What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-31 compared with 2021-03-15 · 686 added, 331 removed, 2 unchanged (100% of the section changed)

Management’s Discussion

and Analysis of Financial Condition and Results of Operations

The following discussion and analysis

of the Company’s financial condition and results of operations should be read in conjunction with our audited financial

statements and the notes related thereto which are included in “Item 8.

Financial Statements and Supplementary Data”

of this Annual Report on Form 10-K.

Certain information contained in the discussion and analysis set forth below includes forward-looking

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of

many factors, including those set forth under “Special Note Regarding Forward-Looking Statements,” “Item 1A.

Risk Factors” and elsewhere in this Annual Report on Form 10-K.

We are a blank check company incorporated

on September 11, 2017 in Delaware and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition,

stock purchase, recapitalization, reorganization or similar business combination with one or more target businesses.

to effectuate our Business Combination using cash from the proceeds of our Initial Public Offering, the sale of the Private Placement

Warrants that occurred simultaneously with the completion of our Initial Public Offering, the sale of the Private Placement Units

under the Contingent Forward Purchase Contract, if any (which has been waived in connection with the Business Combination with

Ensysce), our capital stock, debt or a combination of cash, stock and debt.

We are incurring significant costs in

the pursuit of our acquisition plans.

We cannot assure you that our plans to complete a Business Combination will be successful.

Recent Developments

On November 26, 2019, the Company

held a special meeting of stockholders at which our stockholders approved extending our Combination Period deadline from December 5,

2019 to April 5, 2020 (the “First Extension”).

Our public stockholders were able to elect to redeem their shares

in connection with the First Extension for a pro rata portion of the amount then on deposit in the Trust Account ($10.00 per share,

plus any pro rata interest earned on the funds held in the Trust Account and not previously released to us to pay franchise and

Management’s Discussion and Analysis of Financial Condition and Results of Operations

is a clinical stage pharmaceutical company seeking to develop innovative solutions for severe pain relief while reducing the fear of

and the potential for addiction, opioid misuse, abuse and overdose.

We have also incorporated a 79.2%-owned subsidiary, Covistat, a clinical

stage pharmaceutical company that is developing a compound utilized in our overdose protection program for the treatment of COVID-19.

Our lead product candidate, PF614, is an extended release TAAP prodrug of oxycodone.

TAAP modification of prescription drugs removed

the ability to crush, chew or manipulate and inject to achieve the medication more quickly than by swallowing.

MPAR™ adds a layer

of overdose protection to each TAAP product.

our inception in 2003, we devoted substantially all of our efforts and financial resources to organizing and staffing our company, business

planning, raising capital, discovering product candidates and securing related intellectual property rights and conducting research and

development activities for our product candidates.

We do not have any products approved for sale and we have not generated any revenue

from product sales.

We may never be able to develop or commercialize a marketable product.

lead product candidate, PF614, is in Phase 1b clinical development, PF614-MPAR™ is in Phase 1 clinical development and nafamostat

is proceeding towards Phase 2 clinical development.

Our other product candidates and our research initiatives are in preclinical or earlier

stages of development.

Our ability to generate revenue from product sales sufficient to achieve profitability will depend heavily on

the successful development and eventual commercialization of one or more of our product candidates.

We have not yet successfully completed

any pivotal clinical trials, nor have we obtained any regulatory approvals, manufactured a commercial-scale drug, or conducted sales

and marketing activities.

expect to continue to incur net losses for the foreseeable future, and we expect our clinical development expenses, and general and administrative

expenses to continue to increase.

We have incurred significant operating losses since inception.

Our net loss was $29.1 million for the

year ended December 31, 2021 and as of December 31, 2021, we had an accumulated deficit of $85.8 million.

We expect that our expenses

and capital requirements will increase substantially in connection with our ongoing development activities, particularly if and as we:

preclinical studies and continues existing and initiates new clinical trials for PF614, PF614-MPAR™ and nafamostat, our lead

product candidates being tested for chronic pain and infectious disease;

the development of our product candidate pipeline of other product candidates, including through business development efforts to

invest in or in-license other technologies or product candidates;

expand and protect our intellectual property portfolio;

additional clinical, quality control, medical, scientific and other technical personnel to support our clinical operations;

regulatory approval for any product candidates that successfully complete clinical trials;

any pre-commercialization activities to establish sales, marketing and distribution capabilities for any product candidates for which

we may receive regulatory approval;

our infrastructure and facilities to accommodate our growing employee base;

operational, financial and management information systems and personnel, including personnel to support our research and development

programs, any future commercialization efforts and our transition to operating as a public company.

expect to incur additional costs associated with operating as a public company, including significant legal, accounting, insurance, investor

relations and other expenses that we did not incur as a private company.

We may never become profitable.

require substantial additional funding to support our continuing operations and pursue our growth strategy.

Until we can generate significant

revenue from product sales, if ever, we expect to finance our operations through a combination of private and public equity offerings,

debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions.

extent that we raise additional capital through the sale of private or public equity or convertible debt securities, existing ownership

interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights

of our equity holders.

financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability

to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends.

raise additional funds through collaborations or other strategic transactions with third parties, we may have to relinquish valuable

rights to our technologies, future revenue streams, research programs or drug candidates, or grant licenses on terms that may not be

favorable to us.

We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable

terms, or at all.

If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale

back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential

in-licenses or acquisitions.

of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased

expenses or when or if we will be able to achieve or maintain profitability.

Even if we are able to generate product sales, we may not

become profitable.

If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to

continue our operations at planned levels and be forced to reduce or terminate our operations.

have generated limited revenues and have incurred significant operating losses since our inception, and as of December 31, 2021, have

an accumulated deficit of $85.8 million.

In addition, we expect to continue to incur significant and increasing expenses and operating

losses for the foreseeable future.

These factors raise substantial doubt about our ability to continue as a going concern.

that our available resources and existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure

requirements through the third quarter of 2022.

We based this estimate on assumptions that may prove to be wrong, and we could exhaust

our available capital resources sooner than we expect.

See “— Liquidity and Capital Resources .” Our future viability

beyond the twelve months is dependent on our ability to raise additional capital to finance our operations.

expect to incur substantial expenses in the foreseeable future for the development and potential commercialization of our product candidates

and ongoing internal research and development programs.

At this time, we cannot reasonably estimate the nature, timing or aggregate amount

of costs for our development, potential commercialization, and internal research and development programs.

However, in order to complete

our current and future preclinical studies and clinical trials, and to complete the process of obtaining regulatory approval for our

product candidates, as well as to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize

our product candidates, if approved, we may require substantial additional funding in the future.

Pandemic Business Update

March 2020, the World Health Organization declared COVID-19 a global pandemic.

To date, our financial condition and operations have not

been significantly impacted by the ongoing COVID-19 pandemic.

However, we cannot at this time predict the specific extent, duration,

or full impact that the ongoing COVID-19 pandemic will have on our financial condition and operations, including ongoing and planned

clinical trials and other operations required to support those clinical trials and research and development activities to advance our

The impact of the ongoing COVID-19 pandemic on our financial performance will depend on future developments, including the

duration and spread of the pandemic and related governmental advisories and restrictions.

These developments and the impact of the ongoing

COVID-19 pandemic on the financial markets and the overall economy are highly uncertain and cannot be predicted.

If the financial markets

and/or the overall economy are impacted for an extended period, our results may be materially adversely affected.

are continuing to evaluate the impact of the ongoing COVID-19 pandemic on our business and continue to take proactive measures to protect

the health and safety of our employees, as well as to maintain business continuity.

