What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-03-30 compared with 2022-03-31 · 333 added, 287 removed, 401 unchanged (61% of the section changed)

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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.

We have also incorporated a 79.2%-owned subsidiary, EBIR, Inc.

known as Covistat, Inc.), 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.

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

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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.

requirements into the second quarter of 2023.

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

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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.

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

18,058 shares of the Company’s common stock in the aggregate at an exercise price of $152.60 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 36,116 shares of

the Company’s common stock in the aggregate at an exercise price of $152.60 per share.

The 2021 Notes were satisfied on October

warrants have an exercise price of $15.60 and are exercisable for five years following issuance.

The warrants were originally priced

at a 30% premium to the conversion price and were subject to downward adjustments based on certain issuances of the Company’s common

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

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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.

obligations pursuant to the 2021 Notes were (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

June 30, 2022, we entered into an $8.0 million convertible financing agreement with institutional investors (the “2022 Notes”).

The agreement provided 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.

2022 Notes are convertible into common stock, at a per share conversion price equal to $10.90 (original conversion price).

Notes, commencing on September 29, 2022 and continuing monthly on the first day of each month beginning November 1, 2022, we are obligated

to redeem one fifteenth (1/15 th ) of the original principal amount under the applicable Note, plus accrued but unpaid interest.

We 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 we pay the redemption amount in conversion shares of common stock unless the conversion price is at least equal to

$2.006 and we have been in compliance with customary requirements under the agreement, unless waived in writing by the holder.

connection with each of the first and second closings of the 2022 Notes we also issued warrants to purchase 233,395 shares of the Company’s

common stock.

The warrants have an exercise price of $14.17 (original exercise price), a 30% premium to the conversion price, and are

exercisable for five years following issuance of the 2022 Notes.

The issuance of these warrants required us to reduce the conversion

price of the 2021 Notes and the exercise price of the outstanding warrants associated with the 2021 Notes to $15.60.

proceeds of the 2022 Notes are being used for working capital purposes subject to certain customary restrictions are secured by the Company’s

rights to its patents and licenses.

We are 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.

If, at any time while the 2022 Notes are outstanding, we carry

out one or more capital raises in excess of $5.0 million, the holder has the right to require us 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).

In connection with a financing which occurred in December 2022, we

repaid $0.75 million on the 2022 Notes and paid an additional $0.06 million of premium payments.

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 December 31, 2022,

$4.2 million of the 2022 Notes remained outstanding.

The remaining amount of principal and interest on the 2022 Notes

was repaid in the first quarter of 2023.

However, we remain obligated under the 2022 Notes to pay additional cash as true-up payments for interest

or redemption amounts that we paid in shares of common stock that were valued below $2.006 or the lower conversion price of $0.7512 in

effect between January 12, 2023 and May 12, 2023.

The true-up payments compensate for the difference between the value of a share and

the conversion price in effect at the time of redemption, multiplied by the number of shares paid.

Underwriting Agreement

December 7, 2022, we entered into an underwriting agreement (the “ Underwriting Agreement ”) with Lake Street Capital

Management, LLC (the “ Underwriter ”), pursuant to which we agreed to issue and sell (i) 2,280,000 shares (the “ Firm

Shares ”) of the Company’s common stock, par value $0.0001 per share (the “ Common Stock ”), (ii) pre-funded

warrants (the “ Pre-Funded Warrants ”) to purchase 620,000 shares of Common Stock and (iii) warrants to purchase 5,800,000

shares of Common Stock (the “ Common Warrants ” and, collectively with the Pre-Funded Warrants, the “ Warrants ”)

to the Underwriter in a public offering (the “ Offering ”).

