Ensysce Biosciences, Inc. 10-Q

Item 1. Financial Statements. Ensysce Biosciences, Inc. Consolidated Balance Sheets June 30, 2022 December 31, 2021 (Unaudited) Assets Current assets: Cash and cash equivalents $ 3,734,646 $ 12,264,736 Unbilled receivable 276,631 441,721 Right-of-use asset 10,251 24,721 Prepaid expenses and other current assets 3,173,246 2,931,415 Total current assets 7,194,774 15,662,593 Property and equipment, net - - Deferred financing costs 82,819 - Other assets 671,423 754,756 Total assets $ 7,949,016 $ 16,417,349 Liabilities and stockholders’ equity (deficit) Current liabilities: Accounts payable $ 3,048,037 $ 301,104 Accrued expenses and other liabilities 2,670,591 3,407,533 Lease liability 10,313 24,874 Notes payable and accrued interest ($ 2,519,539 and $ 12,358,886 at fair value at June 30, 2022 and December 31, 2021, respectively) 2,519,539 12,748,155 Total current liabilities 8,248,480 16,481,666 Long-term liabilities: Notes payable, net of current portion 137,317 4,440,951 Other long-term liabilities 360,797 3,652,790 Total liabilities $ 8,746,594 $ 24,575,407 Commitments and contingencies (Note 6) - - Stockholders’ deficit Preferred stock, $ 0.0001 par value, 1,500,000 shares authorized, no shares issued and outstanding at June 30, 2022 (unaudited) and December 31, 2021 - - Common stock, $ 0.0001 par value, 150,000,000 shares authorized; 35,550,034 and 24,662,904 shares issued at June 30, 2022 (unaudited) and December 31, 2021, respectively; 35,530,279 and 24,643,149 shares outstanding at June 30, 2022 (unaudited) and December 31, 2021, respectively 3,553 2,464 Additional paid-in capital 95,016,354 77,964,860 Accumulated deficit ( 95,511,543 ) ( 85,845,567 ) Total Ensysce Biosciences, Inc. stockholders’ deficit ( 491,636 ) ( 7,878,243 ) Noncontrolling interests in stockholders’ deficit ( 305,942 ) ( 279,815 ) Total stockholders’ deficit ( 797,578 ) ( 8,158,058 ) Total liabilities and stockholders’ deficit $ 7,949,016 $ 16,417,349 The accompanying notes are an integral part of these consolidated financial statements. 1 Ensysce Biosciences, Inc. Consolidated Statements of Operations (Unaudited) 2022 2021 2022 2021 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Federal grants $ 207,471 $ 444,516 $ 810,569 $ 695,091 Operating expenses: Research and development 5,311,298 463,219 8,451,394 787,595 General and administrative 1,951,356 393,914 4,217,161 884,386 Total operating expenses 7,262,654 857,133 12,668,555 1,671,981 Loss from operations ( 7,055,183 ) ( 412,617 ) ( 11,857,986 ) ( 976,890 ) Other income (expense): Change in fair value of derivative liabilities - 712,899 - 673,314 Change in fair value of convertible notes ( 88,763 ) - 2,678,415 - Change in fair value of liability classified warrants 148,393 - 2,942,791 - Loss on debt conversions ( 892,636 ) - ( 2,595,278 ) - Interest expense ( 37,781 ) ( 910,327 ) ( 52,802 ) ( 1,258,161 ) Other income and expense, net 2,850 ( 347,566 ) 10,816 ( 347,566 ) Total other income (expense), net ( 867,937 ) ( 544,994 ) 2,983,942 ( 932,413 ) Net loss $ ( 7,923,120 ) $ ( 957,611 ) $ ( 8,874,044 ) $ ( 1,909,303 ) Net loss attributable to noncontrolling interests ( 26,309 ) ( 22,067 ) ( 26,127 ) ( 26,028 ) Deemed dividend related to warrants down round provision 102,479 - 818,059 - Net loss attributable to common stockholders $ ( 7,999,290 ) $ ( 935,544 ) $ ( 9,665,976 ) $ ( 1,883,275 ) Net loss per share: Net loss per share attributable to common stockholders, basic and diluted $ ( 0.24 ) $ ( 0.06 ) $ ( 0.32 ) $ ( 0.12 ) Weighted average common shares outstanding, basic and diluted 33,988,783 16,053,550 30,656,712 15,943,867 The accompanying notes are an integral part of these consolidated financial statements. 2 Ensysce Biosciences, Inc. Consolidated Statements of Changes in Stockholders’ EQUITY (Deficit) (Unaudited) Stockholders’ Equity (Deficit) Common Stock Additional Number of Shares Amount Paid-In Capital Accumulated Deficit Noncontrolling interests Total Balance on March 31, 2021 16,053,550 $ 1,605 $ 49,822,991 $ ( 56,906,447 ) $ ( 221,586 ) $ ( 7,303,437 ) Stock-based compensation - - 36,373 - - 36,373 Settlement of convertible notes 1,357,968 136 5,696,567 - - 5,696,703 Issuance of common stock for business combinations, net of transaction costs 6,844,268 684 7,694,580 - - 7,695,264 Net loss ( 935,544 ) ( 22,067 ) ( 957,611 ) Balance on June 30, 2021 24,255,786 $ 2,425 $ 63,250,511 $ ( 57,841,991 ) $ ( 243,653 ) $ 5,167,292 Balance on March 31, 2022 29,949,032 $ 2,995 $ 88,900,164 $ ( 87,512,253 ) $ ( 279,633 ) $ 1,111,273 Conversion of convertible notes 5,481,247 548 5,718,141 - - 5,718,689 Stock-based compensation 295,580 295,580 Settlement of restricted stock units 100,000 10 ( 10 ) - Deemed dividend related to warrants down round provision - - 102,479 ( 102,479 ) - Net loss ( 7,896,811 ) ( 26,309 ) ( 7,923,120 ) Balance on June 30, 2022 35,530,279 $ 3,553 $ 95,016,354 $ ( 95,511,543 ) $ ( 305,942 ) $ ( 797,578 ) The accompanying notes are an integral part of these consolidated financial statements. 3 Ensysce Biosciences, Inc. Consolidated Statements of Changes in Stockholders’ EQUITY (Deficit) (Unaudited) Stockholders’ Equity (Deficit) Common Stock Additional Number of Shares Amount Paid-In Capital Accumulated Deficit Noncontrolling interests Total Balance on December 31, 2020 239,465,160 $ 5,987 $ 49,511,927 $ ( 55,958,716 ) $ ( 217,625 ) $ ( 6,658,427 ) Retroactive application of recapitalization ( 223,696,435 ) ( 4,410 ) 4,410 - - - Balance on December 31, 2020, effect of reverse recapitalization 15,768,725 1,577 49,516,337 ( 55,958,716 ) ( 217,625 ) ( 6,658,427 ) Exercise of stock options 284,825 28 262,834 - - 262,862 Settlement of convertible notes 1,357,968 136 5,696,567 - - 5,696,703 Issuance of common stock for business combination, net of transaction costs 6,844,268 684 7,694,580 - - 7,695,264 Stock-based compensation - - 80,193 - - 80,193 Net loss - - - ( 1,883,275 ) ( 26,028 ) ( 1,909,303 ) Balance on June 30, 2021 24,255,786 $ 2,425 $ 63,250,511 $ ( 57,841,991 ) $ ( 243,653 ) $ 5,167,292 Balance on December 31, 2021 24,643,149 $ 2,464 $ 77,964,860 $ ( 85,845,567 ) $ ( 279,815 ) $ ( 8,158,058 ) Beginning balance 24,643,149 $ 2,464 $ 77,964,860 $ ( 85,845,567 ) $ ( 279,815 ) $ ( 8,158,058 ) Consultant compensation 50,000 5 54,245 - - 54,250 Conversions of convertible notes 10,189,772 1,019 13,793,013 - - 13,794,032 Settlement of restricted stock units 647,358 65 ( 65 ) - - - Stock-based compensation - - 2,386,242 - - 2,386,242 Deemed dividend related to warrants down round provision - - 818,059 ( 818,059 ) - - Net loss - - - ( 8,847,917 ) ( 26,127 ) ( 8,874,044 ) Balance on June 30, 2022 35,530,279 $ 3,553 $ 95,016,354 $ ( 95,511,543 ) $ ( 305,942 ) $ ( 797,578 ) Ending balance 35,530,279 $ 3,553 $ 95,016,354 $ ( 95,511,543 ) $ ( 305,942 ) $ ( 797,578 ) The accompanying notes are an integral part of these consolidated financial statements. 