Ensysce Biosciences, Inc. 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a–15(e) and 15d-15(e)) as of December 31, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2022, due to the material weaknesses in our internal controls over financial reporting described below. Notwithstanding these material weaknesses, management has concluded that our consolidated financial statements included in this Annual Report on Form 10-K are fairly stated in all material respects in accordance with GAAP for each of the periods presented therein. Management’s Annual Report on Internal Control over Financial Reporting As of December 31, 2022, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013) (the “2013 Framework”) . In adopting the 2013 Framework, management assessed the applicability of the principles within each component of internal control and determined whether they have been adequately addressed within the current system of internal control and adequately documented. Based on this assessment, management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2022, our internal control over financial reporting was ineffective due to material weaknesses. A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal controls over financial reporting such that it is reasonably possible that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified are insufficiently designed internal controls over period end financial reporting because of inadequate accounting expertise and insufficient level of supervision and review of unusual and/or infrequent transactions with complex or infrequently applied accounting topics due to the experience and limited number of accounting personnel in the financial reporting function. We are continuing to take steps to remediate the material weaknesses in our internal controls over financial reporting, including hiring a Chief Financial Officer in February 2021. Further, we plan to enhance our processes to identify and appropriately apply applicable accounting requirements to better evaluate and understand the nuances of the complex accounting standards that apply to our financial statements. Our plans at this time include providing enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects. The conclusion of the Company’s principal executive officer and principal financial officer is based on the recognition that there are inherent limitations in all systems of internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, errors or fraud. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we, engaged our independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to SEC rules that permit us to provide only management’s report in this Annual Report on Form 10-K. 85 Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information Not applicable. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. PART III Item 10. Executive Officers and Directors Information required by this item, including information concerning the board of directors of the Company, the members of the Company’s audit committee, the Company’s audit committee financial expert, compliance with Section 16(a) of the Exchange Act and shareowner proposals, are incorporated by reference to the Company’s Proxy Statement for the 2023 Annual Meeting of Shareowners, which will be filed with the SEC pursuant to Regulation 14A within 120 days after December 31, 2022. The information regarding executive officers is included in this report as Item 1 under the caption “ Identification of our Executive Officers ” and incorporated herein by reference. Delinquent Section 16(a) Reports During 2022, Bob Gower, our chairman, filed one Form 4 late to report one transaction. Code of Business Conduct We adopted a code of business conduct that applies to all our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer, which is available on our website. Our code of business conduct is a “code of ethics,” as defined in Item 406(b) of Regulation S-K. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our website. We will provide a copy of our code of business conduct to any person without charge, upon written request sent to our chief financial officer at 7946 Ivanhoe Avenue, Suite 201, La Jolla, California 92037. Item 11. Executive & Director Compensation Information required by this Item is incorporated by reference from the Company’s Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this Item is incorporated by reference from the Company’s Proxy Statement. Item 13. Certain Relationships and Related Transactions and Director Independence Information required by this Item is incorporated by reference from the Company’s Proxy Statement. Item 14. Principal Accountant Fees and Services Information required by this Item is incorporated by reference from the Company’s Proxy Statement. 86 PART IV Item 15. Exhibits and Financial Statement Schedules. Financial Statements ENSYSCE BIOSCIENCES, INC. CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB No. 199 ) F-1 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-2 Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 F-3 Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2022 and 2021 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 F-5 Notes to the Consolidated Financial Statements F-6 to F-25 87 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Ensysce Biosciences, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Ensysce Biosciences, Inc. (“Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Going Concern Uncertainty The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company does not have revenue generating activities and is dependent on additional financing to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 2 to the financial statements. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2017. /s/ Mayer Hoffman McCann P.C . San Diego, California March 30, 2023 F- 1 Ensysce Biosciences, Inc. Consolidated Balance Sheets 2022 2021 December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 3,147,702 $ 12,264,736 Unbilled receivable 276,821 441,721 Right-of-use asset 27,165 24,721 Prepaid expenses and other current assets 1,847,481 2,931,415 Total current assets 5,299,169 15,662,593 Property and equipment, net - - Other assets 585,883 754,756 Total assets $ 5,885,052 $ 16,417,349 Liabilities and stockholders’ deficit Current liabilities: Accounts payable $ 2,943,791 $ 301,104 Accrued expenses and other liabilities 2,226,494 3,407,533 Lease liability 27,315 24,874 Notes payable and accrued interest ($ 4,063,431 and $ 12,358,886 at fair value at December 31, 2022 and 2021, respectively) 4,266,610 12,748,155 Total current liabilities 9,464,210 16,481,666 Long-term liabilities: Notes payable, net of current portion (at fair value) 140,148 4,440,951 Other long-term liabilities 310,346 3,652,790 Total long-term liabilities 450,494 8,093,741 Total liabilities $ 9,914,704 $ 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 December 31, 2022 and December 31, 2021 - - Common stock, $ 0.0001 par value, 250,000,000 and 150,000,000 shares authorized at December 31, 2022 and December 31, 2021; 6,415,062 and 1,233,148 shares issued at December 31, 2022 and December 31, 2021, respectively; 6,414,074 and 1,232,160 shares outstanding at December 31, 2022 and December 31, 2021, respectively 642 124 Additional paid-in capital 107,215,977 77,967,200 Accumulated deficit ( 110,931,063 ) ( 85,845,567 ) Total Ensysce Biosciences, Inc. stockholders’ deficit ( 3,714,444 ) ( 7,878,243 ) Noncontrolling interests in stockholders’ deficit ( 315,208 ) ( 279,815 ) Total stockholders’ deficit ( 4,029,652 ) ( 8,158,058 ) Total liabilities and stockholders’ deficit $ 5,885,052 $ 16,417,349 The accompanying notes are an integral part of these consolidated financial statements. F- 2 Ensysce Biosciences, Inc. Consolidated Statements of Operations 2022 2021 Year Ended December 31, 2022 2021 Federal grants $ 2,523,383 $ 3,531,199 Operating expenses: Research and development 19,835,875 4,690,082 General and administrative 6,909,603 18,711,548 Total operating expenses 26,745,478 23,401,630 Loss from operations ( 24,222,095 ) ( 19,870,431 ) Other income (expense): Change in fair value of derivative liabilities - 673,314 Loss on issuance of convertible notes ( 3,609,944 ) - Issuance costs for convertible notes ( 1,137,740 ) ( 1,920,158 ) Change in fair value of convertible notes 5,756,787 ( 2,993,060 ) Issuance of liability classified warrants ( 3,737,371 ) ( 1,865,403 ) Change in fair value of liability classified warrants 6,730,613 ( 1,438,186 ) Loss on debt conversions ( 3,964,633 ) ( 154,391 ) Interest expense, net ( 109,525 ) ( 1,295,307 ) Other income and expense, net 86,223 ( 282,279 ) Total other income (expense), net 14,410 ( 9,275,470 ) Net loss $ ( 24,207,685 ) $ ( 29,145,901 ) Net loss attributable to noncontrolling interests ( 35,393 ) ( 62,190 ) Deemed dividend related to warrants down round provision 913,204 803,140 Net loss attributable to common stockholders $ ( 25,085,496 ) $ ( 29,886,851 ) Net loss per basic and diluted share: Net loss per share attributable to common stockholders, basic and diluted $ ( 11.62 ) $ ( 29.64 ) Weighted average common shares outstanding, basic and diluted 2,159,189 1,008,227 The accompanying notes are an integral part of these consolidated financial statements. F- 3 Ensysce Biosciences, Inc. Consolidated Statements of Changes in Stockholders’ Deficit Number of Shares Amount Additional Paid-In Capital Accumulated Deficit Noncontrolling interests Total Stockholders’ Equity (Deficit) Common Stock Number of Shares Amount Additional Paid-In Capital Accumulated Deficit Noncontrolling interests Total Balance on December 31, 2020 788,437 80 49,517,834 ( 55,958,716 ) ( 217,625 ) ( 6,658,427 ) Exercise of stock options 14,241 1 262,861 - - 262,862 Settlement of convertible notes in business combination 67,899 7 5,696,696 - - 5,696,703 Conversion of convertible notes 19,369 2 2,247,613 - - 2,247,615 Issuance of common stock for business combination, net of transaction costs 342,214 34 7,695,230 - - 7,695,264 Stock-based compensation - - 121,764 - - 121,764 Issuance of warrants - - 11,565,472 - - 11,565,472 Warrant modification - - 56,590 - - 56,590 Deemed dividend related to warrants down round provision - - 803,140 ( 803,140 ) - - Net loss - - - ( 29,083,711 ) ( 62,190 ) ( 29,145,901 ) Balance on December 31, 2021 1,232,160 $ 124 $ 77,967,200 $ ( 85,845,567 ) $ ( 279,815 ) $ ( 8,158,058 ) Balance 1,232,160 $ 124 $ 77,967,200 $ ( 85,845,567 ) $ ( 279,815 ) $ ( 8,158,058 ) Consultant compensation 2,507 - 54,250 - - 54,250 Settlement of restricted stock units 39,367 4 ( 4 ) - - - Conversion of convertible notes 2,184,101 218 21,485,686 - - 21,485,904 Settlement of payable to related parties 46,062 5 191,613 - - 191,618 Capital contribution from related parties - - 608,382 - - 608,382 Public offering, net 2,900,000 290 3,782,950 - - 3,783,240 Transaction costs associated with public offering - - ( 547,377 ) - - ( 547,377 ) Stock-based compensation - - 2,760,074 - - 2,760,074 Reverse split fractional shares 9,877 1 ( 1 ) - - - Deemed dividend related to warrants down round provision - - 913,204 ( 913,204 ) - - Net loss - - - ( 24,172,292 ) ( 35,393 ) ( 24,207,685 ) Balance on December 31, 2022 6,414,074 $ 642 $ 107,215,977 $ ( 110,931,063 ) $ ( 315,208 ) $ ( 4,029,652 ) Balance 6,414,074 $ 642 $ 107,215,977 $ ( 110,931,063 ) $ ( 315,208 ) $ ( 4,029,652 ) The accompanying notes are an integral part of these consolidated financial statements. F- 4 Ensysce Biosciences, Inc. Consolidated Statements of Cash Flows 2022 2021 Year Ended December 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 24,207,685 ) $ ( 29,145,901 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation - 151 Gain on sale of asset ( 4,500 ) - Accrued interest 60,488 349,339 Accretion of discounts on promissory notes - 945,969 Change in fair value of derivative liability - ( 673,314 ) Change in fair value of convertible notes ( 5,756,787 ) 2,993,060 Loss on issuance of convertible notes 3,609,944 - Loss on extinguishment of debt - 347,566 Stock-based compensation 1,071,843 121,764 Issuance of liability classified warrants 3,737,371 1,865,403 Change in fair value of liability classified warrants ( 6,730,613 ) 1,438,186 Issuance of warrants for share subscription facility - 11,565,472 Commitment fee for share subscription facility - 1,124,289 Warrant modification - 56,590 Lease cost ( 3 ) ( 1,808 ) Issuance costs for convertible notes 946,085 1,920,158 Loss on debt conversions 3,964,633 154,391 Other income ( 60,035 ) - Changes in operating assets and liabilities: Unbilled receivable 164,900 ( 441,721 ) Prepaid expenses and other assets 1,652,756 ( 1,616,019 ) Accounts payable 2,642,686 ( 1,423,494 ) Accrued expenses and other liabilities 1,021,478 2,177,742 Net cash used in operating activities ( 17,887,439 ) ( 8,242,177 ) Cash flows from investing activities: Proceeds from sale of assets 4,500 - Net cash provided by investing activities 4,500 - Cash flows from financing activities: Proceeds from public offering, net 3,783,240 - Proceeds from issuance of convertible notes, net 7,533,915 14,029,842 Proceeds from issuance of promissory notes to related parties - 350,000 Repayment of convertible notes ( 1,408,364 ) Repayment of promissory notes - ( 467,774 ) Transaction costs from public offering ( 547,377 ) Proceeds from exercise of stock options - 262,862 Proceeds from issuance of common stock for business combination, net of transaction costs - 6,626,312 Repayment of financed insurance premiums ( 595,509 ) ( 488,543 ) Net cash provided by financing activities 8,765,905 20,312,699 Decrease (increase) in cash and cash equivalents ( 9,117,034 ) 12,070,522 Cash and cash equivalents beginning of period 12,264,736 194,214 Cash and cash equivalents end of period $ 3,147,702 $ 12,264,736 Supplemental cash flow information: Income tax payments $ 1,600 $ 1,600 Supplemental disclosure of non-cash investing and financing activities: Stock-based compensation $ 1,742,481 $ - Fair value of derivative liability at issuance $ - $ 3,052 Settlement of convertible notes into common stock $ 17,521,271 $ 7,789,927 Payable to related parties settled in shares $ 191,618 $ - Capital contribution from related parties $ 608,382 $ - Net assets acquired in business combination $ - $ 1,068,950 Financed insurance premiums $ 399,949 $ 867,300 Share subscription facility transaction costs $ - $ 12,689,764 Deemed dividend related to warrants down round provision $ 913,204 $ 803,140 The accompanying notes are an integral part of these consolidated financial statements. F- 5 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES Ensysce Biosciences, Inc. (“Ensysce”), along with its subsidiary, EBIR, Inc. (“EBIR”, formerly known as Covistat, Inc.) and its wholly owned subsidiaries EBI Operating, Inc. and EBI OpCo. Inc. (collectively, the “Company”) is engaged in the development of drug delivery platforms targeting pain and cancer markets. The primary focus of the Company is its program developing abuse and overdose resistant pain technology with a clinical stage program being the abuse resistant, TAAP (Trypsin Activated Abuse Protection) opioid product candidate, PF614. In addition, the Company is developing its MPAR TM (Multi-Pill Abuse Resistant) technology for overdose protection which will be applied to the PF614 program. The Company is also applying its TAAP and MPAR TM technology to a methadone prodrug for use in the treatment of Opioid Use Disorder. 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, EBIR, a Delaware corporation. Pursuant to the articles of incorporation, EBIR 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 EBIR, with 19.8 % and 1.0 % of the shares held by certain key personnel of the Company and an unrelated party, respectively. 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. F- 6 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements 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. Reverse Stock Split In October 2022, the Company completed a 1-for-20 reverse split of its outstanding common stock. All references in these consolidated financial statements to shares and per share amounts in all periods have been retroactively restated to reflect the split. 