Item 1. Financial Statements.
Lexaria Bioscience Corp.s (Lexaria or the Company)
unaudited interim consolidated financial statements for the nine-month period
ended May 31, 2017 form part of this quarterly report. They are stated in United
States Dollars and are prepared in accordance with United States generally
accepted accounting principles.
LEXARIA BIOSCIENCE CORP.
|
CONSOLIDATED BALANCE SHEETS
|
(Expressed in U.S. Dollars)
|
|
|
May 31
|
|
|
August 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash
|
$
|
2,788,978
|
|
$
|
93,409
|
|
Accounts and other
receivables (Note 7)
|
|
57,398
|
|
|
131,083
|
|
Inventory
(Note 8)
|
|
128,381
|
|
|
134,724
|
|
Prepaid expenses and
deposit
|
|
104,523
|
|
|
150,950
|
|
Total
Current Assets
|
|
3,079,280
|
|
|
510,166
|
|
Patents (Note 9)
|
|
63,044
|
|
|
53,997
|
|
Equipment
|
|
2,011
|
|
|
2,475
|
|
|
|
65,055
|
|
|
56,472
|
|
TOTAL ASSETS
|
$
|
3,144,335
|
|
$
|
566,638
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
12,956
|
|
$
|
90,010
|
|
Unearned revenue (Note
10)
|
|
19,600
|
|
|
12,500
|
|
Due to
related parties (Note 15)
|
|
7,446
|
|
|
331,371
|
|
Total Current Liabilities
|
|
40,002
|
|
|
433,881
|
|
|
|
|
|
|
|
|
Convertible debenture (Note 11)
|
|
45,000
|
|
|
45,000
|
|
TOTAL LIABILITIES
|
|
85,002
|
|
|
478,881
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Share Capital
|
|
|
|
|
|
|
Authorized:
220,000,000
common voting shares with a par value of $0.001 per
share
Issued and outstanding:
66,552,303 common shares at May 31,
2017
and 51,288,473 common shares
at August 31, 2016
|
|
66,552
|
|
|
51,288
|
|
Additional paid-in capital
|
|
15,681,352
|
|
|
11,515,419
|
|
Deficit
|
|
(12,483,019
|
)
|
|
(11,300,662
|
)
|
Equity attributable to shareholders of the
Company
|
|
3,264,885
|
|
|
266,045
|
|
Non-Controlling
Interest
|
|
(205,552
|
)
|
|
(178,288
|
)
|
Total Stockholders' Equity
|
|
3,059,333
|
|
|
87,757
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
|
$
|
3,144,335
|
|
$
|
566,638
|
|
The accompanying notes are an intergral part of these
consolidated financial statements
LEXARIA BIOSCIENCE CORP.
|
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS (unaudited)
|
(Expressed in U.S. Dollars, except number of
shares)
|
|
|
THREE
MONTHS ENDED
|
|
|
NINE MONTHS
ENDED
|
|
|
|
May 31
|
|
|
May 31
|
|
|
May 31
|
|
|
May 31
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
29,253
|
|
|
6,215
|
|
|
51,080
|
|
|
32,156
|
|
Cost of Goods Sold
|
|
(9,183
|
)
|
|
(9,309
|
)
|
|
(24,943
|
)
|
|
(42,929
|
)
|
Gross profit (loss)
|
|
20,070
|
|
|
(3,094
|
)
|
|
26,137
|
|
|
(10,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting and audit
|
|
5,260
|
|
|
8,657
|
|
|
27,119
|
|
|
47,023
|
|
Depreciation
|
|
372
|
|
|
464
|
|
|
1,116
|
|
|
464
|
|
Insurance
|
|
4,729
|
|
|
3,999
|
|
|
15,088
|
|
|
11,147
|
|
Advertising and promotions
|
|
73,271
|
|
|
24,471
|
|
|
124,080
|
|
|
179,545
|
|
Bank
charges and exchange (gain) loss
|
|
5,814
|
|
|
9,059
|
|
|
11,071
|
|
|
12,843
|
|
Stock based compensation (Note 13)
|
|
-
|
|
|
42,305
|
|
|
36,642
|
|
|
80,253
