Lexaria Bioscience Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward-Looking Statements This quarterly report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not statements of historical fact may be forward-looking statements. These statements relate to future events or our future financial performance. Any forward-looking statements are based on our present beliefs and assumptions as well as the information currently available to us. In some cases, forward-looking statements are identified by terminology such as “may”, “will”, “should”, “could”, “targets”, “goal”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” set forth in Item 1(A) in our annual report on Form 10-K, as filed with the Securities and Exchange Commission on November 25, 2022, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We caution you not to place undue reliance on any forward-looking statements as they speak only as of the date on which such statements were made, and we undertake no obligation to update any forward-looking statement or to reflect the occurrence of an unanticipated event. New factors may emerge and it is not possible to predict all factors that may affect our business and prospects. Further, management cannot assess the impact of each factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Our unaudited interim consolidated financial statements are stated in United States Dollars (“US$”) and are prepared in accordance with United States Generally Accepted Accounting Principles (“US GAAP”). The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. In this quarterly report, unless otherwise specified, all dollar amounts are expressed in US dollars. All references to “common shares” and “shares” refer to the common shares in our capital stock, unless otherwise indicated. The terms “Lexaria” “we”, “us”, “our” and “Company” mean the Company and/or our subsidiaries, unless otherwise indicated. The following discussion should be read in conjunction with our condensed financial statements and accompanying notes in this quarterly report on Form 10-Q, and our audited financial statements with notes in our annual report on Form 10-K for the year ended August 31, 2022. Page 18 of 30 Table of Contents Overview Lexaria’s patented DehydraTECH technology improves the delivery of bioactive compounds while promoting healthy ingestion methods, lowers overall dosing, and is highly effective in active molecule delivery available in a range of formats from oral ingestible to oral buccal/sublingual to topical products. DehydraTECH substantially improves the rapidity and quantity of Active Pharmaceutical Ingredients (“API”) transport to the blood plasma and brain using the body’s natural process for distributing fatty acids. Applications of this technology extends across many categories beyond the primary pharmaceutical focus of the Company from foods and beverages to cosmetic products and nutraceuticals. Our mission is to obtain FDA approval for a DehydraTECH – CBD drug for use on hypertension. Lexaria operates a federally licensed, in-house research laboratory and continues to build upon our intellectual property portfolio with 28 patents granted internationally and roughly 50 patents pending worldwide. Lexaria is advancing several R&D activities in both preclinical and future clinical programs. Our primary focus during the current year is on our investigations of CBD for the reduction of hypertension. In fiscal 2022 we completed three human studies on hypertension with the results of our fourth and largest hypertension study to date continuing to be released throughout fiscal 2023. The Company continues to engage in small R&D projects and B2B formulation for third parties who are evaluating our technology for use in their products. Patents Our current patent portfolio includes patent family applications or grants pertaining to our method of improving bioavailability and taste, and the use of DehydraTECH as a delivery platform for a wide variety of APIs including, but not limited to, fat soluble vitamins; anti-viral drugs; phosphodiesterase inhibitors; human hormones; regulated cannabinoids, and nicotine and its analogs. We continue to pursue patent protection in more than 40 countries around the world as vigorously as we are able, since the successful granting of more of those applications could lead to material increases in shareholder value. The Company currently has over 50 patent applications pending worldwide . The Company has patents issued in the United States, Australia, Europe, India, Mexico, and Japan. On December 29, 2022, Lexaria was granted its first patent in Canada, marking our 28 th patent to date as listed below: Issued Patent # Patent Family US 9,474,725 B1 #1 Food and Beverage Compositions Infused With Lipophilic Active Agents and Methods of Use Thereof US 9,839,612 B2 US 9,972,680 B2 US 9,974,739 B2 US 10,084,044 B2 US 10,103,225 B2 US 10,381,440 US 10,374,036 US 10,756,180 AU 2015274698 AU 2017203054 AU 2018202562 AU 2018202583 AU 2018202584 AU 2018220067 EP 3164141 JP 6920197 AU 2016367036 #2 Methods for Formulating Orally Ingestible Compositions Comprising Lipophilic Active Agents JP 6963507 MX 388 203 B AU 2016367037 #3 Stable Ready-to-Drink Beverage Compositions Comprising Lipophilic Active Agents IN 365864 JP 6917310 MX 390001 CDN 3093414 #6 Transdermal and/or Dermal Delivery of Lipophilic Active Agents JP 7112510 #7 Lipophilic Active Agent Infused Compositions with Reduced Food Effect AU 2019256805 #8 Compositions Infused with Nicotine Compounds and Methods of Use Thereof US 11,311,559 #18 Compositions and Methods for Enhanced Delivery of Antiviral Agents Page 19 of 30 Table of Contents Research & Development Lexaria is advancing several R&D activities in both preclinical and clinical programs. Currently, our primary research program is the investigation of cannabidiol (CBD) for the reduction of hypertension leading to an application under the FDA for an