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 consolidated 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 $ 110.9 million at December 31, 2022. There is no assurance that profitable operations will ever be achieved, and, if achieved, would 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 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 controls 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, 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 55,306 warrants with a five-year term to purchase common stock of Ensysce at an exercise price of $ 200.20 per share, subsequently reduced to $ 1.40 at December 31, 2022 (Note 8). The Company is required to pay a commitment fee to the investor of $ 1.2 million with $ 0.8 million due on the first anniversary of the public listing date and $ 0.4 million due on the 18-month anniversary of the public listing date. The first $ 0.8 million of the commitment fee was paid in July 2022 in freely tradable common stock of the Company (Note 10) and the remaining $ 0.4 million due in January 2023 was paid in freely tradable common stock of the Company. F- 7 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements 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 7 for additional information). The agreement limits the Company’s ability to execute certain debt and equity financings, including under the GEM Agreement, while the convertible notes are outstanding. Without the availability of proceeds through the GEM Agreement, 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 accrued research and development services, the valuation allowance of deferred tax assets resulting from net operating losses, and the fair value of warrants and options to purchase the Company’s common stock and convertible 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 currently exceed federally insured limits. The Company has no financial instruments with off-balance sheet risk of loss. F- 8 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements 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 . Depreciation expense of $ 0 and $ 151 was recognized for year ended December 31, 2022 and 2021, respectively. Depreciation expense is classified in general and administrative expense in the accompanying consolidated statements of operations. 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 year ended December 31, 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. Under this accounting guidance, 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 willing 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. F- 9 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements 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 December 31, 2022 and 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 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 and expected volatility used in the Monte Carlo simulation. 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. 2022 Notes In July 2022 the Company issued convertible notes with a face value of $ 8.5 million. 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 period. 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 and expected volatility used in the Monte Carlo simulation. Refer to Note 7 for details of the terms and conditions of the 2022 Notes. Warrants In 2021 the Company issued liability classified warrants in connection with the issuance of the 2021 Notes. In 2022 the Company issued liability classified warrants in connection with the issuance of the 2022 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 for details of the warrants. The following tables present assets and liabilities measured and recorded at fair value on the Company’s consolidated balance sheet as of December 31, 2022 and 2021. As of December 31, 2021, all contingent put options, associated with the pre-combination convertible notes, were settled upon conversion of the notes at the closing of the Business Combination. SCHEDULE OF ASSETS AND LIABILITIES MEASURED AT FAIR VALUE Total Level 1 Level 2 Level 3 December 31, 2022 Total Level 1 Level 2 Level 3 Fair value of convertible note $ 4,203,579 $ - $ - $ 4,203,579 Liability classified warrants 310,346 310,346 Total $ 4,513,925 $ - $ - $ 4,513,925 F- 10 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements 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 for the year ended December 31, 2022: SCHEDULE OF CHANGE IN FAIR VALUE OF COMPANY’S LEVEL 3 For the year ended December 31, 2022 Total Convertible note Liability classified warrants Fair value, December 31, 2021 $ 20,103,425 $ 16,799,837 $ 3,303,588 Additions, net 12,217,371 8,480,000 3,737,371 Conversions/payments ( 18,929,415 ) ( 18,929,415 ) - Loss on issuance of convertible notes 3,609,944 3,609,944 - Change in fair value ( 12,487,400 ) ( 5,756,787 ) ( 6,730,613 ) Fair value, December 31, 2022 $ 4,513,925 $ 4,203,579 $ 310,346 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 second research and development grant related to the development of its TAAP/MPAR TM abuse deterrent technology for Opioid Use Disorder (the “OUD Grant”). The total approved budget for the two-year period was approximately $ 5.4 million. 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 2022 2021 Year Ended December 31, 2022 2021 MPAR $ 2,006,885 $ 2,646,579 TAAP/OUD 516,498 884,620 Total $ 2,523,383 $ 3,531,199 Revenue $ 2,523,383 $ 3,531,199 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. F- 11 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements Immaterial Correction of an Error In August 2022, the Company concluded that there was an error in the measurement of the unbilled receivable as of December 31, 2021. The error was corrected in the second quarter of 2022. 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 for the year ended December 31, 2022. 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. 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 year ended December 31, 2022 and 2021, stock-based compensation costs are recorded in research and development and general and administrative 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 on a straight-line basis 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. F- 12 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements 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 Year Ended December 31, 2022 2021 Numerator: Net income (loss) attributable to common stockholders $ ( 25,085,496 ) $ ( 29,886,851 ) Denominator: Weighted average shares outstanding, basic and diluted 2,159,189 1,008,227 Net loss per share attributable to common stockholders, basic and diluted $ ( 11.62 ) $ ( 29.64 ) 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 (the Company has utilized the principal balance outstanding and the end of period conversion price for the Convertible Notes for the purposes of the weighted average share calculation below): SCHEDULE OF WEIGHTED AVERAGE SHARES OF ANTI-DILUTIVE SECURITIES 2022 2021 Year Ended December 31, 2022 2021 Stock options 315,633 224,915 RSUs 45,264 - Warrants 1,661,831 513,688 Convertible Notes 879,918 30,403 Total 2,902,646 769,006 Anti-dilutive weighted average shares 2,902,646 769,006 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. Early adoption is permitted. The Company adopted the guidance in 2022 and it did not have a material impact on the financial statements due to their current tax position. 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. The Company will adopt the standard with an effective date of January 1, 2023 and it is not expected to have a material impact on currently recorded transactions. 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. Reclassification of prior year presentation Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the consolidated statement of operations for the year ended December 31, 2021, to reclassify the loss on debt conversions. F- 13 Ensysce Biosciences, Inc. Notes to 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 2022 2021 December 31, 2022 2021 Prepaid research and development $ 1,300,473 $ 2,124,008 Prepaid insurance 445,583 733,234 Other prepaid expenses 101,425 74,173 Total prepaid expenses and other current assets $ 1,847,481 $ 2,931,415 NOTE 5 – ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consisted of the following: SCHEDULE OF ACCRUED EXPENSES AND OTHER LIABILITIES 2022 2021 December 31, 2022 2021 Accrued research and development $ 1,332,713 $ 388,997 Share subscription facility commitment fees 400,000 800,000 Professional fees 421,530 138,086 Other accrued liabilities 72,251 67,939 Accrued scientific advisory board fees - 60,032 Consultant fees - 1,342,479 Bonus Accrual - 610,000 Total accrued expenses and other liabilities $ 2,226,494 $ 3,407,533 Other long-term liabilities consisted of the following: SCHEDULE OF OTHER LONG-TERM LIABILITIES 2022 2021 December 31, 2022 2021 Share subscription facility commitment fees $ - $ 349,202 Liability classified warrants 310,346 3,303,588 Total other long-term liabilities $ 310,346 $ 3,652,790 Other long-term liabilities $ 310,346 $ 3,652,790 F- 14 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements NOTE 6 - COMMITMENTS AND CONTINGENCIES Purchase Commitments As of December 31, 2022, the Company’s commitments included an estimated $ 21.6 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 December 31, 2022 and 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 The Company’s current lease agreement (as amended) has a term that extends through October 31, 2023 with no option to renew. As of December 31, 2022, the future lease payments totaled $ 27,316 . The Company recognized total rent expense of $ 31,756 and $ 41,418 in the years ended December 31, 2022, and 2021, respectively. Compensation Commitments In assessing performance for 2022 annual bonuses, the Board of Directors established achievement of 2022 goals at 75 % of target but specified that payment of the resulting $ 0.4 million in annual bonuses is dependent upon future achievement of specified financing activities. As such future achievement is uncertain, no accrual has been recorded as of year-end. 