We believe that the current measures we have implemented

with respect to the ongoing COVID-19 pandemic are appropriate, reflecting both regulatory and public health guidance, to maintain business

We will continue to closely monitor and seek to comply with guidance from governmental authorities and adjust our activities

as appropriate.

Promissory Notes

On September 24, 2021, we entered

into the SPA for an aggregate financing of $15.0 million with institutional investors.

A first closing under the SPA occurred

on September 24, 2021 and a second closing under the SPA occurred on November 5, 2021.

At the first closing, the Company issued to the

investors (i) senior secured convertible promissory notes in the aggregate principal amount of $5.3 million for an aggregate purchase

price of $5.0 million (collectively, the “ First Closing Notes ”) and (ii) warrants to purchase 361,158 shares

of the Company’s common stock in the aggregate at an exercise price of $7.63 per share.

At the second closing, the Company

issued to the institutional investors referenced above, (i) senior secured convertible promissory notes in the aggregate principal amount

of $10.6 million (collectively, the “ Second Closing Notes ”, together with the First Closing Notes, the “ 2021

Notes ”) for an aggregate purchase price of $10.0 million and (ii) warrants to purchase 722,317 shares of the

Company’s common stock in the aggregate at an exercise price of $7.63 per share.

Notes, subject to an original issue discount of six percent (6%), have a term of twenty-one months from the date of issuance and accrue

interest at the rate of 5.0% per annum.

The Notes are convertible into common stock, at a per share conversion price equal to $5.87,

a 30% premium to the average price of the common stock for the three trading days prior to the first closing under the SPA.

the 2021 Notes, on the first day of each month, we are obligated to redeem (i) an amount equal to ninety-two percent (92%) of the average

of the three lowest VWAPs (as defined in the SPA) in the ten trading days prior to such date or (ii) an amount in cash with a premium

of eight percent of the one eighteenth (1/18 th ) of the original principal amount under the applicable Note, plus accrued but

unpaid interest, liquidated damages and any other amounts then owing to the holder of such Note.

Our redemption obligation commenced

on January 1, 2022 for the First Closing Notes and February 1, 2022 for the Second Closing Notes.

Company may elect to pay all or part of the redemption amount in the conversion of the 2021 Notes into shares of common stock based on

a conversion price equal to the lesser of (i) the conversion price and (ii) 92% of the average of the three lowest VWAPs (as defined

in the SPA) during the ten (10) consecutive trading days ending on the trading day that is immediately prior to the applicable redemption

date, but in no event may we pay the redemption amount in conversion shares of common stock unless the conversion price is at least equal

to $0.78 and certain equity conditions are satisfied.

December 27, 2021, the Company issued a Letter of Agreement amending the Securities Purchase Agreement to allow for conversion of the

outstanding notes at an exercise price of $4.50 per share of the Company’s common stock for fourteen trading days, commencing December

28, 2021 and ending January 14, 2022.

Following this period, the initial conversion price of $5.87 was restored.

The warrants have an exercise

price of $7.63, a 30% premium to the conversion price (and subject to downward adjustments based on certain issuances of the Company’s

common stock) and are exercisable for five years following issuance.

The Company issued, to the purchasers’ signatory

to the SPA, warrants to purchase up to a number of shares of common stock equal to forty percent (40%) of the shares of common stock

issuable to each purchaser under the SPA upon conversion of the Note such purchaser holds on each of the first and second closing date

under the SPA.

registered with the Securities and Exchange Commission the resale of the shares of common stock issuable upon conversion of the Notes

as well as the shares of common stock issuable upon the exercise of the warrants pursuant to a Registration Rights Agreement, dated September

24, 2021, by and among the Company and the purchasers’ signatory to the SPA.

2021 Notes contain certain covenants, and events of default and triggering events, respectively, which would require repayment of the

obligations outstanding pursuant to such instruments.

Our obligations pursuant to the 2021 Notes are (i) secured by all assets of the

Company and all subsidiaries of the Company pursuant to the Security Agreement and Patent Security Agreement, each dated September 24,

2021, by and among the Company, the subsidiaries of the Company and the holders of the 2021 Notes and (ii) guaranteed jointly and severally

by the subsidiaries of the Company pursuant to the Subsidiary Guarantee, dated September 24, 2021, by and among the Company, the subsidiaries

of the Company and the purchasers signatory to the SPA.

Combination Transaction

June 30, 2021, the Merger with LACQ was consummated and we became a public company.

We received net proceeds of approximately $7.8 million

at the closing and we continue to operate under our management team, led by our Chief Executive Officer Lynn Kirkpatrick.

2021, the combined company’s common stock began trading on Nasdaq under the ticker symbol “ENSC”.

of Our Operating Results

have generated limited revenue since our inception and we do not expect to generate any revenue from the sale of products in the near

future, if at all.

If our development efforts are successful and we commercialize our products, or if we enter into collaboration or

license agreements with third parties, we may generate revenue in the future from product sales, as well as upfront, milestone and royalty

payments from such collaboration or license agreements, or a combination thereof.

have received funding under federal grants from the NIH through NIDA.

In September 2018, we were awarded the MPAR Grant.

2019, we were awarded a second research and development grant, the OUD Grant.

Grant funds are awarded annually through a Notice of Award

which contains certain terms and conditions including, but not limited to, complying with the grant program legislation, regulation and

policy requirements, complying with conditions on expenditures of funds with respect to other applicable statutory requirements such

as the federal appropriations acts, periodic reporting requirements, and budget requirements.

and Development Expenses

and development expenses consist primarily of costs incurred for research activities, including drug discovery efforts and the development

of our product candidates.

We expense research and development costs as incurred, which include:

incurred to conduct the necessary preclinical studies and clinical trials required to obtain regulatory approval;

incurred under agreements with CROs that are primarily engaged in the oversight and conduct of our drug discovery efforts and preclinical

studies, clinical trials and CMOs that are primarily engaged to provide preclinical and clinical drug substance and product for our

research and development programs;

costs related to acquiring and manufacturing materials in connection with our drug discovery efforts and preclinical studies and

clinical trial materials, including manufacturing validation batches, as well as investigative sites and consultants that conduct

our clinical trials, preclinical studies and other scientific development services;

made in cash or equity securities under third-party licensing, acquisition and option agreements;

employee-related

expenses, including salaries and benefits, travel and stock-based compensation expense for employees engaged in research and development

related to compliance with regulatory requirements;

facilities-related costs, depreciation and other expenses, which include rent and utilities.

recognize external development costs as incurred.

Any advance payments that we make for goods or services to be received in the future

for use in research and development activities are recorded as prepaid expenses.

Such amounts are expensed as the related goods are delivered

or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.

estimate and accrue for the value of goods and services received from CROs and other third parties each reporting period based on an

evaluation of the progress to completion of specific tasks using information provided to us by our service providers.

This process involves

reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf

and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or

otherwise notified of actual costs.

do not track our research and development expenses on a program-by-program basis.

Our direct external research and development expenses

consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs and research laboratories in connection with

our preclinical development, process development, manufacturing and clinical development activities.

We do not allocate employee costs,

costs associated with our discovery efforts, laboratory supplies, and facilities, including depreciation or other indirect costs, to

specific programs because these costs are deployed across multiple programs and, as such, are not separately classified.