In addition, under the terms of the Underwriting Agreement,

the Company granted the Underwriter the option, for 45 days from the closing of the Offering, to purchase up to 342,000 additional shares

of Common Stock and Common Warrants to purchase up to an additional 870,000 shares of Common Stock (the “ Option Shares ”

and, together with the Firm Shares, the “ Shares ”).

lieu of a purchase of Common Stock that would otherwise result in an investor’s beneficial ownership exceeding 4.99% (or, at the

election of the investor, 9.99%) of the outstanding Common Stock, a Pre-Funded Warrant was offered, each of which enables the investor

to purchase one share of Common Stock at an exercise price of $0.0001.

Each Pre-Funded Warrant will be exercisable upon issuance and

will expire when exercised in full (all Pre-Funded Warrants were exercised immediately upon issuance).

Each Pre-Funded Warrant is being

sold with a Common Warrant to purchase two shares of Common Stock.

The public purchase price of one share of Common Stock and accompanying

Common Warrant to purchase two shares of Common Stock is $1.40 and the combined purchase price of one Pre-Funded Warrant and accompanying

Common Warrant to purchase two shares of Common Stock is $1.40.

The Underwriter agreed to purchase the Firm Shares from the Company pursuant

to the Underwriting Agreement at a price of $1.302 per share.

Common Warrant is exercisable immediately at an exercise price of $1.40 per share and will expire five years following the date of issuance.

The Offering closed on December 9, 2022 and we received aggregate gross proceeds of approximately $4.1 million from the Offering.

Offering was made under a registration statement on Form S-1 filed with the Securities and Exchange Commission (Registration No.

connection with the Offering, the Company’s directors and executive officers signed lock-up agreements (“Lock-Up Agreements”)

by which they agreed not to sell or transfer any Common Stock without first obtaining the written consent of the Underwriter, subject

to certain exceptions, for a period of 90 days after the date of the final prospectus relating to the Offering.

Combination Transaction

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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.

have received funding under federal grants from the National Institutes of Health (“NIH”) through the National Institute

on Drug Abuse (“NIDA”).

In September 2018, we were awarded a research and development grant related to the development of

our MPAR TM overdose prevention technology (the “MPAR Grant”).

In September 2019, we were awarded a second research

and development grant related to the development of our TAAP/MPAR TM abuse deterrent technology for Opioid Use Disorder (“OUD”)

(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

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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;

incurred under agreements with contract research organizations (“ CROs ”) that are primarily engaged in the oversight

and conduct of our drug discovery efforts and preclinical studies, clinical trials and contract manufacturing organizations (“ 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

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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.

resources primarily to conduct our research and development 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

and development activities are central to our business model.

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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.

[As a result, we expect that our research and development expenses will remain elevated 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, subject to our ability to obtain financing.

We also expect 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 remain elevated over prior periods.

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

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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;

an appropriate safety and efficacy profile with investigational new drug (“ IND ”) enabling studies;

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

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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.

anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the continued

development of our product candidates, subject to our ability to obtain financing.

We also anticipate that we will continue to incur

significant accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public

relations expenses 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

in fair value of 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

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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

on issuance of 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.

The 2022 Notes are accounted for under ASC 480 – Distinguishing Liabilities from Equity, due to share

settlement features contained within the notes.

As a result, the 2022 Notes are recorded as liabilities at fair value upon initial recognition

and at the balance sheet date.

We use a discounted cash flow model and a

Monte Carlo simulation to estimate the fair value of the notes, both of which rely on unobservable Level 3 inputs.

The loss on issuance

of convertible notes represents the difference between the gross proceeds received and the calculated fair value on the issuance date

of the notes.

costs for convertible notes

issuance costs for convertible notes represent the original issue discount (expensed immediately due to the initial recognition at

fair value of both the 2021 and 2022 Notes noted above), legal and accounting fees incurred in connection with the issuance of the 2021 and 2022

in fair value of 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.

The 2022 Notes are accounted for under ASC 480 – Distinguishing Liabilities from Equity, due to share

settlement features contained within the notes.

We use a discounted cash flow model and a

Monte Carlo simulation to estimate the fair value of the notes, both of which rely on unobservable Level 3 inputs.