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 25,000 shares of common stock with a five-year term and an exercise price of $ 125.60 each, 2,500 shares of common stock each, and 10,000 restricted stock units each. The restricted stock units vested 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, at which time 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 (See Note 9 for additional details of the Company’s stock-based compensation). F- 15 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements NOTE 7 - NOTES PAYABLE The following table provides a summary of the Company’s outstanding debt as of December 31, 2022: SCHEDULE OF DEBT Principal balance Accrued interest Fair value adjustment Net debt balance 2022 Notes $ 3,905,264 $ 10,544 $ 287,771 $ 4,203,579 Financed insurance 195,273 7,906 - 203,179 Total $ 4,100,537 $ 18,450 $ 287,771 $ 4,406,758 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 Financed 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 2022 and 2021 Notes) was as follows: SCHEDULE OF INTEREST EXPENSE DEBT 2022 2021 Year Ended December 31, 2022 2021 Stated interest accrual $ 9,909 $ 251,857 Debt discount amortization - 945,969 Total $ 9,909 $ 1,197,826 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”). The proceeds of the sale of the securities 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. The 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 total amount of interest expense (after consideration of the conversions) for the year-ended December 31, 2022 would be $ 0.2 million. After multiple conversions (at original contract terms and at amended reduced conversion prices) since issuance the Company recognized a change in fair value of convertible notes of $ 2.7 million (gain) for the period ended December 31, 2022 primarily due to reductions in the Company’s stock price. F- 16 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements The following table provides a summary of the Company’s 2021 Note conversions during the year ended December 31, 2022: SCHEDULE OF CONVERSION DEBT Shares Weighted Average Conversion Price Conversion Value During the year ended December 31, 2022 849,340 $ 15.92 $ 13,521,834 On August 8, 2022, the parties agreed to modify the conversion price of the remaining 2021 Notes from $ 15.60 to $ 7.00 until October 1, 2022, with any remaining balance payable in cash on October 10, 2022. On September 20, 2022, the parties agreed to modify the conversion price of the remaining 2021 notes from $ 7.00 to $ 4.60 for the period from September 20, 2022 until September 30, 2022. The Company recorded an inducement expense equal to the excess fair value of the consideration transferred (utilizing the number of shares transferred multiplied by the average of the high/low price on the conversion date) above the securities that would have been issued under the original conversion terms. The total loss on debt conversions was $ 4.0 million, for the period ended December 31, 2022, and is reflected in other income (expense), net. Included in the loss on debt conversions was $ 1.0 million related to the inducement expense for the period ended December 31, 2022. The remaining 2021 Notes became due and payable on October 10, 2022, at which time they were satisfied with cash ($ 0.4 million). 2022 Notes On June 30, 2022, the Company entered into an $ 8.0 million convertible financing agreement with institutional investors. 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. On the issuance date, the Company assessed the probability of the potential settlement scenarios under the terms of the 2022 Notes and determined that the predominant settlement feature of the 2022 Notes was the redemption feature into shares of the Company’s common stock issuable at the lower of the conversion price or 92 % of the average of the three lowest VWAPs in the 10 trading days immediately preceding the redemption date. As the predominant settlement feature of the 2022 Notes is to settle a fixed monetary amount into a variable number of shares, the 2022 Notes fell within the scope of ASC 480. Accordingly, the Company determined that the 2022 Notes should be recorded at estimated fair value on its issuance date and adjusted to its estimated fair value as of each reporting date with the change in estimated fair value recorded as a component other income (expense) in the Company’s consolidated statements of operations. The Company recorded the 2022 Notes at an initial fair value of $ 12.09 million which included a loss upon issuance of $ 3.6 million due to the current share price at issuance exceeding the conversion price. Additionally, the Company recorded issuance costs of $ 1.1 million representing a 6 % original issue discount of $ 0.5 million, $ 0.6 million of legal and investment banking fees, which are included in other income (expense) on the consolidated statement of operations. After several conversions since issuance, the Company reflected the remaining balance due as of December 31, 2022 at fair value and recognized a change in fair value of convertible notes of $ 3.1 million (gain) for the period ended December 31, 2022 primarily due to reductions in the Company’s stock price since issuance. The December 31, 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 $ 0.2 million for the year ended December 31, 2022. The 2022 Notes are convertible into common stock, at a per share conversion price equal to $ 10.90 , 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 1, 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 8% 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 $2.006 and the Company has been in compliance with customary requirements under the agreement, unless waived in writing by the holder. F- 17 In connection with each of the first and second closings of the 2022 Notes the Company also issued warrants to purchase 233,395 shares of the Company’s common stock. The warrants have an exercise price of $ 14.17 , 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 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 $ 15.60 . 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. If, at any time while the 2022 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). The Company triggered this provision in connection with the public offering of securities in December of 2022, the resulting principal payments and interest were reflected as a reduction to the outstanding balance of the 2022 Notes. The 8 % premium was paid in cash and is reflected as interest expense within the consolidated statement of operations. 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. The following table provides a summary of the Company’s 2022 Notes conversions during the year ended December 31, 2022: SCHEDULE OF CONVERSION DEBT Weighted Average Conversion Shares Conversion Price Value During the year ended December 31, 2022 1,334,761 $ 3.01 $ 4,011,035 Financed Insurance Premiums During the year ended December 31, 2022, the Company financed its directors’ and officers’ liability insurance in the amount of $ 399,949 , of which $ 203,179 remains outstanding at December 31, 2022. The Company will pay a total of $ 9,402 in interest from inception through March 2023 when the note will be paid in full. The Company expensed $ 7,905 of interest for the year ended December 31, 2022. 