|
|
Consulting (Note 15)
|
|
128,537
|
|
|
127,074
|
|
|
648,916
|
|
|
398,042
|
|
Fees and dues
|
|
15,918
|
|
|
14,536
|
|
|
55,973
|
|
|
45,047
|
|
Interest expense from loan payable
|
|
1,584
|
|
|
1,047
|
|
|
4,890
|
|
|
1,125
|
|
Investor relations
|
|
41,002
|
|
|
-
|
|
|
91,681
|
|
|
16,000
|
|
Legal and professional
|
|
46,367
|
|
|
9,120
|
|
|
115,851
|
|
|
23,955
|
|
Office and miscellaneous
|
|
9,773
|
|
|
2,047
|
|
|
16,174
|
|
|
10,706
|
|
Research and development
|
|
8,240
|
|
|
158
|
|
|
23,279
|
|
|
8,987
|
|
Rent
|
|
4,393
|
|
|
7,586
|
|
|
11,429
|
|
|
21,715
|
|
Taxes
|
|
-
|
|
|
1,643
|
|
|
32
|
|
|
1,643
|
|
Telephone
|
|
951
|
|
|
1,165
|
|
|
2,668
|
|
|
4,799
|
|
Travel
|
|
17,219
|
|
|
7,776
|
|
|
45,098
|
|
|
42,190
|
|
Inventory write-off (Note 8)
|
|
726
|
|
|
-
|
|
|
4,651
|
|
|
34,246
|
|
|
|
364,156
|
|
|
261,107
|
|
|
1,235,758
|
|
|
939,730
|
|
Net loss and comprehensive
loss for the period
|
|
(344,086
|
)
|
|
(264,201
|
)
|
|
(1,209,621
|
)
|
|
(950,503
|
)
|
Net loss and comprehensive loss
attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders
|
|
(339,130
|
)
|
|
(258,028
|
)
|
|
(1,182,357
|
)
|
|
(900,340
|
)
|
Non-controlling interest
|
|
(4,956
|
)
|
|
(6,173
|
)
|
|
(27,264
|
)
|
|
(50,163
|
)
|
Basic and diluted loss per
share
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.02
|
)
|
|
(0.02
|
)
|
Weighted average number of common
shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
60,635,704
|
|
|
45,033,282
|
|
|
55,968,504
|
|
|
42,900,830
|
|
The accompanying notes are an integral part of these
consolidated financial statements
LEXARIA BIOSCIENCE CORP.
|
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
|
(Expressed in U.S. Dollars)
|
|
|
NINE MONTHS
ENDED
|
|
|
|
May 31
|
|
|
May 31
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows used in
operating activities
|
|
|
|
|
|
|
Net loss for the period
|
|
(1,209,621
|
)
|
|
(950,503
|
)
|
Adjustments to reconcile net
loss to net cash used in operating activities:
|
|
|
|
|
|
|
Stock based compensation
|
|
36,642
|
|
|
80,253
|
|
Depreciation
|
|
1,116
|
|
|
464
|
|
Inventory write-off
|
|
4,651
|
|
|
34,246
|
|
Other non-cash items
|
|
292,288
|
|
|
55,752
|
|
Change in working
capital:
|
|
|
|
|
|
|
Accounts and other receivable
|
|
(19,815
|
)
|
|
16,813
|
|
Inventory
|
|
1,692
|
|
|
714
|
|
Prepaid expenses and deposit
|
|
27,352
|
|
|
85,761
|
|
Accounts payable and accrued liabilities
|
|
(60,054
|
)
|
|
267,592
|
|
Due to related parties
|
|
(273,925
|
)
|
|
8,819
|
|
Unearned revenue
|
|
7,100
|
|
|
-
|
|
Net cash used in operating
activities
|
|
(1,192,574
|
)
|
|
(400,089
|
)
|
|
|
|
|
|
|
|
Cash flows used in
investing activities
|
|
|
|
|
|
|
Patent
|
|
(9,699
|
)
|
|
(12,270
|
)
|
Acquisition of equipment
|
|
-
|
|
|
(3,094
|
)
|
Net cash used in investing activities
|
|
(9,699
|
)
|
|
(15,364
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Convertible Loan
|
|
-
|
|
|
45,000
|
|
Repayment of loan to a
related party
|
|
(50,000
|
)
|
|
-
|
|
Proceeds
from private placements
|
|
1,635,242
|
|
|
147,480
