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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, 2022

 

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

 

ENSC

 

The Nasdaq Stock Market LLC

Warrants to purchase one share of Common Stock   ENSCW   OTC Pink Open Market

 

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 7, 2022, the registrant had 2,841,091 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 our 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 us 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 our product candidates;
     
  the risk that our clinical trials may fail to replicate positive results from earlier preclinical studies or clinical trials conducted by us or third parties;
     
  the risk that the potential product candidates that we develop 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 Quarterly Report on Form 10-Q;
     
  the risk that we will be unable to successfully market or gain market acceptance of its product candidates;
     
  the risk that our product candidates may not be beneficial to patients or successfully commercialized;
     
  the risk that we have 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 we depend for laboratory, clinical development, manufacturing, and other critical services will fail to perform satisfactorily;
     
  the risk that our 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 we 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 our management team;
     
  changes in our regulatory environment;
     
  the ability to attract and retain key scientific, medical, commercial, or management personnel;
     
  changes in our industry;

 

  our 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; and
     
  other factors disclosed in this Quarterly Report on Form 10-Q.

 

The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on Ensysce’s current expectations and beliefs concerning future developments and their potential effects Ensysce. There can be no assurance that future developments affecting Ensysce will be those that Ensysce has anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond Ensysce’s control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. Moreover, the occurrence of the events described in the “Risk Factors” in our Annual Report on Form 10-K may adversely affect Ensysce. Ensysce will not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

i
 

 

GLOSSARY

 

Definitions:    
2021 Notes   The senior secured convertible promissory notes in the aggregate original principal amount of $15.9 million, sold in two closings on September 24, 2021 and November 5, 2021, respectively, pursuant to the Securities Purchase Agreement entered into on September 24, 2021
2022 Notes   The senior secured convertible promissory notes in the aggregate original principal amount of $8.48 million, sold in two closings on July 1, 2022, and August 9, 2022, respectively, pursuant to the Securities Purchase Agreement entered into on June 30, 2022
2021 Omnibus Incentive Plan   Ensysce Biosciences, Inc. Amended and Restated 2021 Omnibus Incentive Plan
Aggregate Limit   Up to $60 million of gross proceeds with respect to the GEM Agreement
ASC 606   Accounting Standards Codification Topic 606, Revenue from Contracts with Customers
ASC 740   Accounting Standards Codification Topic 740, Income Taxes
ASC 820   Accounting Standards Codification Topic 820, Fair Value Measurements
Board   Board of directors of Ensysce, or a committee thereof, as applicable
Business Combination   The merger of Merger Sub with and into Former Ensysce, with Former Ensysce continuing as the surviving entity and a wholly-owned subsidiary of LACQ, which changed its name to Ensysce Biosciences, Inc. following consummation of the Merger.
CMOs   Contract manufacturing organizations
Company   Ensysce Biosciences, Inc. and its consolidated subsidiaries
COVID-19   Novel coronavirus disease
CROs   Contract research organizations
EBIR   A clinical stage pharmaceutical company (formerly Covistat, Inc.) that is developing a compound utilized in the Company’s overdose protection program for the treatment of COVID-19 and a 79.2%-owned subsidiary of the Company
Ensysce   Ensysce Biosciences, Inc.
Exchange Act   Securities Exchange Act of 1934
FDA   United States Food and Drug Administration
Former Ensysce   Ensysce Biosciences, Inc., a Delaware corporation, prior to the consummation of the merger with and into Merger Sub
GAAP   Generally Accepted Accounting Principles in the United States of America
GEM Agreement   Share Purchase Agreement between the Company, GEM Global, and GYBL, dated as of December 29, 2020, including a Registration Rights Agreement between the same parties and dated as of the same date
GEM Global   GEM Global Yield LLC SCS
GYBL   GEM Yield Bahamas Limited
IND   Investigational New Drug
IRB   Institutional Review Board
JOBS Act   Jumpstart Our Business Startups Act of 2012
LACQ   Leisure Acquisition Corp., a Delaware Corporation
Merger Agreement   Agreement and Plan of Merger, dated as of January 31, 2021, by and among LACQ, Merger Sub and Former Ensysce, providing for, among other things, and subject to the terms and conditions therein, a business combination between Former Ensysce and LACQ pursuant to the proposed merger of Merger Sub with and into Former Ensysce, with Former Ensysce surviving the transaction as a wholly-owned subsidiary of LACQ, which changed its name to Ensysce Biosciences, Inc. following consummation of the Merger
Merger Sub   EB Merger Sub, Inc., a Delaware corporation, a wholly-owned subsidiary of LACQ prior to the consummation of the Merger
MPAR   Multi-Pill Abuse Resistance
MPAR Grant   Research and development grant related to the development of its MPARTM overdose prevention technology awarded to the Company by NIH through NIDA in September 2018
Nasdaq   Nasdaq Stock Market LLC
NIDA   National Institute of Drug Abuse
NIH   National Institutes of Health
OUD Grant   Research and development grant related to the development of its TAAP/MPARTM abuse deterrent technology for Opioid Use Disorder awarded to the Company by NIH/NIDA in September 2019
Reverse Stock Split   The reclassification and combination of all shares of our common stock outstanding at a ratio of 1-for-20 approved by our stockholders at the Special Meeting held on September 8, 2022 and effective on October 28, 2022
SEC   U.S. Securities and Exchange Commission
Securities Act   Securities Act of 1933
Securities Purchase Agreement   The Securities Purchase Agreement, dated as of September 24, 2021 or June 30, 2022, as the context dictates, by and between Ensysce and the institutional investors party thereto
TAAP   Trypsin Activated Abuse Protection

 

ii
 

 

Table of Contents

 

    Page
     
  Forward-Looking Statements i
  Glossary ii
     
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 Consolidated Financial Statements (Unaudited) 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Item 4. Controls and Procedures 38
     
PART II. OTHER INFORMATION 39
     
Item 1. Legal Proceedings 39
Item 1A. Risk Factors 39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 40
Item 4. Mine Safety Disclosures 40
Item 5. Other Information 40
Item 6. Exhibits 40
Signatures 41

 

iii
 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Ensysce Biosciences, Inc.

