected term of the notes and no gain or loss was recognized.

 

2020 Convertible Notes Payable

 

During the year ended December 31, 2020, Covistat received financing totaling $700,000 under a series of unsecured promissory notes with unrelated parties. The notes mature in July 2022 and bear interest at a rate of 10% per annum. The notes cannot be prepaid without the prior consent of the holder. The notes, together with all accrued and unpaid interest, are automatically convertible upon an initial public offering of Covistat shares or a private sale of a single class of Covistat’s equity securities with gross proceeds of at least $2.0 million within a 12-month period. The notes are convertible at the option of the holder at maturity. With respect to an automatic conversion, the conversion price will be the lesser of (a) 80% of the per-share price of the equity securities sold or (b) the price equal to $10.0 million divided by the aggregate number of shares of Covistat’s common stock immediately prior to the initial closing of such financing. With respect to an optional conversion, the conversion price will be the price equal to $10.0 million divided by the aggregate number of shares of Covistat’s common stock immediately prior to the initial closing of such financing. The conversion feature is required to be bifurcated from the debt host and measured at fair value with changes in fair value recorded in earnings (see Note 3).

 

2020 Promissory Notes Payable

 

During the year ended December 31, 2020, the Company received financing totaling $100,000 under a series of unsecured promissory notes with the Chief Executive Officer and a board member. The promissory notes bear interest at a rate of 10% per annum and mature December 31, 2021 or upon certain financing transactions, whichever is earlier. The notes were repaid in full in July 2021.

 

2021 Convertible Note Payable

 

In January 2021, the Company received financing totaling $50,000 under an unsecured convertible note. The convertible note bears interest at a rate of 10% per annum and matures January 28, 2023. The promissory note, together with accrued interest, would be automatically converted into shares of Ensysce’s common stock at 80% of the price paid per share for equity securities by investors in an IPO or equity financing of no less than $10.0 million gross proceeds. The conversion feature is required to be bifurcated from the debt host and measured at fair value with changes in fair value recorded in earnings (see Note 3).

 

2021 Promissory Notes

 

In March and May 2021, the Company received financing totaling $350,000 under unsecured promissory notes issued to related parties including the Chief Executive Officer and members of the board of directors. The notes mature on the earlier of June 30, 2022 or the Company’s receipt of gross proceeds of at least $2.0 million from the sale of common or preferred stock and bear interest at a rate of 10% per annum. The notes were repaid in full in July 2021.

 

14
 

 

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 $347,566 based on the share price on the date of conversion.

 

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, $554,911 of unamortized debt discount as of the June 30, 2021 conversion has been recognized as interest expense within the consolidated statement of operations.

 

The table below summarizes the conversion of each class of notes payable:

 

    Immediately prior to Business Combination              
Note series   Principal     Interest     Carrying value of debt converted     Shares of common stock issued    

Outstanding debt,

June 30, 2021

 
2015 Convertible Note   $ 100,000     $ 31,151     $ 131,151       15,116     $  
2018 Convertible Notes     3,500,000       901,466       4,401,466       1,259,837        
2020 Convertible Notes     700,000       64,438       764,438       77,000        
2021 Convertible Note     50,000       2,082       52,082       6,015        
Total   $ 4,350,000     $ 999,137     $ 5,349,137       1,357,968     $  

 

September 2021 Convertible Notes Payable

 

On September 24, 2021, the Company entered into an agreement with institutional investors to issue $15.9 million of convertible notes (“Convertible Notes”). The agreement provides for two closings: the first closing for $5.3 million (resulting in net proceeds of $4.7 million) and closed on September 24, 2021. The second closing for $10.6 million was completed in the fourth quarter of 2021 (See Note 11 for additional information).

 

The proceeds of the sale of the securities shall be used for working capital purposes subject to certain customary restrictions and secured by the Company’s rights to its patents and licenses. The Company may not issue any additional debt or equity without the prior written consent of the holders.

 

The convertible notes mature on June 23, 2023 and bear interest at a rate of 5% per annum, in addition to an original issue discount of 6%. The interest may be settled in cash or shares at the option of the Company and is payable together with monthly redemptions of the outstanding principal amount of the debt. The Company recorded $4,417 of interest expense in the third quarter of 2021 related to the notes.