|
|
Proceeds from exercise of
stock options
|
|
164,762
|
|
|
-
|
|
Proceeds
from exercise of warrants
|
|
2,147,838
|
|
|
-
|
|
Net cash from financing activities
|
|
3,897,842
|
|
|
192,480
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
2,695,569
|
|
|
(222,973
|
)
|
Cash, beginning of
period
|
|
93,409
|
|
|
260,075
|
|
Cash, end of period
|
|
2,788,978
|
|
|
37,102
|
|
Supplemental information
of cash flows:
|
|
|
|
|
|
|
Interest paid in cash
|
|
4,890
|
|
|
1,125
|
|
Common
shares issued to settle accounts payable
|
|
53,000
|
|
|
-
|
|
Stock based compensation
recognized in prepaid expenses
|
|
19,075
|
|
|
28,612
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
LEXARIA BIOSCIENCE CORP.
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
(Expressed in U.S. Dollars)
|
|
|
COMMON STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
PAID-IN
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
|
|
|
|
SHARES
|
|
|
AMOUNT
|
|
|
CAPITAL
|
|
|
DEFICIT
|
|
|
NCI
|
|
|
EQUITY
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Balance, August 31,
2015
|
|
43,838,286
|
|
|
43,838
|
|
|
10,814,460
|
|
|
(10,085,889
|
)
|
|
(115,812
|
)
|
|
656,597
|
|
Shares issued for services
|
|
625,000
|
|
|
625
|
|
|
78,875
|
|
|
-
|
|
|
-
|
|
|
79,500
|
|
Non-controlling Interest
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(62,476
|
)
|
|
(62,476
|
)
|
Stock based compensation
|
|
-
|
|
|
-
|
|
|
83,865
|
|
|
-
|
|
|
-
|
|
|
83,865
|
|
Private placement of shares,
net of issuance cost
|
|
5,266,858
|
|
|
5,267
|
|
|
414,025
|
|
|
-
|
|
|
-
|
|
|
419,292
|
|
Private placement
subscription receivable
|
|
1,558,333
|
|
|
1,558
|
|
|
91,942
|
|
|
-
|
|
|
-
|
|
|
93,500
|
|
Warrants to be issued for
services
|
|
-
|
|
|
-
|
|
|
32,252
|
|
|
-
|
|
|
-
|
|
|
32,252
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,214,773
|
)
|
|
-
|
|
|
(1,214,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31,
2016
|
|
51,288,477
|
|
|
51,288
|
|
|
11,515,419
|
|
|
(11,300,662
|
)
|
|
(178,288
|
)
|
|
87,757
|
|
Shares issued for private
placement
|
|
4,104,280
|
|
|
4,105
|
|
|
1,537,637
|
|
|
-
|
|
|
-
|
|
|
1,541,742
|
|
Shares issued for services
|
|
486,921
|
|
|
486
|
|
|
88,274
|
|
|
-
|
|
|
-
|
|
|
88,760
|
|
Non-controlling Interest
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(27,264
|
)
|
|
(27,264
|
)
|
Stock based compensation
|
|
-
|
|
|
-
|
|
|
17,567
|
|
|
-
|
|
|
-
|
|
|
17,567
|
|
Warrants issued for services
|
|
-
|
|
|
-
|
|
|
220,528
|
|
|
-
|
|
|
-
|
|
|
220,528
|
|
Exercise of stock options for
cash
|
|
959,125
|
|
|
960
|
|
|
163,802
|
|
|
-
|
|
|
-
|
|
|
164,762
|
|
Exercise of warrants for cash
|
|
9,713,500
|
|
|
9,713
|
|
|
2,138,125
|
|
|
-
|
|
|
-
|
|
|
2,147,838
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,182,357
|
)
|
|
-
|
|
|
(1,182,357
|
)
|
Balance, May 31, 2017
(Unaudited)
|
|
66,552,303
|
|
|
66,552
|
|
|
15,681,352
|
|
|
(12,483,019
|
)
|
|
(205,552
|
)
|
|
3,059,333
|
|
The accompanying notes are an integral part of these consolidated
financial statements
LEXARIA BIOSCIENCE CORP.