We use internal

resources primarily to conduct our research and discovery as well as for managing our preclinical development, process development, manufacturing

and clinical development activities.

These employees work across multiple programs and, therefore, we do not track our costs by program

and cannot state precisely the total costs incurred for each of our clinical and preclinical programs on a project-by-project basis.

and development activities are central to our business model.

Product candidates in later stages of clinical development generally have

higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage

clinical trials.

As a result, we expect that our research and development expenses will increase substantially over the next several

years as we continue our existing, and commences additional, planned clinical trials for PF614, PF614-MPAR™ and nafamostat, as

well as conduct other preclinical and clinical development, including submitting regulatory filings for our other product candidates.

We also expect our discovery research efforts and our related personnel costs to increase and, as a result, we expect our research and

development expenses, including costs associated with stock-based compensation, to increase above historical levels.

In addition, we

may incur additional expenses related to milestone and royalty payments payable to third parties with whom we may enter into license,

acquisition and option agreements to acquire the rights to future product candidates.

this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical

and clinical development of any of our product candidates or when, if ever, material net cash inflows may commence from any of our product

The successful development and commercialization of our product candidates are highly uncertain.

This uncertainty is due

to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of the following:

scope, progress, outcome and costs of our preclinical development activities, clinical trials and other research and development

an appropriate safety and efficacy profile with IND enabling studies;

patient enrollment in and the initiation and completion of clinical trials;

timing, receipt and terms of any marketing approvals from applicable regulatory authorities including the FDA and non-U.S.

extent of any required post-marketing approval commitments to applicable regulatory authorities;

clinical and commercial manufacturing capabilities or making arrangements with third-party manufacturers in order to ensure that

we or our third-party manufacturers are able to make product successfully;

and timely delivery of clinical-grade and commercial-grade drug formulations that can be used in our clinical trials and for commercial

maintaining, defending and enforcing patent claims and other intellectual property rights;

and changing government regulation;

commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others;

a continued acceptable safety profile of our product candidates following approval, if any, of our product candidates.

changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical

development could mean a significant change in the costs and timing associated with the development of these product candidates.

example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical

trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned

clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development

of that product candidate.

and Administrative Expenses

and administrative expenses consist primarily of employee-related expenses, including salaries and related benefits, travel and stock-based

compensation for personnel in executive, business development, finance, human resources, legal, information technology, and administrative

General and administrative expenses also include direct and allocated facility-related costs as well as insurance costs and

professional fees for legal, patent, consulting, investor and public relations, accounting and audit services.

We expense general and

administrative costs as incurred.

anticipate that our general and administrative expenses, excluding non-cash expenses to recognize the fair value of warrants issued

with the share subscription facility, will increase in the future as we increase our headcount to support the continued development

of our product candidates.

We also anticipate that we will incur significantly increased accounting, audit, legal, regulatory, compliance

and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll

and other employee-related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and

marketing of that product candidate.

Income (Expense)

Derivative Liabilities

2018 and 2021, we entered into a series of notes that were determined to have embedded derivative instruments in the form of a contingent

The notes were recognized at the value of proceeds received after allocating issuance proceeds to the bifurcated contingent

The notes were subsequently measured at amortized cost using the effective interest method to accrete interest over their

term to bring the notes’ initial carrying value to their principal balance at maturity.

The bifurcated put option was initially

measured at fair value and subsequently measured at fair value with changes in fair value recognized as a component of other expenses

in the consolidated statements of operations.

These notes and associated derivatives were settled during 2021.

Convertible Notes

elected the fair value option to account for the 2021 Notes as we believe 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.

We use a Monte Carlo analysis to estimate

the fair value of the conversion feature of the notes, which relies on unobservable Level 3 inputs.

We use a discounted

cash flow model to estimate the fair value of the debt component of the 2021 Notes.

Changes in the fair value of the notes are

recognized through earnings for each reporting period.

The impact to the consolidated statement of operations related to these

2021 Notes is reflected in the following lines:

Change in fair value of convertible notes and issuance costs for convertible notes.

Such issuance costs include investment banking and legal fees as well as original issue discounts on the 2021 Notes.

Liability Classified Warrants

The warrants issued with

the 2021 Notes were liability classified due to certain cash settlement features.

We use a Black-Scholes option pricing model to estimate

the fair value of the warrants.

Changes in the fair value of the warrants are recognized through earnings for each reporting period.

expense consists of interest accrued on our convertible and other promissory notes and the amortization of debt discounts in our convertible

promissory notes that were settled on June 30, 2021, in conjunction with the Merger.

Interest expense related to the 2021 Notes is

included in the estimate of fair value of the convertible notes.

for Income Taxes

have not recorded any significant amounts related to income tax expense, we have not recognized any reserves related to uncertain tax

positions, nor have we recorded any income tax benefits for the majority of our net losses we have incurred to date or for our research

and development tax credits.

account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities

for the expected future tax consequences of events that have been included in the financial statements or our tax returns.

assets and liabilities are determined based on difference between the financial statement carrying amounts and tax bases of existing

assets and liabilities and for loss and credit carryforwards, which are measured using the enacted tax rates and laws in effect in the

years in which the differences are expected to reverse.

The realization of our deferred tax assets is dependent upon the generation of

future taxable income, the amount and timing of which are uncertain.

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.

As of December 31, 2021

and 2020, we continue to maintain a full valuation allowance against all of our deferred tax assets based on our evaluation of all available

file income tax returns in the United States federal tax jurisdiction and state jurisdictions and may become subject to income tax audit

and adjustments by related tax authorities.

Our tax return period for United States federal income taxes for the tax years since 2017

remain open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions.

We record reserves

for potential tax payments to various tax authorities related to uncertain tax positions, if any.

The nature of uncertain tax positions

is subject to significant judgment by management and subject to change, which may be substantial.

These reserves are based on a determination

of whether and how much a tax benefit taken by us in our tax filings or whether our position is more likely than not to be realized following

the resolution of any potential contingencies related to the tax benefit.

We develop our assessment of uncertain tax positions, and the

associated cumulative probabilities, using internal expertise and assistance from third-party experts.

As additional information becomes

available, estimates are revised and refined.

Differences between estimates and final settlement may occur resulting in additional tax

Potential interest and penalties associated with such uncertain tax positions is recorded as a component of our provision for

income taxes.

With respect to public shares not redeemed in connection with the Special Meeting, we agreed to make Contributions

of $0.03 for each public share that was not redeemed by stockholders for each of the four monthly periods covered by the extension

(commencing on December 6, 2019 through the end of the First Extension), subject to certain conditions.

The number of shares

of redeemed by public stockholders in connection with the First Extension was 1,123,749 for an aggregate cash redemption

amount of $11,583,473.

On December 5, 2019, the Company

entered into the Expense Advancement Agreement with GTWY Holdings pursuant to which GTWY Holdings committed to provide $566,288

to fund Contributions to the Trust Account, representing the amount needed to fund the first monthly Contribution during the First

The Company drew down the full amount under the Expense Advancement Agreement to fund the required Contribution to

the Trust Account for the period December 6, 2019 to January 5, 2020 by issuing an unsecured promissory note to GTWY

The note does not bear interest.

If we complete our initial business combination, the amount borrowed under the Expense

Advancement Agreement would be repaid out of the proceeds of the Trust Account released to it.

Otherwise, amounts borrowed under

the Expense Advancement Agreement would be repaid only out of funds held outside the Trust Account.

Amounts borrowed pursuant

to the Expense Advancement Agreement were deposited to the Trust Account on December 6, 2019.