Consolidated Balance Sheets

 

   September 30, 2022   December 31, 2021 
    (Unaudited)       
Assets          
Current assets:          
Cash and cash equivalents  $4,503,081   $12,264,736 
Unbilled receivable   140,813    441,721 
Right-of-use asset   35,313    24,721 
Prepaid expenses and other current assets   2,983,071    2,931,415 
Total current assets   7,662,278    15,662,593 
Property and equipment, net   -    - 
Other assets   627,550    754,756 
Total assets  $8,289,828   $16,417,349 
Liabilities and stockholders’ equity (deficit)          
Current liabilities:          
Accounts payable  $1,285,514   $301,104 
Accrued expenses and other liabilities   2,236,273    3,407,533 
Payable to related parties   800,000    - 
Lease liability   35,403    24,874 
Notes payable and accrued interest ($7,199,135 and $12,358,886 at fair value at September 30, 2022 and December 31, 2021, respectively)   7,552,774    12,748,155 
Total current liabilities   

11,909,964

    16,481,666 
Long-term liabilities:          
Notes payable, net of current portion (at fair value)   1,386,967    4,440,951 
Other long-term liabilities   1,414,829    3,652,790 
Total long-term liabilities   2,801,796    8,093,741 
Total liabilities  $14,711,760   $24,575,407 
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, 2022 (unaudited) and December 31, 2021   -    - 
Common stock, $0.0001 par value, 250,000,000 and 150,000,000 shares authorized at September 30, 2022 and December 31, 2021; 2,208,446 and 1,233,148 shares issued at September 30, 2022 (unaudited) and December 31, 2021, respectively; 2,207,458 and 1,232,160 shares outstanding at September 30, 2022 (unaudited) and December 31, 2021, respectively   221    124 
Additional paid-in capital   99,314,436    77,967,200 
Accumulated deficit   (105,409,155)   (85,845,567)
Total Ensysce Biosciences, Inc. stockholders’ deficit   (6,094,498)   (7,878,243)
Noncontrolling interests in stockholders’ deficit   (327,434)   (279,815)
Total stockholders’ deficit   (6,421,932)   (8,158,058)
Total liabilities and stockholders’ deficit  $8,289,828   $16,417,349 

 

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

 

1

 

 

Ensysce Biosciences, Inc.

Consolidated Statements of Operations

(Unaudited)

 

   2022   2021   2022   2021 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Federal grants  $279,351   $1,200,816   $1,089,920   $1,895,907 
Operating expenses:                    
Research and development   4,756,096    1,714,635    13,393,948    2,502,232 
General and administrative   1,686,580    16,372,976    5,717,281    17,257,361 
Total operating expenses   6,442,676    18,087,611    19,111,229    19,759,593 
                     
Loss from operations   (6,163,325)   (16,886,795)   (18,021,309)   (17,863,686)
                     
Other income (expense):                    
Issuance costs for convertible notes   (1,118,721)   (500,158)   (1,118,721)   (500,158)
Change in fair value of derivative liabilities   -    -    -    673,314 
Loss on issuance of convertible notes   

(3,609,944

)   -    

(3,609,944

)   - 
Change in fair value of convertible notes   3,491,513    1,071,099    6,169,929    1,071,099 
Issuance of liability classified warrants   (3,737,371)   (1,325,804)   (3,737,371)   (1,325,804)
Change in fair value of liability classified warrants   2,683,340    405,086    5,626,130    405,086 
Loss on debt conversions   (1,404,877)   -    (4,000,155)   - 
Interest expense   (4,859)   (24,660)   (57,662)   (1,282,820)
Loss on extinguishment of debt   -    -         (347,566)
Other income and expense, net   8,679    61,758    19,494    61,758 
Total other income (expense), net   (3,692,240)   (312,679)   (708,300)   (1,245,091)
                     
Net loss  $(9,855,565)  $(17,199,474)  $(18,729,609)  $(19,108,777)
Net loss attributable to noncontrolling interests   (21,492)   (35,948)   (47,619)   (61,976)
Deemed dividend related to warrants down round provision   63,539    -    881,598    - 
Net loss attributable to common stockholders  $(9,897,612)  $(17,163,526)  $(19,563,588)  $(19,046,801)
Net loss per share:                    
Net loss per share attributable to common stockholders, basic and diluted  $(5.13)  $(14.15)  $(11.74)  $(20.31)
Weighted average common shares outstanding, basic and diluted   1,928,727    1,212,791    1,666,253    937,764 

 

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)

 

   Shares   Amount   Capital   Deficit   interests   Total 
   Stockholders’ Equity (Deficit) 
   Common Stock   Additional             
   Number of       Paid - In   Accumulated   Noncontrolling     
   Shares   Amount   Capital   Deficit   interests   Total 
Balance on June 30, 2021   1,212,791   $122   $63,252,814   $(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   1,212,791   $122   $74,899,709   $(75,005,517)  $(279,601)  $(385,287)
                               
Balance on June 30, 2022   1,776,520   $178   $95,019,729   $(95,511,543)  $(305,942)  $(797,578)
Conversion of convertible notes   428,438    43    4,074,020    -    -    4,074,063 
Stock-based compensation   -    -    157,148    -    -    157,148 
Settlement of restricted stock units   2,500    -    -    -    -    - 
Deemed dividend related to warrants down round provision   -    -    63,539    (63,539)   -    - 
Net loss   -    -    -    (9,834,073)   (21,492)   (9,855,565)
Balance on September 30, 2022   2,207,458   $221   $

99,314,436

   $(105,409,155)  $(327,434)  $(6,421,932)

 

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       Additional             
   Number of       Paid-In   Accumulated   Noncontrolling     
   Shares   Amount   Capital   Deficit   interests   Total 
Balance on December 31, 2020   11,973,258   $300   $49,517,614   $(55,958,716)  $(217,625)  $(6,658,427)
                               
Retroactive application of recapitalization   (11,184,821)   (220)   220    -    -    - 
Balance on December 31, 2020, effect of reverse recapitalization   788,437    80    49,517,834    (55,958,716)   (217,625)   (6,658,427)
Exercise of stock options   14,241    1    262,861    -    -    262,862 
Settlement of convertible notes   67,899    7    5,696,696    -    -    5,696,703 
Issuance of common stock for business combination, net of transaction costs   342,214    34    7,695,230    -    -    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   1,212,791   $122   $74,899,709   $(75,005,517)  $(279,601)  $(385,287)
                               