4 Ensysce Biosciences, Inc. Consolidated Statements of Cash Flows (U naudited ) 2022 2021 Six Months Ended June 30, 2022 2021 Cash flows from operating activities: Net loss $ ( 8,874,044 ) $ ( 1,909,303 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation - 101 Gain on sale of asset ( 4,500 ) - Accrued interest 28,677 312,197 Accretion of discounts on promissory notes - 945,969 Change in fair value of embedded derivative - ( 673,314 ) Change in fair value of liability classified warrants ( 2,942,791 ) - Change in fair value of convertible notes ( 2,678,415 ) 347,566 Stock-based compensation 698,013 80,193 Lease cost ( 91 ) ( 1,177 ) Loss on debt conversions 2,595,278 - Changes in operating assets and liabilities: Unbilled receivable 165,090 ( 75,354 ) Prepaid expenses and other assets ( 158,499 ) 103,245 Accounts payable 2,746,933 347,420 Accrued expenses and other liabilities 546,841 ( 127,004 ) Net cash used in operating activities ( 7,877,508 ) ( 649,461 ) Cash flows from investing activities: Proceeds from sale of asset 4,500 - Net cash provided by investing activities 4,500 - Cash flows from financing activities: Proceeds from issuance of promissory notes - 50,000 Proceeds from issuance of promissory notes to related parties - 350,000 Proceeds from exercise of stock options - 262,862 Repayments of convertible notes ( 265,812 ) - Proceeds from issuance of common stock for business combination - 7,804,167 Repayment of financed insurance premiums ( 391,270 ) - Net cash (used in) provided by financing activities ( 657,082 ) 8,467,029 Increase (decrease) in cash and cash equivalents ( 8,530,090 ) 7,817,568 Cash and cash equivalents beginning of period 12,264,736 194,214 Cash and cash equivalents end of period 3,734,646 8,011,782 Supplemental cash flow information: Income tax payments 1,600 1,600 Supplemental disclosure of non-cash investing and financing activities: Transaction costs for business combination included in accounts payable offset against additional paid-in capital - 1,200,412 Deferred transaction costs for convertible notes 82,819 - Stock-based compensation 1,742,479 - Conversions of convertible notes into common stock 11,198,754 5,696,703 Net assets acquired in business combination - 1,068,950 Deemed dividend related to warrants down round provision 818,059 - The accompanying notes are an integral part of these consolidated financial statements. 5 ENSYSCE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES Ensysce Biosciences, Inc. (“Ensysce”), along with its subsidiary, Covistat Inc. (“Covistat”) and its wholly-owned subsidiaries EBI Operating, Inc. and EBI OpCo, Inc. (collectively, the “Company”), is a clinical-stage biotech company using its two novel proprietary technology platforms to develop safer prescription drugs. The primary focus of the Company is developing abuse and overdose resistant pain drugs, with a clinical stage program for the abuse resistant, TAAP (Trypsin Activated Abuse Protection) opioid product candidate, PF614. In addition, the Company is developing its MPAR TM (Multi-Pill Abuse Resistance) technology for overdose protection which will be applied to the PF614 program. The Company has also commenced development work applying its TAAP and MPAR TM technology to a methadone prodrug for use in the treatment of Opioid Use Disorder (OUD). On January 31, 2021, Leisure Acquisition Corp., a Delaware corporation (“LACQ”), entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with Ensysce Biosciences, Inc., a Delaware corporation (“Former Ensysce”), and EB Merger Sub, Inc., a Delaware corporation and wholly-owned, direct subsidiary of LACQ (“Merger Sub”). Pursuant to the Merger Agreement, on June 30, 2021 (the “Closing Date”), Merger Sub was merged with and into Former Ensysce, with Former Ensysce surviving the merger (“Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). In connection with the closing of the Business Combination on the Closing Date (the “Closing”), Former Ensysce became a wholly-owned subsidiary of LACQ and the stockholders of Former Ensysce, as of immediately prior to the effective time of the Merger, received shares of LACQ and hold a portion of the shares of Common Stock, par value $ 0.0001 per share (the “Common Stock”), of LACQ. On the Closing Date, at the effective time of the Merger, LACQ changed its name from “Leisure Acquisition Corp.” to “Ensysce Biosciences, Inc.” Unless the context otherwise requires, “we,” “us,” “our” and the “Company” refer to Ensysce and the combined company and its subsidiaries following the Closing. Unless the context otherwise requires, references to “LACQ” refer to Leisure Acquisition Corp., a Delaware corporation, prior to the Closing. In connection with the Business Combination, outstanding shares of common stock of Former Ensysce (including shares resulting from the conversion of Former Ensysce’s convertible debt prior to Closing) were converted into the right to receive shares of Ensysce at an exchange ratio of 0.06585 . Immediately following the Business Combination, stockholders of Former Ensysce owned approximately 71.8 % of the outstanding common stock of the combined company. In addition, Former Ensysce’s existing options and warrants were exchanged for equivalent securities in Ensysce on their existing terms (with standard adjustments to exercise price and underlying shares, consistent with the foregoing exchange ratio). As of July 2, 2021, Ensysce’s shares of common stock are traded on the Nasdaq Capital Market (“Nasdaq”) under the new ticker symbol “ENSC”. In June 2020, the Company commenced an initiative to develop a therapeutic for the treatment of certain coronavirus infections through the formation of a separate entity, Covistat, Inc., a Delaware corporation. Pursuant to the articles of incorporation, Covistat was authorized to issue 1,000,000 shares of common stock, $ 0.001 par value per share, and 100,000 shares of preferred stock, $ 0.001 par value per share. Ensysce is a 79.2 % stockholder in Covistat, with 19.8 % and 1.0 % of the shares held by certain key personnel of the Company and an unrelated party, respectively. Covistat’s emphasis is now on developing one or more compounds utilized in Ensysce’s overdose protection program for the treatment of respiratory diseases. To date, the Company’s financial condition and operations have not been significantly impacted by the ongoing COVID-19 pandemic. However, the Company 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 pipeline. No impairments were recorded as of the balance sheet date as no triggering events or changes in circumstances; however, due to significant uncertainty surrounding the situation, management’s judgment regarding this could change in the future. In addition, while the Company’s results of operations, cash flows and financial condition could be negatively impacted, the extent of the impact cannot be reasonably estimated at this time. 6 The Company currently operates in one business segment, which is pharmaceuticals. The Company is not organized by market and is managed and operated as one business. A single management team reports to the chief operating decision maker, the Chief Executive Officer. NOTE 2 - BASIS OF PRESENTATION The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities Exchange Commission (“SEC”). The consolidated financial statements include the accounts of Ensysce Biosciences, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the consolidated financial statements. Operating results for the three and six months ended June 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The interim unaudited consolidated financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited consolidated financial statements for the fiscal year ended December 31, 2021, which may be found in the Company’s Form 10-K filed with the SEC on March 31, 2022. Business Combination The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, LACQ was identified as the acquired company for financial reporting purposes, primarily because the stockholders of Former Ensysce control the majority of the voting power of the combined company, Former Ensysce’s board of directors comprise a majority of the governing body of the combined company, and Former Ensysce’s senior management comprise the leadership of the combined company. Accordingly, for accounting purposes, the transaction was treated as the equivalent of Former Ensysce issuing shares for the net assets of LACQ, accompanied by a recapitalization. The net assets of LACQ, primarily consisting of cash of $ 7.8 million and prepaid expenses of $ 1.1 million, were recorded at historical cost with no goodwill or other intangible assets recorded. The shares and net loss per share prior to the reverse recapitalization have been retroactively restated to reflect the exchange ratio of 0.06585 . The financial statements reflect the historical operations of Ensysce. Going Concern The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has not generated any product revenue and had an accumulated deficit of $ 95.5 million at June 30, 2022. There is no assurance that profitable operations will ever be achieved, and, if achieved, could be sustained on a continuing basis. Product development activities, clinical and pre-clinical testing, and commercialization of the Company’s product candidates are necessary to develop the Company’s products and will require significant additional financing. There can be no assurance the Company will be able to obtain such funds. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. In December 2020, the Company executed a share subscription facility with an investment group (the “GEM agreement”). Under the agreement, the investor agreed to provide the Company with a share subscription facility of up to $ 60.0 million for a 36-month term following the public listing of the Company’s common stock. The Company will control the timing and maximum amount of drawdown under this facility and has no minimum drawdown obligation. The investor will pay, in cash, a per-share amount equal to 90% of the average daily closing price of the Company’s stock during the 30 consecutive trading days prior to the issuance of a draw notice, which shall not exceed 400% of the average trading volume for the 30 trading days immediately preceding the draw down date. On June 30, 2021, the Company consummated the Business Combination with LACQ, resulting in the Company’s shares becoming publicly listed on Nasdaq on July 2, 2021. Concurrent with the public listing of the Company’s shares, the Company issued to the investor 1,106,108 warrants with a five-year term to purchase common stock of Ensysce at an exercise price of $ 10.01 per share (Note 8). The Company must pay a commitment fee to the investor of $ 1.2 million with $ 800,000 due on the first anniversary of the public listing date and $ 400,000 due on the 18-month anniversary of the public listing date. The commitment fee can be paid from the proceeds of a draw against the facility or in freely tradable common stock of the Company (Note 11). 7 In September 2021, the Company entered into a $ 15.9 million convertible note financing agreement with institutional investors (the “2021 Notes”) (See Note 7 for additional information). In July and August 2022, the Company received funding under a $ 8.48 million convertible note financing agreement with the same institutional investors (the “2022 Notes”) (See Note 11 for additional information). The agreements limit the Company’s ability to execute certain debt and equity financings, including its existing $ 60.0 million share subscription facility, while the convertible notes are outstanding. Without the availability of proceeds through the share subscription facility, existing cash resources are not sufficient to fund current planned operations. While the Company believes in the viability of its strategy to ultimately realize revenues and in its ability to raise additional funds, management cannot be certain that additional funding will be available on acceptable terms, or at all. The Company’s ability to continue as a going concern is dependent upon its ability to obtain adequate financing and achieve profitable operations. As a result, these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern for a period of 12 months following the date these consolidated financial statements were issued. The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates and Assumptions Preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosed in the accompanying notes. Actual results may differ from those estimates and such differences may be material to the consolidated financial statements. The more significant estimates and assumptions by management include, but are not limited to, the expense recognition for certain research and development services, the valuation allowance of deferred tax assets resulting from net operating losses, warrants, options to purchase the Company’s common stock, and the notes payable. Cash and Cash Equivalents For purposes of the consolidated balance sheets and consolidated statements of cash flows, the Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. Concentrations of credit risk and off-balance sheet risk Cash and cash equivalents are financial instruments that are potentially subject to concentrations of credit risk. The Company’s cash and cash equivalents are deposited in accounts at large financial institutions, and amounts may exceed federally insured limits. The Company believes it is not exposed to significant credit risk due to the financial strength of the depository institutions in which the cash and cash equivalents are held. The Company has no financial instruments with off-balance sheet risk of loss. Property and Equipment Property and equipment include office and laboratory equipment that is recorded at cost and depreciated using the straight-line method over the estimated useful lives of five to six years. No depreciation expense was recognized for the three and six months ended June 30, 2022. Depreciation expense of $ 50 and $ 101 was recognized for the three and six months ended June 30, 2021. Depreciation expense is classified in general and administrative expense in the accompanying consolidated statements of operations. 8 Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company will recognize an impairment loss only if the carrying amount is not recoverable through its undiscounted cash flows and measure any impairment loss based on the difference between the carrying amount and estimated fair value. There were no such losses for the three and six months ended June 30, 2022 and 2021. Derivative Financial Instruments The Company does not use derivative instruments to hedge exposures to interest rate, market, or foreign currency risks. The Company evaluates all of its financial instruments, including notes payable, to determine whether such instruments are derivatives or contain features that qualify as embedded derivatives. Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract and the features of the derivatives. Bifurcated embedded derivatives are recognized at fair value, with changes in fair value recognized in the consolidated statement of operations each period. Bifurcated embedded derivatives are classified with the related host contract in the Company’s consolidated balance sheet. Fair Value Measurement ASC 820, Fair Value Measurements , (“ASC 820”) provides guidance on the development and disclosure of fair value measurements. Pursuant to ASC 820, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The accounting guidance classifies fair value measurements in one of the following three categories for disclosure purposes: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace. Level 3: Unobservable inputs which are supported by little, or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. This determination requires significant judgments to be made by the Company. As of June 30, 2022 and December 31, 2021, the recorded values of cash and cash equivalents, prepaid expenses, accounts payable, and accrued expenses and other liabilities approximate their fair values due to the short-term nature of these items. 