The note was converted into

warrants on January 31, 2021 at a price of $1.00 per warrant and subject to the same terms and conditions as our private placement

On January 6, 2020, the Company deposited

$566,288 to the Trust Account to fund the required Contribution to the Trust Account for the period January 6, 2020 to February 5,

On January 15, 2020, we drew down

$1,000,000 under the Expense Advancement Agreement with our sponsors and strategic investor dated December 1, 2017 to fund general

corporate purposes in exchange for issuing unsecured promissory notes.

The holders had the option to convert the promissory notes

into warrants at a price of $1.00 per warrant subject to the same terms and conditions as private placement warrants.

notes were converted into warrants on June 25, 2020.

Notes issued under the Expense Advancement Agreement do not bear interest.

If we complete an initial business combination, we would repay amounts borrowed under the Expense Advancement Agreement out of

the proceeds of the Trust Account released to it;

provided, however, that the sponsors and strategic investor have the option to

convert promissory notes into warrants at a price of $1.00 per warrant subject to the same terms and conditions as our private

placement warrants.

Otherwise, amounts borrowed under the Expense Advancement Agreement would be repaid only out of funds held

outside the Trust Account.

The expense advancement agreement was amended to increase the total amount of advances available to

us under the agreement by $125,000 on June 29, 2020 and by an additional $75,000 on October 26, 2020 and an additional $100,000

on November 30, 2020, for a total of $300,000, of which we drew down $225,000 pursuant to promissory notes issued in October and

November 2020, with a resulting balance of $225,000 under the promissory notes as of December 31, 2020.

On February 23, 2021, we

entered into the Fourth Expense Advancement Amendment to the Expense Advancement Agreement to increase the total amount of advances

available to the Company under the agreement to $1,460,000.

The November 2020 Promissory Notes were amended and restated on February

24, 2021 in order to reflect the incremental increase of the total amount of advances available to the Company thereunder to $460,000

from $300,000 and all of such increase was drawn on February 24, 2021.

On each of February 4, 2020 and March

4, 2020, we deposited $566,288 into the Trust Account to fund the required Contribution to the Trust Account for the remaining

monthly periods covered by the Extension.

On March 26, 2020, we held a special meeting

pursuant to which our stockholders approved extending the Combination Period from April 5, 2020 to June 30, 2020 (the “Second

Extension Date”).

In connection with the approval of the extension, stockholders elected to redeem an aggregate of 16,837,678

shares of our common stock.

As a result, an aggregate of $176,283,492 (or approximately $10.47 per share) was released from our

Trust Account to pay such stockholders.

Of the amount paid to redeeming stockholders, $136,283,492 was paid as of March 31, 2020

and the balance of $40,000,000 was paid on April 1, 2020.

On June 26, 2020, we held a special meeting pursuant to which

our stockholders approved extending the Combination Period from June 30, 2020 to December 1, 2020 (the “Third Extension Date”).

In connection with the approval of the extension, stockholders elected to redeem an aggregate of 776,290 shares of our common stock.

As a result, an aggregate of $8,099,292 (or approximately $10.43 per share) was released from our Trust Account to pay such stockholders.

On July 16, 2020, we elected to terminate

the Agreement and Plan of Merger, dated December 27, 2019 (the “GTWY Merger Agreement”), with GTWY Holdings, and a

related subsidiary, GTWY Merger Sub Corp.

Pursuant to its terms, we had the ability to terminate the GTWY Merger Agreement to the

extent the business combination had not been completed by July 15, 2020.

On November 24, 2020, our stockholders

approved extending the Combination Period from December 1, 2020 to June 30, 2021 (the “Fourth Extension Date”).

connection with the approval of the extension, stockholders elected to redeem an aggregate of 38,015 shares of the Company’s

common stock.

As a result, an aggregate of $393,380 (or approximately $10.34 per share) was released from our Trust Account to

pay such stockholders , and we have 6,224,268 shares of common stock outstanding as

of March 15, 2021 .

NASDAQ Notice

On November 30, 2020, we received a notice

from the Listing Qualifications Department of The Nasdaq Stock Market LLC stating that we were not in compliance with Listing

Rule IM-5101-2 (the “Rule”), which requires that a special purpose acquisition company complete one or more business

combinations within 36 months of the effectiveness of the registration statement filed in connection with its initial public offering,

and that we were also not in compliance with Nasdaq’s minimum publicly held shares requirement under Listing Rule 5550(a)(4),

which requires a listed company’s primary equity security to maintain a minimum of 500,000 publicly held shares.

On January 27, 2021, the Panel granted

our request for continued listing of our equity securities on the Nasdaq Capital Market pursuant to an extension,

subject to certain milestones, through June 1, 2021.

See “ Item 1A.

Risk Factors — The Nasdaq may not continue to list

our securities, which could limit investors’ ability to make transactions in our securities and subject us to additional

trading restrictions” .

Merger Agreement

On January 31, 2021, we entered into a

Merger Agreement with Ensysce and Merger Sub, relating to a proposed business combination transaction between us and Ensysce.

Pursuant to the Merger Agreement, Merger

Sub will merge with and into Ensysce, with Ensysce surviving such merger as our wholly owned subsidiary and the stockholders of

Ensysce becoming our stockholders (the “Merger”).

Ensysce’s issued and outstanding

share of common stock as of immediately prior to the closing of the Merger (including shares issuable on conversion of convertible

notes of Ensysce).

will, at the closing (the “Closing”) of the transactions contemplated by the Merger Agreement (collectively,

the “Transaction”), be canceled and converted into the right to receive our common stock, calculated based on an exchange

ratio of 0.06585 (the “Exchange Ratio”).

The Transaction will be consummated subject

to the deliverables and provisions as further described in the Merger Agreement.

We are incurring significant costs in

the pursuit of its acquisition plans.

We may be required to seek additional resources in the future to fund general corporate

purposes and cannot assure you that our plans to complete the Transactions will be successful.

Results of Operations

Our only activities from inception through

December 31, 2020 were organizational activities and those necessary to prepare for the Initial Public Offering, identifying a

target for our Business Combination and seeking to complete an initial business combination, including activities in connection

with the proposed acquisition of Ensysce and the announced and subsequently terminated acquisition of GTWY Holdings.

expect to generate any operating revenues until after the completion of our Business Combination.

We generate non-operating income

in the form of interest income on marketable securities.

We are incurring expenses as a result of being a public company (for

legal, financial reporting, accounting and auditing compliance), as well as for due diligence and transaction expenses in connection

with completing a Business Combination.

For year ended December 31, 2020, we had a net income of $2,404,519,

which consists interest income on marketable securities held in the Trust Account of $719,646 and the forgiveness of accounts payable

of $3,298,207, offset by operating costs of $1,368,841 and a provision for income taxes of $244,493.

For the year ended December 31, 2019,

we had net income of $365,954, which consists of interest income on marketable securities held in the Trust Account of $4,249,828

offset by operating costs of $3,328,674 and a provision for income taxes of $555,200.

Liquidity and Capital Resources

As of December 31, 2020, we had marketable

securities held in the Trust Account of $12,628,170 (including approximately $239,000 of interest income) consisting of money

market funds.

Interest income on the Trust Account will be used by us to pay franchise and income taxes.

Through December 31,

2020, we withdrew $2,001,144 of interest earned on the Trust Account to pay franchise and income taxes, of which $326,352 was

withdrawn during the year ended December 31, 2020.

