Ensysce Biosciences, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Clinical-stage biotechnology company developing abuse- and overdose-resistant prescription drugs. Lead programs include PF614, PF614-MPAR™, and a methadone prodrug for opioid use disorder; Covistat is a 79.2%-owned subsidiary focused on respiratory-disease applications. The report covers the three and six months ended June 30, 2022, with unaudited consolidated financial statements.
The Company has no approved products and has generated no product-sales revenue. Reported revenue consists primarily of NIH/NIDA research grants.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Federal grant revenue | $0.2 million, versus $0.4 million | $0.8 million, versus $0.7 million |
| Research and development expense | $5.3 million, versus $0.5 million | $8.5 million, versus $0.8 million |
| General and administrative expense | $2.0 million, versus $0.4 million | $4.2 million, versus $0.9 million |
| Net loss | $7.9 million, versus $1.0 million | $8.9 million, versus $1.9 million |
| Net loss attributable to common stockholders | $8.0 million, versus $0.9 million | $9.7 million, versus $1.9 million |
| Loss per share | $0.24, versus $0.06 | $0.32, versus $0.12 |
Operating loss was $7.1 million for the quarter and $11.9 million for the six-month period. Profitability and conventional operating margins are not meaningful because the Company has no product revenue and grant revenue is limited.
- Cash and cash equivalents were $3.7 million at June 30, 2022, down from $12.3 million at December 31, 2021.
- Operating cash use was $7.9 million for the first six months, compared with $0.6 million in the prior-year period.
- Financing activities used $0.7 million, primarily for convertible-note redemptions and repayment of financed insurance premiums.
- Accumulated deficit was $95.5 million, and total stockholders’ deficit was $0.8 million.
- Current liabilities of $8.2 million exceeded current assets of $7.2 million.
- At June 30, 2022, the fair value of the remaining 2021 convertible notes was $2.7 million and liability-classified warrants were valued at $0.4 million.
Material Changes Versus the Prior Comparable Period
- Six-month research and development expense increased $7.7 million, primarily from higher external clinical and preclinical costs for PF614 and PF614-MPAR™.
- Six-month general and administrative expense increased $3.3 million, driven largely by public-company costs, professional fees, insurance and stock-based compensation.
- Six-month net loss increased $7.0 million, although fair-value gains on convertible notes and liability-classified warrants partially offset operating losses.
- The Company converted approximately $11.2 million of 2021 convertible-note redemption value into 10.2 million common shares during the first half of 2022 and recognized a $2.6 million loss on those conversions.
- Common shares outstanding increased to 35.5 million at June 30, 2022 from 24.6 million at December 31, 2021, excluding additional subsequent issuances.
- The Company received notice of an additional approximately $2.8 million of MPAR Grant funding for the year beginning July 1, 2022. Remaining funding under the two federal grants was approximately $6.3 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued significant operating losses and increasing expenses as clinical and preclinical programs advance. It expects future research and development and general and administrative expenses to approximate current levels in the near term, but longer-term costs are expected to rise with development activity.
- The financial statements contain a going-concern warning. Management states that existing cash resources were insufficient to fund planned operations for the following 12 months without access to additional financing.
- The Company entered into an $8.0 million convertible financing agreement on June 30, 2022; gross proceeds of $4.0 million were received July 1, 2022 and another $4.0 million August 9, 2022. The notes carry 6% interest, monthly redemption requirements and conversion features. The filing also describes $8.48 million of aggregate principal, reflecting the original principal amount rather than cash proceeds.
- The 2022 financing included warrants for 9.3 million shares at an exercise price of $0.7085 and restricted certain additional debt and equity financings. The financing also reduced the conversion price of certain 2021 Notes and related warrant exercise prices.
- Subsequent to quarter-end, the Company issued 2.8 million shares from conversions of $1.1 million of 2021 Notes and issued approximately 0.9 million shares to settle $0.8 million of GEM share-subscription commitment fees.
- Open purchase orders and contractual obligations, including CRO commitments, totaled an estimated $18.6 million at June 30, 2022, although many orders could be canceled, rescheduled or adjusted.
- A $214,308 correction reduced unbilled receivables and increased general and administrative expense. Management concluded the error was not material to previously issued or current financial statements.
- Disclosure controls were ineffective because of material weaknesses related to insufficient technical accounting expertise and inadequate supervision and review. Management reported a remediation plan but provided no assurance that remediation will be successful.
- Key business risks include clinical-trial failure or delay, regulatory nonapproval, dependence on CROs and CMOs, intellectual-property risks, need for substantial additional capital, dilution, Nasdaq listing compliance, competition, COVID-19 disruption and the ability to demonstrate PF614 and PF614-MPAR™ abuse- and overdose-resistance claims.
Important Facts for Investors to Verify
- Cash runway after the July and August 2022 financings, including required monthly redemptions of the 2021 and 2022 Notes.
- Actual terms, outstanding principal and conversion activity under the 2022 Notes, including the distinction between $8.0 million of cash proceeds and $8.48 million of principal.
- Potential dilution from convertible notes, 21.1 million outstanding warrants, stock options, restricted stock units and subsequent share issuances.
- Progress and data from PF614, PF614-MPAR™ and nafamostat clinical programs, including regulatory and enrollment milestones.
- Availability and remaining conditions of the $60.0 million GEM share-subscription facility, which was restricted while the convertible notes were outstanding.
- Remediation of the disclosed material weaknesses in internal control over financial reporting.
- Ability to satisfy approximately $18.6 million of contractual and purchase commitments and to meet grant milestones, particularly the remaining OUD Grant milestone.