Balance on December 31, 2021   1,232,160   $124   $77,967,200   $(85,845,567)  $(279,815)  $(8,158,058)
Consultant compensation   2,507    -    54,250    -    -    54,250 
Conversions of convertible notes   937,924    93    17,868,004    -    -    17,868,097 
Settlement of restricted stock units   34,867    

4

    

(4

)   -    -    - 
Stock-based compensation   -    -    2,543,388    -    -    2,543,388 
Deemed dividend related to warrants down round provision   -    -    881,598    (881,598)   -    - 
Net loss   -    -    -    (18,681,990)   (47,619)   (18,729,609)
Balance on September 30, 2022   2,207,458   $221   $99,314,436   $(105,409,155)  $(327,434)  $(6,421,932)

 

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

 

4

 

 

Ensysce Biosciences, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

   2022   2021 
   Nine Months Ended September 30, 
   2022   2021 
Cash flows from operating activities:          
Net loss  $(18,729,609)  $(19,108,777)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   -    151 
Gain on sale of asset   (4,500)   - 
Accrued interest   57,536    336,851 
Accretion of discounts on promissory notes   -    945,969 
Change in fair value of derivative liabilities   -    (673,314)
Change in fair value of liability classified warrants   (5,626,130)   - 
Loss on issuance of convertible notes   

3,609,944

    - 
Change in fair value of convertible notes   (6,169,929)   (1,071,099)
Loss on extinguishment of debt   -    347,566 
Stock-based compensation   855,160    105,026 
Issuance of warrants for share subscription facility   -    11,565,472 
Issuance of liability classified warrants   3,737,371    620,718 
Issuance costs for convertible notes   946,085    800,158 
Commitment fee for share subscription facility   -    1,124,292 
Warrant modification   -    56,590 
Lease cost   (63)   (1,838)
Loss on debt conversions   4,000,155    - 
Changes in operating assets and liabilities:          
Unbilled receivable   300,908    (86,867)
Prepaid expenses and other assets   475,499    (683,492)
Accounts payable   984,410    (1,252,740)
Accrued expenses and other liabilities   971,344    2,500,970 
Net cash used in operating activities   (14,591,819)   (4,474,364)
Cash flows from investing activities:          
Proceeds from sale of asset   4,500    - 
Net cash provided by investing activities   4,500    - 
Cash flows from financing activities:          
Proceeds from issuance of convertible notes, net   7,533,915    4,549,842 
Proceeds from issuance of promissory notes to related parties   -    350,000 
Proceeds from exercise of stock options   -    262,862 
Repayment of promissory notes   -    (467,774)
Repayments of convertible notes   (265,812)   - 
Proceeds from issuance of common stock for business combination, net of transaction costs   -    6,626,312 
Repayment of financed insurance premiums   (442,439)   (195,420)
Net cash (used in) provided by financing activities   6,825,664    11,125,822 
Increase in cash and cash equivalents   (7,761,655)   6,651,458 
Cash and cash equivalents beginning of period   12,264,736    194,214 
Cash and cash equivalents end of period  $4,503,081   $6,845,672 
           
Supplemental cash flow information:          
Income tax payments  $1,600   $1,600 
Supplemental disclosure of non-cash investing and financing activities:          
Stock-based compensation  $1,742,478   $- 
Conversions of convertible notes and accrued interest into common stock  $13,879,535   $5,696,703 
Payable to related parties  $800,000   $- 
Net assets acquired in business combination  $-   $1,068,950 
Financed insurance premiums  $399,949   $867,300 
Share subscription facility transaction costs  $-   $12,689,764 
Deemed dividend related to warrants down round provision  $881,598   $- 

 

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, EBIR, Inc. (“EBIR”, formerly Covistat, Inc.) and its wholly-owned subsidiaries EBI Operating, Inc. and EBI OpCo, Inc. (collectively, the “Company”), is a clinical-stage biotech company using its two novel proprietary technology platforms to develop safer prescription drugs. The primary focus of the Company is developing abuse and overdose resistant pain drugs, with a clinical stage program for the abuse resistant, TAAP (Trypsin Activated Abuse Protection) opioid product candidate, PF614. In addition, the Company is developing its MPARTM (Multi-Pill Abuse Resistance) technology for overdose protection which will be applied to the PF614 program. The Company has also 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, LACQ entered into the Merger Agreement with Former Ensysce and 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”). 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 began trading 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. In August 2022, Covistat was renamed EBIR, Inc. Ensysce is a 79.2% stockholder in EBIR, with 19.8% and 1.0% of the shares held by certain key personnel of the Company and an unrelated party, respectively. EBIR’s emphasis is now on developing one or more compounds utilized in Ensysce’s overdose protection program for the treatment of respiratory diseases.

 

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.

 

NOTE 2 - BASIS OF PRESENTATION

 

The consolidated financial statements have been prepared in accordance with GAAP and pursuant to the rules and regulations of the 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.

 

6

 

 

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, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021, which may be found in the Company’s Form 10-K filed with the SEC on March 31, 2022.

 

Reverse Stock Split

 

In October 2022, the Company completed a 1-for-20 reverse split of its outstanding common stock. All references in these consolidated financial statements to shares and per share amounts in all periods have been retroactively restated to reflect the split (see Note 11).

 

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.

 

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 $105.4 million at September 30, 2022. 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 the GEM Agreement. 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 controls 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, 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 55,306 warrants with a five-year term to purchase common stock of Ensysce at an exercise price of $200.20 per share (Note 8). The Company is required to pay a commitment fee to the investor of $1.2 million with $0.8 million due on the first anniversary of the public listing date and $0.4 million due on the 18-month anniversary of the public listing date. The first $0.8 million of the commitment fee was paid in July 2022 in common stock of the Company (Note 10) and the remaining $0.4 million due in January 2023 may be paid from the proceeds of a draw against the facility or in freely tradable common stock of the Company.

 

7

 

 

In September 2021, the Company entered into a $15.9 million convertible note financing agreement with institutional investors (the “2021 Notes”) (See Note 7 for additional information). In July and August 2022, the Company received funding under a $8.48 million convertible note financing agreement with the same institutional investors (the “2022 Notes”) (Note 7). The agreements limit the Company’s ability to execute certain debt and equity financings, including under the GEM Agreement, while the convertible notes are outstanding. Without the availability of proceeds through the GEM Agreement, 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.

