Lexaria Bioscience Corp. - Quarter Report: 2023 February (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended February 28, 2023

or

For the transition period from [   ] to [   ]

Commission file number 000-52138

Registrant’s Telephone number, including area code: 1.250.765.6424

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the last 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.

5,985,650 common shares as of April 14, 2023

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

LEXARIA BIOSCIENCE CORP.

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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 DehydraTECH^TM, our patented proprietary drug delivery technology.

We are primarily a research and development company that continues to investigate the benefits of using DehydraTECH with numerous molecules.

Revenues are generated from intellectual property (“IP”) licensing contracts for DehydraTECH based on the terms of use and defined geographic and licensing arrangements. We derive income from our third party contracted manufacturing of Business-to-Business (“B2B”) DehydraTECH enhanced products which are made to customer specifications and sold online and in stores in the US. 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. Annual losses attributable to shareholders were $7.4m (2022), $4.2m (2021) and $4.1m (2020). As of February 28, 2023, we had an accumulated deficit of $42.2m. 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 and negative cash flows from operations raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not contain any adjustments that might result for this uncertainty.

The Company entered into a sales agreement with Maxim Group LLC, (“Maxim”) on August 12, 2022, 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 At-The-Market (“ATM”) Offering. This 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.   

We may also offer securities for sale during our fiscal year 2023 or thereafter 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 and is in the best interests of our stockholders.

Based on our existing working capital and access to an ATM, management believes the Company has sufficient working capital to satisfy the Company’s estimated liquidity needs for the next 12 months. In making this assessment, 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. If the Company is unable to obtain funding, the Company would be forced to delay, reduce or eliminate some or all of its research and development programs, preclinical and clinical testing or commercialization efforts, which could adversely affect its business prospects.

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 February 28, 2023, there has been no material impact on the Company’s financial position as a direct result of the pandemic. 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 a 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.

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 83.333% owned subsidiary Lexaria Nicotine LLC with the remaining 16.667% 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.

Basis of Presentation

The Company’s unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC.  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 for 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.

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.

 Estimates and Judgments

The preparation of financial statements in conformity with US 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.

3. Marketable Securities

The components of Marketable Securities were as follows:

Marketable securities held by Lexaria represent available-for-sale common stock of Hill Street Beverage Company Inc. Unrealized gains and losses from common stock are due to market price movements. In management’s opinion based on the evaluation of available information at February 28, 2023, unrealized losses represent temporary impairments.

4. Accounts Receivable

Accounts receivable at February 28, 2023 and August 31, 2022 consist of the following:

5. Inventory

Inventory at February 28, 2023, and August 31, 2022, consists of the following:

During the six-month period ended February 28, 2023, raw materials inventory valued at $29,391 was expensed to R&D.

6. Prepaid Expenses and Deposits

Prepaid expenses consist of the following at February 28, 2023 and August 31, 2022:

7. Intellectual Property, net

The following is a list of capitalized US patents held by the Company:

A continuity schedule for capitalized patents is presented below:

8. Property & Equipment

During the six month period ended February 28, 2023, amortization of $2,883 was included in cost of goods sold.   

9. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at February 28, 2023 and August 31, 2022 consist of the following:

10.  Revenues

A breakdown of our revenues by type for the six months ended February 28, 2023 and 2022 are as follows:

During the six month period ended February 28, 2023, the Company recognized licensing revenue consisting of IP licensing fees for transfer of the DehydraTECH technology in line with definitive agreements and also includes royalty fees. B2B product revenues of $30,300 (2022 - $17,512) were recorded that relate to sales of our intermediate products for use by B2B customers in their products. The Company recognized $80,310 (2022 - $16,160) in licensing revenue in the same period.

11.  Common Shares, Warrants and Options

There was no change to our issued and outstanding shares during the six-months ended February 28, 2023.

During the six months ended February 28, 2023, no warrants were issued or exercised.

A continuity schedule for warrants for the six months ended February 28, 2023, is presented below:

A summary of warrants outstanding as of February 28, 2023, is presented below:

Stock Options

The Company has established an Equity Incentive Plan whereby the board of directors may 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 vesting terms of each grant are also set by the 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 Company granted the following options during the six months ended February 28, 2023:

A continuity schedule for stock options is presented below:

The fair value of stock options granted in the six months ended February 28, 2023 were estimated as of the date of the grant by using the Black-Scholes option pricing model with the following assumptions:

As of February 28, 2023, the total unrecognized non-cash compensation costs are $95,369 related to 27,500 non-vested stock options with a weighted average price of $4.40. These costs are expected to be recognized over a weighted average period of 0.37 years.  All non-vested options are attributable to employees.

12.  Commitments, Significant Contracts and Contingencies

Right of Use Assets - Operating Lease

The corporate office and R&D laboratory are located in Kelowna, British Columbia, Canada. The facility 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 other operating costs which are subject to annual adjustments.

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 February 28, 2023:

13.  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 B2B Products. Licensing revenues are significantly concentrated on one licensee.