We intend to use substantially all of

the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account (less deferred underwriting

commissions and interest income that is used to pay franchise and income taxes) to complete our Business Combination.

To the extent

that our capital stock or debt is used, in whole or in part, as consideration to complete our Business Combination, the remaining

proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses,

make other acquisitions and pursue our growth strategies.

As of December 31, 2020, we had cash of

$49,202 held outside the Trust Account.

We intend to use the funds held outside the Trust Account primarily to identify and evaluate

target businesses, perform business due diligence on prospective target businesses, travel to and from the offices, plants or

similar locations of prospective target businesses or their representatives or owners, review corporate documents and material

agreements of prospective target businesses, and structure, negotiate and complete a Business Combination, and we have also used

such funds to make Contributions to the Trust Account in connection with the First Extension (see “Recent Developments”

For the year ended December 31, 2020, cash used in operating

activities was $864,439.

Net income of $2,404,519 was impacted by interest earned on marketable securities held in the Trust Account

of $719,646 and the forgiveness of accounts payable in the amount of $3,298,207.

Changes in operating assets and liabilities provided

$748,895 of cash from operating activities.

For the year ended December 31, 2019,

cash used in operating activities was $1,424,792.

Net income of $365,954 was offset by interest earned on marketable securities

held in the Trust Account of $4,249,828 and a deferred tax benefit of $1,764.

Changes in operating assets and liabilities provided

$2,460,846 of cash from operating activities.

On December 5, 2019, the Company

entered into the Expense Advancement Agreement with GTWY Holdings pursuant to which GTWY Holdings committed to provide $566,288

to fund Contributions to the Trust Account.

representing the amount needed to fund the first monthly Contribution during the First

The Company drew down the full amount under the Expense Advancement Agreement to fund the required Contribution to

the Trust Account for the period December 6, 2019 to January 5, 2020 by issuing an unsecured promissory note to GTWY

Holdings (the “GTWY Promissory Note”).

The GTWY Promissory Note does not bear interest.

Amounts borrowed pursuant

to the Expense Advancement Agreement were deposited to the Trust Account on December 6, 2019.

On January 31, 2021, we

entered into an amendment to the GTWY Promissory Note to permit conversion of all or a portion of the GTWY Promissory Note into

warrants at a price of $1.00 per warrant.

In connection with such amendment, GTWY Holdings elected to convert the full principal

balance of the GTWY Promissory Note into 566,288 warrants.

On December 1, 2017, HG Vora entered into

a Contingent Forward Purchase Contract with us to purchase, in a private placement for gross proceeds of $62,500,000 to occur concurrently

with the consummation of our Business Combination, 6,250,000 Units on the same terms as the sale of Units in the Initial Public

Offering at $10.00 per unit.

The funds from the sale of the Private Placement Units may be used as part of the consideration to

the sellers in the Business Combination;

any excess funds from the Private Placement Units may be used for working capital in the

post-transaction company.

This commitment is independent of the percentage of stockholders electing to redeem their shares and

provides us with an increased minimum funding level for the Business Combination.

HG Vora’s obligation to purchase our Units

under the Contingent Forward Purchase contract is contingent upon, among other things, HG Vora approving the Business Combination,

which approval can be withheld for any reason.

In connection with previously proposed business combination transaction with GTWY

Holdings, an amendment to the Contingent Forward Purchase Contract was effected on December 27, 2019 to provide that the Contingent

Forward Purchase Contract would terminate as of, and contingent upon, the closing of the transaction with GTWY Holdings such that

the strategic investor would instead purchase 3,000,000 units of GTWY Holdings’ equity securities (with each unit consisting

of one GTWY Holdings Share and one-half of one GTWY Holdings Warrant) for a purchase price of $10.00 per unit.

In addition, HG

Vora waived its rights under the Contingent Forward Purchase Contract to purchase Private Placement Units in connection with the

proposed Merger with Ensysce.

In order to fund working capital

deficiencies or finance transaction costs in connection with a Business Combination, the Hydra Sponsor, an affiliate of the

Matthews Lane Sponsor and HG Vora (the “Funding Parties”) loaned an aggregate of $1,000,000 to the Company, in

accordance with unsecured promissory notes issued on January 15, 2020 to the Funding Parties, pursuant to an expense advance

agreement dated December 1, 2017 which were subsequently converted by the holders into warrants on June 25, 2020.

advancement agreement was amended to increase the total amount of advances available to the Company under the agreement by

an additional $300,000 pursuant to amendments effected through November 30, 2020, of which the Company drew down an aggregate

of $225,000 through December 31, 2020.

The agreement was further amended on February 23, 2021 to increase the total amount of

advances available to the Company by an additional $160,000 which was drawn down, on February 24, 2021, resulting in aggregate loans

outstanding of $460,000 at March 10, 2021.

The Funding Parties may, but are not obligated to, loan the Company additional

funds from time to time or at any time, as may be required (“Working Capital Loans”).

Under the expense

advancement agreement, Working Capital Loans would either be paid upon completion of a Business Combination, without

interest, or, at the holder’s discretion, could be converted into warrants at a price of $1.00 per warrant.

warrants would be identical to the Private Placement Warrants.

In the event that a Business Combination does not close, the

Company may use a portion of the proceeds held outside the Trust Account to repay the Working Capital Loans, but no proceeds

held in the Trust Account would be used to repay the Working Capital Loans.

As of December 31, 2020, there were $225,000

amounts outstanding under the Working Capital Loans (the $1,000,000 previously loaned by the Funding Parties having been

converted into warrants on June 25, 2020).

As of December 31, 2020, we had $49,202

in our operating bank accounts, $12,628,170 in securities held in the Trust Account to be used for a Business Combination or to

repurchase or redeem its common stock in connection therewith and working capital deficit of $127,869, which excludes $93,929

of prepaid income and franchise taxes.

We will need to raise additional capital

through loans or additional investments from our sponsors, HG Vora, stockholders, officers, directors, or third parties.

and HG Vora may, but are not obligated to, loan us funds, from time to time or at any time, in whatever amount they deem reasonable

in their sole discretion, to meet our working capital needs.

Accordingly, we may not be able to obtain additional financing.

we are unable to raise additional capital, we may be required to take additional measures to conserve liquidity, which could include,

but not necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead

We cannot provide any assurance that new financing will be available to us on commercially acceptable terms, if at all.

These conditions raise substantial doubt about our ability to continue as a going concern through June 30, 2021, the date that

we will be required to cease all operations, except for the purpose of winding up, if a Business Combination is not consummated.

These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification

of the liabilities that might be necessary should we be unable to continue as a going concern.

Off-Balance Sheet Financing Arrangements

We have no obligations, assets or liabilities,

which would be considered off-balance sheet arrangements as of December 31, 2020.

We do not participate in transactions that create

relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would

have been established for the purpose of facilitating off-balance sheet arrangements.

We have not entered into any off-balance

sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities,

or purchased any non-financial assets.

Contractual Obligations

As of December 31, 2020, we do not have

any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an agreement dated

December 1, 2017 to pay our Hydra sponsor a monthly fee of up to $10,000 for office space, utilities and secretarial and administrative

support provided to us until the earlier of the completion of the Business Combination and our liquidation.

We began incurring

these fees on December 1, 2017.