2021 Notes In 2021 the Company issued convertible notes with a face value of $ 15.9 million. The Company elected the fair value option to account for the convertible notes as it believes 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 and redemption feature. The fair value estimate of the 2021 Notes was based on a discounted cash flow model and a Monte Carlo model, which represent Level 3 measurements. Significant assumptions include the discount rate used in the discounted cash flow model and the expected premium for conversion used in the Monte Carlo model. Changes in the fair value of the notes are recognized in other income (expense) for each reporting period. Refer to Note 7 for details of the terms and conditions of the 2021 Notes. 9 Warrants In 2021 the Company issued liability classified warrants in connection with the issuance of the 2021 Notes. The warrants were liability classified due to certain cash settlement features and included in “Other long-term liabilities” on the consolidated balance sheets. The Company uses a Black Scholes model to estimate the fair value of the warrants. Changes in the fair value of the warrants are recognized in other income (expense) for each reporting period. Refer to Note 8. The following tables present assets and liabilities measured and recorded at fair value on the Company’s consolidated balance sheet as of June 30, 2022 and December 31, 2021. SCHEDULE OF ASSETS AND LIABILITIES MEASURED AT FAIR VALUE Total Level 1 Level 2 Level 3 June 30, 2022 Total Level 1 Level 2 Level 3 Fair value of convertible note $ 2,656,856 $ - $ - $ 2,656,856 Liability classified warrants 360,797 360,797 Total $ 3,017,653 $ - $ - $ 3,017,653 Total Level 1 Level 2 Level 3 December 31, 2021 Total Level 1 Level 2 Level 3 Fair value of convertible note $ 16,799,837 $ - $ - $ 16,799,837 Liability classified warrants 3,303,588 3,303,588 Total $ 20,103,425 $ - $ - $ 20,103,425 The following table summarizes the change in fair value of the Company’s Level 3 assets and liabilities: SCHEDULE OF CHANGE IN FAIR VALUE OF COMPANY’S LEVEL 3 Total Convertible note Liability classified warrants Fair value, December 31, 2021 $ 20,103,425 $ 16,799,837 $ 3,303,588 Conversions ( 11,464,566 ) ( 11,464,566 ) - Change in fair value ( 5,621,206 ) ( 2,678,415 ) ( 2,942,791 ) Fair value, June 30, 2022 $ 3,017,653 $ 2,656,856 $ 360,797 Federal Grants In September 2018, the National Institutes of Health (“NIH”) through the National Institute on Drug Abuse awarded the Company a research and development grant related to the development of its MPAR TM overdose prevention technology (the “MPAR Grant”). The total approved budget for the initial two-year period was approximately $ 5.4 million ($ 3.2 million and $ 2.2 million in years 1 and 2 respectively) of which the Company must contribute $ 1.1 million in the first year of the grant. In August 2019, the grant was amended such that the approved budget for the two-year period decreased to approximately $ 5.1 million ($ 2.1 million and $ 3.0 million in years 1 and 2, respectively). In June 2021, the Company received a Notice of Award for an additional $ 2.8 million of funding in year 3 under the MPAR Grant beginning July 1, 2021. In June 2022, the Company received a Notice of Award for an additional $ 2.8 million of funding in year 4 under the MPAR Grant from July 1, 2022 through June 30, 2023. This brings total funding under this grant to approximately $ 10.7 million. In September 2019, the NIH/National Institute on Drug Abuse awarded the Company a research and development grant related to the development of its TAAP/MPAR TM abuse deterrent technology for Opioid Use Disorder (“OUD”) (the “OUD Grant”). The total approved budget was approximately $ 5.4 million and the current grant period ends in August 2023. 10 The Company recognizes revenue when costs related to the grants are incurred. The Company believes this policy is consistent with the overarching premise in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), applied by analogy, to ensure that it recognizes revenues to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services, even though there is no “exchange” as defined in ASC 606. The Company believes the recognition of revenue as costs are incurred and amounts become due is analogous to the concept of transfer of control of a service over time under ASC 606. The revenue recognized under the MPAR Grant and OUD Grant was as follows: SCHEDULE OF REVENUE RECOGNIZATION UNDER GRANTS June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Three Months Ended Six months ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 MPAR $ - $ 53,386 $ 504,471 $ 127,112 OUD 207,471 391,130 306,098 567,979 Total $ 207,471 $ 444,516 $ 810,569 $ 695,091 Amounts requested or eligible to be requested through the NIH payment management system, but for which cash has not been received, are presented as an unbilled receivable on the Company’s consolidated balance sheet. As all amounts are expected to be remitted timely, no valuation allowances are recorded. Immaterial Correction of an Error In August 2022, the Company concluded that due to an error in the measurement of the unbilled receivable and the associated grant revenue as of December 31, 2021, and March 31, 2022, the June 30, 2022, balance sheet would be adjusted. The change resulted in a decrease in the balance of the unbilled receivable of $ 214,308 and a corresponding increase in general and administrative expense presented in the consolidated statement of operations. The Company, in consultation with the Audit Committee of the Board of Directors, evaluated the effect of these adjustments on the Company’s consolidated financial statements under ASC 250, Accounting Changes and Error Corrections and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements and determined it was not necessary to recall its previously issued consolidated financial statements as the errors did not materially misstate any previously issued consolidated financial statements and the correction of the error in the current fiscal year is also not material. The Company looked at both quantitative and qualitative characteristics of the required corrections in making the determination. Research and Development Costs The Company’s research and development expenses consist primarily of third-party research and development expenses, consulting expenses, animal and clinical studies, and any allocable direct overhead, including facilities and depreciation costs, as well as salaries, payroll taxes, and employee benefits for those individuals directly involved in ongoing research and development efforts. Research and development expenses are charged to expense as incurred. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. General and Administrative Expenses General and administrative expenses consist primarily of personnel costs associated with the Company’s executive, finance, human resources, compliance, and other administrative personnel, as well as accounting and legal professional services fees. Stock-based Compensation The Company expenses stock-based compensation over the requisite service period based on the estimated grant-date fair value of the awards using a graded amortization approach. The Company accounts for forfeitures as they occur. 11 The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. For the three and six months ended June 30, 2022 and 2021, stock-based compensation costs are recorded in general and administrative expenses and research and development expenses in the consolidated statements of operations. From time to time equity classified awards may be modified. On the modification date, the Company estimates the fair value of the awards immediately before and immediately after modification. The incremental increase in fair value is recognized as expense immediately to the extent the underlying equity awards are vested and over the same remaining amortization schedule as the unvested underlying equity awards. Income Taxes Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. 