Investigational New Drug (“IND”). Other programs include nicotine for oral pouches and nicotine replacement therapy, hormones, diabetes, dementia and others. From time to time the Company will engage in contract R&D for third parties who are interested in evaluating DehydraTECH in their products. During the quarter ended February 28, 2023, Lexaria incurred $696,178 (Feb 2022- $275,686) in R&D expenditures. Specific R&D programs are in ongoing development and align to our financial ability to undertake each research phase for each API. Due to our expanding portfolio coverage, we continually examine accelerated timetable options for testing, research, and development of each API. Fiscal 2023 continues to highlight the direction of our research and development programs with confirmatory results from our ongoing programs. We continue to devote an increasing proportion of our resources and focus toward pharmaceutical applications. Investigational New Drug The FDA provided Lexaria with a positive written response on August 10, 2022 from our pre-IND meeting regarding DehydraTECH-CBD for the treatment of hypertension. The FDA confirmed that it has agreed with Lexaria’s proposal to pursue a 505(b)(2) new drug application (“NDA”) regulatory pathway for our program. We continue working toward our IND filing which is anticipated to be in late fiscal 2023 or early 2024. We have begun the process of selecting our contract research organization (“CRO”) to perform the IND study which will be a Phase 1(b) study that we are designating HYPER-H23-1. We have begun certain manufacturing work associated with that study in advance of our IND filing and corresponding response from the FDA. Along with our CRO, we will soon begin certain administrative tasks associated with the IND study as we prepare for what we anticipate to be first-in-patient dosing during Q1 of our 2024 fiscal year. HYPER-H21-4 The first results of our hypertension study HYPER-H21-4 were announced on October 27, 2022, with the primary safety and efficacy objectives being met. The study showed, among other things, a sustained drop in blood pressure in normally active hypertensive patients following multiple weeks of oral cannabidiol ("CBD") therapy, using Lexaria's patented DehydraTECH-CBD capsule formulation. Page 20 of 30 Table of Contents On December 21, 2022 further results were released from this multi-week human clinical hypertension study, indicating superior cannabidiol ("CBD") blood absorption levels from our patented DehydraTECH-CBD™ relative to those of published, pharmaceutical-grade CBD industry. On February 21, 2023 the Company announced additional findings demonstrating a potentially novel mechanism of action in reducing blood pressure. These latest results from study HYPER-H21-4 imply that the antihypertensive effects of DehydraTECH-CBD may be explained, at least in part, by its interaction with the sympatho-chromaffin system via catestatin modulation. This suggests a potentially unique mechanistic benefit upon cardiovascular regulation with DehydraTECH-CBD treatment that has not previously been demonstrated, to our knowledge, with testing of CBD for blood pressure reduction. Additional study endpoint analyses as described in the complete study protocol are still underway and any relevant material findings will be reported upon as these findings become available. EPIL-A21-1 In March 2022, Lexaria initiated an animal study to determine if DehydraTECH-CBD evidences superior treatment of seizure activity when compared to Epidiolex. Epidiolex is an FDA-approved oral solution prescription CBD available to children 1 year of age and older to treat seizures associated with Lennox-Gastaut syndrome, Dravet syndrome or tuberous sclerosis complex. On November 29, 2022, Lexaria announced findings from the study indicating its patented DehydraTECH-CBD has demonstrated performance enhancements compared to one of the world's leading anti-seizure medications, Epidiolex®, generally at a lower DehydraTECH-CBD dose. Additional work has been completed in study program EPIL-A21-1 with the final study designed to establish an ED50 (i.e., the dose required to achieve seizure inhibition in 50% of the animals tested) for DehydraTECH-CBD in this animal model, where ED50 determination is a common performance metric in preclinical animal studies for developmental therapeutics. This ED50 study is designed to corroborate the experimental findings to date. Final results are expected to be released in the third quarter of fiscal 2023. DEM-A22-1 On November 8, 2022 commencement of animal study program DEM-A22-1 was announced. The study is designed to determine whether DehydraTECH-CBD may offer therapeutic utility against diabetes and dementia respectively. We are expecting the results of this study program in Q4 of fiscal 2023. DIAB-A22-1 We announced the commencement of animal study program DIAB-A22-1 on November 8, 2022. On March 2, 2023 the Company announced that its diabetes animal model study has completed and produced at least three positive outcomes including weight loss in obese diabetic-conditioned animals, together with improved triglyceride and cholesterol levels. Additional study work is nearing completion with results expected in fourth fiscal quarter of 2023. Page 21 of 30 Table of Contents NIC-H22-1 On November 1, 2022, the Company announced that independent review board approval had been received for human clinical nicotine study NIC-H22-1. The study is a 36-person human pharmacokinetic randomized, double blinded, cross-over study conducted in current cigarette smokers, wherein each person will visit the laboratory to be dosed three times over a period of weeks. During each visit only one oral nicotine pouch will be administered and evaluated: either DehydraTECH-nicotine; On! brand manufactured by Altria; or Zyn brand manufactured by Swedish Match. The study had earlier faced certain time extensions due to manufacturing and logistics issues which have since been resolved. Dosing continued during the second and into the third fiscal quarter of 2023. At the date of this report, the study is nearing completion. Results are anticipated to be released in the fourth quarter of 2023. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders. Critical Accounting Estimates Our consolidated financial statements and accompanying notes are prepared in accordance with US GAAP. These accounting principles require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses during the periods reported. Based on information available to management at the time, these estimates, judgments and assumptions are considered reasonable. We believe that understanding the basis and nature of the estimates, judgments and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financials. We considered the impact of the COVID-19 pandemic on the assumptions and estimates used and determined that there were no material adverse impacts on the financial statements for the period ending February 28, 2023. For a discussion of our critical accounting estimates, please read Note 4. Estimates and Judgements as found in the financial statements in our Annual Report on Form 10-K for the year ended August 31, 2022. There have been no material changes to the critical accounting estimates as previously disclosed in our 2022 Form 10-K. Page 22 of 30 Table of Contents Funding Requirements We anticipate that our expenditures will increase in connection with our ongoing R&D program, specifically with respect to our animal and human clinical trials of our DehydraTECH formulations for the purposes of treating hypertension, dementia and diabetes. As we move forward with our IND application with the FDA, we anticipate that our expenditures will further increase and accordingly, we expect to incur increased operating losses and negative cash flows for the foreseeable future. Through February 28, 2023, we have funded our operations primarily through the proceeds from the sale of common stock. The Company has consistently incurred recurring losses and negative cash flows from operations, including net losses of $3,079,944 and $3,452,155 for the six months ended February 28, 2023 and 2022, respectively. The continuation of Lexaria as a going concern depends on raising additional capital and/or attaining and maintaining profitable operations. The accompanying financial statements do not include any adjustment relating to the recovery and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should our Company discontinue operations. The recurring losses from operations and net capital deficiency do raise doubt about the Company’s ability to continue as a going concern within one year following the date that these consolidated financial statements are issued. Page 23 of 30 Table of Contents On August 12, 2022, we entered into an At-The-Market (“ATM”) Offering equity distribution 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. The equity distribution agreement entitles Maxim to a sales commission equal to 3.0% of the gross sales price per share of all shares sold under the ATM. As of the issuance date of these consolidated interim financial statements, we expect our approximately $3.3m cash at February 28, 2023, along with funds anticipated from both our ATM and brokered financing will be sufficient to fund our R&D programs, operating expenses and capital expenditure requirements through the forthcoming 12 months from the issuance date of this report. Results of Operations for the Period Ended February 28, 2023 and 2022 Our net loss for the six months ended for the respective items are summarized as follows: Six Months Ended February 28, 2023 2022 Change Gross profit $ 117,738 $ 32,573 $ 85,165 Expenses Research and development 1,525,667 734,395 791,272 Consulting fees & salaries 627,475 1,174,863 (547,388 ) Legal and professional 197,650 365,657 (168,007 ) Other general and administrative 846,890 1,209,813 (362,923 ) Net Loss $ 3,079,944 $ 3,452,155 $ (372,211 ) Revenue Fees from intellectual property licensing increased by $64k and B2B sales increased by $12.8k with other sales slightly higher by $15k year- over year. Research and Development Expenditures on R&D increased by $791k year-over-year for the period ended February 28, 2023, as the Company continues with applied research and development programs in our pharmaceutical division with our primary focus being on DehydraTECH-CBD to treat hypertension. Consulting Fees and Salaries In the six months ended February 28, 2023 consulting fees and salaries decreased by $547k primarily due to the prior years’ recognition of stock-based compensation costs recorded for contractors ($287K) and employees ($121K), and the payment of management bonuses in the second quarter of 2022. Page 24 of 30 Table of Contents Legal and Professional Fees Our legal and professional fees decreased by $168k during the period compared to the same prior year period. Previous year expenditures were higher due to increased patent and trademark filings and the utilization of additional legal advisory services. General and Administrative Our other general and administrative expenses decreased overall by $363k during the period ended February 28, 2023, over the same period last year. Advertising and promotion was down by $140k in the current period with a slight decrease in investor relations ($35k) offset by an increase in office expenses ($34k). Unrealized losses on marketable securities were less in the current year ($80k vs $281k). Liquidity and Financial Condition Working Capital February 28, August 31, 2023 2022 Current assets $ 4,003,781 $ 6,977,516 Current liabilities (223,131 ) (194,036 ) Net Working Capital $ 3,780,650 $ 6,783,480 Cash Flows February 28, 2023 2022 Cash flows used in operating activities $ (2,473,590 ) $ (2,443,593 ) Cash flows used in investing activities (67,526 ) (92,638 ) Cash flows used in financing activities - (21,191 ) Decrease in cash $ (2,541,116 ) $ (2,557,422 ) Operating Activities Net cash used in operating activities increased by $30k for the period compared with cash used during the same period in 2022. This difference was largely due to decreased stock-based compensation ($79k vs $409k), unrealized losses on marketable securities ($80k vs $281k) and an increased reduction in prepaid expenses balance in the current six months ended of $257k vs $97k in the prior year. Investing Activities Net cash used in investing activities decreased by $25k over 2022 due to decreased spending on acquisitions of equipment. Page 25 of 30 Table of Contents Financing Activities The change in net cash used in financing activities in the prior year relate to the reduction of the lease liability. Liquidity and Capital Resources We have incurred net losses of approximately $7.4m and $4.2m respectively in the past two fiscal years. We expect to continue to incur significant expenditures for R&D and operational activities resulting in net losses in the upcoming 12 months and beyond. 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 related expenditures, the receipt of additional revenues from the licensing of our technology and B2B sales, if any, and the receipt of payments under any current or future collaborations we may enter into. As the Company continues with our IND application process and progresses into the clinical development of our initial product candidate, the need for substantial capital resources increases. Our existing cash will not be sufficient to complete the full development, testing and commercialization of an FDA approved product candidate. To achieve this objective, we will require substantial funding in the future. On August 12, 2022, we entered into an equity distribution agreement with 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 an ATM. The equity distribution 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. As of April 1, 2023 we have sold 34,652 shares into the market through the ATM for gross proceeds of $114,546. During the first half of fiscal 2023 we did not sell any shares. Subsequent to the six months ended February 28, 2023, we issued 34,652 shares of our common stock in a series of sales under the ATM at an average price of $3.30 per share and gross proceeds of $114,456. As of April 14, 2023, $5,810,544 in shares of our common stock remain eligible for sale under the ATM. We may also offer securities in response to market conditions or other circumstances if we believe such a plan of financing is required to advance the Company’s business plans. There is no certainty that future equity or debt financing will be available or that it will be at acceptable terms. The outcome of these matters is unpredictable. A lack of adequate funding may force us to reduce spending, curtail or suspend planned programs or possibly liquidate assets. Any of these actions could adversely and materially affect our business, cash flow, financial condition, results of operations, and potential prospects. The sale of additional equity may result in additional dilution to our stockholders. Entering into additional licensing agreements, collaborations, partnerships, alliances marketing, distribution, or licensing arrangements with third parties to increase our capital resources is also possible. If we do so we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. The Company has evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern. As of February 28, 2023, the Company had cash on hand of approximately $3.3m to settle $223k in current liabilities. The Company believes this is sufficient to fund our expected R&D and operating expenditures for twelve months following the date of filing this report. We anticipate making few if any material capital expenditures in fiscal 2023 as we believe our current facilities and equipment are sufficient for the forthcoming twelve months following the date of filing this report. Page 26 of 30 Table of Contents Impact of COVID-19 To date, we have not experienced any material impact on our financial statements, impairments of any of our assets or any major business disruptions, including with our vendors. We will continue to actively monitor the evolving situation related to COVID-19 and may take further actions 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 whom we do business. We do not know when, or if, it will become practical to revise or eliminate some or all these measures entirely. Item 3. Controls and Procedures Management’s Report on Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer (Principal Financial and Accounting Officer) to allow for timely decisions regarding required disclosure. As of February 28, 2023, the fiscal quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our CEO and CFO concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of February 28, 2023. Inherent limitations on Effectiveness of Controls Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, regulations, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human error. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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. Changes in Internal Control over Financial Reporting During the quarter ended February 28, 2023, our controls and controls processes remained consistent with August 31, 2022. There have been no changes in our internal controls over financial reporting that occurred during the quarter ended February 28, 2023, that have materially or are reasonably likely to materially affect our internal controls over financial reporting. Our control processes are designed to include remote workers. The advent of the COVID-19 pandemic has not materially impacted our internal controls over financial reporting other than increasing requirements for social distancing and some additional remote working requirements for staff. Page 27 of 30 Table of Contents PART II—OTHER INFORMATION