Effective September 30, 2020, Hydra Sponsor agreed to stop charging the Company the monthly administrative

fee and forgave the $71,000 outstanding balance due under the agreement.

underwriters are entitled to underwriting discounts and commissions of 5.5%, of which 2.0% ($4,000,000) was paid at the closing

of the Initial Public Offering, and 3.5% ($7,000,000) was deferred.

The deferred discount will become payable to the underwriters

from the amounts held in the Trust Account solely in the event that we complete a Business Combination, subject to the terms of

the underwriting agreement.

The underwriters are not entitled to any interest accrued on the deferred discount.

On November 23,

2020, the underwriters agreed to waive $250,000 of the deferred fee that is to be paid upon consummation of the Business Combination,

as a result of which $6,750,000 remained payable.

On January 31, 2021, the underwriters agreed to reduce the total deferred underwriting

fee that is to be paid to such underwriters upon the consummation of our Business Combination to $2,000,000, which have the right,

under certain situations, to pay in the form of our common stock.

Critical Accounting Policies

The preparation of financial statements

and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management

to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets

and liabilities at the date of the financial statements, and income and expenses during the periods reported.

Actual results could

materially differ from those estimates.

We have identified the following critical accounting policies:

Common Stock Subject to Possible Redemption

We account for our common stock subject

to possible conversion in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing

Liabilities from Equity.” Common stock subject to mandatory redemption is classified as a liability instrument and measured

at fair value.

Conditionally redeemable common stock (including common stock that features redemption rights that are either within

the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) is classified

as temporary equity.

At all other times, common stock is classified as stockholders’ equity.

Our common stock features certain

redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events.

common stock subject to possible redemption is presented at redemption value as temporary equity, outside of the stockholders’

equity section of our balance sheets.

Net Income (Loss) Per Common Share

We apply the two-class method in calculating

earnings per share.

Net income per common share, basic and diluted for redeemable common stock is calculated by dividing the interest

income earned on the Trust Account, net of applicable taxes, if any, by the weighted average number of shares of redeemable common

stock outstanding for the period.

Net loss per common share, basic and diluted for non-redeemable common stock is calculated by

dividing net income less income attributable to redeemable common stock, by the weighted average number of shares of non-redeemable

common stock outstanding for the period presented.

Recent Accounting Pronouncements

Management does not believe that any other

recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our financial

Quantitative and Qualitative

Disclosures about Market Risk

Not applicable for smaller reporting companies.

To date, no amounts are being presented as an uncertain tax position.

of Operations

of the Years ended December 31, 2021 and 2020

following table summarizes our results of operations for the years ended December 31, 2021 and 2020:

Year Ended December 31,

Federal grants

Operating expenses:

Research and development

General and administrative

Total operating expenses

Loss from operations

Other income (expense):

Change in fair value of derivative liabilities

Issuance costs for convertible notes

Change in fair value of convertible notes

Issuance of liability classified warrants

Change in fair value of liability classified warrants

Interest expense

Other income and expense, net

Total other income (expense), net

Net loss attributable to noncontrolling interests

Deemed dividend related to warrants down round provision

Net income (loss) attributable to common stockholders

$ (29,886,851 )

$ (29,943,621 )

Revenue from federal grants

totaled $3.5 million for the year ended December 31, 2021, compared to $3.9 million for the year ended December 31, 2020.

related to two grants from the NIH through NIDA.

Revenue decreased $0.4 million during the year ended December 31, 2021, due to the

timing of research activities eligible for funding under the grants under the MPAR TM grant awarded in September 2018.

We expect funding from federal grants in the future to approximate current levels.

and Development Expenses

and development expenses were $4.7 million for the year ended December 31, 2021, compared to $4.4 million for the year ended December

The increase was primarily the result of increased external research and development costs related to the clinical programs

for PF614 and PF614-MPAR™.

We do not currently track expenses on a program-by-program basis.

We expect research and development

expenses to increase in the future due to planned clinical trials and higher preclinical and clinical development costs for our product

and Administrative Expenses

and administrative expenses were $18.7 million for the year ended December 31, 2021, compared to $1.2 million for the year ended December

The increase was primarily driven by a one-time $11.6 million non-cash expense related to warrants issued for the share subscription

facility, reflecting the fair value of 1,106,108 warrants issued with an exercise price of $10.01 per share in July 2021, based on the

$14.49 share price on the date of issuance.

Also contributing to the increase was $1.3 million of non-cash expense for consultants and

$1.1 million expense for commitment fees for the share subscription facility.

Excluding the one-time expenses related to the share subscription

facility, which were recorded due to the uncertainty of future issuance of shares under the facility, and consultant expenses, we expect

our general and administrative expenses to increase in the future due to increased director and officer insurance costs and various expenses

related to operating as a public company.

Income and Expense

The change in fair value of

derivative liabilities was an increase of $0.7 million for the year ended December 31, 2021, compared to an increase

of $2.4 million for the year ended December 31, 2020.

The change resulted from changes in the likelihood of realization of the embedded

derivative instrument in previous convertible notes payable.

expense was $1.3 million for the year ended December 31, 2021, compared to $1.0 million for the year ended December 31, 2020.

primarily reflect stated interest expense and debt discount accretion for the convertible notes converted upon the closing of the Merger

on June 30, 2021.

The remaining elements of other

income and expense primarily relate to the 2021 Notes, reflecting issuance costs and changes in valuation of the notes and

related warrants.

There was no corresponding activity in the year ended December 31, 2020.

and Capital Resources

of Liquidity and Capital

of December 31, 2021, we had $12.3 million of cash and cash equivalents.

Since inception, we have generated limited revenues and have

incurred significant operating losses and negative cash flows from our operations, and we anticipate that we will continue to incur losses

for at least the foreseeable future.

We have not yet commercialized any of our product candidates and we do not expect to generate revenue

from sales of any product candidates for several years, if at all.

As of December 31, 2021, we had an accumulated deficit of $85.8 million.

have funded our operations to date primarily with proceeds from the sale of common equity, funding under federal research grants and

borrowings under promissory notes.

To fund future operations, we will need to raise additional capital.

The amount and timing of future

funding requirements will depend on many factors, including the timing and results of our ongoing research and development efforts and

related general and administrative support.

We anticipate that we will fund our operations through public or private equity or debt financings

or other sources, such as potential collaboration agreements.

We cannot make assurances that anticipated additional financing will be

available to us on favorable terms, if at all.

funding under two approved federal research grants totals $4.3 million and is expected to be utilized by December 31, 2022.

to the terms and conditions of the two grants, we are required to submit progress reports to NIDA on an annual basis and a final research

performance progress report within 120 days of the performance period end date.

Additionally, the grants limit the use of funds to activities

that are clearly severable and independent from activities that involve human subjects until the receipt by NIDA of (i) Institutional

Review Board (“ IRB ”) approval, (ii) federal-wide assurance from the Office for Human Research Protections, (iii) a

Data and Safety Monitoring Plan, (iv) certification that all key personnel have completed education on the protection of human subjects

and (v) a Clinical Trials Dissemination Plan.

We must also comply with the data sharing policies of NIDA and the NIH Public Access Policy,

that require submission of final peer-reviewed journal manuscripts that arise from the use of grants to PubMed Central immediately upon

acceptance for publication.

grant has to be repaid.

To receive the remaining funding for each respective study covered by a grant, we must meet certain milestones.

We have met the required milestones under the MPAR Grant.

The remaining milestone under the OUD Grant is identification of a R-methadone-TAAP

clinical candidate that meet the specified criteria.

arising from the research projects funded with the grants are required to be reported to NIDA, per the Bayh-Dole Act (the Patent and

Trademark Law Amendments Act), that permits us to retain ownership of the inventions, while also giving NIDA the license to practice

the subject invention.