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
May 31, 2017
|
(Expressed in U.S. Dollars)
|
|
(Unaudited)
|
|
1.
|
Basis of Presentation
|
|
|
|
The unaudited interim consolidated financial statements
for the nine months ended May 31, 2017 included herein 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 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.
|
|
|
|
These unaudited interim consolidated financial statements
should be read in conjunction with the August 31, 2016 audited annual
financial statements and notes thereto.
|
2.
|
Organization, Business and Going Concern
|
|
|
|
The Company was formed on December 9, 2004 under the laws
of the State of Nevada as an independent oil and gas company engaged in
the exploration, development and acquisition of oil and gas properties in
the United States and Canada. In March of 2014, the Company began its
entry into the bioscience and alternative health and wellness business and
discontinued its involvement in the oil and gas business in November 2014.
In May 2016, the Company also commenced out-licensing its patented
technology for improved delivery of bioactive compounds that promotes
healthy ingestion methods, lower overall dosing and higher effectiveness
in active molecule delivery. The Company has its office in Kelowna, BC,
Canada.
|
|
|
|
The Companys unaudited interim consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States applicable to a going concern,
which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The Company
has a net loss attributable to its shareholders of $1,182,357 for the nine
months ended May 31, 2017 (2016: $900,340) and at May 31, 2017 had a
deficit accumulated since its inception of $12,483,019 (August 31, 2016:
$11,300,662). The Company had a working capital balance of $3,039,278 as
at May 31, 2017 with net cash used in operating activities of $1,192,574
during the nine months ended May 31, 2017.
|
3.
|
Business Risk and Liquidity
|
|
|
|
The Company is subject to several categories of risk
associated with its operating activities. The production and sale of
alternative health products is an emerging industry in which business
practices are not yet standardized and are subject to frequent scrutiny
and evaluation by federal, state, provincial, and municipal authorities,
academics, and media outlets, among others. Although we intend to develop
our businesses in accordance with best ethical practices, we may suffer
negative publicity if we, our partners, contractors, or customers are
found to have engaged in any environmentally insensitive practices or
other business practices that are viewed as unethical.
|
|
|
|
Our operations may require licenses and permits from
various governmental authorities. We believe that we will be able to
obtain all necessary licenses and permits under applicable laws and
regulations for our operations and believe we will be able to comply in
all material respects with the terms of such licenses and permits.
However, such licenses and permits are subject to change in various
circumstances. There can be no guarantee that we will be able to obtain or
maintain all necessary licenses and permits, and failing to obtain or retain
required licenses could have a materially adverse effect on the Company.
|
4.
|
Basis of Consolidation
|
|
|
|
The unaudited interim consolidated financial statements
include the financial statements of the Company, its wholly-owned
subsidiary, Lexaria CanPharm Corp. which was incorporated on April 4, 2014
under the laws of Canada, and 51%-owned subsidiary PoViva Tea, LLC which
was incorporated on December 12, 2014, under the laws of the State of
Nevada. All significant inter-company balances and transactions have been
eliminated.
|
5.
|
Estimates and Judgments
|
|
|
|
Preparing financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, and expenses. The estimates and the associated
assumptions are based on historical experience and various other factors
that are believed to be reasonable under the circumstances, the results of
which form the basis of making the judgments about carrying values of
assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
|
|
|
|
In preparing these unaudited interim consolidated
financial statements, the significant judgments made by management in
applying the Companys accounting policies and the key sources of
estimation uncertainty were the same as those applied to the consolidated
financial statements for the year ended August 31,
2016.
|
6.
|
Recent Accounting Guidance Not Yet
Adopted
|
|
|
|
In May 2014, the Financial Accounting Standards Board
(the FASB) issued a new standard related to the revenue recognition.