 

The Company elected to apply the fair value option to the measurement of the Convertible Notes and accordingly recorded a charge to other income (expense), net for issuance costs of $500,158. The initial fair value of the debt at issuance was $5.3 million. The Company remeasured the fair value of the debt as of September 30, 2021 and recognized a gain of $1.1 million as the fair value of the Convertible Notes had decreased to $4.2 million due to a decrease in the value of the conversion option resulting from a decrease in the price of the Company's common stock.

 

The convertible notes may be converted into the Company’s common stock at the option of the holder in whole or in part at the conversion price of $5.87, subject to a beneficial ownership limitation of 4.99% (subject to adjustment). The Company must reserve sufficient shares of authorized common stock to effect the conversion of the convertible notes and payment of interest. The shares were registered for public resale under a registration statement.

 

At the Company’s option, the Company may redeem some or all of the then-outstanding principal amount of the convertible notes for cash in an amount equal to 100% of the outstanding principal amount of the principal to be redeemed, plus accrued but unpaid interest, plus all other amounts due with respect to the convertible notes.

 

On January 1, 2022, and the first of each subsequent month, terminating upon the full redemption of the Convertible Notes (each a “Monthly Redemption Date”), the Company shall redeem the Monthly Redemption Amount (defined below), payable in cash or shares. The number of shares to be settled shall be based on a conversion price equal to the lesser of (a) $5.87 and (b) 92% of the average of the three lowest volume-weighted average prices (“VWAP”) during the 10 consecutive trading days prior to the applicable Monthly Redemption Date. The Company may not pay the Monthly Redemption Amount in shares unless the applicable conversion price is greater than or equal to $0.78 and the Company has been in compliance with customary requirements under the agreement, unless waived in writing by the holder.

 

The Monthly Redemption Amount is defined as 1/18th of the original principal amount, plus accrued but unpaid interest, plus any other amounts due to the holder with respect to the Convertible Notes. If the Company elects to settle such redemptions in shares (with a total maximum of 4,855,108 shares issuable), the Monthly Redemption Amount is calculated based on 92% of the average of the lowest three VWAPs in the ten trading days prior to the Monthly Redemption Date. If the Company elects to settle redemptions in cash, the Monthly Redemption Amount shall include an 8% premium of the Monthly Redemption Amount.

 

If, at any time while the Convertible Notes are outstanding, the Company carries out one or more capital raises in excess of $5.0 million, the holder has the right to require the Company to use up to 20% of the gross proceeds of such transaction to redeem all or a portion of the convertible notes for an amount in cash equal to the cash Mandatory Redemption Amount (i.e., 108% of outstanding principal and unpaid interest).

 

Financed insurance premiums

 

During the nine months ended September 30, 2021, the Company financed its directors and officers liability insurance in the amount of $867,300. The Company will pay a total of $12,078 in interest from inception through March 2022 when the note will be paid in full.

 

NOTE 8 - STOCKHOLDERS’ EQUITY

 

In June 2021, in connection with the Business Combination, the Company amended and restated its Certificate of Incorporation to authorize 150,000,000 shares of common stock and 1,500,000 shares of preferred stock, both with par value equal to $0.0001. As of September 30, 2021 and December 31, 2020, there were no shares of preferred stock issued and outstanding.

 

Common Stock

 

On June 30, 2021, in connection with the Closing, the following common stock activity occurred:

 

  16,053,550 shares of common stock were issued to holders of Former Ensysce common stock.
     
  6,219,268 shares of common stock outstanding were assumed by the Company.
     
  1,357,968 shares of common stock were issued in settlement of $5.8 million of convertible debt.
     
  19,755 shares of restricted common stock were issued in exchange for previously outstanding warrants to purchase Former Ensysce common stock.
     
  500,000 shares of common stock were issued in settlement of a termination agreement with a strategic advisor dated January 2021.
     
  125,000 shares of common stock were issued in settlement of deferred underwriting costs.

 

15
 

 

Warrants

 

In February 2013, the Company issued 13,170 warrants to purchase common stock, with a ten-year life and an exercise price of $6.23 per share. In August 2019, in connection with the issuance of convertible debt, the Company issued 6,585 warrants to purchase common stock, with a ten-year life and an exercise price of $3.04. As of December 31, 2020, the warrants remained outstanding. On June 30, 2021, the Company issued 19,755 shares of common stock in settlement of the warrants, with such shares subject to restriction until certain conditions are met.