Changes in the fair

value of the notes are recognized through earnings for each reporting period.

of liability classified warrants

warrants issued with the 2021 Notes and 2022 Notes are liability classified due to certain cash settlement features.

Black-Scholes option pricing model to estimate the fair value of the warrants.

This represents the immediate expense upon initial

recognition of the liability that is included in the statement of operations.

The liability is subsequently remeasured each reporting period as described further below.

in fair value of liability classified warrants

warrants issued with the 2021 Notes and 2022 Notes are 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.

on debt conversions

conversions on the 2021 Notes occur, we calculate the difference between the conversion price and the average of the high and low stock

price on the date of conversion.

The resulting difference is either a loss if the conversion price was below the average of the high

and low stock price on the date of conversion or a gain if the conversion price was above the average of the high and low stock price

on the date of conversion.

expense consists of interest accrued on our financed directors and officers’ insurance as well as imputed interest on the commitment

fees related to the share subscription facility.

Interest expense related to the 2021 Notes and 2022 Notes is included in the estimate

of fair value of the convertible notes.

for Income Taxes

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and 2021, we continue to maintain a full valuation allowance against all of our deferred tax assets based on our evaluation of all available

in 2022, the Tax Cuts and Jobs Act, or the Tax Act, eliminated the option to deduct research and development expenditures currently and

requires taxpayers to capitalize and amortize them over five or fifteen years pursuant to Internal Revenue Code Section 174.

has not impacted our effective tax rate or our cash tax payable in 2022;

however, if the requirement to capitalize Section 174 expenditures

is not modified, it may also impact our effective tax rate and our cash tax liability in future years.

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

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Federal grants

$ (1,007,816 )

Operating expenses:

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General and administrative

(11,801,945 )

Total operating expenses

Loss from operations

(24,222,095 )

(19,870,431 )

Other income (expense):

Change in fair value of derivative liabilities

Loss on issuance of convertible notes

Issuance costs for convertible notes

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Change in fair value of liability classified warrants

Loss on debt conversions

Interest expense

Other income and expense, net

Total other income (expense), net

Total other income/(expenses), net

$ (24,207,685 )

$ (29,145,901 )

Net loss attributable to noncontrolling interests

Deemed dividend related to warrants down round provision

Net income (loss) attributable to common stockholders

Net loss attributable to common stockholders

$ (25,085,496 )

$ (29,886,851 )

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.

from federal grants totaled $2.5 million for the year ended December 31, 2022, compared to $3.5 million for the year ended December 31,

2021.Revenue decreased $1.0 million during the year ended December 31, 2022, due to the timing of research activities eligible for funding

under the grants.

We expect funding from federal grants to generally increase in the future due to the timing of preclinical and clinical

development activities under the grants.

and Development Expenses

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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

We expect future research and development

expenses to approximate current levels but may need to be adjusted based on our ability to raise capital sufficient to fund these expenses.

and Administrative Expenses

and administrative expenses were $6.9 million for the year ended December 31, 2022, compared to $18.7 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.

The decrease was primarily driven by a one-time $11.6 million non-cash expense in 2021 related to warrants issued for the GEM

share subscription facility.

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

$1.1 million expense for commitment fees for the share subscription facility incurred in 2021.

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 approximate current levels.

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.

costs for convertible notes decreased due to the lower principal amount of the 2022 Notes being issued during the period as compared to the

2021 Notes issued in the prior period.

The loss on issuance of the convertible notes and related liability classified warrants was due

to the current share price at issuance (of the 2022 Notes and the related warrants) exceeding the conversion (exercise) price.

in fair value of convertible notes and liability classified warrants for the 2022 period relate to both the 2021 Notes and 2022 Notes

compared to only changes related to the 2021 Notes in the prior period.

Loss on debt conversions is driven by the difference between

the conversion price of the 2021 Notes and the average of the high and low stock price on the date of conversion.

and Capital Resources

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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.

borrowings under convertible 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

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 August 31, 2023.

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.

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acceptance for publication.

grant has to be repaid.

grant must be repaid.