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 . In September 2022, the Company amended and restated its Certificate of Incorporation to authorize up to a total of 250,000,000 shares of common stock. As of December 31, 2022 and 2021, there were no shares of preferred stock issued and outstanding. F- 18 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements Common Stock On June 30, 2021, in connection with the Business Combination, the following common stock activity occurred: ● 802,679 shares of common stock were issued to holders of Former Ensysce common stock. ● 310,963 shares of common stock outstanding were assumed by the Company. ● 67,899 shares of common stock were issued in settlement of $ 5.8 million of convertible debt. ● 988 shares of restricted common stock were issued in exchange for previously outstanding warrants to purchase Former Ensysce common stock. ● 25,000 shares of common stock were issued in settlement of a termination agreement with a strategic advisor dated January 2021. ● 6,250 shares of common stock were issued in settlement of deferred underwriting costs. On December 9, 2022, the Company completed a public offering for the sale of 2.9 million shares of common stock at $ 1.40 per share for gross proceeds of $ 4.1 million, net of $ 0.3 million in underwriting fees. In addition, the Company issued 6.6 million warrants with an exercise price of $ 1.40 per share that expire five years following the date of issuance. In connection with the public offering, the Company incurred approximately $ 0.5 million in transaction costs that are recognized in the consolidated statement of changes in stockholders’ deficit. Warrants On December 31, 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) 851,663 $ 200.00 - 230.00 LACQ warrants Equity (b) 55,306 $ 1.40 Share subscription facility Equity (c) 54,174 $ 15.60 2021 Notes Liability (d) 466,788 $ 2.01 2022 Notes Liability (e) 6,600,000 $ 1.40 Public offering Equity 8,027,931 a) On June 30, 2021, as a result of the Closing, the Company assumed a total of 945,063 warrants previously issued by LACQ (subsequently in December 2022, 93,400 warrants were cancelled). The warrants provide holders the right to purchase common stock at a strike price of between $ 200.00 and $ 230.00 per share and expire June 30, 2026 , five years following the completion of the Business Combination. A total of 500,000 of the outstanding warrants are public warrants which trade on the OTC Pink Open Market under the ticker symbol ENSCW. The remaining 445,063 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 price of 25,000 warrants issued on June 30, 2021 from $ 230.00 to $ 200.00 , resulting in an incremental increase in their fair value of $ 56,590 , recognized in general and administrative expense. b) On July 2, 2021, upon public listing of the Company’s shares, the Company issued 55,306 warrants to purchase common stock pursuant to the share subscription facility. The warrants have a three -year life and an exercise price of $ 200.20 per share. The grant date fair value of the warrants, based on the $ 289.80 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. F- 19 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements The warrants have been subject to multiple exercise price reductions 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 (primarily the result of the conversions of the 2021 Notes and the 2022 Notes). The adjustments have progressed from the original exercise price of $ 200.20 per share to the current exercise price at December 31, 2022 of $ 1.40 per share. 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 and November 5, 2021, the Company issued 18,058 and 36,116 warrants in connection with the issuance of the 2021 Notes. The warrants were immediately exercisable with an exercise price of $ 152.60 (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 . As a result of the issuance of the 2022 Notes in July 2022, the exercise price of these warrants was adjusted down to $ 15.60 . d) On July 1, 2022 and August 9, 2022, the Company issued 233,394 warrants each in connection with the issuance of the 2022 Notes. The warrants were immediately exercisable with an exercise price of $ 14.17 (subject to downward revision protection in the event the Company makes certain issuance of common stock at prices below the conversion price) and expire on June 29, 2027 and August 8, 2027 , respectively. e) On December 9, 2022, the Company issued 6,600,000 equity classified warrants in connection with the public offering. The warrants were immediately exercisable with an exercise price of $ 1.40 (subject to downward revision protection in the event the Company makes certain issuance of common stock at prices below the conversion price) and expire on December 9, 2027 . 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 Stock price Exercise price Expected term (years) Volatility Risk free rate (a) LACQ warrants (grant date varies) 289.80 200.00 - 230.00 3.00 110.0 % 0.5 % (b) Share subscription facility (grant date 7/2/21) 289.80 200.20 3.00 110.0 % 0.5 % (b) Share subscription facility (remeasurement date varies) 1.20 - 85.80 1.40 - 90.00 1.56 - 2.49 108.2 % - 125.3 % 1.0 % - 4.5 % (c) Liability classified warrants (grant date 9/24/21) 89.80 152.60 5.00 94.1 % 1.0 % (c) Liability classified warrants (grant date 11/5/21) 45.00 152.60 5.00 94.1 % 1.0 % (c) Liability classified warrants (remeasured at 12/31/22) 0.78 15.60 3.75 - 3.85 140.9 % - 141.1 % 4.2 % (d) Liability classified warrants (grant date 7/1/22) 11.40 14.17 5.00 98.9 % 2.9 % (d) Liability classified warrants (grant date 8/9/22) 10.60 14.17 5.00 102.8 % 3.0 % (d) Liability classified warrants (remeasured at 12/31/22) 0.78 2.01 4.50 - 4.61 138.0 % - 139.4 % 4.0 % 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 221,191 options outstanding under Former Ensysce stock plans and reserves for issuance an additional 50,000 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 150,000 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 $ 919,056 and $ 121,764 for the year ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022 and 2021, the company recognized within research and development expense stock-based compensation expense of $ 152,787 and $ 0 , respectively. F- 20 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements Option Activity During the year ended December 31, 2022, the Company granted stock options to purchase an aggregate of 114,550 shares of common stock to employees, consultants and members of the board of directors. The options vest over periods between zero and four years and have an exercise price of between $ 8.50 and $ 125.60 per share. There were no stock option grants in 2021. The following table summarizes the Company’s stock option activity during the year ended December 31, 2022: SCHEDULE OF STOCK OPTION ACTIVITY Weighted average Options Exercise price Remaining contractual life Intrinsic value Outstanding at December 31, 2021 222,191 $ 48.00 6.00 $ 10,207,306 Granted 114,550 77.30 8.34 - Exercised - - - - Expired / Forfeited ( 20,493 ) 43.31 - - Outstanding at December 31, 2022 316,248 58.96 6.53 - Exercisable at December 31, 2022 279,306 61.57 6.19 - Vested and expected to vest 316,248 58.96 6.53 - 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 December 31, 2022 Exercise price $ 8.5 - 125.60 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 comparable publicly traded companies within the Company’s industry over a period approximately equal to the expected term. The comparable companies were utilized as the Company’s stock does not have sufficient historical trading activity. ● 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. F- 21 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements The weighted-average grant date fair value of options granted during the year ended December 31, 2022 was $ 19.24 . There were no options granted during the year ended December 31, 2021. As of December 31, 2022, the Company had an aggregate of $ 361,863 of unrecognized share-based compensation cost, which is expected to be recognized over the weighted average period of 1.61 years. Restricted Stock Units The following table summarizes the Company’s restricted