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. The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company recognizes any interest and penalties accrued related to unrecognized tax benefits as income tax expense. Earnings per Share The basic earnings per share is calculated by dividing the Company’s net income or loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. The diluted earnings per share is calculated by dividing the Company’s net earnings attributable to common stockholders by the diluted weighted average number of common shares outstanding during the period, determined using the treasury stock method and the average stock price during the period. A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows: SCHEDULE OF EARNINGS PER SHARE RECONCILIATION 2022 2021 2022 2021 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Numerator: Net loss attributable to common stockholders $ ( 7,999,290 ) $ ( 935,544 ) $ ( 9,665,976 ) $ ( 1,883,275 ) Denominator: Weighted average shares outstanding, basic and diluted 33,988,783 16,053,550 30,656,712 15,943,867 Net loss per share attributable to common stockholders, basic and diluted $ ( 0.24 ) $ ( 0.06 ) $ ( 0.32 ) $ ( 0.12 ) The following weighted average shares have been excluded from the calculations of diluted weighted average common shares outstanding because they would have been anti-dilutive: SCHEDULE OF WEIGHTED AVERAGE SHARES OF ANTI-DILUTIVE SECURITIES 2022 2021 2022 2021 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Stock options 6,885,282 4,444,068 6,341,204 4,553,751 Warrants 21,090,873 19,755 21,090,873 19,755 Total 27,976,155 4,463,823 27,432,077 4,573,506 Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 31, 2021 and interim periods within that year. On January 1, 2022, the Company adopted ASU 2019-12 and the adoption did not have a significant impact on the consolidated financial statements. In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Topic 470) to address issues identified as a result of the complexity with applying GAAP for certain financial instruments with characteristics of liabilities and equity. The FASB decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock, resulting in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Certain types of convertible instruments will continue to be subject to separation models: (a) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (b) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. For convertible instruments, the contracts primarily affected are those with beneficial conversions or cash conversion features as the accounting models for those specific features have been removed. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives due to a failure to meet the settlement conditions of the derivatives scope exceptions. The FASB simplified the settlement assessment by removing the requirements to (a) consider whether the contract would be settled in registered shares, (b) to consider whether collateral is required to be posted, and (c) assess shareholder rights. The FASB also decided to enhance information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023 and early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. Entities must adopt the guidance as of the beginning of its annual fiscal year and a modified retrospective or fully retrospective transition approach is permitted. The Company is evaluating the impact of ASU 2020-06 on the consolidated financial statements. In May 2021, the FASB issued ASU No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (A Consensus of the FASB Emerging Issues Task Force (the “EITF”)) – to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The guidance in the ASU requires the issuer to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. Under the amendments, an issuer should measure the effect of a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before modification. The EITF concluded that the recognition of the modification depends on the nature of the transaction in which a warrant is modified. If there is more than one element in a transaction (for example, if the modification involves both a debt modification and an equity issuance), then the guidance requires the issuer to allocate the effect of the option modification to each element. On January 1, 2022, the Company adopted ASU 2021-04 and the adoption did not have a significant impact on the consolidated financial statements. NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consisted of the following: SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS June 30, December 31, 2022 2021 Prepaid research and development $ 2,359,986 $ 2,124,008 Prepaid insurance 681,851 733,234 Other prepaid expenses 131,409 74,173 Total prepaid expenses and other current assets $ 3,173,246 $ 2,931,415 12 NOTE 5 – ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consisted of the following: SCHEDULE OF ACCRUED EXPENSES AND OTHER LIABILITIES June 30, December 31, 2022 2021 Share subscription facility commitment fees $ 1,200,000 $ 800,000 Accrued research and development 747,645 388,997 Bonus accrual 302,519 610,000 Professional fees 242,050 138,086 Accrued scientific advisory board fees 60,032 60,032 Consultant stock compensation expenses - 1,342,479 Other accrued liabilities 118,345 67,939 Total accrued expenses and other liabilities $ 2,670,591 $ 3,407,533 Other long-term liabilities consisted of the following: SCHEDULE OF OTHER LONG-TERM LIABILITIES 2022 2021 June 30, December 31, 2022 2021 Share subscription facility commitment fees $ - $ 349,202 Liability classified warrants 360,797 3,303,588 Total other long-term liabilities $ 360,797 $ 3,652,790 NOTE 6 – COMMITMENTS AND CONTINGENCIES Purchase Commitments As of June 30, 2022, the Company’s commitments included an estimated $ 18.6 million related to the Company’s 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 the Company the option to cancel, reschedule, and adjust its requirements based on its business needs prior to the delivery of goods or the performance of services. Litigation As of June 30, 2022 and December 31, 2021, there were no pending legal proceedings against the Company that are expected to have a material adverse effect on cash flows, financial condition or results of operations. From time to time, the Company could become involved in disputes and various litigation matters that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters. Periodically, the Company reviews the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation. Lease In August 2020, the Company entered into an agreement to lease office space. The lease commencement date was October 1, 2020 and was subsequently amended to extend the term of the lease through October 31, 2022 with no option to renew. The amendment resulted in a modification of the lease under ASC 842 and the Company remeasured the lease liability as of the amendment date. 13 As of June 30, 2022, the future lease payments totaled $ 10,506 . The Company recognized total rent expense of $ 7,834 and $ 15,667 in the three and six months ended June 30, 2022, and $ 7,062 and $ 14,123 in the three and six months ended June 30, 2021. Compensation Subject to Shareholder Approval In July 2021, the Company engaged two consultants to perform certain public and investor relations services in consideration for warrants to purchase 500,000 shares of common stock with a five-year term and an exercise price of $ 6.28 each, 50,000 shares of common stock each, and 200,000 restricted stock units each. The restricted stock units vest over one year with 50 % of the vesting contingent upon certain market conditions. These equity awards were contingent