Under the new standard, recognition of revenue occurs when a customer
obtains control of promised goods or services in an amount that reflects
the consideration which the entity expects to receive in exchange for
those goods or services. In addition, the standard requires disclosure of
the nature, amount, timing, and uncertainty of revenue and cash flows
arising from contracts with customers. The FASB has recently issued
several amendments to the standards, including clarification on the
accounting for licenses of intellectual property and identifying
performance obligations.
|
|
|
|
The guidance permits two methods of adoption:
retrospectively to each prior reporting period presented (full
retrospective method), or retrospectively with the cumulative effect of
initially applying the guidance recognized at the date of initial
application (the cumulative catch-up transition method). The Company will
apply the full retrospective approach to adopt the standard but does not
anticipate that this standard will have a material impact on its
consolidated financial statements.
|
|
|
|
In August 2014, the FASB issued new guidance on
determining when and how to disclose going concern uncertainties in the
financial statements. The new guidance requires management to perform
interim and annual assessments of an entitys ability to continue as a
going concern within one year of the date the financial statements are
issued. An entity must provide certain disclosures if conditions or events
raise substantial doubt about its ability to continue as a going concern.
The guidance is effective for annual periods ending after December 15,
2016 and interim periods thereafter. Early adoption is permitted. Upon
adoption, the Company does not believe this guidance will have a material
impact on its consolidated results of operations or financial
position.
|
|
|
|
In July 2015, FASB issued ASU 2015-11, Simplifying the
Measurement of Inventory (ASU 2015-11). ASU 2015-11 requires that an
entity measure inventory at the lower of cost and net realizable value.
This ASU does not apply to inventory measured using last-in, first-out
methodology. ASU 2015-11 is effective for annual reporting periods
beginning after December 15, 2016, including interim periods within that
reporting period. The Company does not expect the new standard to have a
significant impact on its consolidated financial position, results of
operations or cash flows.
|
In November 2015, the FASB issued ASU
2015-17, Balance Sheet Classification of Deferred Taxes (ASU 2015-17). ASU
2015-17 requires companies to classify all deferred tax assets or liabilities as
noncurrent on the balance sheet rather than separately disclosing deferred taxes
as current and noncurrent. This standard is effective for the Company beginning
on September 1, 2017 and can be applied either prospectively or retrospectively
to all periods presented upon adoption. The standard is not expected to have any
impact on the Companys financial statements.
In January 2016, FASB issued a new
standard to amend certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments. Most prominent among the amendments is the
requirement for changes in fair value of equity investments, with certain
exceptions, to be recognized through profit or loss rather than other
comprehensive income. The new standard will be effective for the Company
beginning September 1, 2018. The standard is not expected to have any impact on
the Companys financial statements.
In February 2016 FASB issued ASU No.