In turn, we are expected to file for patent protection and to ensure commercialization upon licensing for the

benefit of public health.

to the GEM Agreement, we are entitled to draw down up to $60.0 million of gross proceeds (“ Aggregate Limit ”) from

GEM Global in exchange for shares of our common stock, subject to meeting the terms and conditions of the GEM Agreement.

This share subscription

facility is available for a period of 36 months from the closing date of the Merger.

A draw down is subject to limitations on the amount

that is drawn under the facility and must comply with certain conditions precedent including the listing of our shares on a principal

market (which includes Nasdaq), having the necessary number of shares that are issuable pursuant to the draw down registered under an

effective registration statement, and other notice and timing requirements.

Upon our valid exercise of a draw down, pursuant to delivery

of a notice and in accordance with other conditions, GEM Global is required to pay, in cash, a per-share amount equal to 90% of the average

closing bid price of the shares of our common stock recorded by Nasdaq during the 30 consecutive trading days commencing on the first

trading day that is designated on the draw down notice.

In no event may our draw down requests exceed 400% (“ Draw Down Limit ”)

of the average daily trading volume for the 30 trading days immediately preceding the date we deliver the draw down notice.

to utilize this share subscription facility is restricted while the 2021 Notes are outstanding.

the closing of the Merger, GEM Global became entitled to a commitment fee in the form of cash or freely tradeable shares of our common

stock in an amount equal to 2% of the Aggregate Limit or $1.2 million to be paid in two tranches.

The commitment fee for the first tranche,

which is equal to 67% of the commitment fee, or $800,000, becomes payable on the first anniversary of the closing of the Merger and the

commitment fee for the second tranche, which is equal to the remaining 33% of the commitment fee, or $400,000, becomes payable on the

eighteen-month anniversary of the closing of the Merger.

Additionally,

we issued a warrant with a 36-month term at the closing of the Merger granting GEM Global the right to purchase 1,106,108 shares of our

common stock (an amount equal to 4% of the total number of our common stock outstanding as of the closing date of the Merger (subject

to adjustments described below), calculated on a fully diluted basis), at a strike price per share equal to $10.01, which was the closing

bid price for such common stock on the first day of trading on Nasdaq.

The strike price was reduced to $4.50 per share at December 31,

2021 because of a pricing adjustment per the GEM Agreement.

The warrant can be exercised on a cashless basis in part or in whole at any

time during the term.

Any failure by us to timely transfer the shares under the warrant pursuant to GEM Global’s exercise will

entitle GEM Global to compensation in addition to other remedies.

The number of shares underlying the warrant as well as the strike price

is subject to adjustments for recapitalizations, reorganizations, change of control, stock split, stock dividend, reverse stock splits,

and issuances of additional common shares at a price per share less than the exercise price.

GEM Agreement contains certain negative covenants restricting us from securing an share subscription line similar to the financing provided

under the GEM Agreement and requiring prompt notice of events constituting an alternate transaction.

An “alternate transaction”

includes an issuance of common stock at a price less than the then current market price, an “at-the-market” offering of securities,

and an issuance of options, warrants, or similar rights of subscription or the issuance of convertible equity or debt securities.

“ Risks Related to Our Business, Financial Condition and Capital Requirements ” for additional information.

pursuant to the terms of the GEM Agreement, we are required to indemnify GEM Global for any losses it incurs as a result of a breach

by us or of our representations and warranties and covenants under the GEM Agreement or for any misstatement or omission of a material

fact in a registration statement registering those shares pursuant to the GEM Agreement.

Also, GEM Global is entitled to be reimbursed

for legal or other costs or expenses reasonably incurred in investigating, preparing, or defending against any such loss.

September 24, 2021, we entered into the SPA for an aggregate financing of $15.0 million with institutional investors.

closing under the SPA occurred on September 24, 2021 and a second closing under the SPA occurred on November 5, 2021.

At the first closing,

the Company issued to the investors (i) 2021 Notes in the aggregate principal amount of $5.3 million for an aggregate purchase price

of $5.0 million and (ii) warrants to purchase 361,158 shares of the Company’s common stock in the aggregate at an exercise price

of $7.63 per share.

At the second closing, the Company issued to the institutional investors referenced above, (i) 2021 Notes in the

aggregate principal amount of $10.6 million for an aggregate purchase price of $10.0 million and (ii) warrants to purchase 722,317

shares of the Company’s common stock in the aggregate at an exercise price of $7.63 per share.

Flows for the years ended December 31, 2021 and 2020

following table summarizes our cash flows for each of the periods presented:

Year Ended December 31,

Net cash used in operating activities

$ (8,242,177 )

$ (1,247,342 )

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

the years ended December 31, 2021 and 2020, we used cash in operating activities of $8.2 million and $1.2 million, respectively, primarily

resulting from the clinical advancement of our product candidates, the timing of vendor invoicing and payments, legal and accounting

fees, and increased costs related to operating as a public company.

the years ended December 31, 2021 and 2020, net cash provided by financing activities was $20.3 million and $1.1 million, respectively.

The increase consisted primarily of net proceeds from the Merger in June 2021 and net proceeds from the issuance of the 2021 Notes.

primary use of cash is to fund operating expenses, primarily related to our research and development activities.

Cash used to fund operating

expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued

expenses and prepaid expenses.

expect our expenses, excluding non-cash expenses to recognize the fair value of warrants and convertible notes, to increase substantially

in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates.

In addition, upon the completion of the Merger, we have incurred, and will continue to incur, additional costs associated with operating

as a public company, including significant legal, accounting, insurance, investor relations and other expenses that we did not incur

as a private company.

The timing and amount of our operating expenditures will depend largely on our ability to:

preclinical development of our early-stage programs and clinical trials of our product candidates;

or have manufactured on our behalf, our preclinical and clinical drug material and develop processes for late state and commercial

manufacturing;

regulatory approvals for any product candidates that successfully complete clinical trials;

a sales, marketing, medical affairs and distribution infrastructure to commercialize any product candidates for which we may obtain

marketing approval and intend to commercialize on our own;

additional clinical, quality control and scientific personnel;

our operational, financial and management systems and increase personnel, including personnel to support our clinical development,

manufacturing and commercialization efforts and our operations as a public company;

maintain, expand and protect our intellectual property portfolio;

the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights,

including enforcing and defending intellectual property related claims;

the costs of operating as a public company.

commitments as of December 31, 2021 included an estimated $13.0 million related to open purchase orders and contractual obligations that

occurred in the ordinary course of business, including commitments with contract research organizations for multi-year pre-clinical and

clinical research studies.

Although open purchase orders are considered enforceable and legally binding, the terms generally allow us

the option to cancel, reschedule, and adjust requirements based on our business needs prior to the delivery of goods or the performance

have generated limited revenues and have incurred significant operating losses since our inception and, as of December 31, 2021, we have

an accumulated deficit of $85.8 million.

We expect to continue to incur significant expenses and operating losses for the foreseeable

the completion of the Merger and public listing of our common stock on Nasdaq, we had access to up to $60.0 million from a share subscription

facility entered into in December 2020.

The SPA for the 2021 Notes limits our ability to execute certain debt and equity financings,

including our existing $60.0 million share subscription facility, while the notes are outstanding.

