Ensysce Biosciences, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods. Ensysce is a clinical-stage pharmaceutical company developing abuse- and overdose-resistant opioid products, including PF614 and PF614-MPAR, and developing nafamostat-related programs through its 79.2%-owned subsidiary, Covistat. The company has no approved products and has generated no product-sale revenue.
The June 30, 2021 merger with Leisure Acquisition Corp. was accounted for as a reverse recapitalization. Ensysce began trading on Nasdaq under ENSC on July 2, 2021 and had 24,255,786 common shares outstanding as of November 12, 2021.
Financial condition and performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Federal grant funding | $1.2 million | $0.8 million | $1.9 million | $3.5 million |
| Research and development expense | $1.7 million | $0.9 million | $2.5 million | $3.1 million |
| General and administrative expense | $16.4 million | $0.3 million | $17.3 million | $0.9 million |
| Loss from operations | $(16.9) million | $(0.4) million | $(17.9) million | $(0.5) million |
| Net income (loss) | $(17.2) million | $1.6 million | $(19.1) million | $(0.2) million |
| Net loss attributable to common stockholders per diluted share | $(0.71) | $0.09 | $(1.02) | $(0.01) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(4.5) million | $(0.7) million |
Grant funding is reimbursement-based and is not product revenue. Grant funding declined by $1.6 million year over year for the first nine months, primarily because of the timing of eligible MPAR activities. The filing does not provide a meaningful product-revenue margin or operating margin because the company has no product sales.
Cash and cash equivalents were $6.8 million at September 30, 2021, compared with $0.2 million at December 31, 2020. Total assets were $9.7 million, total liabilities were $10.1 million, and total stockholders’ deficit was $0.4 million. Accumulated deficit was $75.0 million.
Net cash provided by financing activities was $11.1 million for the first nine months of 2021, including approximately $6.6 million of net proceeds from the business combination and $4.5 million of net proceeds from the first closing of convertible notes. Investing cash flow was negligible.
At September 30, 2021, debt included $5.3 million principal of senior secured convertible notes, recorded at a $4.2 million fair value, and $0.7 million of financed insurance premiums. The convertible notes bear 5% interest, mature in 2023, and may require monthly redemptions beginning January 2022, payable in cash or shares subject to specified conditions.
Material changes versus the prior comparable period
- Quarterly net loss increased from $1.6 million of net income to a $17.2 million net loss. The nine-month net loss increased from $0.2 million to $19.1 million.
- General and administrative expense increased by $16.0 million in the quarter and $16.4 million year to date. Major items included an $11.6 million non-cash fair-value expense for warrants issued under the share subscription facility, $2.3 million of consultant-related non-cash expense, and $1.1 million of commitment-fee expense.
- Quarterly research and development expense increased $0.8 million, reflecting higher external costs for PF614 clinical work and PF614-MPAR preclinical activities. Year-to-date R&D expense decreased $0.6 million because of lower costs for certain prior programs.
- Existing convertible notes converted into common stock at the business-combination closing. The company also issued 1,106,108 warrants under its share subscription facility and 361,158 warrants with the September convertible-note financing.
- Common shares outstanding increased from 15.8 million at December 31, 2020 to 24.3 million at September 30, 2021, with additional potential dilution from options, warrants and convertible notes.
Guidance, outlook, risks and unusual items
- Management expects continued and increasing operating losses, higher R&D spending, and higher public-company expenses. No formal revenue or earnings guidance is provided.
- The company disclosed substantial doubt about its ability to continue as a going concern. Existing cash was not sufficient to fund planned operations for the next 12 months without additional financing or access to the share subscription facility.
- The September convertible-note agreement restricts certain additional debt and equity financings, including use of the $60.0 million share subscription facility while the notes remain outstanding. The company expects to require additional equity, debt, grant or collaboration funding.
- After quarter-end, on November 5, 2021, the company completed the second closing of the convertible-note financing, issuing $10.6 million of notes for $10.0 million of cash proceeds and 722,317 warrants.
- The company’s primary development risks include failure of PF614, PF614-MPAR or nafamostat clinical programs; regulatory delays or non-approval; clinical-trial enrollment and execution risks; dependence on CROs and contract manufacturers; controlled-substance and opioid-market restrictions; intellectual-property challenges; competition; and COVID-19 disruptions.
- Disclosure controls and procedures were not effective at September 30, 2021 because of material weaknesses related to limited accounting personnel, insufficient technical accounting expertise, and inadequate supervision and review. Management reported a remediation plan but provided no assurance that remediation will be successful.
- A former financial advisor’s post-merger lawsuit was settled and dismissed with prejudice on October 6, 2021. The settlement included registration of securities and modification of warrants.
Most important facts for investors to verify
- Verify the company’s liquidity runway after considering the November 2021 financing, mandatory or optional note redemptions, restrictions on the share subscription facility, and expected clinical spending.
- Review the full terms, collateral, conversion mechanics, potential share issuance and dilution associated with the senior secured convertible notes and related warrants.
- Reconcile the filing’s financial statements with risk-factor language that separately refers to a $18.4 million nine-month net loss and $74.3 million accumulated deficit, versus the financial statements’ $19.1 million and $75.0 million figures.
- Assess progress, enrollment, safety and efficacy data for PF614, PF614-MPAR and nafamostat, and confirm the timing and regulatory requirements for the next clinical phases.
- Monitor remediation of the material weaknesses in internal control over financial reporting and any subsequent restatements or control-related disclosures.
- Evaluate dilution from 20.4 million outstanding warrants, 4.4 million options, convertible notes, the share subscription facility and any future equity financing.