2016-02, Leases (Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic
840) and provides principles for the recognition, measurement, presentation, and
disclosure of leases for both lessees and the lessors. The new standard requires
the lessees to apply a dual approach, classifying leases as either finance or
operating leases based on the principle of whether or not the lease is
effectively a financed purchase by the lessee. The classification will determine
whether lease expense is recognized based on an effective interest method or on
a straight-line basis over the term of the lease, respectively. A lessee is also
required to record a right-of-use asset and a lease liability for all leases
with a term of greater than twelve months regardless of classification. Leases
with a term of twelve months or less will be accounted for similar to existing
guidance for operating leases. The standard is effective for annual and interim
periods beginning after December 15, 2018, with early adoption permitted upon
issuance. When adopted, the Company does not expect this guidance to have a
material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU
2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee
Share-Based Payment Accounting. Under ASU 2016-09, companies will no longer
record excess tax benefits and certain tax deficiencies in additional paid in
capital (APIC). Instead, they will record all excess tax benefits and tax
deficiencies as income tax expense or benefit in the income statement and the
APIC pools will be eliminated. In addition, ASU 2016-09 eliminates the
requirement that excess tax benefits be realized before companies can recognize
them. ASU 2016-09 also requires companies to present excess tax benefits as an
operating activity on the statement of cash flows rather than as a financing
activity. Furthermore, ASU 2016-09 will increase the amount an employer can
withhold to cover income taxes on awards and still qualify for the exception to
liability classification for shares used to satisfy the employers statutory
income tax withholding obligation. An employer with a statutory income tax
withholding obligation will now be allowed to withhold shares with the fair
value up to the amount of taxes owed using the maximum statutory rate in the
employees applicable jurisdiction(s). ASU 2016-09 requires a company to
classify the cash paid to a tax authority when shares are withheld to satisfy
its statutory income tax withholding obligation as a financing activity on the
statement of cash flows. Under current U.S. GAAP, it is not specified how these
cash flows should be classified. In addition, companies will now have to elect
whether to account for forfeitures on share-based payments by (1) recognizing
forfeiture awards as they occur or (2) estimating the number of awards expected
to be forfeited and adjusting the estimate when it is likely to change, as in
currently required. The amendments of this ASU are effective for annual
reporting periods beginning after December 15, 2016, with early adoption
permitted but all of the guidance must be adopted in the same period. The
Company does not grant non-statutory stock options and, as such, does not expect
this guidance to have a material impact on its consolidated financial
statements.
In June 2016, the FASB issued a new
standard to replace the incurred loss impairment methodology in current U.S.
GAAP with a methodology that reflects expected credit losses and requires
consideration of a broarder range of reasonable and supportable information to
inform credit loss credit loss estimates. For trade and other receivables, loans
and other financial instruments, the Company will be required to use a
forward-looking expected loss model rather than the incurred loss model for
recognizing credit losses which reflects losses that are probable. Credit losses
relating to available for sale debt securities will also be recorded through an
allowance for credit losses rather than as a reduction in the amortized cost
basis of the securities. The new standard will be effective for Lexaria beginning September 1,
2020, with early adoption permitted. Application of the amendments is through a
cumulative-effect adjustment to deficit as of the effective date. The Company is
currently assessing the impact of the standard on its consolidated financial
statements.
7.
|
Accounts and Other
Receivables
|
|
|
|
May 31
|
|
|
August 31
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Territory License Fee
receivable (Note 10)
|
|
26,392
|
|
|
10,000
|
|
|
Security deposit receivable
|
|
1,533
|
|
|
-
|
|
|
Sales tax receivable
|
|
29,495
|
|
|
27,583
|
|
|
Subscription receivable (Note 12)
|
|
-
|
|
|
93,500
|
|
|
|
|
57,398
|
|
|
131,083
|
|
|
|
|
May 31
|
|
|
August 31
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
6,938
|
|
|
27,358
|
|
|
Finished goods
|
|
110,754
|
|
|
94,349
|
|
|
Work in progress
|
|
10,689
|
|
|
13,017
|
|
|
|
|
128,381
|
|
|
134,724
|
|
During the nine months ended May 31
2017, the Company wrote down $4,651 (2016 - $34,246) of inventory to reflect its
net realizable value.
|
|
|
May 31
|
|
|
August 31
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Balance Beginning
|
|
53,997
|
|
|
36,989
|
|
|
Addition
|
|
9,699
|
|
|
17,008
|
|
|
Amortization
|
|
(652
|
)
|
|
-
|
|
|
Balance Ending
|
|
63,044
|
|
|
53,997
|
|
The Company has filed multiple U.S.
provisional patent applications, a U.S. utility patent application with
continuation applications thereto and International patent applications under
the Patent Cooperation Treaty (PCT) procedure. Filing under the PCT allows the
Company to elect to pursue patent protection in up to 148 nations around the
world. The patents provide an intellectual property protection for a number of
molecules. The list of molecules infused within a unique lipid-formulation
technology include THC, CBC, Nicotine, Non-Steroidal Anti- Inflammatories,
certain Vitamins, edible starches (e.g. tapioca starch), and gum Arabic.
