Business Context and Reporting Period
Leisure Acquisition Corp. filed this unaudited Form 10-Q for the three months ended March 31, 2021. Although the request identifies Ensysce Biosciences, the registrant in the filing is Leisure Acquisition Corp., a Delaware special purpose acquisition company and shell company formed to complete a business combination. The company had not commenced operating activities and generated no revenue.
On January 31, 2021, Leisure entered into a merger agreement with Ensysce Biosciences, Inc. Under the proposed transaction, Ensysce would become a wholly owned subsidiary and its stockholders would receive Leisure common stock based on an exchange ratio of 0.06585. The merger had not closed as of the filing date.
Key Financial Metrics
| Metric | March 31, 2021 / Three Months | Comparable Period or Prior Date |
|---|---|---|
| Operating costs | $292,027 | $915,183 in Q1 2020 |
| Net income (loss) | $(1,711,607) | $1,792,718 in Q1 2020 |
| Net loss per non-redeemable share | $(0.27) | $0.28 in Q1 2020 |
| Cash and marketable securities in Trust Account | $12,690,899 | $12,628,170 at December 31, 2020 |
| Cash outside Trust Account | $18,034 | $49,202 at December 31, 2020 |
| Total assets | $12,980,390 | $12,854,634 at December 31, 2020 |
| Total liabilities | $11,086,555 | $14,061,692 at December 31, 2020 |
| Warrant liability | $8,307,375 | $6,260,000 at December 31, 2020 |
| Working capital deficit | $163,896 | Prior comparable value not clearly provided |
| Net cash used in operating activities | $266,168 | $234,388 in Q1 2020 |
Interest earned on Trust Account securities was $229, compared with $639,954 in Q1 2020. The quarter’s loss primarily reflected a $1,481,087 non-cash loss from the change in fair value of warrant liabilities and $292,027 of operating costs, partly offset by a $61,278 tax benefit. The filing does not provide a meaningful operating margin because the company had no revenue.
At March 31, 2021, the company had $460,000 of related-party working capital loans outstanding and a $2,000,000 deferred underwriting fee payable. The former $566,288 GTWY promissory note was converted into 566,288 warrants during the quarter.
Material Changes Versus the Prior Comparable Period
- The company moved from $1,792,718 of net income in Q1 2020 to a $1,711,607 net loss in Q1 2021, largely because the warrant fair-value impact changed from a $2,184,000 gain to a $1,481,087 loss.
- Operating costs declined approximately 68% from $915,183 to $292,027.
- Operating cash use increased from $234,388 to $266,168, while cash outside the Trust Account declined by $31,168 during the quarter.
- The warrant liability increased by $2,047,375 to $8,307,375, producing a significant non-cash charge.
- Underwriters waived $4,750,000 of deferred underwriting fees, reducing the payable from $6,750,000 at December 31, 2020 to $2,000,000.
- Additional related-party working capital financing increased outstanding loans from $225,000 to $460,000.
- Additional paid-in capital increased to $4,812,500, and stockholders’ equity improved from a $1,207,058 deficit to $1,893,835, primarily because of the underwriting-fee waiver and related adjustments.
Liquidity, Outlook, Risks, and Unusual Items
- Only $18,034 was available outside the Trust Account, while the company reported a $163,896 working capital deficit. Management stated that additional financing would be needed from sponsors, related parties, stockholders, officers, directors, or third parties, but none was obligated to provide funding.
- These conditions raised substantial doubt about the company’s ability to continue as a going concern through June 30, 2021, the deadline by which it was required to complete a business combination or begin winding up.
- If a business combination was not completed by June 30, 2021, the company was required to cease operations other than winding up and redeem the public shares using Trust Account funds, subject to applicable obligations and limitations. Warrants could expire worthless.
- Nasdaq had granted an extension through June 1, 2021 for the company to complete a business combination and address listing deficiencies. Subsequent to quarter-end, Nasdaq notified the company that trading would be suspended effective June 3, 2021; the securities became eligible for OTC Markets trading. The company stated that completion of the Ensysce merger could restore listing compliance, but provided no assurance that the merger or relisting would occur.
- The filing disclosed a material weakness in disclosure controls related to the accounting for private warrants. Previously issued financial statements from inception through December 31, 2020 were determined not to be reliable and were restated or revised through the company’s Form 10-K/A. The non-cash adjustments did not affect previously reported cash, total assets, revenue, or cash flows.
- The company adopted ASU 2020-06 effective January 1, 2021; management stated that adoption had no impact on the financial statements.
- Management continued to evaluate COVID-19 effects and stated that the potential impact on financial position, operations, and the target search was not readily determinable.
- The company had no long-term debt, capital leases, operating leases, or off-balance-sheet financing arrangements reported as of March 31, 2021.
Most Important Facts for Investors to Verify
- Confirm the registrant identity and transaction status: this filing is for Leisure Acquisition Corp., not an operating Ensysce filing, and the proposed merger had not closed as of the filing.
- Review the restated warrant accounting and the resulting $8.3 million warrant liability, including the effect of future fair-value changes on reported earnings.
- Assess liquidity outside the Trust Account, the $163,896 working capital deficit, the $460,000 related-party loan balance, and the need for additional financing.
- Verify the June 30, 2021 business-combination deadline, subsequent Nasdaq suspension, OTC trading status, and any later listing or merger outcome.
- Review the going-concern uncertainty and the liquidation and redemption consequences if the business combination was not completed.
- Evaluate the disclosed material weakness in disclosure controls and management’s remediation efforts.