| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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. 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 six years 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. As of September 30, 2023 and December 31, 2022, the Company
did not have any bifurcated embedded derivatives in the Company’s consolidated balance sheets. Fair
Value Measurement ASC
820, Fair Value Measurements The
accounting guidance classifies fair value measurements in one of the following three categories for disclosure purposes:
Level
1: Quoted
prices in active markets for identical assets or liabilities.
Level
2: Inputs
other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level
3: Unobservable
inputs which are supported by little, or no market activity and values determined using pricing models, discounted cash flow methodologies,
or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The
Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at
which to classify them for each reporting period. This determination requires significant judgments to be made by the Company. As
of September 30, 2023 and December 31, 2022, 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 and 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 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 accounted for under ASC 480 – Distinguishing Liabilities from Equity, Warrants The
Company issued liability-classified warrants in connection with the issuance of the 2021 and 2022 Notes. The warrants were liability-classified
due to certain cash settlement features and are 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 at each balance sheet date. 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 liabilities measured and recorded at fair value on the Company’s consolidated balance sheets as of September
30, 2023, and December 31, 2022. SCHEDULE
OF ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
Total Level
1 Level
2 Level
3
September
30, 2023
Total Level
1 Level
2 Level
3
Fair
value of convertible note $ 30,473 $ - $ - $ 30,473
Liability
classified warrants $ 30,473 $ - $ - $ 30,473
Total $ 30,473 $ - $ - $ 30,473
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 The
following table summarizes the change in fair value of the Company’s Level 3 assets and liabilities for the nine months
ended September 30, 2023: SCHEDULE
OF CHANGE IN FAIR VALUE OF COMPANY’S LEVEL 3
Total Convertible
note Liability classified warrants
Fair value, December 31, 2022 $ 4,513,925 $ 4,203,579 $ 310,346
Conversions (3,056,892 ) (3,056,892 ) -
Cash payments (415,351 ) (415,351 ) -
Cash true-up liability (584,857 ) (584,857 ) -
Change in fair value (426,352 ) (146,479 ) (279,873 )
Fair value, September 30, 2023 $ 30,473 $ - $ 30,473 Federal
Grants In
September 2018, the National Institutes of Health (“NIH”) through the National Institute on Drug Abuse (“NIDA”)
awarded the Company a research and development grant related to the development of its MPAR ® 5.4 3.2 2.2 1.1 5.1 2.1 3.0 2.8 2.8 10.7 In
September 2019, the NIH/NIDA awarded the Company a second research and development grant related to the development of its TAAP/MPAR ®
5.4 The
Company recognizes revenue when costs related to the grants are incurred and assessed as reimbursable. The Company believes this policy
is consistent with the overarching premise in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers The
revenue recognized under the MPAR Grant and OUD Grant: SCHEDULE
OF REVENUE RECOGNIZATION UNDER GRANTS
2023 2022 2023 2022
Three
Months Ended September 30, Nine
Months Ended September 30,
2023 2022 2023 2022
MPAR $ 119,942 $ 206,290 $ 1,038,484 $ 710,761
TAAP/OUD 315,438 73,061 677,004 379,159
Total $ 435,380 $ 279,351 $ 1,715,488 $ 1,089,920 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 sheets. As all amounts are expected to be remitted in a timely
manner, no valuation allowances are recorded. 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. Stock-based compensation costs are recorded in general and administrative expenses and research and development
expenses in the consolidated statements of operations. From
time-to-time equity classified awards may be modified. On the modification date, the Company estimates the fair value of the awards immediately
before and immediately after modification. The incremental increase in fair value is recognized as expense immediately to the extent
the underlying equity awards are vested and over the same remaining amortization schedule as the unvested underlying equity awards. Income
taxes Income
taxes are recorded in accordance with ASC 740, Income Taxes 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. Net
loss per share The
basic net loss per share is calculated by dividing the Company’s net loss attributable to common stockholders by the weighted average
number of common shares outstanding during the period. Basic shares outstanding include the weighted average effect of the Company’s
outstanding pre-funded warrants, the exercise of which requires little or no consideration for the delivery of shares of common stock.
The diluted net loss per share is calculated by dividing the Company’s net loss 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. The
following weighted average shares have been excluded from the calculations of diluted weighted average common shares outstanding because
they would have been anti-dilutive: SCHEDULE
OF WEIGHTED AVERAGE SHARES OF ANTI-DILUTIVE SECURITIES
2023 2022 2023 2022
Three Months
Ended September 30, Nine Months
Ended September 30,
2023 2022 2023 2022
Stock options 26,354 29,249 26,354 27,378
RSUs 63 4,261 63 3,317
Warrants 4,711,236 87,878 2,876,380 87,878
Convertible notes - 267,957 - 89,647
Total 4,737,653 389,345 2,902,797 208,220
Anti-dilutive weighted
average shares 4,737,653 389,345 2,902,797 208,220 Recently
Issued Accounting Pronouncements In
August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Topic 470) to address issues identified
as a result of the complexity with applying GAAP for certain financial instruments with characteristics of liabilities and equity. The
FASB decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock, resulting in
fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Certain types of
convertible instruments will continue to be subject to separation models: (a) those with embedded conversion features that are not clearly
and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from
derivative accounting and (b) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in
capital. For convertible instruments, the contracts primarily affected are those with beneficial conversions or cash conversion features
as the accounting models for those specific features have been removed. For contracts in an entity’s own equity, the contracts
primarily affected are freestanding instruments and embedded features that are accounted for as derivatives due to a failure to meet
the settlement conditions of the derivatives scope exceptions. The FASB simplified the settlement assessment by removing the requirements
to (a) consider whether the contract would be settled in registered shares, (b) to consider whether collateral is required to be posted,
and (c) assess shareholder rights. The FASB also decided to enhance information transparency by making targeted improvements to the disclosures
for convertible instruments and earnings-per-share guidance. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023
and early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. Entities must adopt the guidance
as of the beginning of its annual fiscal year and a modified retrospective or fully retrospective transition approach is permitted. The
Company adopted the standard with an effective date of January 1, 2023 and the adoption did not have a significant impact on the consolidated
financial statements. | 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. 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 six years 0 151 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 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. 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 2022
Notes In
July 2022 the Company issued convertible notes with a face value of $ 8.5 Distinguishing Liabilities from Equity, 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 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 5.4 3.2 2.2 1.1 5.1 2.1 3.0 2.8 2.8 10.7 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 5.4 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 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. 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 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 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. 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 179,925 84,018
Net loss per share attributable to common stockholders, basic and diluted $ (139.42 ) $ (355.72 ) 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 26,302 18,742
RSUs 3,772 -
Warrants 138,485 42,807
Convertible Notes 73,326 2,533
Total 241,885 64,082
Anti-dilutive weighted average shares 241,885 64,082 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. Ensysce
Biosciences, Inc. Notes
to the Consolidated Financial Statements |