The Company was granted its first
patent with a publish date of October 27, 2016. The patent is being amortized
over its legal life of 20 years.
The Company entered into a licensing
agreement with an arms length party (the Licensee) allowing the Licensee, for
a fixed term, to utilize the Companys lipid infusion technology (the
Technology) to create, test, manufacture, and sell marijuana-infused
consumable and/or topical products (the Territorial License). The Company also
earns a usage fee (the Usage Fee) for the different products developed by the
Licensee using the Companys Technology. In addition to the granting of the
license, the Company is required to provide support services to the Licensee in
connection with the use of the Companys Technology during the term of the
licensing agreement.
The Company determined that the
provision of the support services is a separate deliverable under the licensing
agreement. As the support services will not be sold on a stand-alone basis, the
Company is unable to establish a vendor-specific objective evidence of fair
value of such services to be able to objectively allocate the Territory License
fee receipts between the license and the support services. Accordingly, the
Company recognizes revenue ratably over the term of the Licensing agreement.
During the nine months ended May 31, 2017, the Company recognized $25,000 of
Territorial License fee and also recognized $12,000 in Usage Fee (2016 - $nil,
and $nil, repectively). As at May 31, 2017 a total of $26,000 in Territorial
License and Usage Fee is receivable from the Licensee (August 31, 2016 -
$10,000).
As at May 31, 2017, the Company also
received $4,900 in advance payments for future delivery of its manufactured
products and has delivered $2,800 of the products.
|
|
|
May 31
|
|
|
August 31
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Balance Beginning
|
|
12,500
|
|
|
-
|
|
|
Territorial License fees received/receivable
|
|
30,000
|
|
|
20,000
|
|
|
Advance payments on product
sales
|
|
4,900
|
|
|
-
|
|
|
Earned revenue
|
|
(27,800
|
)
|
|
(7,500
|
)
|
|
Balance - Ending
|
|
19,600
|
|
|
12,500
|
|
11.
|
Convertible Debenture
|
|
|
|
On March 8, 2016, the Company closed a private placement
offering of a convertible debenture in the aggregate amount of $45,000.
The convertible debenture matures on August 31, 2020 with an interest rate
of 10% per annum (on a simple basis) and is convertible at (i) $0.12 per
share at any time prior to August 31, 2016 (ii) $0.15 per share at any
time prior to August 31, 2017; (iii) $0.20 per share at any time prior to
August 31, 2018 or, at the sole option of the holder, a price equal to a
20% discount to the 10-day average closing price of the shares prior to
the date of conversion (the Average Price) provided that the Average
Price is less than $0.20 and provided further that the conversion price
shall not be less than $0.15; (iv) $0.25 per share at any time prior to
August 31, 2019 or, at the sole option of the holder, the Average Price
provided that the Average Price is less than $0.25 and provided further
that the conversion price shall not be less than $0.15; and (v) $0.30 per
share at any time prior to August 31, 2020 or, at the sole option of the
holder, the Average Price provided that the Average Price is less than
$0.30 and provided further that the conversion price shall not be less
than $0.15.
|
|
|
|
The Company determined that the conversion options did
not qualify as derivatives as they did not meet the net settlement
provision characteristics. The proceeds from the convertible debenture
therefore were not bifurcated on the balance sheet.
|
|
|
|
During the nine months ended May 31, 2017, the Company
paid interest of $3,375 in connection with the convertible debenture (2016
- $2,250).
|
12.
|
Common Shares and Warrants
|
|
|
|
Fiscal 2017
Activity
|
On October 11, 2016, pursuant to its
agreement with Docherty Management Ltd. (Note 17), the Company issued 252,000
restricted common shares with a value of $35,760.
On October 11, 2016, pursuant to the
Advisory Agreement, the Company issued 750,000 warrants with an exercise price
of $0.14 per share and term of five years, in return for consulting services
provided in August, September, and October. The Company recognized the fair
value of $32,252 from 250,000 of such warrants for services received during the
month of August 2016, during the year ended August 31, 2016, and during the
three months ended November 30, 2016, further recognized $59,490 for the
remaining 500,000 warrants issued in return for consulting services received
during the months of September and October 2016.