 

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, 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. No depreciation expense was recognized for the three and nine months ended September 30, 2022. Depreciation expense of $50 and $151 was recognized for the three and nine months ended September 30, 2021. 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, 2022 and 2021.

 

8

 

 

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.

 

Fair Value Measurement

 

ASC 820, Fair Value Measurements, (“ASC 820”) provides guidance on the development and disclosure of fair value measurements. Pursuant to ASC 820, 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.

 

As of September 30, 2022 and December 31, 2021, 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.

 

2021 Notes

 

In 2021 the Company issued convertible notes with a face value of $15.9 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 fair value estimate of the 2021 Notes was based on a discounted cash flow model and a Monte Carlo model, which represent Level 3 measurements. Significant assumptions include the discount rate used in the discounted cash flow model and the expected premium for conversion used in the Monte Carlo model. Changes in the fair value of the notes are recognized in other income (expense) for each reporting period. Refer to Note 7 for details of the terms and conditions of the 2021 Notes.

 

2022 Notes

 

In July 2022 the Company issued convertible notes with a face value of $8.5 million. The 2022 Notes are accounted for under ASC 480 – Distinguishing Liabilities from Equity, due to share settlement features contained within the notes. As a result, the 2022 Notes are recorded as liabilities at fair value at the balance sheet date with changes in the fair value of the notes recognized in other income (expense) for each reporting period. The fair value estimate of the 2022 Notes was based on a discounted cash flow model and a Monte Carlo model, which represent Level 3 measurements. Significant assumptions include the discount rate used in the discounted cash flow model and the expected premium for conversion used in the Monte Carlo model. Refer to Note 7 for details of the terms and conditions of the 2022 Notes.

 

9

 

 

Warrants

 

In 2021 the Company issued liability classified warrants in connection with the issuance of the 2021 Notes. In 2022 the Company issued liability classified warrants in connection with the issuance of the 2022 Notes. The warrants were liability classified due to certain cash settlement features and included in “Other long-term liabilities” on the consolidated balance sheets. The Company uses a Black Scholes model to estimate the fair value of the warrants. Changes in the fair value of the warrants are recognized in other income (expense) for each reporting period. Refer to Note 8 for details of the warrants.

 

The following tables present assets and liabilities measured and recorded at fair value on the Company’s consolidated balance sheet as of September 30, 2022 and December 31, 2021.

 

   Total   Level 1   Level 2   Level 3 
   September 30, 2022 
   Total   Level 1   Level 2   Level 3 
Fair value of convertible notes  $8,586,102   $-   $-   $8,586,102 
Liability classified warrants   1,414,829    -    -    1,414,829 
Total  $10,000,931   $-   $-   $10,000,931 

 

   Total   Level 1   Level 2   Level 3 
   December 31, 2021 
   Total   Level 1   Level 2   Level 3 
Fair value of convertible note  $16,799,837   $-   $-   $16,799,837 
Liability classified warrants   3,303,588    -    -    3,303,588 
Total  $20,103,425   $-   $-   $20,103,425 

 

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

 

   Total   Convertible notes   Liability classified warrants 
Fair value, December 31, 2021  $20,103,425   $16,799,837   $3,303,588 
Additions, net   12,217,371    8,480,000    3,737,371 
Conversions   (14,133,750)   (14,133,750)   - 
Change in fair value   (8,186,115)   (2,559,985)   (5,626,130)
Fair value, September 30, 2022  $10,000,931   $8,586,102   $1,414,829 

 

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 June 2022, the Company received a Notice of Award for an additional $2.8 million of funding in year 4 under the MPAR Grant from July 1, 2022 through June 30, 2023. This brings total funding under this grant to approximately $10.8 million.

 

10

 

 

In September 2019, the NIH/National Institute on Drug Abuse awarded the Company a 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 was approximately $5.4 million and the current grant period ends in August 2023.

 

The Company recognizes revenue when costs related to the grants are incurred. The Company believes this policy is consistent with the overarching premise in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“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 reimbursable amounts become due is analogous to the concept of transfer of control of a service over time under ASC 606.

 

The revenue recognized under the MPAR Grant and OUD Grant was as follows:

 

   September 30, 2022   September 30, 2021   September 30, 2022   September 30, 2021 
   Three Months Ended   Nine months ended 
   September 30, 2022   September 30, 2021   September 30, 2022   September 30, 2021 
MPAR  $206,290   $1,119,312   $710,761   $1,246,424 
OUD   73,061    81,504    379,159    649,483 
Total  $279,351   $1,200,816   $1,089,920   $1,895,907 

 

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.

 

Immaterial Correction of an Error Adjusted in Prior Quarter

 

In August 2022, the Company concluded that due to an error in the measurement of the unbilled receivable and the associated grant revenue as of December 31, 2021, and March 31, 2022, the June 30, 2022, balance sheet would be adjusted. The change resulted in a decrease in the balance of the unbilled receivable of $214,308 as of June 30, 2022 and a corresponding increase in general and administrative expense presented in the consolidated statement of operations for the three months ended June 30, 2022.

 

The Company, in consultation with the Audit Committee of the Board of Directors, evaluated the effect of these adjustments on the Company’s consolidated financial statements under ASC 250, Accounting Changes and Error Corrections and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements and determined it was not necessary to recall its previously issued consolidated financial statements as the errors did not materially misstate any previously issued consolidated financial statements and the correction of the error in the current fiscal year is also not material. The Company looked at both quantitative and qualitative characteristics of the required corrections in making the determination.

 

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, 2022 and 2021, stock-based compensation costs are recorded in general and administrative expenses and research and development 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 over the same remaining amortization schedule as the unvested underlying equity awards.

 

11

 

 

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.

 

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:

 

   2022   2021   2022   2021 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
Numerator:                
Net loss attributable to common stockholders  $(9,897,612)  $(17,163,526)  $(19,563,588)  $(19,046,801)
                     
Denominator:                    
Weighted average shares outstanding, basic and diluted   1,928,727    1,212,791    1,666,253    937,764 
                     
Net loss per share attributable to common stockholders, basic and diluted  $(5.13)  $(14.15)  $(11.74)  $(20.31)

 

 

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:

 

   2022   2021   2022   2021 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
Stock options   350,995    222,203    328,538    225,833 
Warrants   1,054,544    1,000,953    1,054,544    335,531 
Total   1,405,539    1,223,156    1,383,082    561,364 

 

12

 

 

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. On January 1, 2022, the Company adopted ASU 2019-12 and the adoption did not have a significant impact 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.

