Lexaria Bioscience Corp. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview This discussion and analysis contain forward-looking statements that involve not only risks and uncertainties but also changes in condition, significance, value and other factors as described in “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Our actual results of operations, performance, financial position and business prospects and opportunities for this fiscal year and the periods that follow could differ materially from those expressed in or implied by forward-looking statements. This discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes related thereto that appear in this Report. The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided to enhance the readers understanding of our results of operations and financial condition for the year ended August 31, 2023, and in comparison, to the year ended August 31, 2022. Executive Summary Lexaria’s DehydraTECH patented 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 API transport to the blood plasma and brain using the body’s natural process for distributing fatty acids via the oral route. This technology extends across many categories beyond the primary pharmaceutical focus of the Company from foods and beverages to cosmetic products and nutraceuticals. Lexaria is advancing several R&D activities in both preclinical and planned future clinical programs. Our primary focus during the year was on our investigations of CBD for the reduction of hypertension. We previously completed human studies on hypertension with results that were supportive of our plans to file an Investigational New Drug (“IND”) application with the US Food and Drug Administration (“FDA”). The FDA provided us with a positive written response from our pre-IND meeting in July 2022 regarding DehydraTECH-CBD for the treatment of hypertension. The FDA confirmed that it had agreed with Lexaria’s proposal to pursue a 505(b)(2) new drug application regulatory pathway for our program. We continue working toward our IND filing, however as announced in our news release of August 30, 2023, we have experienced some delays due to FDA compliance requirements of one of our ingredient suppliers which must be completed prior to our submission of our IND application. During the year ended August 31, 2023, we also completed studies with estradiol and nicotine and reported improved drug delivery characteristics with both molecules after they were treated with DehydraTECH. In fiscal 2023, we also advanced R&D activities in the fields of diabetes and weight loss management pursuant to successfully completed animal study work with our DehydraTECH-CBD in these areas. It is now our intention to explore whether or not DehydraTECH has any benefits together with GLP-1 drugs in this regard. 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 product. We were granted a total of nine new patents during fiscal 2023 including our first ever patents in the country of Canada, making it one of our most successful years ever for the acquisition of new intellectual property. 23 Table of Contents Financial condition and operating performance The data generated from our past and ongoing R&D programs continues to support confirmatory results and are contributing greatly to our understanding of the workings of DehydraTECH. These findings encourage the pursuit of lucrative commercial applications in the pharmaceutical sector. We continue to devote an increasing proportion of our resources toward pharmaceutical applications with the continuation of our programs directed at hypertension as we move toward FDA approved IND clinical studies. During the year ended August 31, 2023, we completed seven studies investigating DehydraTECH infused CBD, nicotine and estradiol. These programs, having been funded by the capital infusion of Lexaria’s 2021 financing of approximately $15 million, supported our significant advancements in the fields of heart disease and hypertension, hormones, oral nicotine, and diabetes. We consider the advancement of our applied R&D studies as a vital step towards our goal of establishing commercial relationships with industry partners who can utilize DehydraTECH within existing or new product lines. Conducting additional in vitro and in vivo studies which test the absorption of some, or all of the molecules named within our patents and patent applications, i.e. CBD, vitamins, PDE5 inhibitors, nicotine and antiviral drugs, further substantiate the effectiveness of DehydraTECH. Successful tests are expected to increase awareness and acceptance of DehydraTECH as a meaningful method used to deliver some or all of the named molecules more effectively than current delivery methods avail. Absorption tests are an important element leading towards higher rates of acceptance and the implementation of our technology licensing initiatives. Our R&D results serve to de-risk the potential API products that could conceivably develop into clinical trials and ultimately new drugs. Our pursuit of opportunities within the cannabinoid, nicotine and other bioactive molecular markets in the US and internationally continue unabated. We believe there are meaningful competitive advantages in manufacturers adopting DehydraTECH in their products with its demonstrated higher absorption levels, its ability to infuse smaller quantities of active molecules in their products and the benefit of its predictable drug delivery times. Implementing our technology could lead to smaller dosing and decreased manufacturing costs while masking unwanted flavor and smell of the active molecules. We are anticipating these efforts will lead to increased licencing revenue through licensing partnerships. We are pursuing technology licensing opportunities as a method of generating profitable revenue streams over long periods of time. We have not yet, however, been able to secure a large client utilizing our technology in large quantities of products. With thirty-seven patents granted to date of which thirteen are granted in the US, Lexaria believes that it has a robust patent portfolio but continues to seek additional protection for its intellectual property globally. The successful granting of additional patents could lead to material increases in shareholder value through the ability to generate meaningful license revenues from our increased intellectual property portfolio. Lexaria expects its current cash reserves to meet our operational requirements for the twelve months following the release of this report. The Company is continuing to explore strategic corporate business