UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission
File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 9, 2023, the registrant had shares of common stock, $0.0001 par value per share, outstanding.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will” and “would,” or the negative of these terms or other similar expressions intended to identify statements about the future. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements include, without limitation, statements about:
| ● | our estimates regarding expenses, revenue, capital requirements and timing and availability of and the need for additional financing will almost certainly not match actual amounts and timing; | |
| ● | our ability to continue as a going concern for the next twelve months; | |
| ● | 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; | |
| ● | 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 our 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; |
| i |
| ● | 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 we will be unable to obtain and maintain sufficient intellectual property protection for our 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 establish and maintain effective internal controls over financial reporting; | |
| ● | the risk that our common stock will be delisted from Nasdaq; | |
| ● | other factors disclosed in this Quarterly Report on Form 10-Q; and | |
| ● | other factors beyond our control. |
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 on Ensysce. There can be no assurance that future developments affecting Ensysce will be those that Ensysce has anticipated. These forward-looking statements involve 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, 2022 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.
| ii |
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 | |
| 2021 Omnibus Incentive Plan | Ensysce Biosciences, Inc. Amended and Restated 2021 Omnibus Incentive Plan | |
| 2022 Notes | The senior secured convertible promissory notes in the aggregate original principal amount of $8.48 million, sold in two closings on June 30, 2022 and August 8, 2022, respectively, pursuant to the Securities Purchase Agreement entered into on June 30, 2022 | |
| 2022 December Offering | The Company’s December 2022 registered direct offering of common stock (including pre-funded warrants in lieu thereof). The Offering closed on December 9, 2022 for aggregate consideration of $4.1 million | |
| 2023 February Offering | The Company’s February 2023 registered direct offering of common stock and private placement warrants for aggregate consideration of $3.0 million | |
| 2023 May Offering | The Company’s May 2023 registered direct offering of common stock (including pre- funded warrants in lieu thereof) for aggregate consideration of $7.0 million | |
| Aggregate Limit | Up to $60 million of gross proceeds with respect to the GEM Agreement | |
| Board | Board of directors of Ensysce, or a committee thereof, as applicable | |
| Business Combination | The definitive merger agreement among LACQ, Merger Sub and Former Ensysce, dated January 31, 2021, providing for, among other things, and subject to terms and conditions therein, the business combination between LACQ and Former Ensysce pursuant to the merger of Merger Sub with and into Former Ensysce, with Former Ensysce continuing as the surviving entity and as a wholly-owned subsidiary of LACQ | |
| CMOs | Contract manufacturing organizations | |
| Company | Ensysce Biosciences, Inc. and its consolidated subsidiaries | |
| COVID-19 | Novel coronavirus disease | |
| Covistat | A subsidiary renamed EBIR, Inc. | |
| CROs | Contract research organizations | |
| Draw Down Limit | 400% of the average daily trading volume for the 30 trading days immediately preceding the date the Company delivers the draw down notice with respect to the GEM Agreement | |
| EB | Ensysce Biosciences, Inc. prior to its merger with Signature Acquisition Corp. pursuant to the EB-ST Agreement. | |
| EBIR | Previously known as Covistat, Inc., EBIR, Inc. is a clinical stage pharmaceutical company that is developing a compound utilized in the Company’s overdose protection program for the treatment of COVID-19 and 79.2%-owned subsidiary of the Company |
| iii |
| EB-ST Agreement | Agreement and Plan of Merger, dated as of December 28, 2015, by and among Signature, SAQ, and EB | |
| Ensysce | Ensysce Biosciences Inc. and its consolidated subsidiaries | |
| Exchange Act | Securities Exchange Act of 1934, as amended | |
| 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 | |
| GEM Warrants | 4,608 shares of common stock that may be issued upon the exercise of warrants issued to GYBL under the terms of the GEM Agreement at an exercise price of $3.64 per share | |
| GYBL | GEM Yield Bahamas Limited | |
| JOBS Act | Jumpstart Our Business Startups Act of 2012 | |
| LACQ | Leisure Acquisition Corp., a Delaware Corporation | |
| LACQ Warrants | Warrants that relate to the Business Combination or were issued prior to it and are exercisable for 21,993 shares of our common stock at a weighted average exercise price of $2,725.90 per share | |
| Merger | 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. | |
| 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 Grant | Research and development grant related to the development of its MPAR® overdose prevention technology awarded to the Company by NIH through NIDA in September 2018 | |
| Nasdaq | The Nasdaq Stock Market LLC |
| iv |
| NIDA | National Institute of Drug Abuse | |
| NIH | National Institutes of Health | |
| OUD Grant | Research and development grant related to the development of its TAAP/MPAR® abuse deterrent technology for Opioid Use Disorder awarded to the Company by NIH/NIDA in September 2019 | |
| Prior Warrants | Warrants issued pursuant to the Securities Purchase Agreement. The Prior Warrants issued in (i) 2021 are exercisable for an aggregate of 4,512 shares of our common stock at an exercise price of $3.64 per share and (ii) 2022 are exercisable for an aggregate of 38,894 shares of our common stock at an exercise price of $3.64 per share | |
| Public Warrants | The redeemable warrants issued by us and sold as part of the units in the LACQ IPO (whether they were purchased in the LACQ IPO or thereafter in the open market). The Public Warrants are exercisable for an aggregate of approximately 41,666 shares of our common stock at an exercise price of $2,760.00 per share | |
| SAQ | Signature Acquisition Corp., a wholly-owned subsidiary of Signature | |
| SEC | U.S. Securities and Exchange Commission | |
| Securities Act | Securities Act of 1933, as amended | |
| Securities Purchase Agreement | The Securities Purchase Agreement, dated as of September 24, 2021, June 30, 2022 or October 23, 2023, as the context dictates, by and between Ensysce and the institutional investors party thereto | |
| Signature | Signature Therapeutics Inc. | |
| SPA | A Securities Purchase Agreement, dated as of September 24, 2021, June 30, 2022 or October 23, 2023, as the context dictates, by and between Ensysce and the institutional investors party thereto | |
| TAAP | Trypsin Activated Abuse Protection |
| v |
Table of Contents
| Page | ||
| Forward-Looking Statements | i | |
| Glossary | iii | |
| 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 | 4 | |
| Notes to Consolidated Financial Statements (Unaudited) | 5 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 35 |
| Item 4. | Controls and Procedures | 35 |
| PART II. | OTHER INFORMATION | 36 |
| Item 1. | Legal Proceedings | 36 |
| Item 1A. | Risk Factors | 36 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 36 |
| Item 3. | Defaults Upon Senior Securities | 36 |
| Item 4. | Mine Safety Disclosures | 36 |
| Item 5. | Other Information | 36 |
| Item 6. | Exhibits | 36 |
| Signatures | 37 | |
| vi |
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
ENSYSCE BIOSCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Unbilled receivable | ||||||||
| Right-of-use asset | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other liabilities | ||||||||
| Lease liability | ||||||||
| Notes payable and accrued interest | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Notes payable, net of current portion | ||||||||
| Liability classified warrants | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
| Commitments and contingencies (Note 6) | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Preferred stock, $ par value, shares authorized, shares issued and outstanding at September 30, 2023 and December 31, 2022 | $ | $ | ||||||
| Common stock, $ par value, shares authorized at September 30, 2023 and December 31, 2022; and shares issued at September 30, 2023 and December 31, 2022, respectively; and shares outstanding at September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Ensysce Biosciences, Inc. stockholders’ equity (deficit) | ( | ) | ||||||
| Noncontrolling interests in stockholders’ equity (deficit) | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 1 |
Ensysce Biosciences, Inc.
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Federal grants | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Issuance costs for convertible notes | ( | ) | ( | ) | ||||||||||||
| Loss on issuance of convertible notes | ( | ) | ( | ) | ||||||||||||
| Change in fair value of convertible notes | ||||||||||||||||
| Issuance of liability classified warrants | ( | ) | ( | ) | ||||||||||||
| Change in fair value of liability classified warrants | ||||||||||||||||
| Loss on debt conversions | ( | ) | ( | ) | ||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income, net | ||||||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Deemed dividend related to warrants down round provision | ||||||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per basic and diluted share: | ||||||||||||||||
| Net loss per share attributable to common stockholders, basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average common shares outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
Ensysce Biosciences, Inc.