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

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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.

have not used the GEM Facility to date.

Pursuant 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 (July

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.

We may not be able to utilize the facility before it expires.

Our ability to utilize

this share subscription facility is restricted while financing commitments to which we are subject remain outstanding.

the public listing of the Company’s shares following 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, was discharged

with 46,062 shares of common stock transferred from related parties in July 2022.

The commitment fee for the second tranche, which is

equal to the remaining 33% of the commitment fee, or $400,000 was paid in January 2023 through the issuance of 533,334 shares of registered

common stock.

Additionally,

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The strike price was reduced to $1.40 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,

2022 because of a pricing adjustment per the GEM Agreement and reduced to $0.7512 per share in January 2023.

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.

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 a Securities Purchase Agreement for an aggregate financing of $15.0 million with institutional investors.

The Company issued to the investors (i) 2021 Notes in the aggregate principal amount of $15.9 million for an aggregate purchase price

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of $152.60 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.

The 2021 Notes were satisfied in October 2022.

June 30, 2022, we entered into a Securities Purchase Agreement for an aggregate financing of $8.0 million with institutional investors.

The Company issued to the investors (i) 2022 Notes in the aggregate principal amount of $8.48 million for an aggregate purchase price

of $8.0 million and (ii) warrants to purchase 466,788 shares of the Company’s common stock in the aggregate at an exercise price

of $14.17 per share.

The first funding of $4.0 million occurred on July 1, 2022 and the second funding of $4.0 million occurred on August

9, 2022 At December 31, 2022, $4.2 million of 2022 Notes remained outstanding.

Flows for the years ended December 31, 2022 and 2021

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$ (8,242,177 )

Net cash provided by investing activities

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

$ (9,117,034 )

the years ended December 31, 2022 and 2021, we used cash in operating activities of $17.9 million and $8.2 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.

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

the years ended December 31, 2022 and 2021, net cash provided by financing activities was $8.8 million and $20.3 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.

For 2021, net cash consisted primarily of net proceeds from the Merger in June 2021 and net proceeds from the issuance of the 2021 Notes.

In 2022, net cash consisted primarily of net proceeds from the issuance of the 2022 Notes and the net proceeds of the issuance of shares

and related warrants in connection with the underwriting agreement completed in December of 2022 which were less in the aggregate than

that raised in 2021.

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

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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.

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

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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

2021 Notes and 2022 Notes limit our ability to execute certain debt and equity financings, including under the GEM Agreement, while the

2021 Notes or 2022 Notes are outstanding.

Without the availability of proceeds through the share subscription facility, or capital raised

through other financing transactions, 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

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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;

Many 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.

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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:

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

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

including research laboratories, in connection with preclinical development activities;

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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.

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.

We grant stock options and restricted stock awards that are subject

to either service or performance-based vesting conditions.

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

performance-based vesting conditions is recognized based on the grant date fair value over the requisite service period using the accelerated

attribution method to the extent achievement of the performance condition is probable.

We estimate the probability that certain performance

criteria will be met and do not recognize compensation expense until it is probable that the performance-based vesting condition will

classify stock-based compensation expense in our statements of operations in the same way 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

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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.

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 simulation 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.

July and August 2022, the Company issued the 2022 Notes.

The 2022 Notes are accounted for under ASC 480 – Distinguishing Liabilities

from Equity, due to share settlement features contained within the notes.

As a result, the 2022 Notes are recorded as liabilities

at fair value at the balance sheet date with changes in the fair value of the notes recognized in other income (expense) for each reporting

The fair value estimate of the 2022 Notes was based on a discounted cash flow model and a Monte Carlo simulation, 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 simulation.

issued warrants in connection with the issuance of both the 2021 and 2022 Notes.

The warrants were liability classified due to certain

cash settlement features.

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.

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

do not have during the periods presented, and do not currently have, any off-balance sheet arrangements, as defined in the rules and

regulations of the SEC.

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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

company, we are not 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.

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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