 

In May 2021, the FASB issued ASU No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (A Consensus of the FASB Emerging Issues Task Force (the “EITF”)) – to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The guidance in the ASU requires the issuer to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. Under the amendments, an issuer should measure the effect of a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before modification. The EITF concluded that the recognition of the modification depends on the nature of the transaction in which a warrant is modified. If there is more than one element in a transaction (for example, if the modification involves both a debt modification and an equity issuance), then the guidance requires the issuer to allocate the effect of the option modification to each element. On January 1, 2022, the Company adopted ASU 2021-04 and the adoption did not have a significant impact on the consolidated financial statements.

 

13

 

 

NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of the following:

 

   September 30,   December 31, 
   2022   2021 
Prepaid research and development  $2,323,473   $2,124,008 
Prepaid insurance   550,634    733,234 
Other prepaid expenses   108,964    74,173 
Total prepaid expenses and other current assets  $2,983,071   $2,931,415 

 

NOTE 5 – ACCRUED EXPENSES AND OTHER LIABILITIES

 

Accrued expenses and other liabilities consisted of the following:

 

   September 30,   December 31, 
   2022   2021 
Share subscription facility commitment fees  $400,000   $800,000 
Accrued research and development   1,186,498    388,997 
Bonus accrual   297,224    610,000 
Professional fees   203,034    138,086 
Accrued scientific advisory board fees   60,032    60,032 
Consultant stock compensation expenses   -    1,342,479 
Other accrued liabilities   89,485    67,939 
Total accrued expenses and other liabilities  $2,236,273   $3,407,533 

 

Other long-term liabilities consisted of the following:

   September 30,   December 31, 
   2022   2021 
Share subscription facility commitment fees  $-   $349,202 
Liability classified warrants   1,414,829    3,303,588 
Total other long-term liabilities  $1,414,829   $3,652,790 

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

Purchase Commitments

 

As of September 30, 2022, the Company’s commitments included an estimated $25.7 million related to the Company’s open purchase orders and contractual obligations that occurred in the ordinary course of business, including commitments with contract research organizations for multi-year pre-clinical and clinical research studies. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the Company the option to cancel, reschedule, and adjust its requirements based on its business needs prior to the delivery of goods or the performance of services.

 

Litigation

 

As of September 30, 2022 and December 31, 2021, 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.

 

14

 

 

Lease

 

In August 2020, the Company entered into an agreement to lease office space. The original lease commencement date was October 1, 2020 and was subsequently amended to extend the term of the lease through October 31, 2023 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, 2022, the future lease payments totaled $35,403.

 

The Company recognized total rent expense of $7,939 and $23,606 in the three and nine months ended September 30, 2022, and $11,781 and $36,058 in the three and nine months ended September 30, 2021.

 

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 25,000 shares of common stock with a five-year term and an exercise price of $125.60 each, 2,500 shares of common stock each, and 10,000 restricted stock units each. The restricted stock units vested over one year with 50% of the vesting contingent upon certain market conditions. These equity awards were contingent upon shareholder approval of an amended and restated 2021 Omnibus Plan at a special shareholder meeting in January 2022, at which time the warrants were replaced by non-qualified stock options with similar terms. As the original terms of the awards did not satisfy the grant date criteria for an equity award, as of December 31, 2021, the Company recorded a liability $1,342,479 to reflect the estimated value of services received during the period. On February 14, 2022, the equity awards were granted, and the Company reclassified the outstanding liability to stockholders’ equity (See Note 9 for additional details of the Company’s stock-based compensation).

 

NOTE 7 – NOTES PAYABLE

 

The following table provides a summary of the Company’s outstanding debt as of September 30, 2022:

 

   Principal balance   Accrued interest   Fair Value Adjustment   Net debt balance 
2021 Notes  $379,695   $11,006   $-   $390,701 
2022 Notes   8,126,667    93,559    (24,825)   8,195,401 
Financed Insurance   348,780    4,859    -    353,639 
Total  $8,855,142   $109,424   $(24,825)  $8,939,741 

 

The following table provides a summary of the Company’s outstanding debt as of December 31, 2021:

 

   Principal balance   Accrued interest  

Fair value adjustment

   Net debt balance 
2021 Notes  $13,647,341   $159,435   $2,993,061   $16,799,837 
Financed Insurance   385,187    4,082    -    389,269 
Total  $14,032,528   $163,517   $2,993,061   $17,189,106 

 

15

 

 

The interest expense recognized for notes payable (excluding the 2021 Notes) was as follows:

 

   September 30, 2022   September 30, 2021   September 30, 2022   September 30, 2021 
   Three months ended   Nine months ended 
   September 30, 2022   September 30, 2021   September 30, 2022   September 30, 2021 
Stated interest accrual  $4,859   $24,660   $6,864   $251,857 
Debt discount amortization   -    -    -    945,969 
Total  $4,859   $24,660   $6,864   $1,197,826 

 

2021 Notes

 

On September 24, 2021, the Company entered into an agreement with institutional investors to issue the 2021 Notes. The agreement provided for two closings: the first closing for $5.3 million (resulting in net proceeds of $4.6 million) occurred on September 24, 2021 (the “First Closing”). The second closing for $10.6 million (resulting in net proceeds of $9.4 million) occurred on November 5, 2021 (the “Second Closing”).

 

The proceeds of the 2021 Notes 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 2021 Notes mature on June 23, 2023 for the First Closing, and August 4, 2023 for the Second Closing. The notes 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 elected to apply the fair value option to the measurement of the 2021 Notes. The total initial fair value of the debt at issuance was $15.9 million. The Company recorded total issuance costs of $1.9 million representing investment banking and legal fees of $1.0 million and original issue discounts of $0.9 million. After multiple conversions (at original contract terms and at amended reduced conversion prices) since issuance, the Company reflected the remaining balance due as of September 30, 2022 and recognized a change in fair value of convertible notes of $45,329 (loss) for the three-month period then ended and a change in fair value of convertible notes of $2.7 million (gain) for the nine-month period ended September 30, 2022 primarily due to reductions in the Company’s stock price. The September 30, 2022 fair value measurement includes the assumption of accrued interest and interest expense (at the stated rate plus an 8% cash settlement premium) and thus a separate amount is not reflected on the consolidated statements of operations. If presented separately, the amount of interest expense after consideration of the conversions would be $39,847 and $0.2 million for the three- and nine-month periods ended September 30, 2022, respectively.