upon shareholder approval of an amended and restated 2021 Omnibus Plan at a special shareholder meeting in January 2022, whereby the warrants were replaced by non-qualified stock options with similar terms. As the original terms of the awards did not satisfy the grant date criteria for an equity award, as of December 31, 2021, the Company recorded a liability $ 1,342,479 to reflect the estimated value of services received during the period. On February 14, 2022, the equity awards were granted, and the Company reclassified the outstanding liability to stockholders’ equity. During the six months ended June 30, 2022, the Company recorded an additional $ 125,222 ($ 38,014 related to the three-month period ended June 30, 2022) of consultant compensation to general and administrative expense as a result of the vesting schedule of the restricted stock units. NOTE 7 – NOTES PAYABLE The following table provides a summary of the Company’s outstanding debt as of June 30, 2022: SCHEDULE OF DEBT Principal balance Accrued interest Fair value adjustment Net debt balance 2021 convertible notes $ 2,651,074 $ 34,984 $ ( 29,202 ) - $ 2,656,856 Total $ 2,651,074 $ 34,984 $ ( 29,202 ) $ 2,656,856 The following table provides a summary of the Company’s outstanding debt as of December 31, 2021: Principal balance Accrued interest Unamortized debt discount Net debt balance 2021 Notes $ 13,647,341 $ 159,435 $ 2,993,061 $ 16,799,837 Finance Insurance 385,187 4,082 - 389,269 Total $ 14,032,528 $ 163,517 $ 2,993,061 $ 17,189,106 The interest expense recognized for notes payable (excluding the 2021 Notes) was as follows: SCHEDULE OF INTEREST EXPENSE DEBT June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Three months ended Six months ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Stated interest accrual $ - $ 117,817 $ 2,004 $ 227,197 Debt discount amortization - 771,556 - 945,969 Total $ - $ 889,373 $ 2,004 $ 1,173,166 2021 Notes On September 24, 2021, the Company entered into an agreement with institutional investors to issue the 2021 Notes. The agreement provides for two closings: the first closing for $ 5.3 million (resulting in net proceeds of $ 4.6 million) which closed on September 24, 2021 (the “First Closing”). The second closing for $ 10.6 million (resulting in net proceeds of $ 9.4 million) which closed on November 5, 2021 (the “Second Closing”). 14 The proceeds of the 2021 Notes shall be used for working capital purposes subject to certain customary restrictions and secured by the Company’s rights to its patents and licenses. The Company may not issue any additional debt or equity without the prior written consent of the holders. The 2021 Notes mature on June 23, 2023 for the First Closing, and August 4, 2023 for the Second Closing. The notes bear interest at a rate of 5 % per annum, in addition to an original issue discount of 6 %. The interest may be settled in cash or shares at the option of the Company and is payable together with monthly redemptions of the outstanding principal amount of the debt. The Company elected to apply the fair value option to the measurement of the 2021 Notes. The total initial fair value of the debt at issuance was $ 15.9 million. The Company recorded total issuance costs of $ 1.9 million representing investment banking and legal fees of $ 1.0 million and original issue discounts of $ 0.9 million. After multiple conversions since issuance, the Company remeasured the fair value as of June 30, 2022 and recognized a loss of $ 88,763 due to changes in effective interest rates for the three-month period then ended and a gain of $ 2,678,415 for the six-month period ended June 30, 2022 primarily to reductions in the Company’s stock price. The June 30, 2022 fair value measurement includes the assumption of accrued interest and interest expense (at the stated rate plus an 8 % cash settlement premium) and thus a separate amount is not reflected on the consolidated statements of operations. If presented separately, the amount of interest expense after consideration of the conversions would be $ 71,637 and $ 194,856 for the three- and six-month periods ended June 30, 2022, respectively. The 2021 Notes may be converted into the Company’s common stock at the option of the holder in whole or in part at the conversion price of $ 5.87 , subject to a beneficial ownership limitation of 4.99% (subject to adjustment). The Company must reserve sufficient shares of authorized common stock to effect the conversion of the 2021 Notes and payment of interest. The shares were registered for public resale under a registration statement. At the Company’s option, the Company may redeem some or all of the then-outstanding principal amount of the 2021 Notes for cash in an amount equal to 100% of the principal to be redeemed, plus accrued but unpaid interest, plus all other amounts due with respect to the 2021 Notes. Beginning January 1, 2022 for the First Closing, and February 1, 2022 for the Second Closing, and the first of each subsequent month, terminating upon the full redemption of the 2021 Notes (each a “Monthly Redemption Date”), the Company shall redeem the Monthly Redemption Amount (defined below), payable in cash or shares. The number of shares to be settled shall be based on a conversion price equal to the lesser of (a) $ 5.87 and (b) 92 % of the average of the three lowest volume-weighted average prices (“VWAP”) during the 10 consecutive trading days prior to the applicable Monthly Redemption Date. The Company may not pay the Monthly Redemption Amount in shares unless the applicable conversion price is greater than or equal to $ 0.78 and the Company has been in compliance with customary requirements under the agreement, unless waived in writing by the holder . If the applicable conversion price is less than $ 0.78 at the time of the Monthly Redemption Date the Company will be required to fund the difference in cash. During the period ended June 30, 2022, the Company paid $ 265,812 to fund such differences in cash (reducing the outstanding principal balance of the 2021 Notes). The Monthly Redemption Amount is defined as 1/18 th of the original principal amount, plus accrued but unpaid interest, plus any other amounts due to the holder with respect to the 2021 Notes. If the Company elects to settle such redemptions in shares, the Monthly Redemption Amount is calculated based on 92% of the average of the lowest three VWAPs in the ten trading days prior to the Monthly Redemption Date. If the Company elects to settle redemptions in cash, the Monthly Redemption Amount shall include an 8% premium of the Monthly Redemption Amount. If, at any time while the 2021 Notes are outstanding, the Company carries out one or more capital raises in excess of $ 5.0 million, the holder has the right to require the Company to use up to 20 % of the gross proceeds of such transaction to redeem all or a portion of the convertible notes for an amount in cash equal to the cash Mandatory Redemption Amount (i.e., 108% of outstanding principal and unpaid interest). 