partnerships for many of its specific drug investigations after sufficient data has been generated which, if successful, could generate any combination of up-front milestone and/or royalty payments to the Company. Results of Operations for our Year Ended August 31, 2023 Our net loss from operations for the year ended August 31, 2023, was $6,712,525 (2022 - $7,383,653). The changes between these periods for the respective items are summarized as follows: August 31 August 31 2023 2022 Change Revenues $ 226,208 $ 255,397 $ (29,189 ) Cost of goods sold (31,500 ) (71,841 ) 40,341 Research and development 3,666,721 1,842,675 1,824,046 Consulting fees & salaries 1,300,965 2,244,664 (943,699 ) Legal and professional 444,593 561,265 (116,672 ) Other general and administrative 1,316,451 2,153,991 (837,540 ) Other income (loss) (178,503 ) (764,614 ) 586,111 Net Loss $ (6,712,525 ) $ (7,383,653 ) $ 671,128 24 Table of Contents Revenue Lexaria’s business operations include technology licensing agreements where corporate licensees implement DehydraTECH under license within our contracted facilities under royalty agreements. This includes specific B2B pre-processed DehydraTECH CBD-powders manufactured at a Lexaria contracted GMP-certified food facility for clients to integrate into their final product formats. Fees are derived from a combination of manufacturing charges, royalties and trademark fees. Year Ended August 31, 2023 2022 Change IP Licensing $ 146,800 $ 54,560 $ 92,240 B2B 44,167 113,438 (69,271 ) Other 35,241 87,399 (52,158 ) $ 226,208 $ 255,397 $ (29,189 ) The primary source of revenues for the Company are derived from Lexaria Hemp where sales of B2B processing of intermediary CBD product saw a significant decrease of approximately 61% (2023 - $44,167 vs 2022- $113,438) in the year. During the year ended August 31, 2023, Other revenue included $35,241 (2022- $87,399) from R&D contracts for exploratory work the Company performed on behalf of third parties interested in our technology. Challenges in the US market for small companies has made it difficult to generate larger revenue streams, irrespective of the use of our technology, with many small companies struggling to exist. On the other hand, revenue generated by licensing our technology to others has grown substantially to reach $146,800 in fiscal 2023 vs only $54,560 in fiscal 2022. In fiscal 2024 and assuming our existing clients remain in compliance with their contracts, the Company expects to see an increase in revenue through further technology licensing from DehydraTECH processed hemp-based CBD and other consumer products. One of our contracted clients is contractually required to make significantly larger quarterly payments to us during fiscal 2024 than during fiscal 2023. The anticipated expansion of our intellectual property portfolio and conducting supportive R&D may jointly contribute to strengthening revenue prospects as we continue to explore new applications for our technology. Research and Development Research and development (“R&D”) costs are expensed as incurred and account for a significant portion of our operational expenses. With proceeds from our underwritten public offering in January of 2021, we were able to direct additional expenditures to the increased focus on studies pertaining to hypertension and anti-viral drugs. Our R&D expenditures for fiscal 2023, at $3,666,721 were nearly double those of fiscal 2022 at $1,842,675. This was in agreement with our internal plans. In large part, this was due to our ongoing expenditures in preparation for our hypertension-related prospective IND filing; and also because of R&D programs completed in the fields of a human oral nicotine study and animal based DehydraTECH-CBD seizure and diabetes studies. Each of these three areas of study produced positive results. We will continue to invest in our R&D programs for the foreseeable future and we expect these expenses to continue to increase in 2024 compared to 2023, assuming successful corporate financing activities. Our R&D programs are focused on three core business segments: pharmaceutical applications, reduced-risk non-combusted nicotine and CBD from hemp. Of these three, we do not expect to make any significant expenditures during fiscal 2024 on non-combusted nicotine R&D. Of significant note, Lexaria submitted our preliminary pre-meeting application for an Investigational New Drug (“IND”) to the FDA with plans to develop a cannabidiol-based drug formulation, DehydraTECH-CBD for hypertension. We received a written response following our pre-IND meeting in August 2022 where the agency has agreed with the Company’s plans to pursue a faster 505(b)(2) new drug application regulatory pathway for the program. The 505(b)(2) pathway permits a faster commercial approval than the traditional 505(b)(1) NDA pathway. The FDA has agreed with the Company’s proposed clinical protocol for DehydraTECH-CBD, which, as currently designed, would target 120 patients with hypertension. The regulator has also decided that there was no need to conduct additional non-clinical studies before the start of the IND program. Lexaria has engaged its CRO and the start-up activities for this study have commenced. We expect to file our IND application as soon as possible after our third-party ingredient supplier has completed its FDA compliance requirements. Preclinical and clinical development is inherently unpredictable as is regulatory approval and commercialization, therefore we are unable to estimate with any certainty the costs we will incur, and the timelines required in our continued development and commercialization efforts. We will require significant additional funding to complete any IND planned studies. Any successful development and completion of clinical trials as well as regulatory approval and commercialization are uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each future product candidate and are difficult to predict. Lexaria and our commercial partners will continue to explore multiple R&D programs directed toward further evaluation, development, and commercialization of our DehydraTECH technology. General and Administrative General and administrative expenses consist primarily of consulting fees, executive and employee salaries and stock-based compensation expense (non-cash). Also included are costs for advertising and marketing, investor relations, corporate facilities, insurance premiums, legal fees related to corporate matters, fees for auditing, and tax filings. 25 Table of Contents Our general and administrative expenses saw an overall decrease of $1,897,911 during the year ended August 31, 2023, as compared to a $753,185 increase during the previous year. We decreased advertising and promotional expenditures by $817,363, as we scaled back our efforts to bring the results of the Company’s R&D programs to the attention of various industry sectors and to the scientific and investment communities. Stock-based compensation expense (non-cash) decreased from $752,591 to $170,382 ($582,209), due to fewer options vesting during the year. These year-to-year decreases are a significant driver of the year-to-year overall decrease in consulting wages and salaries expense. Travel expenses were also down by $34,678 due primarily to a decrease in participation in industry conferences. Unrealized losses on marketable securities decreased by $542,921 in the year. This is attributable to continuing decreases in the fair value of the Company’s investment in Hill Inc. common shares. We remain confident that the loss may be temporary in nature as Hill Inc. continues to make inroads to the US hemp markets with DehydraTECH enabled products produced and sold by their licensees. Our consulting fees and salaries decreased by $943,699 in the year ended August 31, 2023, due primarily to a decrease of $582,209 in stock-based (non-cash) compensation expense, the elimination of one management position and the renegotiation for reduced fees with our consultants. Legal and professional fees were $116,672 lower in the year ended 2023 as compared to the previous year’s expenses. No bad debts were recorded in the years ended 2023 and 2022. The Company evaluated its patent portfolio and determined that certain pending applications had been abandoned or would not be pursued. As such, during the year ended August 31, 2023, the Company recognized an impairment loss of $106,761 related to those abandoned applications. Liquidity and Capital Resources Since Lexaria’s entrance into the bioscience sector, it has accumulated net losses of $45.8 million of which approximately $6.7 million and $7.4 million were incurred, respectively, in the past two fiscal years. We expect to continue to incur significant operational expenses and 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 payments related to the out-licencing of our technology, if any, and the receipt of payments under any current or future collaborations we may enter. 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. Accordingly, we will be required to obtain significant further funding to achieve this business objective and/or delay or modify the program in accordance with the financial resources available. 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. During the fiscal year ended August 31, 2023, 34,652 shares were sold under the ATM for gross proceeds of $114,456. Offering costs netted against proceeds amounted to $125,122 and, as per the terms of the sales agreement, the ATM was terminated July 30, 2023. On May 8, 2023, we entered into a placement agency agreement with Maxim, pursuant to which we agreed to sell 2,106,000 units at a price of $0.95 per unit for aggregate gross and net proceeds of $2,000,700 and $1,600,397, respectively. Each unit was comprised of one share and one warrant, with each warrant being exercisable for a five-year period to purchase an additional share at a price of $0.95. The securities were issued on May 11, 2023, and were registered pursuant to a Form S-1 registration statement filed under number 333-271096. Maxim was paid 7% of the gross proceeds and was also reimbursed $70,000 for its expenses. 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 and 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 licencing 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 favourable to us. 26 Table of Contents 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 August 31, 2023, the Company had cash on hand of approximately $1.4 million to settle $270,000 in current liabilities. The Company believes this is sufficient to fund our expected R&D and operating expenditures for twelve-months following the filing date of this report. We do not anticipate making any material capital expenditures in the fiscal 2024 as we believe our current facilities and equipment are sufficient for the forthcoming twelve months following the filing date of this report. Working Capital August 31, August 31, 2023 2022 Current assets $ 2,199,772 $ 6,977,516 Current liabilities (267,735 ) (194,036 ) Net Working Capital $ 1,932,037 $ 6,783,480 The Company’s working capital balance decreased by approximately $4.8 million due primarily to cash used in operating activities during the year ended August 31, 2023. Cash Flows August 31, August 31, 2023 2022 Cash flows used in operating activities $ (5,881,237 ) $ (4,879,339 ) Cash flows used in investing activities (169,610 ) (180,640 ) Cash flows used in financing activities 1,589,731 (44,600 ) Decrease in cash $ (4,461,116 ) $ (5,104,579 ) Operating Activities Net cash used in operating activities was approximately $5.9 million for the year ended August 31, 2023, compared with $4.9 million during the same period in 2022. The increase in net cash used in operating activities during the year ended August 31, 2023 relates primarily to a decrease in non-cash expenses related to common shares issued for services ($1,200,000), stock-based compensation ($582,209) and unrealized loss on marketable securities ($542,921); partially offset by a decrease in our net loss ($671,128) and a decrease in working capital ($494,738). Investing Activities Net cash used in investing activities is attributable to increased spending on our intellectual property. During the fiscal year, nine additional patents were granted. Financing Activities Net cash provided by financing activities reflects net proceeds from the issuance of common shares. Net proceeds from the ATM and May 11, 2023 offerings totaled $1,589,731. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with US GAAP. Preparing financial statements requires management to make estimates, judgements and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenue, and expenses. Actual results may differ from these estimates. Information about critical judgments in applying the accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is discussed below. Further details of the nature of these judgments, estimates and assumptions may be found in the relevant notes to the consolidated financial statements. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a “Smaller Reporting Company”, this Item and the related disclosure is not required. 27 Table of Contents