stock units activity during the year ended December 31, 2022: SCHEDULE OF RESTRICTED STOCK UNITS Restricted Stock Units Weighted average fair value Outstanding at December 31, 2021 - $ - Granted 63,867 17.93 Released ( 41,867 ) 24.50 Cancelled ( 10,000 ) - Outstanding at December 31, 2022 12,000 $ 9.95 The remaining awards outstanding are subject to time-based vesting conditions and are scheduled to vest by December 2023. The estimated fair value of each of the Company’s restricted stock unit awards 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 December 31, 2022 Awards outstanding under the 2021 Omnibus Incentive Plan 328,248 Awards available for future grant under 2021 Omnibus Incentive Plan 54,588 2022 Notes outstanding 1,946,792 Warrants outstanding 8,027,931 Total shares of common stock reserved for future issuance 10,357,559 NOTE 10 - INCOME TAXES Loss before provision for income taxes consisted of the following: SCHEDULE OF INCOME TAXES BENEFIT Year ending December 31, 2022 2021 United States $ ( 24,207,685 ) $ ( 29,145,901 ) The federal and state income tax provision (benefit), included in general and administrative expenses in the Consolidated Statement of Operations, is summarized as follows: SCHEDULE OF FEDERAL AND STATE INCOME TAX PROVISION (BENEFIT) Year ending December 31, 2022 2021 Current state provision - $ 1,600 F- 22 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements The effective tax rate of the Company’s provision (benefit) for income taxes differs from the federal statutory rate as follows: SCHEDULE OF FEDERAL INCOME TAX RATE RECONCILIATION Year ending December 31, 2022 2021 Income (benefit) taxes at statutory rates ( 5,083,614 ) ( 6,120,640 ) State income tax, net of federal benefit ( 175,164 ) ( 131,962 ) Warrants and convertible debt ( 234,214 ) 1,620,341 Nondeductible executive compensation - 480,248 Stock based compensation 303,499 ( 278,940 ) Share subscription facility transaction costs 20,335 2,664,850 Research and development tax credits ( 1,028,988 ) ( 501,451 ) Change in tax rates 54,263 371,784 Other ( 78,227 ) ( 139,213 ) Change in valuation allowance 6,222,110 2,034,983 Total - - Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards. The Company’s deferred tax assets were comprised of the following: SCHEDULE OF DEFERRED TAX ASSETS As of December 31, 2022 2021 Deferred tax assets: Net operating loss tax carryforwards $ 26,726,066 $ 25,068,127 Tax credits 4,164,187 3,164,799 Capitalized research costs 3,729,483 - Stock-based compensation 1,173,158 915,675 Other 265,677 687,422 Deferred Tax Assets, Gross 36,058,571 29,836,023 Valuation allowance ( 36,052,644 ) ( 29,830,534 ) Total deferred tax assets 5,927 5,489 Deferred tax liabilities: Convertible notes: embedded derivatives - - Other ( 5,927 ) ( 5,489 ) Total deferred tax liabilities ( 5,927 ) ( 5,489 ) Net deferred tax assets $ - $ - As of December 31, 2022, the Company had federal and California net operating loss (NOL) carryforwards of $ 102.9 million and $ 73.2 million, respectively, net of the NOLs that will expire due to Internal Revenue Code (IRC) Section 382 limitations. The federal net operating losses generated in 2018 and after of $ 20.5 million will carryforward indefinitely and be available to offset up to 80% of future taxable income each year. The federal net operating losses generated prior to 2018 of $ 82.4 million will begin to expire in 2026 unless previously utilized. The California NOL carryforwards will begin to expire in 2028, unless previously utilized. F- 23 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements In addition, as of December 31, 2022, the Company had federal and state research and development (R&D) tax credit carryforwards of $ 4.2 million and $ 1.7 million, respectively. The federal tax credit carryforwards will begin to expire in 2024 unless previously utilized. The California research tax credits do not expire. Pursuant to IRC Sections 382 and 383, annual use of the Company’s NOL and R&D credit carryforwards may be limited in the event that a cumulative change in ownership of more than 50% occurs within a three-year period. Although the Company has not completed an IRC Section 382/383 analysis regarding the limitation of NOL and R&D credit carryforwards as of December 31, 2022, the Company estimates that approximately $ 1.5 million of tax benefits related to NOL and R&D carryforwards acquired in 2015 will expire unused. Accordingly, the related NOL and R&D credit carryforwards have been removed from deferred tax assets accompanied by a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, limitations created by current and future ownership changes, if any, related to the Company’s operations in the United States will not impact its effective tax rate. Any additional ownership changes may further limit the ability to use the NOL and R&D credit carryforwards. The following table summarizes the activity related to the Company’s unrecognized tax benefits: SUMMARY OF INCOME TAX CONTINGENCIES Year ending December 31, 2022 2021 Balance at beginning of year 1,135,179 968,445 Increases related to current year tax positions 341,108 171,977 Decreases related to prior year tax positions ( 48,026 ) ( 5,243 ) Balance at end of year 1,428,261 1,135,179 As of December 31, 2022 and 2021, the Company had unrecognized tax benefits of $ 1.4 million and $ 1.1 million, respectively. Due to the existence of the valuation allowance, none of the unrecognized tax benefits would affect the effective tax rate. The Company’s policy is to recognize interest and penalties from uncertain tax positions in income tax expense. The Company did not record any interest or penalties for the years ended December 31, 2022 or 2021 and had no accrued interest on the consolidated balance sheets as of December 31, 2022 or 2021. The Company does not anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. With few exceptions, the Company is no longer subject to United States federal income tax examinations for years before 2019 and state and local income tax examinations before 2018. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the NOL carryforward amount. The Company is not currently under examination by the Internal Revenue Service or any state or local tax authority. F- 24 Ensysce Biosciences, Inc. Notes to the Consolidated Financial Statements NOTE 11 - RELATED PARTIES The Company paid cash compensation during the year ended December 31, 2022 and 2021 of $ 0 and $ 30,909 , respectively, to the Chief Executive Officer through a separate operating company with which the Chief Executive Officer is affiliated. As of December 31, 2022 and 2021, the Company owed $ 0 and $ 12,989 , respectively, in accounts payable to the separate operating company. The Company issued a series of convertible notes to the Chairman of the Board as described in Note 7, which totaled $ 2.5 million as of December 31, 2020. All outstanding notes and accrued interest converted into common stock upon the closing of the Business Combination on June 30, 2021. In July 2022, the Chief Executive Officer and a Board member transferred 46,062 shares of registered common stock to GYBL to settle $ 0.8 million of Company obligations related to the GEM Agreement (Note 2). In October 2022, 46,062 shares of unregistered and restricted common stock were subsequently issued by the Company to the related parties as reimbursement and recognized under the consolidated statement of changes in stockholders’ deficit. On December 9, 2022, the Company completed a public offering for the sale of 2.9 million shares of common stock at $ 1.40 per share and issued 6.6 million warrants with an exercise price of $ 1.40 per share that expire five years following the date of issuance. A Board member purchased 357,143 shares of common stock and was issued 714,286 warrants in the public offering. NOTE 12 - SUBSEQUENT EVENTS On January 3, 2023, the Company issued 522,094 shares to satisfy the remaining $ 400,000 commitment fee payable to GYBL. On January 12, 2023, the Company entered into a Letter Agreement to reduce the conversion price for the remaining balance of the Company’s outstanding 2022 Notes from $ 2.006 to $ 0.7512 for the period from January 12, 2023 until May 12, 2023. In the first quarter of 2023, the Company issued 4.9 million shares of common stock in repayment of $ 3.1 million of the 2022 Notes, as discussed in