 

On September 30, 2021, outstanding warrants to purchase shares of common stock are as follows:

 

 

Reference

  Shares Underlying Outstanding Warrants   Exercise Price    Description 

 

Classification

(a)   18,901,290   $10.00 - 11.50    LACQ warrants  Equity
(b)   1,106,108   $10.01    Share subscription facility  Equity
(c)   361,158   $7.63    Convertible note  Liability
    20,368,556             

 

(a) On June 30, 2021, as a result of the Closing, the Company assumed a total of 18,901,290 warrants previously issued by LACQ. The warrants provide holders the right to purchase common stock at a strike price of between $10.00 and $11.50 per share and expire June 30, 2026, five years following the completion of the Business Combination. A total of 10,000,000 of the outstanding warrants are public warrants which trade on the OTC Pink Open Market under the ticker symbol ENSCW. The remaining 8,901,290 warrants are private warrants with restrictions on transfer and which have the right to a cashless exercise at the option of the holder.
   
  On August 3, 2021, the Company entered into an agreement with an existing warrant holder to reduce the exercise price of 500,000 warrants issued on June 30, 2021 from $11.50 to $10.00, resulting in an incremental increase in their fair value of $56,591, recognized in general and administrative expense.
   
   
(b) On July 2, 2021, upon public listing of the Company’s shares, the Company issued 1,106,108 warrants to purchase common stock pursuant to the share subscription facility. The warrants have a three-year life and an exercise price of $10.01 per share. The grant date fair value of the warrants, based on the $14.49 stock price on the date of issuance, was $11.6 million, and was recognized in general and administrative expense due to the uncertainty of future issuance of shares under the share subscription facility.
   
(c) On September 24, 2021, the Company issued 361,158 warrants in connection with the issuance of the convertible notes. The warrants were immediately exercisable with an exercise price of $7.63 and expire on September 23, 2026.

 

The fair value of each warrant issued has been determined using the Black-Scholes option-pricing model. The material assumptions used in the Black-Scholes model in estimating the fair value of the warrants issued for the periods presented were as follows:

   Share
subscription
facility
     Liability classified warrants (grant date 9/24/2021)   Liability classified warrants (remeasured at 9/30/2021) 
Stock price  $14.49     $ 4.49   $3.03 
Exercise price  $10.01     $       7.63   $7.63 
Expected term (years)   3.00       5.00    5.00 
Volatility   110.0%      94.1 %  94.1%
Risk free rate   0.5%      1.0 %  1.0%

 

NOTE 9 - STOCK-BASED COMPENSATION

 

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.

 

In connection with the Business Combination, the Company assumed the 2021 Omnibus Incentive Plan (the “2021 Omnibus 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 Plan provides for the conversion with existing terms of the 4,444,068 options outstanding under Former Ensysce stock plans and reserves for issuance an additional 1,000,000 shares for future awards under the 2021 Omnibus Plan. No further awards may be made under the Former Ensysce stock plans.

 

As of September 30, 2021 and December 31, 2020, the options outstanding under each plan were as follows:

 

   September 30,   December 31, 
   2021   2020 
Legacy Plans   -    543,106 
2016 Plan   -    4,034,332 
2019 Directors Plan   -    151,455 
2021 Omnibus Plan   4,444,068    - 
Total options outstanding   4,444,068    4,728,893 

 

Option Activity

 

During the three and nine months ended September 30, 2020, the Company granted stock options to purchase an aggregate of 65,850 and 131,700 shares of common stock to members of the board of directors. The options vest over three years and have an exercise price of $3.35 per share.

 

16
 

 

The Company recognized within general and administrative expense stock-based compensation expense of $24,833 and $105,026 for the three and nine months ended September 30, 2021, respectively. The Company recognized within general and administrative expense stock-based compensation expense of $51,510 and $120,061 for the three and nine months ended September 30, 2020, respectively. During the three and nine months ended September 30, 2021 and 2020, there was no stock-based compensation allocated to research and development expense.

 

The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2021:

 

       Weighted average     
   Options   Exercise price   Remaining contractual life   Intrinsic value 
Outstanding at December 31, 2020   4,728,893   $2.28    6.80   $1,817,383 
Granted   -    -         - 
Exercised   (284,825)