 

The 2021 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 $117.40, 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 2021 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 2021 Notes for cash in an amount equal to 100% of the principal to be redeemed, plus accrued but unpaid interest, plus all other amounts due with respect to the 2021 Notes.

 

Beginning January 1, 2022 for the First Closing, and February 1, 2022 for the Second Closing, and the first of each subsequent month, terminating upon the full redemption of the 2021 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) $117.40 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 $15.60 and the Company has been in compliance with customary requirements under the agreement, unless waived in writing by the holder. If the applicable conversion price is less than $15.60 at the time of the Monthly Redemption Date the Company will be required to fund the difference in cash. During the period ended September 30, 2022, the Company paid $265,812 to fund such differences in cash (reducing the outstanding principal balance of the 2021 Notes).

 

16

 

 

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 2021 Notes. If the Company elects to settle such redemptions in shares, 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 2021 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).

 

The following table provides a summary of the Company’s 2021 note conversions during the nine-month period ending September 30, 2022:

 

Three Months Ended  Shares   Weighted Average
Conversion Price
   Conversion Value 
March 31, 2022   235,428   $27.07   $6,372,700 
June 30, 2022   274,058   $17.61    4,826,053 
September 30, 2022   339,854   $6.84    2,323,081 
Total   849,340        $13,521,834 

 

On August 8, 2022, the parties agreed to modify the conversion price of the remaining 2021 Notes from $15.60 to $7.00 until October 1, 2022, with any remaining balance payable in cash on October 10, 2022. On September 20, 2022, the parties agreed to modify the conversion price of the remaining 2021 notes from $7.00 to $4.60 for the period from September 20, 2022 until September 30, 2022. The Company recorded an inducement expense equal to the excess fair value of the consideration transferred (utilizing the number of shares transferred multiplied by the average of the high/low price on the conversion date) above the securities that would have been issued under the original conversion terms. The total loss on debt conversions was $1.4 million and $4.0 million, for the three- and nine-month periods ended September 30, 2022 and is reflected in other income (expense), net. Included in the loss on debt conversions was $1.0 million related to the inducement expense for the three- and nine-month periods ended September 30, 2022, The remaining 2021 Notes became due and payable on October 10, 2022, at which time they were satisfied with cash (refer to Note 11).

 

2022 Notes

 

On June 30, 2022, the Company entered into an $8.0 million convertible financing agreement with institutional investors. The agreement provided for two closings, each for notes payable of $4.24 million (resulting in gross cash proceeds of $4.0 million). Funds were received for the first closing on July 1, 2022 and for the second closing on August 9, 2022.

 

On the issuance date, the Company assessed the probability of the potential settlement scenarios under the terms of the 2022 Notes and determined that the predominant settlement feature of the 2022 Notes was the redemption feature into shares of the Company’s common stock issuable at the lower of the conversion price or 92% of the average of the three lowest VWAPs in the 10 trading days immediately preceding the redemption date. As the predominant settlement feature of the 2022 Notes is to settle a fixed monetary amount into a variable number of shares, the 2022 Notes fell within the scope of ASC 480. Accordingly, the Company determined that the 2022 Notes should be recorded at estimated fair value on its issuance date and adjusted to its estimated fair value as of each reporting date with the change in estimated fair value recorded as a component other income (expense) in the Company’s consolidated statements of operations.

 

The Company recorded the 2022 Notes at an initial fair value of $12.06 million which included a loss upon issuance of $3.6 million. The loss upon issuance was due to the current share price at issuance exceeding the conversion price. Additionally, the Company recorded issuance costs of $1.1 million representing a 6% original issue discount of $0.5 million, $0.6 million of legal and investment banking fees, which are included in other income (expense) on the consolidated statement of operations. After an initial conversion since issuance, the Company reflected the remaining balance due as of September 30, 2022 at fair value and recognized a change in fair value of convertible notes of $3.5 million (gain) for the three and nine-month period then ended September 30, 2022 primarily due to reductions in the Company’s stock price.

 

The September 30, 2022 fair value measurement includes the assumption of accrued interest and interest expense (at the stated rate plus an 8% cash settlement premium) and thus a separate amount is not reflected on the consolidated statements of operations. If presented separately, the amount of interest expense after consideration of the conversions would be $0.1 million for the three- and nine-month periods ended September 30, 2022.

 

The 2022 Notes are convertible into common stock, at a per share conversion price equal to $10.90, a 10% premium to the average price of the common stock for the three trading days prior to the first closing. Under the Notes, commencing on September 29, 2022 and continuing monthly on the first day of each month beginning November 2, 2022, the Company is obligated to redeem one fifteenth (1/15th) of the original principal amount under the applicable Note, plus accrued but unpaid interest. The Company may elect to pay all or part of the redemption amount in cash with a premium of eight percent or in conversion shares of common stock based on a conversion price equal to the lesser of (i) the conversion price and (ii) 92% of the average of the three lowest VWAPs (as defined) during the ten consecutive trading days ending on the trading day that is immediately prior to the applicable redemption date, but in no event may the Company pay the redemption amount in conversion shares of common stock unless the conversion price is at least equal to $2.006 and the Company has been in compliance with customary requirements under the agreement, unless waived in writing by the holder.

 

17

 

 

In connection with each of the first and second closings of the 2022 Notes the Company also issued warrants to purchase 233,395 shares of the Company’s common stock. The warrants have an exercise price of $14.17, a 30% premium to the conversion price, and are exercisable for five years following issuance of the 2022 Notes. The issuance of these warrants required the Company to reduce the conversion price of the 2021 Notes and the exercise price of the outstanding warrants associated with the 2021 Notes to $15.60.