Note 7. The Company also paid cash of $ 0.4 million in repayment of the 2022 Notes. As of the date of issuance of these financial statements, cash true-up payments totaling $ 0.6 million for conversions below the adjusted price are due to be paid within 120 days from January 12, 2023 in accordance with the Letter Agreement. On January 31, 2023, the Board of Directors declared a dividend of 0.001 of a share of Series A Preferred Stock, par value $0.0001 per share, for each outstanding share of the Company’s common stock to stockholders of record on February 13, 2023. Each full share of the Series A Preferred Stock entitles holders to 1,000,000 votes per share with respect to the reverse stock split proposal and the adjournment proposal at the Company’s special meeting of stockholders on March 23, 2023. The Series A Preferred Stock has no dividend rights and is subject to full redemption following the effectiveness of a reverse stock split. The Series A Preferred Stock was registered through a Certificate of Designation filed with the State of Delaware on February 1, 2023. On February 2, 2023, the Company agreed to issue and sell in a registered direct offering an aggregate of 3,571,431 shares of common stock of the Company at an offering price of $ 0.84 per share, for gross proceeds of approximately $ 3.0 million before the deduction of placement agent fees and offering expenses. The closing of the offering occurred on February 6, 2023 . Concurrent with the offering, the Company issued to the purchasers, for each share of common stock purchased in the offering, a common warrant to purchase a share of common stock. The common warrants are exercisable immediately upon issuance and terminate five and one-half years following issuance. The common warrants have an exercise price of $ 0.715 per share and are exercisable to purchase an aggregate of up to 3,571,431 shares of common stock. The Company also issued warrants to the placement agent to purchase up to 250,000 shares of common stock at an exercise price equal to $ 1.05 per share and are exercisable for five years from the commencement of sales in the offering. On March 23, 2023, at a special meeting of stockholders, the Company’s stockholders approved a proposal to authorize the Company’s Board of Directors to complete a reverse stock split at a ratio of not less than one-for-five and not more than one-for-twelve. F- 25 Exhibit Index No. Description of Exhibit 2.1† Agreement and Plan of Merger, dated January 31, 2021, by and among Leisure Acquisition Corp., Ensysce Biosciences, Inc. and EB Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 filed with the registrant’s Registration Statement on Form S-4 (File No.333-254279) initially filed on March 15, 2021). 3.1(a) Third Amended and Restated Certificate of Incorporation of Ensysce Biosciences, Inc. (incorporated by reference to Exhibit 3.1 filed with the registrant’s Current Report on Form 8-K on July 7, 2021). 3.1(b) Certificate of amendment to Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1(b) filed with the registrant’s Registration Statement on Form S-1 (File No. 333-268038) on October 28, 2022) 3.1(c) Certificate of Second Amendment to Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 filed with the registrant’s Current Report on Form 8-K (File No. 001-38306) on October 27, 2022) 3.1(d) Certificate of Designation of the Series A Preferred Stock of Ensysce Biosciences, Inc., dated February 1, 2023 (incorporated by reference to Exhibit 3.1 to the registrant’s Registration Statement on Form 8-A, filed on February 1, 2023, File No. 000-56516) 3.1(e) Certificate of Amendment to Certificate of Designation of the Series A Preferred Stock of Ensysce Biosciences, Inc., dated February 7, 2023 (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A/A (Amendment No. 1), filed on February 7, 2023, File No. 000-56516) 3.2 Amended and Restated Bylaws of Ensysce Biosciences, Inc. (incorporated by reference to Exhibit 3.2 filed with the registrant’s Current Report on Form 8-K on July 7, 2021). 4.1 Warrant Agreement, dated December 1, 2017, between the Leisure Acquisition Corp. and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 filed with the registrant’s Current Report on Form 8-K on December 5, 2017). 4.2 Investor Rights Agreement between Ensysce Biosciences, Inc. and the Investors listed on the signature pages thereto dated as of May 11, 2018 (incorporated by reference to Exhibit 4.6 filed with the registrant’s Registration Statement on Form S-4 (File No.333-254279) initially filed on March 15, 2021). 4.3 Form of Warrant Certificate issued to previous holders of Private Placement Warrants and other private warrants (incorporated by reference to Exhibit 4.8 filed with the registrant’s Registration Statement on Form S-4 (File No.333-254279) initially filed on March 15, 2021). 4.4 Form of Senior Secured Convertible Promissory Note issued by the Company pursuant to and in accordance with the Securities Purchase Agreement (incorporated by reference to Exhibit 4.6 filed with the registrant’s Current Report on Form 8-K initially filed on September 27, 2021). 4.5 Form of Common Stock Purchase Warrant to be issued by the Company pursuant to and in accordance with the Securities Purchase Agreement (incorporated by reference to Exhibit 4.7 filed with the registrant’s Current Report on Form 8-K initially filed on September 27, 2021). 4.6 Form of Senior Secured Convertible Promissory Note issued by Ensysce Biosciences, Inc. pursuant to and in accordance with a 2022 Securities Purchase Agreement (incorporated by reference to Exhibit 4.6 filed with the registrant’s Current Report on Form 8-K on August 9, 2022). 4.7 Form of Common Stock Purchase Warrant issued by Ensysce Biosciences, Inc. pursuant to and in accordance with a 2022 Securities Purchase Agreement (incorporated by reference to Exhibit 4.7 filed with the registrant’s Current Report on Form 8-K on August 9, 2022). 4.8 Form of warrant delivered by Ensysce Biosciences, Inc. in December 2022 in connection with an underwritten offering (incorporated by reference to Exhibit 4.10 filed with the registrant’s Post-Effective Amendment No. 1 to the registrant’s Registration Statement on Form S-1 filed December 8, 2022). 4.9 Form of pre-funded warrant delivered by Ensysce Biosciences, Inc. in December 2022 in connection with an underwritten offering (incorporated by reference to Exhibit 4.10 filed with the registrant’s Post-Effective Amendment No. 1 to the registrant’s Registration Statement on Form S-1 filed December 8, 2022). 4.10 Form of warrant issued in connection with a private placement conducted concurrently with a public offering (incorporated by reference to Exhibit 4.1 filed with the registrant’s Current Report on Form 8-K on February 7, 2023). 4.11 Form of warrant issued to a placement agent or its designees in connection with a private placement conducted concurrently with a public offering (incorporated by reference to Exhibit 4.2 filed with the registrant’s Current Report on Form 8-K on February 7, 2023). 10.1 Registration Rights Agreement, dated December 1, 2017, among Leisure Acquisition Corp. and certain securityholders (incorporated by reference to Exhibit 10.2 filed with the registrant’s Current Report on Form 8-K on December 5, 2017). 10.2 Warrant Purchase Agreement, dated December 1, 2017, between Leisure Acquisition Corp. and certain security holders (incorporated by reference to Exhibit 10.3 filed with the registrant’s Current Report on Form 8-K on December 5, 2017). 88 10.3(a) Form of Director and Officer Indemnity Agreement (incorporated by reference to Exhibit 10.8 filed with the registrant’s Registration Statement on Form S-1 (File No.333-221330) initially filed on November 3, 2017). 10.3(b) Form of Indemnification Agreement executed by each of the Ensysce directors and executive officers (incorporated by reference to Exhibit 10.6 filed with the registrant’s Form 10-Q initially filed on November 15, 2021). 10.4+ Executive Employment Agreement, by and between the Company and Dr. Lynn Kirkpatrick, dated September 14, 2021 (incorporated by reference to Exhibit 10.44 filed with the registrant’s Amendment Number 1 to its Registration Statement on Form S-1 (File No.333-260478) filed on October 29, 2021). 