Consolidated Statements of Changes in Stockholders’ EQUITY (Deficit)
(Unaudited)
| Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||
| Number of Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Noncontrolling interests | Total | |||||||||||||||||||
| Balance on June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Conversion of convertible notes | ||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Settlement of restricted stock units | ||||||||||||||||||||||||
| Deemed dividend related to warrants down round provision | - | ( | ) | |||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance on September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Balance on June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Settlement of restricted stock units | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of warrants | ( | ) | ||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance on September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balance on December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Consultant Compensation | ||||||||||||||||||||||||
| Conversion of convertible notes | ||||||||||||||||||||||||
| Settlement of restricted stock units | ||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Deemed dividend related to warrants down round provision | - | ( | ) | |||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance on September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Balance on December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Settlement of restricted stock units | ||||||||||||||||||||||||
| Settlement of commitment fee | ||||||||||||||||||||||||
| Conversion of convertible notes | ||||||||||||||||||||||||
| Public offerings, net | ||||||||||||||||||||||||
| Transaction costs associated with public offerings | - | ( | ) | ( | ) | |||||||||||||||||||
| Issuance of common stock upon exercise of warrants | ( | ) | ||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Reverse split fractional shares | ( | ) | ||||||||||||||||||||||
| Deemed dividend related to warrants down round provision | - | ( | ) | |||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance on September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
Ensysce Biosciences, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Gain on sale of asset | ( | ) | ||||||
| Accrued interest | ||||||||
| Change in fair value of liability classified warrants | ( | ) | ( | ) | ||||
| Loss on issuance of convertible notes | ||||||||
| Change in fair value of convertible notes | ( | ) | ( | ) | ||||
| Stock-based compensation | ||||||||
| Issuance of liability classified warrants | ||||||||
| Lease cost | ( | ) | ( | ) | ||||
| Issuance costs paid to close convertible notes | ||||||||
| Loss on debt conversions | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Unbilled receivable | ||||||||
| Prepaid expenses and other assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses and other liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of asset | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Proceeds public offerings, net | ||||||||
| Proceeds from issuance of convertible notes, net | ||||||||
| Transaction costs associated with public offerings | ( | ) | ||||||
| Repayments of convertible notes | ( | ) | ( | ) | ||||
| Repayment of financed insurance premiums | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents beginning of period | ||||||||
| Cash and cash equivalents end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Income tax payments | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Stock-based compensation | $ | $ | ||||||
| Conversions of convertible notes into common stock | $ | $ | ||||||
| Payable to related parties | $ | $ | ||||||
| Proceeds from financed insurance premiums, net | $ | $ | ||||||
| Settlement of commitment fee in shares | $ | $ | ||||||
| Deemed dividend related to warrants down round provision | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
ENSYSCE BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Ensysce
Biosciences, Inc. (“Ensysce”), along with its
In
2020, the Company commenced an initiative to develop a therapeutic for the treatment of certain coronavirus infections through the formation
of a separate entity, EBIR, a Delaware corporation. Pursuant to the certificate of incorporation, EBIR was authorized to issue
shares of common stock, $ par value per share, and shares of preferred stock, $ par value per share. Ensysce is a
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.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included in these unaudited consolidated financial statements. Operating results for the three and nine months ended September 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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, 2022, which may be found in the Company’s Form 10-K filed with the SEC on March 30, 2023.
| 5 |
Reverse stock split
In
March 2023, the Company completed a
Going concern
The accompanying unaudited 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 $ million at September 30, 2023. 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 $ 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
| 6 |
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.
These unaudited 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 accrued research and development services, the valuation allowance of deferred tax assets resulting from net operating losses, and the fair value of warrants and options to purchase the Company’s common stock and convertible 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 currently exceed federally insured limits. 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 to
| 7 |
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. As of September 30, 2023 and December 31, 2022, the Company did not have any bifurcated embedded derivatives in the Company’s consolidated balance sheets.
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, 2023 and December 31, 2022, 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 and 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 simulation, 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 simulation. 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 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 simulation, 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 simulation. Refer to Note 7 for details of the terms and conditions of the 2022 Notes.
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Warrants
The Company issued liability-classified warrants in connection with the issuance of the 2021 and 2022 Notes. The warrants were liability-classified due to certain cash settlement features and are 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 at each balance sheet date. 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 liabilities measured and recorded at fair value on the Company’s consolidated balance sheets as of September 30, 2023, and December 31, 2022.
| September 30, 2023 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liability classified warrants | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Fair value of convertible note | $ | $ | $ | $ | ||||||||||||
| Liability classified warrants | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The following table summarizes the change in fair value of the Company’s Level 3 assets and liabilities for the nine months ended September 30, 2023:
| Total | Convertible note | Liability classified warrants | ||||||||||
| Fair value, December 31, 2022 | $ | $ | $ | |||||||||
| Conversions | ( | ) | ( | ) | ||||||||
| Cash payments | ( | ) | ( | ) | ||||||||
| Cash true-up liability | ( | ) | ( | ) | ||||||||
| Change in fair value | ( | ) | ( | ) | ( | ) | ||||||
| Fair value, September 30, 2023 | $ | $ | $ | |||||||||
Federal Grants
In
September 2018, the National Institutes of Health (“NIH”) through the National Institute on Drug Abuse (“NIDA”)
awarded the Company a research and development grant related to the development of its MPAR® overdose prevention technology
(the “MPAR Grant”). The total approved budget for the initial two-year period was approximately $
In
September 2019, the NIH/NIDA awarded the Company a second research and development grant related to the development of its TAAP/MPAR®
abuse deterrent technology for Opioid Use Disorder (the “OUD Grant”). The total approved budget was approximately $
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The Company recognizes revenue when costs related to the grants are incurred and assessed as reimbursable. 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:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| MPAR | $ | $ | $ | $ | ||||||||||||
| TAAP/OUD | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Amounts requested or eligible to be requested through the NIH payment management system, but for which cash has not been received, are presented as an unbilled receivable on the Company’s consolidated balance sheets. As all amounts are expected to be remitted in a timely manner, no valuation allowances are recorded.
Research and development costs
The Company’s research and development expenses consist primarily of third-party research and development expenses, consulting expenses, animal and clinical studies, and any allocable direct overhead, including facilities and depreciation costs, as well as salaries, payroll taxes, and employee benefits for those individuals directly involved in ongoing research and development efforts. Research and development expenses are charged to expense as incurred. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.
General and administrative expenses
General and administrative expenses consist primarily of personnel costs associated with the Company’s executive, finance, human resources, compliance, and other administrative personnel, as well as accounting and legal professional services fees.
The Company expenses stock-based compensation over the requisite service period based on the estimated grant-date fair value of the awards using a graded amortization approach. The Company accounts for forfeitures as they occur.
The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. 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.
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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.
The basic net loss per share is calculated by dividing the Company’s net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Basic shares outstanding include the weighted average effect of the Company’s outstanding pre-funded warrants, the exercise of which requires little or no consideration for the delivery of shares of common stock. The diluted net loss per share is calculated by dividing the Company’s net loss attributable to common stockholders by the diluted weighted average number of common shares outstanding during the period, determined using the treasury stock method and the average stock price during the period.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Stock options | ||||||||||||||||
| RSUs | ||||||||||||||||
| Warrants | ||||||||||||||||
| Convertible notes | ||||||||||||||||
| Total | ||||||||||||||||
Recently Issued Accounting Pronouncements
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 adopted the standard with an effective date of January 1, 2023 and the adoption did not have a significant impact on the consolidated financial statements.
NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
| September
30, 2023 | December
31, 2022 | |||||||
| Prepaid research and development | $ | $ | ||||||
| Prepaid insurance | ||||||||
| Other prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
NOTE 5 – ACCRUED EXPENSES AND OTHER LIABILITIES
| September
30, 2023 | December
31, 2022 | |||||||
| Accrued research and development | $ | $ | ||||||
| Share subscription facility commitment fees | ||||||||
| Professional fees | ||||||||
| Other accrued liabilities | ||||||||
| Total accrued expenses and other liabilities | $ | $ | ||||||
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NOTE 6 – COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As
of September 30, 2023, the Company’s commitments included an estimated $
Litigation
As of September 30, 2023 and December 31, 2022, 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.