 

The proceeds of the 2022 Notes will be used for working capital purposes subject to certain customary restrictions are secured by the Company’s rights to its patents and licenses. The Company is restricted from issuing certain additional debt or equity without the prior written consent of the holders for certain specified periods set forth in the 2022 Notes. If, at any time while the 2022 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).

 

The 2022 Notes mature on December 29, 2023 and February 7, 2024, for the first and second closings, respectively. The notes bear interest at a rate of 6% 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 following table provides a summary of the Company’s 2022 Notes conversions during the nine-month period ending September 30, 2022:

 

Three Months Ended  Shares   Weighted Average Conversion Price   Conversion Value 
September 30, 2022   88,584   $4.04   $357,701 
Total   88,584        $357,701 

 

Financed insurance premiums

 

During year ended December 31, 2021, the Company financed its directors’ and officers’ liability insurance in the amount of $0.9 million, of which the note was paid in full as of September 30, 2022. During the quarter ended September 30, 2022, the Company financed its directors’ and officers’ liability insurance in the amount of $0.4 million. The Company expensed $4,589 and $6,684 of interest for the three and nine months ended September 30, 2022, respectively.

 

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. In September 2022, the Company amended and restated its Certificate of Incorporation to authorize shares up to a total of 250,000,000 shares of common stock. As of September 30, 2022 and December 31, 2021, 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:

 

  802,679 shares of common stock were issued to holders of Former Ensysce common stock.
     
  310,963 shares of common stock outstanding were assumed by the Company.
     
  67,899 shares of common stock were issued in settlement of $5.8 million of convertible debt.
     
  988 shares of restricted common stock were issued in exchange for previously outstanding warrants to purchase Former Ensysce common stock.
     
  25,000 shares of common stock were issued in settlement of a termination agreement with a strategic advisor dated January 2021.
     
  6,250 shares of common stock were issued in settlement of deferred underwriting costs.

 

18

 

 

Warrants

 

On September 30, 2022, outstanding warrants to purchase shares of common stock are as follows:

 

Reference   Shares Underlying Outstanding Warrants   Exercise Price   Description  Classification 
(a)    945,063   $200.00 - 230.00    LACQ warrants   Equity 
(b)    55,306   $4.04   Share subscription facility   Equity 
(c)    18,058   $15.60   2021 Notes   Liability 
(d)    36,116   $15.60   2021 Notes   Liability 
(e)    233,394   $14.17   2022 Notes   Liability 
(f)    233,394   $14.17   2022 Notes   Liability 
     1,521,331              

 

a) On June 30, 2021, as a result of the closing of the Business Combination, the Company assumed a total of 945,063 warrants previously issued by LACQ. The warrants provide holders the right to purchase common stock at a strike price of between $200.00 and $230.00 per share and expire June 30, 2026, five years following the completion of the Business Combination. A total of 500,000 of the outstanding warrants are public warrants which trade on the OTC Pink Open Market under the ticker symbol ENSCW. The remaining 445,063 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 25,000 warrants issued on June 30, 2021 from $230.00 to $200.00, resulting in an incremental increase in their fair value of $56,590, recognized in general and administrative expense.
   
b)

On July 2, 2021, upon public listing of the Company’s shares, the Company issued 55,306 warrants to purchase common stock pursuant to the share subscription facility. The warrants have a three-year life and an exercise price of $200.20 per share. The grant date fair value of the warrants, based on the $289.80 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.

 

On December 28, 2021, January 3, 2022, February 1, 2022, March 1, 2022, May 2, 2022,June 1, 2022, July 1, 2022, August 10, 2022, September 20, 2022 and September 29, 2022 the exercise price of the warrants adjusted to $90.00 per share, $56.60 per share, $31.60 per share, $19.20 per share, $18.80 per share, $9.20 per share, $8.00 per share, $7.00 per share, $4.60 per share and $4.00 for those conversion dates, respectively, as required by a down round adjustment feature of the warrant, due to common stock issued at a price below the then current exercise price. The difference in fair value of the existing warrant prior to the adjustment and the value of the warrant after (utilizing a “Black-Scholes model”) is reflected on the consolidated statement of operations as a “deemed dividend.”

   
c) On September 24, 2021, the Company issued 18,058 warrants in connection with the issuance of the 2021 Notes. The warrants were immediately exercisable with an exercise price of $152.60 (subject to downward revision protection in the event the Company makes certain issuances of common stock at prices below the conversion price) and expire on September 23, 2026. As a result of the issuance of the 2022 Notes in July of 2022, the exercise price of these warrants was adjusted down to $15.60. The difference in fair value of the existing warrant prior to the adjustment and the value of the warrant after (utilizing a “Black-Scholes model”) is reflected on the consolidated statement of operations in other income (expense).

 

19

 

 

d) On November 5, 2021, the Company issued 36,116 warrants in connection with the issuance of the 2021 Notes. The warrants were immediately exercisable with an exercise price of $152.60 (subject to downward revision protection in the event the Company makes certain issuances of common stock at prices below the conversion price) and expire on November 4, 2026. As a result of the issuance of the 2022 Notes in July of 2022, the exercise price of these warrants was adjusted down to $15.60. The difference in fair value of the existing warrant prior to the adjustment and the value of the warrant after (utilizing a “Black-Scholes model”) is reflected on the consolidated statement of operations in other income (expense).
   

e)

 

On July 1, 2022, the Company issued 233,394 warrants in connection with the issuance of the 2022 Notes. The warrants were immediately exercisable with an exercise price of $14.17 (subject to downward revision protection in the event the Company makes certain issuance of common stock at prices below the conversion price) and expire on June 29, 2027.
   
f) On August 9, 2022, the Company issued 233,394 warrants in connection with the issuance of the 2022 Notes. The warrants were immediately exercisable with an exercise price of $14.17 (subject to downward revision protection in the event the Company makes certain issuance of common stock at prices below the conversion price) and expire on August 8, 2027.

 

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:

 

   (a) LACQ
warrants
(grant date varies)
  (b) Share
subscription facility
(grant date 7/2/21)
    (b) Share
subscription facility
(remeasurement
date varies)
 
Stock price  $289.80   $289.80    $4.80-85.80 
Exercise price  $200.00-230.00    $200.20    $4.00-90.00 
Expected term (years)   3.00   3.00     1.76-2.49 
Volatility   110.0%  110.0%     108.2%-125.3% 
Risk free rate   0.5%  0.5%     1.0%-4.2% 

 

   (c) Liability
classified warrants
(grant date
9/24/21)
   (c) Liability
classified warrants
(remeasured
at 9/30/22)
   (d) Liability
classified warrants
(grant date
11/5/21)
   (d) Liability
classified warrants
(remeasured at
9/30/22)
 
Stock price  $89.80   $4.30   $45.00   $4.30 
Exercise price  $152.60   $15.60   $152.60   $15.60 
Expected term (years)   5.00    4.00    5.00    4.10 
Volatility   94.1%   116.1%   94.1%   114.9%
Risk free rate   1.0%   4.1%   1.0%   4.1%

 

   (e) Liability
classified warrants
(grant date
7/1/22)
   (e) Liability
classified warrants
(remeasured
9/30/22)
   (f) Liability
classified warrants
(grant date
8/9/22)
   (f) Liability
classified warrants
(remeasured
9/30/22)
 
Stock price  $11.40   $4.40   $10.60   $4.40 
Exercise price  $14.20   $14.20   $14.20   $14.20 
Expected term (years)   5.00    4.75    5.00    4.86 
Volatility   98.9%   109.4%   102.8%   108.3%
Risk free rate   2.9%   4.1%   3.0%   4.1%

 

20

 

 

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 221,191 options outstanding under Former Ensysce stock plans and reserves for issuance an additional 50,000 shares for future awards under the 2021 Omnibus Plan. On January 26, 2022, the 2021 Omnibus Plan was amended and restated to include an additional 150,000 shares available for future grant and to provide for future annual increases. No further awards may be made under the Former Ensysce stock plans.

 

The Company recognized within general and administrative expense stock-based compensation expense of $128,357 and $731,126 for the three and nine months ended September 30, 2022, and $24,833 and $105,026 for the three and nine months ended September 30, 2021. During the three and nine months ended September 30, 2022, the Company recognized stock-based compensation expense of $28,791 and $124,034 within research and development. During the three and nine months ended September 30, 2021, there was no stock-based compensation allocated to research and development.

 

Option Activity

 

During the nine months ended September 30, 2022, the Company granted stock options to purchase an aggregate of 114,550 shares of common stock to employees, consultants and members of the board of directors. The options vest over periods between zero and 4 years and have an exercise price of between $8.50 and $125.60 per share. There were no stock option grants in 2021.

 

21

 

 

The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2022:

 

       Weighted average     
   Options   Exercise price   Remaining
contractual life
   Intrinsic value 
Outstanding at December 31, 2021   222,191   $48.00    6.00   $10,207,306 
Granted   114,550    77.30    7.63    - 
Exercised   -    -    -    - 
Expired / Forfeited   (10,000)   21.40    -    - 
Outstanding at September 30, 2022   326,741    59.13    6.57    - 
Exercisable at September 30, 2022   284,014    62.03    6.15    - 
Vested and expected to vest   326,741    59.13    6.57    - 

 

Option Valuation

 

The fair value of each stock option granted 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 options granted for the periods presented were as follows (there were no grants issued in 2021): 

 

   Nine Months Ended 
   September 30, 2022 
Stock price  $8.60 - 34.00 
Exercise price  $8.5-125.60 
Expected stock price volatility   76.61 - 95.87%
Expected term (years)   5.19-10.00 
Risk-free interest rate   1.52% - 3.14%
Expected dividend yield   0%

 

  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 nine months ended September 30, 2022 was $19.24. There were no options granted during the nine months ended September 30, 2021.

 

As of September 30, 2022, the Company had an aggregate of $605,868 of unrecognized share-based compensation cost, which is expected to be recognized over the weighted average period of 1.42 years.

 

22

 

 

Restricted Stock Units

 

The following table summarizes the Company’s restricted stock units activity during the nine months ended September 30, 2022:

 

   Restricted Stock Units   Weight average fair value 
Outstanding at December 31, 2021   -   $- 
Granted   61,367    23.02 
Released   (34,867)   26.25 
Cancelled   (10,000)   - 
Outstanding at September 30, 2022   16,500    10.63 

 

The remaining awards outstanding are subject to time-based vesting conditions and are scheduled to vest by December 2023. The estimated fair value of each of the Company’s was determined on the date of grant based on the closing price of the Company’s common stock on the previous trading date.

 

Shares Reserved for Future Issuance

 

The following shares of common stock are reserved for future issuance:

 

   September 30, 2022 
Awards outstanding under the 2021 Omnibus Incentive Plan   343,241 
Awards available for future grant under 2021 Omnibus Incentive Plan   44,095 
2022 Notes outstanding   

754,149

 
Warrants outstanding   1,521,331 
Total shares of common stock reserved for future issuance   2,662,816 

 

NOTE 10 - RELATED PARTIES

 

The Company paid cash compensation during the three and nine months ended September 30, 2021 of $3,584 and $43,898, respectively, to the Chief Executive Officer through a separate operating company with which the Chief Executive Officer is affiliated. There were no such payments in the three and nine months ended September 30, 2022. In July 2022, the Chief Executive Officer and a Board member transferred 46,062 shares of registered common stock to GYBL to settle $0.8 million of Company obligations related to the GEM Agreement (Note 2). In October 2022, 46,062 shares of unregistered and restricted common stock were subsequently issued by the Company to the related parties as reimbursement.

 

NOTE 11 - SUBSEQUENT EVENTS

 

On October 11, 2022, the Company paid $390,701 in cash to fulfill the remaining amounts outstanding under the 2021 Notes.

 

On October 28, 2022, the Company completed a 1-for-20 reverse split of its outstanding common stock. All references in these consolidated financial statements to shares and per share amounts in all periods have been retroactively restated to reflect the split.

 

In the fourth quarter of 2022, the Company issued 573,944 shares of common stock as a result of conversions of $2.1 million of principal and interest of the 2022 Notes.

 

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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 opioid misuse, abuse and overdose. We have a 79.2%-owned subsidiary, EBIR, a clinical stage pharmaceutical company that is developing a compound utilized in Ensysce’s overdose protection program for the treatment of respiratory diseases. 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 September 30, 2022, we had an accumulated deficit of $105.4 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:

 

  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;
     
  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;
     
  maintain, expand and protect our intellectual property portfolio;
     
  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;