Ensysce Biosciences, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and six months ended June 30, 2021. Ensysce is a clinical-stage pharmaceutical company developing abuse- and overdose-resistant opioid products and other drug-delivery technologies. Its lead candidates are PF614, PF614-MPAR™, and nafamostat. The company has no approved products and has generated no product-sale revenue.
On June 30, 2021, Ensysce completed its business combination with Leisure Acquisition Corp. The transaction was accounted for as a reverse recapitalization. The combined company began trading on Nasdaq under the ticker ENSC on July 2, 2021. Former Ensysce stockholders owned approximately 71.8% of the combined company immediately after closing.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Federal grant revenue | $444,516 in 2021 vs. $1,824,681 in 2020 | $695,091 in 2021 vs. $2,687,081 in 2020 |
| Research and development expense | $463,219 vs. $1,404,246 | $787,595 vs. $2,243,217 |
| General and administrative expense | $393,914 vs. $281,354 | $884,386 vs. $559,047 |
| Loss from operations | $(412,617) vs. income of $139,081 | $(976,890) vs. $(115,183) |
| Net loss | $(957,611) vs. $(706,474) | $(1,909,303) vs. $(1,729,721) |
| Net loss attributable to common stockholders | $(935,544) vs. $(704,498) | $(1,883,275) vs. $(1,727,745) |
| Loss per share | $(0.06) vs. $(0.04) | $(0.12) vs. $(0.11) |
Grant revenue is recognized as eligible research costs are incurred and is not product revenue. No meaningful product-sales margin or gross margin was reported. The company expects continued operating losses and increasing development and public-company costs.
- Cash and cash equivalents were $8.0 million at June 30, 2021, compared with $194,214 at December 31, 2020.
- Working capital was approximately $4.3 million at June 30, 2021.
- Net cash used in operating activities was $649,461 for the six months ended June 30, 2021, compared with $560,573 in the prior-year period.
- Net cash provided by financing activities was $8.5 million, primarily reflecting approximately $7.8 million of business-combination proceeds, $350,000 of related-party promissory notes, and $262,862 from option exercises.
- Accumulated deficit was $57.8 million at June 30, 2021.
- Debt declined substantially following conversion of convertible notes. Remaining net debt at June 30 was $466,055, consisting of $450,000 principal and $16,055 accrued interest under promissory notes.
- All outstanding derivative liabilities and approximately $5.35 million of convertible debt carrying value were settled or converted into 1,357,968 shares in connection with the merger.
Material changes versus the prior comparable period
- Federal grant revenue decreased by $1.4 million in the quarter and $2.0 million for the six-month period, primarily because of lower MPAR Grant activity, partly offset by higher OUD Grant activity.
- Research and development expense declined by $942,?; the filing’s stated comparison is a decrease of $887,998 for the quarter and $1,402,593 for the six-month period, primarily due to reduced external development activity.
- General and administrative expense increased by $112,480 for the quarter and $325,259 for the six-month period, primarily due to legal, accounting, audit, tax, and other professional fees associated with the business combination and transition to a public company.
- Net loss increased by $251,137 for the quarter and $179,582 for the six-month period.
- Other expense improved year over year because the fair value of embedded derivative liabilities decreased; however, 2021 included accelerated debt-discount amortization and a $347,566 loss on extinguishment of debt.
- Common shares outstanding increased to 24,255,786 at June 30, 2021 from 15,768,725 at December 31, 2020, primarily because of the business combination, debt conversion, and other equity issuances.
The filing contains an apparent typographical inconsistency in the management discussion regarding the six-month R&D decrease; the financial statements show $787,595 in 2021 versus $2,243,217 in 2020, a decrease of $1,455,622, while the discussion states $1,402,593. Investors should verify the filed XBRL and financial-statement values.
Guidance, outlook, commentary, risks, and unusual items
- Management expects continued significant losses, negative operating cash flow, and increasing research, clinical, regulatory, personnel, and public-company expenses.
- The company expects R&D expense to increase as PF614, PF614-MPAR™, and nafamostat advance through clinical development. PF614 was in Phase 1b, PF614-MPAR™ in Phase 1, and nafamostat was proceeding toward Phase 2 development.
- Remaining approved federal grant funding was approximately $6.6 million and was expected to be used by December 31, 2022, subject to applicable milestones and grant requirements. The remaining OUD Grant milestone involved identifying a qualifying R-methadone-TAAP clinical candidate.
- Management stated that cash resources and the available $60.0 million GEM share-subscription facility were sufficient to fund planned operations for at least the next 12 months following the filing. The facility has no minimum draw obligation, but draws depend on registration, trading-volume, and other conditions and would dilute existing holders.
- The July 2, 2021 listing triggered issuance of 1,106,108 warrants at $10.01 per share and a $1.2 million commitment fee, payable in cash or freely tradable common stock.
- On July 15, 2021, the company repaid the remaining 2020 and 2021 promissory notes in full.
- A former financial advisor filed litigation after the merger concerning the registration and tradability of securities issued as compensation. The parties entered into a conditional settlement on August 3, 2021 involving registration of the securities, cashless exercise, and a reduced warrant exercise price; dismissal was expected after effectiveness of the resale registration statement.
- COVID-19 had not materially affected operations through the filing date, but the company warned of potential impacts on clinical enrollment, CRO and manufacturing activities, supply chains, and financing conditions.
- Management reported material weaknesses in internal control over financial reporting related to limited accounting personnel, inadequate technical accounting expertise, and insufficient supervision and review. Remediation efforts included hiring a CFO and enhancing accounting processes, but effectiveness was not assured.
- Key risks include clinical-trial failure or delay, regulatory nonapproval, inability to demonstrate abuse- or overdose-resistance, reliance on CROs and contract manufacturers, controlled-substance quotas, intellectual-property disputes, competition, dilution from future financing, Nasdaq listing compliance, warrant-accounting uncertainty, and inability to obtain sufficient capital.
Important facts for investors to verify
- Reconcile the reported business-combination proceeds of approximately $7.8 million in the cash-flow statement with the approximately $6.6 million net proceeds described in the use-of-proceeds section after expenses.
- Verify the correct six-month R&D year-over-year decrease using the audited source tables and XBRL because the MD&A comparison appears inconsistent with the financial statements.
- Assess cash burn, timing and availability of the GEM facility, commitment-fee obligations, and the dilution and pricing impact of any future draws.
- Review the debt conversions, remaining promissory-note obligations, subsequent repayment, and the accounting effects of derivative-liability settlement and debt extinguishment.
- Monitor PF614, PF614-MPAR™, and nafamostat clinical progress, regulatory feedback, enrollment, safety results, and manufacturing readiness.
- Evaluate remediation of the material weaknesses and whether subsequent filings report effective internal controls.
- Track the former-advisor settlement, resale registration effectiveness, warrant modifications, and any resulting dilution or litigation exposure.
- Consider the substantial outstanding option and warrant overhang, including 4.44 million options and approximately 18.9 million merger-related warrants outstanding at June 30, 2021.