Lease
The
Company’s current lease agreement (as amended) has a term that extends through October 31, 2024 with no option to renew. As of
September 30, 2023, the future lease payments totaled $
NOTE 7 – NOTES PAYABLE
The
Company’s outstanding notes payable balance was $
The following table provides a summary of the Company’s outstanding debt as of December 31, 2022:
Principal balance | Accrued interest | Fair value adjustment | Net debt balance | |||||||||||||
| 2022 Notes | $ | $ | $ | $ | ||||||||||||
| Financed insurance | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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Interest expense
The
interest expense recognized for financed insurance was $
2021 Notes
On
September 24, 2021, the Company entered into an agreement with institutional investors to issue the 2021 Notes. The agreement provides
for two closings: the first closing for $
The
2021 Notes included a stated rate of interest of
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 $
The 2021 Notes were settled on October 11, 2022 and were not outstanding during the quarter ended September 30, 2023.
2022 Notes
On
June 30, 2022, the Company entered into an $
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
The
Company initially recorded the 2022 Notes at a fair value of $
In
connection with each of the first and second closings of the 2022 Notes, the Company also issued warrants to purchase
The
proceeds of the 2022 Notes were 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 $
The
2022 Notes were scheduled to mature on
In
January 2023, the Company entered into a letter agreement to reduce the conversion price for the remaining balance of the Company’s
outstanding 2022 Notes from $
Financed insurance premiums
In
June 2023, the Company renewed and financed its directors’ and officers’ liability insurance in the amount of $
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NOTE 8 - STOCKHOLDERS’ EQUITY
In June 2021, the Company amended and restated its Certificate of Incorporation to authorize shares of common stock and shares of preferred stock, both with par value equal to $. In September 2022, the Company amended and restated its Certificate of Incorporation to authorize shares up to a total of shares of common stock. As of September 30, 2023 and December 31, 2022, there were shares of preferred stock issued and outstanding.
2023 February Offering
On
February 2, 2023, the Company agreed to issue and sell in a registered direct offering an aggregate of shares of common stock
of the Company, par value $ per share, at an offering price of $ per share, for gross proceeds of approximately $
2023 May Offering
On
May 12, 2023, the Company completed a public offering of an aggregate of shares of its common stock at par value $ per
share (including pre-funded warrants in lieu thereof) at a combined offering price of $ per share, gross proceeds from this offering
were approximately $
In
connection with the offering, the Company also agreed to amend certain existing warrants to purchase up to an aggregate of
Warrants
As of September 30, 2023, outstanding warrants to purchase shares of common stock are as follows:
Shares Underlying Outstanding | |||||||||||
| Reference | Warrants | Exercise Price | Description | Classification | |||||||
| (a) | $ | - | Equity | ||||||||
| (b) | $ | Equity | |||||||||
| (c) | $ | Liability | |||||||||
| (d) | $ | Liability | |||||||||
| (e) | $ | - | Equity | ||||||||
| (f) | $ | - | Equity | ||||||||
| (g) | $ | - | Equity | ||||||||
| (h) | $ | Equity | |||||||||
| a) |
On
August 3, 2021, the Company entered into an agreement with an existing warrant holder to reduce the price of |
| b) |
| 14 |
| The
warrants have been subject to multiple exercise price reductions 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 adjustments have progressed from the original exercise
price of $ | |
| c) | |
| d) | |
| e) | |
| f) | |
| (g) | |
| (h) |
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:
| Stock price | Exercise price | Expected term (years) | Volatility | Risk free rate | |||||||||||||||
| (a) LACQ warrants (grant date varies) | $ | $ | - | % | % | ||||||||||||||
| (b) Share subscription facility (grant date 7/2/21) | $ | $ | % | % | |||||||||||||||
| (b) Share subscription facility (remeasurement date varies) | $ | - | $ | - | - | % - | % | %- | % | ||||||||||
| (c) Liability classified warrants (grant date 9/24/21) | $ | $ | % | % | |||||||||||||||
| (c) Liability classified warrants (grant date 11/5/21) | $ | $ | % | % | |||||||||||||||
| (c) Liability classified warrants (remeasured at 9/30/23) | $ | $ | % | ||||||||||||||||