Without the availability of proceeds

through the share subscription facility, existing cash resources are not sufficient to allow us to fund current planned operations through

the next 12 months following the filing of this Annual Report on Form 10-K, which raises substantial doubt about the Company’s

ability to continue as a going concern.

additional information on risks associated with our substantial capital requirements, please read the section titled “ Risk Factors ”

included elsewhere in this Annual Report on Form 10-K.

of the numerous risks and uncertainties associated with research, development and commercialization of biologic product candidates, we

are unable to estimate the exact amount of our working capital requirements.

Our future funding requirements will depend on and could

increase significantly as a result of many factors, including:

scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical

costs, timing and outcome of regulatory review of our product candidates;

costs, timing and ability to manufacture our product candidates to supply our clinical and preclinical development efforts and our

clinical trials;

costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, for any of our product

candidates for which we receive marketing approval;

costs of manufacturing commercial-grade product and necessary inventory to support commercial launch;

ability to receive additional non-dilutive funding, including grants from organizations and foundations;

revenue, if any, received from commercial sale of our products, should any of our product candidates receive marketing approval;

costs of preparing, filing and prosecuting patent applications, obtaining, maintaining, expanding and enforcing our intellectual

property rights and defending intellectual property-related claims;

ability to establish and maintain collaborations on favorable terms, if at all;

extent to which we acquire or in-license other product candidates and technologies.

Accounting Policies and Significant Judgments and Estimates

consolidated financial statements are prepared in accordance with GAAP.

The preparation of our consolidated financial statements and

related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses.

We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under

the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that

are not readily apparent from other sources.

We evaluate our estimates and assumptions on an ongoing basis.

Our actual results may differ

from these estimates under different assumptions or conditions.

our significant accounting policies are described in more detail in Note 3 to our audited consolidated financial statements, we believe

that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated

financial statements.

and Supplementary Data

This information appears following Item 15 of this Report and

is incorporated herein by reference.

Changes in and Disagreements

with Accountants on Accounting and Financial Disclosure

Research and Development Expenses

part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development

This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify

services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the

service when it has not yet been invoiced or otherwise notified of actual costs.

The majority of our service providers invoice us in

arrears for services performed, on a pre-determined schedule or when contractual milestones are met;

however, some require advance payments.

We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances

known to us at that time.

We periodically confirm the accuracy of the estimates with the service providers and makes adjustments if necessary.

Examples of estimated accrued research and development expenses include fees paid to:

including research laboratories, in connection with preclinical development activities;

and investigative sites in connection with preclinical studies and clinical trials;

in connection with drug substance and drug product formulation of preclinical studies and clinical trial materials.

base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant

to quotes and contracts with multiple research institutions and CROs that supply, conduct and manage preclinical studies and clinical

trials on our behalf.

The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result

in uneven payment flows.

There may be instances in which payments made to our vendors will exceed the level of services provided and

result in a prepayment of the expense.

Payments under some of these contracts depend on factors such as the successful enrollment of

patients and the completion of clinical trial milestones.

In accruing service fees, we estimate the time period over which services will

be performed and the level of effort to be expended in each period.

If the actual timing of the performance of services or the level

of effort varies from the estimate, we adjust the accrual or the prepaid expense accordingly.

Although we do not expect our estimates

to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative

to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any

particular period.

We measure all stock-based awards

granted to employees, directors and non-employees based on their fair value on the date of the grant and recognize the corresponding

compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award.

Forfeitures are accounted for as they occur.

We grant stock options and restricted stock awards that are subject to either service or

market-based vesting conditions.

Compensation expense related to awards to employees and non-employees with market-based

vesting conditions is recognized based on the grant date fair value, which includes a probability assessment of the achievement of

the market condition, over the requisite service period using the accelerated attribution method.

classify stock-based compensation expense in our statements of operations in the same manner in which the award recipient’s payroll

costs are classified or in which the award recipient’s service payments are classified.

estimate the fair value of each stock option grant using the Black-Scholes option-pricing model, which uses as inputs the fair value

of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free

interest rate for a period that approximates the expected term of our stock options and our expected dividend yield.

Value of Liabilities

elected the fair value option to account for the 2021 Notes as we believe 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.

We use a Monte Carlo analysis to estimate the fair

value of the conversion feature of the notes, which relies on unobservable Level 3 inputs.

We use a discounted cash flow model

to estimate the fair value of the debt component of the 2021 Notes.

Changes in the fair value of the notes are recognized through

other income (expense) for each reporting period.

Determination

of the Fair Value of Common Stock

there has historically been no public market for Former Ensysce common stock prior to the date of the closing of the Merger, the estimated

fair value of Former Ensysce common stock was determined by our most recently available third-party valuations of common stock.

third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’

Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

Our common stock valuations

were prepared using an option pricing method (“ OPM ”).

The OPM treats common stock and preferred stock as call options

on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various

holders of a company’s securities changes.

Under the OPM method, the common stock has value only if the funds available for distribution

to stockholders exceeded the value of the preferred stock liquidation preferences at the time of the liquidity event, such as a strategic

sale or a merger.

A discount for lack of marketability of the common stock is then applied to arrive at an indication of value for the

common stock.

These third-party valuations were performed at various dates, which resulted in valuations of Former Ensysce common stock

of $1.37 per share as of July 1, 2017, $1.82 per share as of February 28, 2018, $2.58 per share as of October 1, 2018, and $2.58 per

share as of December 31, 2019 (prices adjusted for the exchange ratio of 0.06585 per the merger agreement).

addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective

factors to determine the fair value of our common stock as of each grant date, including:

progress of our research and development programs, including the status and results of preclinical studies and clinical trials for

our product candidates;

stage of development and commercialization and our business strategy;

market conditions affecting the biopharmaceutical industry and trends within the biopharmaceutical industry;

financial position, including cash on hand, and our historical and forecasted performance and results of operations;

lack of an active public market for our common stock and our preferred stock;

likelihood of achieving a liquidity event, such as an initial public offering, or IPO, or our sale in light of prevailing market

analysis of initial public offerings and the market performance of similar companies in the specialty biopharmaceutical industry.

assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application

of management’s judgment.

As a result, if we had used significantly different assumptions or estimates, the fair value of our common

stock and our stock-based compensation expense could have been materially different.

of our common stock are now listed and trade on Nasdaq, so it will no longer be necessary for our board of directors to estimate the

fair value of our common stock in connection with our accounting for granted stock options and other such awards we may grant, as the

fair value of our common stock will be determined based on the publicly-traded quoted market price of our common stock.

Sheet Arrangements

did not have during the periods presented, nor do we currently have, any off-balance sheet arrangements, as defined in the rules and

regulations of the SEC.

Issued Accounting Pronouncements

description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations

is disclosed in Note 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Growth Company and Smaller Reporting Company Status

are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various

reporting requirements that are applicable to other public companies that are not emerging growth companies.

We may take advantage of

these exemptions until we are no longer an emerging growth company under Section 107 of the JOBS Act, which provides that an emerging

growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised

accounting standards.

We have elected to avail ourselves of the extended transition period and, therefore, while we are an emerging growth

company we are not be subject to new or revised accounting standards at the same time that they become applicable to other public companies

that are not emerging growth companies, unless we choose to early adopt a new or revised accounting standard.

Additionally,

we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.

Smaller reporting companies may take

advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements.

We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held

by non-affiliates exceeds $250 million as of the prior June 30, or (ii) our annual revenues exceeded $100 million during such completed

fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the prior June 30.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis