Lexaria Bioscience Corp. 10-Q

Item 1. Financial Statements LEXARIA BIOSCIENCE CORP. CONSOLIDATED BALANCE SHEETS (Expressed in U.S. Dollars) November 30, August 31, 2022 2022 ASSETS (Unaudited) (Audited) Current Cash $ 4,533,063 $ 5,813,218 Marketable securities 269,707 347,335 Accounts receivable 286,322 201,784 Inventory 9,936 38,418 Prepaid expenses and deposit 260,342 576,761 Total Current Assets 5,359,370 6,977,516 Non-current assets, net Right of use assets 42,340 52,444 Intellectual property 500,549 488,462 Property & equipment 311,221 315,505 Total Non-current Assets 854,110 856,411 TOTAL ASSETS $ 6,213,480 $ 7,833,927 LIABILITIES Current Accounts payable and accrued liabilities $ 241,891 $ 151,449 Lease payable 39,629 42,587 Total Current Liabilities 281,520 194,036 Long Term Lease payable - 7,401 Total Long Term Liabilities - 7,401 TOTAL LIABILITIES 281,520 201,437 STOCKHOLDERS' EQUITY Share Capital Authorized: 220,000,000 common voting shares with a par value of $ 0.001 per share Issued and outstanding: 5,950,998 common shares at November 30, 2022 and at August 31, 2022 5,951 5,951 Additional paid-in capital 47,110,257 47,041,481 Deficit ( 40,854,472 ) ( 39,098,528 ) Equity attributable to shareholders of the Company 6,261,736 7,948,904 Non-controlling Interest ( 329,776 ) ( 316,414 ) Total Stockholders' Equity 5,931,960 7,632,490 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,213,480 $ 7,833,927 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 3 of 28 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (Expressed in U.S. Dollars, except number of shares) THREE MONTHS ENDED November 30, 2022 2021 (Unaudited) Revenue $ 101,476 $ 13,880 Cost of Goods Sold 15,795 5,570 Gross profit 85,681 8,310 Expenses Research and development 829,489 458,709 Office and administration 1,025,498 1,553,083 1,854,987 2,011,792 Net loss ( 1,769,306 ) ( 2,003,482 ) Net loss for the period $ ( 1,769,306 ) $ ( 2,003,482 ) Net loss attributable to: Common shareholders $ ( 1,755,944 ) $ ( 1,993,157 ) Non-controlling interest $ ( 13,362 ) $ ( 10,325 ) Basic and diluted loss per share $ ( 0.30 ) $ ( 0.35 ) Weighted average number of common shares outstanding Basic and diluted 5,950,998 5,726,699 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 4 of 28 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in U.S. Dollars) THREE MONTHS ENDED November 30, 2022 2021 (Unaudited) Cash flows used in operating activities Net loss $ ( 1,769,306 ) $ ( 2,003,482 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation 68,776 408,544 Depreciation and amortization 24,730 27,930 Noncash right-of-use lease expense 10,104 9,385 Unrealized loss on marketable securities 77,628 340,417 Unrealized foreign exchange - ( 109 ) Lease accretion 845 1,562 Change in operating assets and liabilities Accounts receivable ( 84,538 ) ( 119,111 ) Inventory 30,791 2,914 Prepaid expenses and deposits 316,419 82,030 Accounts payable and accrued liabilities 90,442 88,819 Due to related parties - ( 5,223 ) Net cash used in by operating activities $ ( 1,234,109 ) $ ( 1,166,324 ) Cash flows used in investing activities Purchase of equipment ( 20,500 ) ( 42,375 ) Intellectual property ( 14,342 ) ( 15,840 ) Net cash used in investing activities $ ( 34,842 ) $ ( 58,215 ) Cash flows from financing activities Lease Payments ( 11,204 ) ( 10,987 ) Net cash used in financing activities $ ( 11,204 ) $ ( 10,987 ) Net change in cash for the period ( 1,280,155 ) ( 1,235,526 ) Cash at beginning of period 5,813,218 10,917,797 Cash at end of period $ 4,533,063 $ 9,682,271 Supplemental information of cash flows: Income taxes paid in cash $ - $ - The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 5 of 28 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Expressed in U.S. Dollars) ADDITIONAL TOTAL COMMON STOCK PAID-IN STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT NCI EQUITY $ $ $ $ $ Balance August 31, 2021 5,726,699 5,727 45,089,114 ( 31,829,204 ) ( 202,085 ) 13,063,552 Stock based compensation - - 408,544 - - 408,544 Net loss - - - ( 1,993,157 ) - ( 1,993,157 ) Non-controlling interest - - - - ( 10,325 ) ( 10,325 ) Balance November 30, 2021 5,726,699 5,727 45,497,658 ( 33,822,361 ) ( 212,410 ) 11,468,614 Balance August 31, 2022 5,950,998 5,951 47,041,481 ( 39,098,528 ) ( 316,414 ) 7,632,490 Stock based compensation - - 68,776 - - 68,776 Net loss - - - ( 1,755,944 ) - ( 1,755,944 ) Non-controlling interest - - - - ( 13,362 ) ( 13,362 ) Balance November 30, 2022 5,950,998 5,951 47,110,257 ( 40,854,472 ) ( 329,776 ) 5,931,960 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 6 of 28 Table of Contents LEXARIA BIOSCIENCE CORP. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS November 30, 2022 (Expressed in U.S. Dollars) 1. Nature of Business Lexaria Bioscience Corp. (“Lexaria”, “we”, “our” or the “Company”) is a biotechnology company pursuing the enhancement of the bioavailability of a diverse and broad range of active pharmaceutical ingredients (“API”) using our proprietary DehydraTECH drug delivery technology. Revenues are generated from licensing contracts for the Company’s patented DehydraTECH technology based on the terms of use and defined geographic and licensing arrangements. We derive income from our third party contracted manufacturing of B2B DehydraTECH enhanced products made to customer specifications that are sold online and in-store in the US and Canada. We also perform contract services in R&D for customer specific formulations that are used in comparison testing to customers’ existing products. Going Concern Consideration The Company’s consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”) applicable to a going concern which assumes the Company will have sufficient funds to pay it operational, research and development and capital expenditures for a period of at least 12 months from the date this Report. Since inception, the Company has incurred significant operating and net losses. The losses attributable to shareholders were $ 7.4 m, $ 4.2 m and $ 4.1 m for the years ended August 31, 2022, 2021 and 2020, respectively. As of November 30, 2022, we had an accumulated deficit of $ 40.9 m. We expect to continue to incur significant operational expenses and net losses in the upcoming 12 months. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the stage and complexity of our R&D studies and corporate expenditures, additional revenues received from the licensing of our technology, if any, and the receipt of payments under any current or future collaborations we may enter into. The recurring losses from operations and negative cash flows from operations raise substantial doubt about the Company’s ability to continue as a going concern. As of November 30, 2022, the Company had cash of approximately $4.5m and carries no significant debt other than amounts payable in the short term. Also, on August 12, 2022, we entered into a sales agreement with Maxim Group LLC, (“Maxim”), pursuant to which we may offer and sell shares of our common stock with an aggregate offering price of up to $5,925,000 under the At-The-Market (“ATM”) Offering. The sales agreement provides that Maxim will be entitled to a sales commission equal to 3.0% of the gross sales price per share of all shares sold under the ATM Offering. As of January 17, 2023 we have not sold any shares under the ATM Offering. Based on our existing working capital and access to an ATM offering, as disclosed above management believes the Company has sufficient working capital to satisfy the Company’s estimated liquidity needs for the next 12 months. Because of the above factors, the Company believes that this alleviates the substantial doubt in connection with the Company's ability to continue as a going concern. However, there is no assurance that management’s plans will be successful due to the current economic climate in the United States and globally. Page 7 of 28 Table of Contents Impacts of COVID-19 Pandemic The emergence of the COVID-19 pandemic in 2020 continues to present uncertainty and unforecastable new risks to the Company and its business plans. As of November 30, 2022, there has been no material impact on the Company’s financial position as a direct result of the pandemic. However, the Company has experienced some supply chain disruptions and shortages in the timely procurement of ingredients and supplies used in both our R&D activities and B2B production. Management views this situation as transitory but cannot predict the length of time it may take for these disruptions to dissipate or if there will be a significant economic effect on the Company’s operations. In the interim, it may cause delays in carrying out our research studies and in our production schedules. There may be further actions we must take that alter our operations, including those that may be required by federal, state, provincial, or local authorities, or that we determine are in the best interests of our employees and other third parties with which we do business. We do not know when it will become practical to relax or eliminate some or all these measures entirely. The economic effect of a prolonged pandemic is difficult to predict and could result in material financial impact in the Company’s future reporting periods. 2. Significant Accounting Policies The significant accounting policies of the Company are consistent with those of our audited financial statements on Form 10-K for the year ended August 31, 2022. 3. Basis of Consolidation These interim consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries; Lexaria CanPharm ULC, Lexaria CanPharm Holdings Corp., PoViva Corp., Lexaria Hemp Corp., Kelowna Management Services Corp., and Lexaria Pharmaceutical Corp., and our 83.33 3% owned subsidiary Lexaria Nicotine LLC with the remaining 16.66 7% owned by Altria Ventures Inc., an indirect wholly owned subsidiary of Altria Group, Inc. All significant intercompany balances and transactions have been eliminated upon consolidation. 4. Basis of Presentation The Company’s unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles (US GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for a full year or any subsequent period. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated annual financial statements and notes thereto included in our annual report filed on Form 10-K for the year ended August 31, 2022. Page 8 of 28 Table of Contents 5. Recent Accounting Guidance Pronouncements Issued but Not Yet Adopted In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2023. These standards require that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, these standards now require allowances to be recorded instead of reducing the amortized cost of the investment. These standards limit the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. The Company does not currently expect the adoption of these standards to have a material impact on its consolidated financial statements. 6. Estimates and Judgments The preparation of financial statements in conformity with U.S. GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of the Company’s accounting policies require us to make subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. These accounting policies involve critical accounting estimates because they are particularly dependent on estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are made. Although we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably could have been used. Changes in the accounting estimates used by the Company are reasonably likely to occur from time to time, which may have a material effect on the presentation of financial condition and results of operations. The Company reviews these estimates, judgments, and assumptions periodically and reflect the effects of revisions in the period in which they are deemed to be necessary. Although we believe that these estimates are reasonable actual results could differ. In preparing these unaudited interim consolidated financial statements, the significant judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the audited consolidated financial statements for the year ended August 31, 2022. Page 9 of 28 Table of Contents 7. Marketable Securities The components of Marketable Securities were as follows: Cost Basis $ Unrealized Gains $ Unrealized Losses $ Fair Value $ August 31, 2021 1,037,025 16,243 ( 219,427 ) 833,841 Common stock 278,107 118,196 ( 882,809 ) ( 486,506 ) August 31, 2022 1,315,132 134,439 ( 1,102,236 ) 347,335 Common stock - - ( 77,628 ) ( 77,628 ) November 30, 2022 1,315,132 134,439 ( 1,179,864 ) 269,707 Marketable securities represented the common shares of Hill Street Beverage Company Inc. held by Lexaria. Unrealized losses from common stock are due to market price movements. In management’s opinion based on the evaluation of available information at the quarter ended November 30, 2022, unrealized losses represent temporary impairments. 8. Accounts Receivables Accounts receivable at November 30, 2022 and August 31, 2022 consist of the following: November 30, August 31, 2022 2022 $ $ Trade and deposits 137,041 80,374 Territory license fees 100,683 37,248 Sales tax 48,598 84,162 286,322 201,784 9. Inventory Inventory at November 30, 2022 and August 31, 2022 consist of the following: November 30, August 31, 2022 2022 $ $ Raw materials 9,936 38,418 During the three month period ended November 30, 2022, inventory valued at $ 25,243 was expensed to research and development. Page 10 of 28 Table of Contents 10. Prepaid Expenses and Deposits Prepaid expenses consist of the following at November 30, 2022, and August 31, 2022: November 30, August 31, 2022 2022 $ $ Advertising & conferences 74,656 359,863 Legal fees 25,000 25,000 License, filing fees, dues 3,750 15,000 Office & insurance 60,901 80,863 Capital financing 96,035 96,035 260,342 576,761 11. Intellectual Property, net The following is a list of US capitalized patents held by the Company: Issued Patent # Patent Certificate Grant Date Patent Family US 9,474,725 B1 10/25/2016 Food and Beverage Compositions Infused With Lipophilic Active Agents and Methods of Use Thereof US 9,839,612 B2 12/12/2017 US 9,972,680 B2 05/15/2018 US 9,974,739 B2 05/22/2018 US 10,084,044 B2 09/25/2018 US 10,103,225 B2 10/16/2018 US 10,381,440 08/13/2019 US 10,374,036 08/06/2019 US 10,756,180 08/25/2020 US 11,311,559 04/26/2022 Compositions and Methods for Enhanced Delivery of Antiviral Agents A continuity schedule for capitalized patents is presented below: November 30, August 31, 2022 2022 $ $ Balance – beginning 488,462 364,623 Addition 14,342 131,448 Amortization ( 2,255 ) ( 7,609 ) Balance – ending 500,549 488,462 Patents are amortized over their 20 year legal life. Page 11 of 28 Table of Contents 12. Property & Equipment, net Three Months Ended November 30, 2022 Cost Period Amortization Additions Accumulated Amortization Net Balance November 30, 2022 $ $ $ $ $ Leasehold improvements 259,981 ( 13,509 ) - ( 208,195 ) 51,786 Computers 70,781 ( 1,183 ) - ( 62,607 ) 8,174 Furniture fixtures & equipment 31,126 ( 1,604 ) - ( 24,442 ) 6,684 Lab equipment 333,675 ( 8,616 ) 20,500 ( 109,598 ) 244,577 695,563 ( 24,912 ) 20,500 ( 404,842 ) 311,221 Year Ended August 31, 2022 Cost Period Amortization Disposal Accumulated Amortization Net Balance August 31, 2022 $ $ $ $ $ Leasehold improvements 259,981 ( 54,037 ) - ( 194,685 ) 65,296 Computers 63,964 ( 9,874 ) 6,817 ( 61,424 ) 9,357 Furniture fixtures & equipment 31,126 ( 6,417 ) - ( 22,837 ) 8,288 Lab equipment 291,235 ( 31,572 ) 42,375 ( 101,047 ) 232,564 646,306 ( 101,900 ) 49,192 ( 379,993 ) 315,505 During the three-month period ended November 30, 2022, $2,438 of depreciation was included in cost of goods sold. 13. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities at November 30, 2022 and August 31, 2022 consist of the following: November 30, August 31, 2022 2022 $ $ Accounts Payable Trades payable 173,678 57,150 Sales tax payable 11,011 31,303 Accrued Liabilities Trades payable 57,202 62,996 Balance 241,891 151,449 Page 12 of 28 Table of Contents 14. Revenues A breakdown of our revenues by type for the three months ended November 30, 2022 and 2021 are as follows: Three Months Ended November 30, 2022 November 30, 2021 $ $ B2B sales 29,100 7,000 Licensing 63,435 - Other 8,941 6,880 Total 101,476 13,880 During the period ended November 30, 2022, the Company recognized B2B product revenues of $ 29,100 (2021 - $ 7,000 ) that relate to sales of our intermediate products for use by B2B customers in their products. Licensing revenue consist of IP licensing fees for transfer of the DehydraTECH technology in line with definitive agreements and also includes royalty fees. The Company recognized $ 63,435 (2021 - $Nil) in licensing revenue in the same period. 15. Common Shares and Warrants The fair value of share purchase warrants granted was estimated as of the date of the grant by using the Black-Scholes option pricing model. During the quarter ended November 30, 2022, the Company issued no warrants. A continuity schedule for warrants is presented below: Number of Warrants Weighted Average Exercise Price $ Balance August 31, 2022 2,421,983 8.04 Cancelled/expired ( 7,500 ) 24.00 Balance November 30, 2022 2,414,483 7.99 A summary of warrants outstanding as of November 30, 2022, is presented below: # of Warrants Weighted Average Remaining Contractual Life Weighted Average Exercise Price $ 60,798 1.96 - 2 .00 years 36.00 317,190 2.43 years 10.50 116,667 1.38 - 2.29 years 9.00 200,000 1.38 years 7.00 1,719,828 3.13 years 6.58 2,414,483 2.78 years 7.99 Page 13 of 28 Table of Contents 16. Stock Options The Company has established the Equity Incentive Plan whereby the board of directors may, from time to time, grant up to 510,433 stock options to directors, officers, employees, and consultants. Stock options granted must be exercised within five years from the date of grant or such lesser period as determined by the Company’s board of directors. The exercise price of an option is equal to or greater than the closing market price of the Company’s common shares on the day preceding the date of grant. The vesting terms of each grant are set by the board of directors. The Company granted the following options during the quarter ended November 30, 2022: Quantity Exercise Price $ Life (Years) 3,400 3.04 5 41,200 1.96 5 44,600 2.04 5 A continuity schedule for stock options is presented below: Options Weighted Average Exercise Price $ Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value $ Balance August 31, 2021 206,170 8.90 Cancelled/expired ( 3,334 ) 9.60 Granted 222,000 4.21 Balance August 31, 2022 424,836 6.45 3.69 5,175 Granted 44,600 2.04 Balance November 30, 2022 (granted) 469,436 5.35 3.91 46,375 Balance November 30, 2022 (exercisable) 441,963 5.41 3.90 41,200 The fair value of share purchase options granted were estimated as of the date of the grant by using the Black-Scholes option pricing model with the following assumptions: November 30, 2022 Expected volatility 99 %- 105 % Risk-free interest rate 3.30 - 4.12 % Expected life 5 years Dividend yield 0 % Estimated fair value per option $ 1.60 - $ 2.58 Page 14 of 28 Table of Contents 17. Commitments, Significant Contracts and Contingencies Right of Use Assets - Operating Lease The Corporate office and R&D lab space located in Kelowna, British Columbia, Canada is leased until November 15, 2023, with a five-year renewal option. In addition to minimum lease payments, the lease requires us to pay property taxes and operating costs which are subject to annual adjustments. November 30, 2022 August 31, 2022 $ $ Right of use assets - operating leases 52,444 91,041 Amortization ( 10,104 ) ( 38,597 ) Total lease assets 42,340 52,444 Liabilities: 49,989 89,393 Lease payments ( 11,204 ) ( 44,600 ) Interest accretion 844 5,195 Total lease liabilities 39,629 49,988 Operating lease cost 52,444 52,444 Operating cash flows for lease 11,204 44,599 Remaining lease term 0.9 Years 1.17 Years Discount rate 7.25 % 7.25 % Pursuant to the terms of the Company’s lease agreements in effect, the following table summarizes the Company’s maturities of operating lease liabilities as of November 30, 2022: Fiscal 2023 33,611 Fiscal 2024 7,470 Thereafter - Total lease payments 41,081 Less: imputed interest ( 1,452 ) Present value of operating lease liabilities 39,629 Less: current obligations under leases ( 39,629 ) Total - 18. Segment Information The Company’s operations involve the development and usage, including licensing, of its proprietary DehydraTECH Technology. Lexaria is centrally managed and its chief operating decision makers, being the president and the CEO, use the consolidated and other financial information supplemented by revenue information by category of alternative health consumer products and technology licensing to make operational decisions and to assess the performance of the Company. The Company has identified two reportable segments: Intellectual Property and Products. Licensing revenues are significantly concentrated on one licensee. Page 15 of 28 Table of Contents Three Months Ended November 30, 2022 IP Licensing $ B2B $ Corporate $ Consolidated Total $ Revenue 63,435 29,100 8,941 101,476 Cost of goods sold - ( 15,795 ) - ( 15,795 ) Operating expenses ( 707,034 ) ( 10,992 ) ( 1,136,961 ) ( 1,854,987 ) Segment income (loss) ( 643,599 ) 2,313 ( 1,128,020 ) ( 1,769,306 ) Total assets 118,096 75,723 6,019,661 6,213,480 Three Months Ended November 30, 2021 IP Licensing $ Products $ Corporate $ Consolidated Total $ External revenue - 7,000 6,880 13,880 Cost of goods sold - ( 5,570 ) - ( 5,570 ) Operating expenses ( 837,750 ) ( 77,002 ) ( 1,097,040 ) ( 2,011,792 ) Segment loss ( 837,750 ) ( 75,572 ) ( 1,090,160 ) ( 2,003,482 ) Total assets 724,665 116,060 10,905,217 11,745,942 Capital Asset by Region Cost US Addition US Net Balance US Cost Canada Net Balance Canada Total Net Balance Three Months Ended November 30, 2022 $ $ $ $ $ $ Leasehold Improvements - - - 259,981 51,786 51,786 Computers - - - 70,781 8,174 8,174 Furniture & Fixtures - - - 31,126 6,684 6,684 Lab Equipment 140,487 20,500 116,553 193,185 128,024 244,577 140,487 20,500 116,553 555,073 194,668 311,221 Capital Asset by Region Cost US Addition US Net Balance US Cost Canada Addition Canada Net Balance Canada Total Net Balance Year Ended August 31, 2022 $ $ $ $ $ $ $ Leasehold Improvements - - - 259,981 - 65,296 65,296 Computers - - - 63,964 6,817 9,357 9,357 Furniture & Fixtures - - - 31,126 - 8,288 8,288 Lab Equipment 98,050 42,375 100,031 193,185 - 132,533 232,564 98,050 42,375 100,031 548,256 6,817 215,474 315,505 Page 16 of 28 Table of Contents