10.5 Agreement and Plan of Merger by and among the Signature Therapeutics, Inc., Signature Acquisition Corp. and the Company dated December 28, 2015 (incorporated by reference to Exhibit 10.21 filed with the registrant’s Registration Statement on Form S-4 (File No.333-254279) initially filed on March 15, 2021). 10.6+ Executive Employment Agreement, by and between the Company and Geoffrey Birkett, dated August 21, 2021 (incorporated by reference to Exhibit 10.45 filed with the registrant’s Amendment Number 1 to its Registration Statement on Form S-1 (File No.333-260478) filed on October 29, 2021) 10.7+ Employment Agreement between the Company and David Humphrey dated February 11, 2021 (incorporated by reference to Exhibit 10.26 filed with the registrant’s Registration Statement on Form S-4 (File No.333-254279) initially filed on March 15, 2021). 10.8+ Amendment to Offer Letter between the Company and David Humphrey dated February 23, 2021 (incorporated by reference to Exhibit 10.27 filed with the the registrant’s Registration Statement on Form S-4 (File No.333-254279) initially filed on March 15, 2021). 10.9(a)+ Amended and Restated 2021 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.22 filed with the registrant’s Annual Report on Form 10-K filed on March 31, 2022). 10.9(b)+ Amended and Restated 2021 Omnibus Incentive Plan Form of Stock Option Grant Notice and Award Agreement (incorporated by reference to Exhibit 10.22(a) filed with the registrant’s Annual Report on Form 10-K filed on March 31, 2022). 10.10 Share Purchase Agreement between the Company, GEM Global Yield LLC SCS and GEM Yield Bahamas Limited dated as of December 29, 2020, including a Registration Rights Agreement between the same parties and dated as of the same date and form of Warrant to Purchase Common Shares of Ensysce Biosciences, Inc. issued by the Company to GEM Yield Bahamas Limited (incorporated by reference to Exhibit 10.29 filed with the registrant’s Registration Statement on Form S-4 (File No.333-254279) initially filed on March 15, 2021). 10.11† Technology Transfer Agreement by and among the Company, Covistat, Inc., Mucokinetica, Ltd., Roderick Hall and Peter Cole dated August 5, 2020 (incorporated by reference to Exhibit 10.30 filed with the registrant’s Registration Statement on Form S-4 (File No.333-254279) initially filed on March 15, 2021). 10.12 Manufacturing Agreement between Recro Gaineville LLC and the Company dated September 11, 2019 (incorporated by reference to Exhibit 10.35 filed with the registrant’s Registration Statement on Form S-4 (File No.333-254279) initially filed on March 15, 2021). 10.13(a) Form of Exchange Agreement between Leisure Acquisition Corp. and the holders of Private Placement Warrants (incorporated by reference to Exhibit 10.36(a) filed with the registrant’s Registration Statement on Form S-4 (File No.333-254279) initially filed on March 15, 2021). 10.13(b) Form of Exchange Agreement to be entered into by the Company with each of the Sponsors and the Strategic Investor (incorporated by reference to Exhibit 10.36(b) filed with the registrant’s Registration Statement on Form S-4 (File No.333-254279) initially filed on March 15, 2021). 10.14(a)† Securities Purchase Agreement, dated September 24, 2021 by and among the Company and the purchasers signatory thereto (incorporated by reference to Exhibit 10.1 filed with the registrant’s Current Report on Form 8-K initially filed on September 27, 2021). 10.14(b) Registration Rights Agreement, dated September 24, 2021, by and among the Company and the parties signatory thereto (incorporated by reference to Exhibit 10.2 filed with the registrant’s Current Report on Form 8-K initially filed on September 27, 2021). 10.14(c) Subsidiary Guarantee, dated September 24, 2021, by and among the Company and the purchasers signatory thereto (incorporated by reference to Exhibit 10.3 filed with the registrant’s Current Report on Form 8-K initially filed on September 27, 2021). 89 10.14(d)† Security Agreement, dated September 24, 2021, by and among the Company, EBI OpCo, Inc., Covistat, Inc. and the other parties signatory thereto (incorporated by reference to Exhibit 10.4 filed with the registrant’s Current Report on Form 8-K initially filed on September 27, 2021). 10.14(e) Patent Security Agreement, dated September 24, 2021, by and among the Company, EBI OpCo, Inc., Covistat, Inc. and the other parties signatory thereto (incorporated by reference to Exhibit 10.5 filed with the registrant’s Current Report on Form 8-K initially filed on September 27, 2021). 10.14(f) Letter Agreement, dated December 27, 2021, by and among the Company and the parties signatory thereto (incorporated by reference to Exhibit 10.6 filed with the registrant’s Current Report on Form 8-K initially filed on December 27, 2021). 10.14(g) Second Letter Agreement, dated January 16, 2022, by and among the Company and the parties signatory thereto (incorporated by reference to Exhibit 10.7 filed with the registrant’s Current Report on Form 8-K initially filed on January 18, 2022). 10.15(a) Securities Purchase Agreement, dated June 30, 2022, by and among the Company and the purchasers signatory thereto (incorporated by reference to Exhibit 10.1 filed with the registrant’s Current Report on Form 8-K on July 6, 2022). 10.15(b) Registration Rights Agreement, dated June 30, 2022, by and among the Company and the parties signatory thereto (incorporated by reference to Exhibit 10.2 filed with the registrant’s Current Report on Form 8-K on July 6, 2022). 10.15(c) Subsidiary Guarantee, dated June 30, 2022, by and among the Company and the purchasers signatory thereto (incorporated by reference to Exhibit 10.3 filed with the registrant’s Current Report on Form 8-K on July 6, 2022). 10.15(d) Security Agreement, dated June 30, 2022, by and among the Company, EBI OpCo, Inc., Covistat, Inc. and the other parties signatory thereto (incorporated by reference to Exhibit 10.4 filed with the registrant’s Current Report on Form 8-K on July 6, 2022). 10.15(e) Patent Security Agreement, dated June 30, 2022, by and among the Company, EBI OpCo, Inc., Covistat, Inc. and the other parties signatory thereto (incorporated by reference to Exhibit 10.5 filed with the registrant’s Current Report on Form 8-K on July 6, 2022). 10.15(f) Letter Agreement, dated January 12, 2023, by and among the Company and the parties signatory thereto (incorporated by reference to Exhibit 10.6 filed with the registrant’s Current Report on Form 8-K on January 13, 2023). 14* Company’s Code of Business Conduct 21.1 List of Subsidiaries (incorporated by reference to Exhibit 21 filed with the Registration Statement on Form S-1 (333-268038) filed on October 28, 2022) 23.1* Consent of Mayer Hoffman McCann P.C. 31.1*++ Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2*++ Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1*++ Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2*++ Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (101) Interactive Data File (104) Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) * Filed herewith. † Certain schedules (or similar attachments) to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5) or 601(b)(2), as applicable. The registrant agrees to furnish supplementally a copy of all omitted schedules to the Securities and Exchange Commission upon its request. + Denotes compensatory plans or arrangements or management contracts. ++ This certificate accompanies this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Ensysce for purposes of Section 18 or any other provisions of the Exchange Act. Item 16. Form 10-K Summary. Not applicable. 90 SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in San Diego, State of California, on March 30, 2023. ENSYSCE BIOSCIENCES, INC. By: /s/ Dr. Lynn Kirkpatrick Name: Dr. Lynn Kirkpatrick Title: President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on March 30, 2023. Name Title By: /s/ Dr. Lynn Kirkpatrick President, Chief Executive Officer and Director Dr. Lynn Kirkpatrick (Principal Executive Officer) By: /s/ David Humphrey Chief Financial Officer, Secretary and Treasurer David Humphrey (Principal Financial and Accounting Officer) By: /s/ Andrew Benton Director Andrew Benton By: /s/ William Chang Director William Chang By: /s/ Bob Gower Director and Chairman of the Board Bob Gower By: /s/ Adam Levin Director Adam Levin By: /s/ Steve Martin Director Steve Martin By: /s/ Lee Rauch Director Lee Rauch By: /s/ Curtis Rosebraugh Director Curtis Rosebraugh 91