15 The following table provides a summary of the Company’s 2021 note conversions during the six-month period ending June 30, 2022: SCHEDULE OF CONVERSION DEBT Shares Conversion Price Redemption Value January 3, 2022 535,249 $ 2.83 $ 1,517,054 February 1, 2022 1,354,423 $ 1.58 2,145,135 March 1, 2022 2,818,853 $ 0.96 2,710,511 April 1, 2022 1,962,010 $ 0.99 1,957,878 May 1, 2022 2,549,910 $ 0.94 2,406,713 June 1, 2022 969,327 $ 0.46 461,463 Total 10,189,772 $ 11,198,754 During the three and six months ended June 30, 2022, the company recognized $ 0.9 million and $ 2.6 million of loss on debt conversions related to the monthly conversions, resulting from the difference between the conversion price and the average of the high and low stock price on the date of conversion. Such loss is reported under other income (expense), net in the consolidated statements of operations. Financed insurance premiums During year ended December 31, 2021, the Company financed its directors’ and officers’ liability insurance in the amount of $ 867,300 , of which the note was paid in full as of June 30, 2022. The Company expensed $ 0 and $ 2,004 of interest for the three and six months ended June 30, 2022, respectively. NOTE 8 - STOCKHOLDERS’ EQUITY In June 2021, in connection with the Business Combination, the Company amended and restated its Certificate of Incorporation to authorize 150,000,000 shares of common stock and 1,500,000 shares of preferred stock, both with par value equal to $ 0.0001 . As of June 30, 2022 and December 31, 2021, there were no shares of preferred stock issued and outstanding. Common Stock On June 30, 2021, in connection with the Closing, the following common stock activity occurred: ● 16,053,550 shares of common stock were issued to holders of Former Ensysce common stock. ● 6,219,268 shares of common stock outstanding were assumed by the Company. ● 1,357,968 shares of common stock were issued in settlement of $ 5.8 million of convertible debt. ● 19,755 shares of restricted common stock were issued in exchange for previously outstanding warrants to purchase Former Ensysce common stock. ● 500,000 shares of common stock were issued in settlement of a termination agreement with a strategic advisor dated January 2021. ● 125,000 shares of common stock were issued in settlement of deferred underwriting costs. 16 Warrants On June 30, 2022, outstanding warrants to purchase shares of common stock are as follows: SCHEDULE OF OUTSTANDING WARRANT Reference Shares Underlying Outstanding Warrants Exercise Price Description Classification (a) 18,901,290 $ 10.00 - 11.50 LACQ warrants Equity (b) 1,106,108 $ 0.46 Share subscription facility Equity (c) 361,158 $ 7.63 Convertible note Liability (d) 722,317 $ 7.63 Convertible note Liability 21,090,873 a) On June 30, 2021, as a result of the closing of the business combination, the Company assumed a total of 18,901,290 warrants previously issued by LACQ. The warrants provide holders the right to purchase common stock at a strike price of between $ 10.00 and $ 11.50 per share and expire June 30, 2026 , five years following the completion of the Business Combination. A total of 10,000,000 of the outstanding warrants are public warrants which trade on the OTC Pink Open Market under the ticker symbol ENSCW. The remaining 8,901,290 warrants are private warrants with restrictions on transfer and which have the right to a cashless exercise at the option of the holder. On August 3, 2021, the Company entered into an agreement with an existing warrant holder to reduce the exercise price of 500,000 warrants issued on June 30, 2021 from $ 11.50 to $ 10.00 , resulting in an incremental increase in their fair value of $ 56,591 , recognized in general and administrative expense. b) On July 2, 2021, upon public listing of the Company’s shares, the Company issued 1,106,108 warrants to purchase common stock pursuant to the share subscription facility. The warrants have a three -year life and an exercise price of $ 10.01 per share. The grant date fair value of the warrants, based on the $ 14.49 stock price on the date of issuance, was $ 11.6 million, and was recognized in general and administrative expense due to the uncertainty of future issuance of shares under the share subscription facility. On December 28, 2021, January 3, 2022, February 1, 2022, March 1, 2022, May 1, 2022, and June 1, 2022 the exercise price of the warrants adjusted to $ 4.50 per share, $ 2.83 per share, $ 1.58 per share, $ 0.96 per share, $ 0.94 per share, and $ 0.46 per share, respectively, as required by a down round adjustment feature of the warrant, due to common stock issued at a price below the then current exercise price. The difference in fair value of the existing warrant prior to the adjustment and the value of the warrant after (utilizing a “Black-Scholes model”) is reflected on the consolidated statement of operations as a “deemed dividend.” c) On September 24, 2021, the Company issued 361,158 warrants in connection with the issuance of the convertible notes. The warrants were immediately exercisable with an exercise price of $ 7.63 (subject to downward revision protection in the event the Company makes certain issuances of common stock at prices below the conversion price) and expire on September 23, 2026 . d) On November 5, 2021, the Company issued 722,317 warrants in connection with the issuance of the 2021 Notes. The warrants were immediately exercisable with an exercise price of $ 7.63 (subject to downward revision protection in the event the Company makes certain issuances of common stock at prices below the conversion price) and expire on November 4, 2026 . 17 The fair value of each warrant issued has been determined using the Black-Scholes option-pricing model. The material assumptions used in the Black-Scholes model in estimating the fair value of the warrants issued for the periods presented were as follows: SCHEDULE OF WARRANTS FAIR VALUE ESTIMATION ASSUMPTIONS (a) LACQ warrants (grant date varies) (b) Share subscription facility (grant date 7/2/21) (b) Share subscription facility (remeasurement date varies) Stock price $ 14.49 $ 14.49 $ 0.57 - 4.29 Exercise price $ 10.00 - 11.50 $ 10.01 $ 0.46 - 2.83 Expected term (years) 3.00 3.00 2.08 - 2.49 Volatility 110.0 % 110.0 % 108.17 %- 117.22 % Risk free rate 0.5 % 0.5 % 1.04 %- 2.93 % (c) Liability classified warrants (grant date 9/24/2021) (c) Liability classified warrants (remeasured at 6/30/22) (d) Liability classified warrants (grant date 11/5/2021) (d) Liability classified warrants (remeasured at 6/30/22) Stock price $ 4.49 $ 0.87 $ 2.25 $ 0.87 Exercise price $ 7.63 $ 7.63 $ 7.63 $ 7.63 Expected term (years) 5.00 4.25 5.00 4.35 Volatility 94.1 % 103.6 % 94.1 % 103.0 % Risk free rate 1.0 % 3.0 % 1.0 % 3.0 % NOTE 9 - STOCK-BASED COMPENSATION In 2016, Former Ensysce adopted the Ensysce Biosciences, Inc. 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan, as amended, allowed for the issuance of non-statutory stock options, incentive stock options and other equity awards to Former Ensysce’s employees, directors, and consultants. In March 2019, Former Ensysce adopted the 2019 Directors Plan, which was amended in August 2020. The 2019 Directors Plan, as amended, allowed for the issuance of shares of Former Ensysce’s common stock pursuant to the grant of non-statutory stock options. In addition to the 2016 Plan and the 2019 Directors Plan, the Company has two legacy equity incentive plans (the “Legacy Plans”). No additional equity awards may be made under the Legacy Plans and the outstanding options will expire if unexercised by certain dates through August 2024. In connection with the Business Combination, the Company assumed the 2021 Omnibus Incentive Plan (the “2021 Omnibus Plan”), which was approved by LACQ’s board and subsequently LACQ’s stockholders at a special stockholder meeting on June 28, 2021. The 2021 Omnibus Plan provides for the conversion with existing terms of the 4,444,068 options outstanding under Former Ensysce stock plans and reserves for issuance an additional 1,000,000 shares for future awards under the 2021 Omnibus Plan. On January 26, 2022, the 2021 Omnibus Plan was amended and restated to include an additional 3,000,000 shares available for future grant and to provide for future annual increases. No further awards may be made under the Former Ensysce stock plans. The Company recognized within general and administrative expense stock-based compensation expense of $ 228,823 and $ 602,767 for the three and six months ended June 30, 2022, and $ 36,373 and $ 80,193 for the three and six months ended June 30, 2021. During the three and six months ended June 30, 2022, the Company recognized stock-based compensation expense of $ 66,756 and $ 95,246 within research and development. During the three and six months ended June 30, 2021, there was no stock-based compensation allocated to research and development. 18 Option Activity During the six months ended June 30, 2022, the Company granted stock options to purchase an aggregate of 2,291,000 shares of common stock to employees, consultants and members of the board of directors. The options vest over periods between 0 and 4 years and have an exercise price of between $ 0.43 and $ 6.28 per share. There were no stock option grants in 2021. The following table summarizes the Company’s stock option activity during the six months ended June 30, 2022: SCHEDULE OF STOCK OPTION ACTIVITY Weighted average Options Exercise price Remaining contractual life Intrinsic value Outstanding at December 31, 2021 4,444,068 $ 2.40 6.00 $ 10,207,306 Granted 2,291,000 3.86 7.63 46,515 Exercised - - - - Expired / Forfeited - - - - Outstanding at June 30, 2022 6,735,068 2.90 6.91 46,515 Exercisable at June 30, 2022 5,619,542 3.11 6.37 - Vested and expected to vest 6,735,068 2.90 6.91 46,515 Option Valuation The fair value of each stock option granted has been determined using the Black-Scholes option-pricing model. The material assumptions used in the Black-Scholes model in estimating the fair value of the options granted for the periods presented were as follows (there were no grants issued in 2021): SCHEDULE OF SHARE-BASED PAYMENT AWARD, STOCK OPTIONS, VALUATION ASSUMPTIONS Six Months Ended June 30, 2022 Stock price $ 0.43 - $ 1.70 Exercise price $ 0.43 - $ 6.28 Expected stock price volatility 76.61 - 95.87 % Expected term (years) 5.19 - 10.00 Risk-free interest rate 1.52 % - 3.14 % Expected dividend yield 0 % ● Expected stock-price volatility. The expected volatility is derived from the historical volatilities of publicly traded companies within the Company’s industry that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term. ● Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term due to a lack of sufficient data. Therefore, the Company estimates the expected term for employees by using the simplified method provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. ● Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term. ● Expected dividend yield. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock. 19 The weighted-average grant date fair value of options granted during the six months ended June 30, 2022 was $ 0.96 . There were no options granted during the six months ended June 30, 2021. As of June 30, 2022, the Company had an aggregate of $ 819,956 of unrecognized share-based compensation cost, which is expected to be recognized over the weighted average period of 1.7 years. Restricted Stock Units During the six months ended June 30, 2022, the Company granted 927,358 restricted stock unit (“RSU”) awards (weighted average fair value of $1.04), issued 647,358 shares of common stock for vested RSU awards (weighted average fair value of $ 1.29 ) and cancelled 150,000 RSU awards. The remaining 130,000 awards (weighted average fair value of $ 0.99 ) outstanding are subject to time-based and market vesting conditions and are scheduled to vest by December 2023. The estimated fair value of each of the Company’s was determined on the date of grant based on the closing price of the Company’s common stock on the previous trading date. Shares Reserved for Future Issuance The following shares of common stock are reserved for future issuance: SCHEDULE OF COMMON STOCK FUTURE ISSUANCE June 30, 2022 Awards outstanding under the 2021 Omnibus Incentive Plan 6,865,068 Awards available for future grant under 2021 Omnibus Incentive Plan 931,642 Warrants outstanding 21,090,873 Total shares of common stock reserved for future issuance 28,887,583 NOTE 10 - RELATED PARTIES The Company paid cash compensation during the three and six months ended June 30, 2021 of $ 10,752 and $ 40,314 , respectively, to the Chief Executive Officer through a separate operating company with which the Chief Executive Officer is affiliated. There were no such payments in the three and six months ended June 30, 2022. NOTE 11 - SUBSEQUENT EVENTS In the third quarter of 2022, the Company issued 2,797,621 shares of common stock as a result of conversions of $ 1.1 million of the 2021 Notes. In July 2022, the Company settled $ 0.8 million of the share subscription facility commitment fees (described in Note 2) through payment of 921,935 shares of common stock in accordance with the GEM agreement. In July 2022, the Company financed its directors’ and officers’ liability insurance in the amount of $ 0.4 million to satisfy the outstanding liability recorded in accounts payable as of June 30, 2022. 2022 Notes On June 30, 2022, the Company entered into an $ 8.0 million convertible financing agreement with institutional investors. The agreement provides for two closings, each for notes payable of $ 4.24 million (resulting in gross cash proceeds of $ 4.0 million). Funds were received for the first closing on July 1, 2022 and for the second closing on August 9, 2022. 20 The 2022 Notes are convertible into Common Stock, at a per share conversion price equal to $ 0.5450 , a 10 % premium to the average price of the Common Stock for the three trading days prior to the first closing. Under the Notes, commencing on September 29, 2022 and continuing monthly on the first day of each month beginning November 2, 2022, the Company is obligated to redeem one fifteenth (1/15 th ) of the original principal amount under the applicable Note, plus accrued but unpaid interest. The Company may elect to pay all or part of the redemption amount in cash with a premium of eight percent or in conversion 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) during the ten consecutive trading days ending on the trading day that is immediately prior to the applicable redemption date, but in no event may the Company pay the redemption amount in conversion shares of Common Stock unless the conversion price is at least equal to $0.1003 and certain equity conditions are satisfied . In connection with each of the first and second closings of the 2022 Notes the Company also issued warrants to purchase 4,667,890 shares of the Company’s common stock. The warrants have an exercise price of $ 0.7085 , a 30 % premium to the conversion price and are exercisable for five years following issuance of the 2022 Notes. The issuance of these warrants will require the Company to reduce the conversion price of the 2021 Notes and the exercise price of the outstanding warrants associated with the 2021 Notes to $ 0.78 . The proceeds of the 2022 Notes will be used for working capital purposes subject to certain customary restrictions are secured by the Company’s rights to its patents and licenses. The Company is restricted from issuing certain additional debt or equity without the prior written consent of the holders for certain specified periods set forth in the 2022 Notes. The 2022 Notes mature on December 29, 2023 and February 7, 2024 , for the first and second closings, respectively. The notes bear interest at a rate of 6 % per annum, in addition to an original issue discount of 6 %. The interest may be settled in cash or shares at the option of the Company and is payable together with monthly redemptions of the outstanding principal amount of the debt. At the second closing of the 2022 Notes, the parties agreed to modify the conversion price of the remaining 2021 Notes from $ 0.78 to $ 0.35 until October 1, 2022, with any remaining balance payable in cash on October 10, 2022. 21