The Company reached an agreement with a
director to settle the outstanding amount pursuant to a marketing agreement
(Note 17), through issuance of common shares of the Company. To settle the
outstanding amount of $16,000 for four months to October 31, 2016, the Company
issued 114,286 shares of its common stock at a value of $0.14 per share, on
October 11, 2016. On February 17, 2017, the Company issued a further 29,091
common shares to settle $16,000 of fees incurred during the four months ended
February 28, 2017. A total of $8,000 of the $32,000 was recognized as consulting
fees during the year ended August 31, 2016.
On October 27, 2016, the Company issued
56,250 shares of its common stock in settlement of $9,000, recognized within
accounts payable and accrued liabilities as at August 31, 2016.
On November 1, 2016, the Company issued
500,000 warrants to a consultant. Each warrant entitles the consultant to
purchase one common share of the Company at a price of $0.31 per share with a
term expiring on May 31, 2017. The Company recognized $48,313, representing the
fair value of such warrants, during the nine months ended May 31, 2017.
During November, 2016, the Company
provided to its warrant holders, an incentive for early exercise of their
previously held warrants. Upon exercise of each warrant, in addition to the
common shares of the Company, the warrant holders received a second warrant with
identical terms to purchase one additional common share of the Company. The
Company raised $737,508 from this early exercise warrant incentive program. A
total of 3,245,000 warrants were exercised at a weighted average exercise price
of $0.23 and the Company issued 3,245,000 common shares as well as 3,245,000
additional warrants to purchase common shares with an exercise price of $0.23
per share, expiring on May 14, 2017. The fair value of these additional warrants
was determined to be $298,777.
On January 10, 2017, the Company issued
500,000 warrants to a consultant. Each warrant entitles the consultant to
purchase one common share of the Company at a price of $0.44 per share with a
term expiring on January 9, 2018. The Company recognized $112,725, representing
the fair value of such warrants, during the nine months ended May 31, 2017.
On April 3, 2017, the Company closed
its brokered private placement of 4,104,280 units at a price per Unit of $0.42
for total gross proceeds of $1,723,798. Each Unit consists of one common share
and one-half of one Share purchase warrant. Each whole Warrant entitles the
holder to acquire one common share of the Company at a price of $0.60 per Share
for a period of 24 months. The Agents received a cash commission of seven
percent of the gross proceeds and 287,300 compensation units exercisable for a
period of 24 months at an exercise price of $0.42 consisting of one common share
and one half share purchase warrant. Each whole compensation warrant is
exercisable for one common share at an exercise price of $0.60 for a period of
24 months following closing.
On May 31, 2017, the Company reached an
agreement with a director to settle the outstanding amount pursuant to a
marketing agreement (Note 17), through issuance of common shares of the Company.
To settle the outstanding amount of $12,000 to May 31, 2017, the Company issued
35,294 shares of its common stock at a value of $0.34 per share, on May 31,
2017.
During the nine months ended May 31,
2017, a total of 959,125 incentive stock options were exercised for proceeds of
$164,762. A total of 9,713,500 warrants were exercised for proceeds of
$2,147,838.
As at May 31, 2017, Lexaria had
66,552,303 shares issued and outstanding and 8,896,681 warrants issued and
outstanding.
A continuity schedule for warrants is
presented below:
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
|
Warrants
|
|
|
$
|
|
|
Balance, August 31, 2015
|
|
19,840,186
|
|
|
0.23
|
|
|
Expired
|
|
(13,978,286
|
)
|
|
0.22
|
|
|
Issued
|
|
6,274,341
|
|
|
0.15
|
|
|
Balance, August 31, 2016
|
|
12,136,241
|
|
|
0.18
|
|
|
Cancelled
|
|
(38,500
|
)
|
|
0.18
|
|
|
Expired
|
|
(965,650
|
)
|
|
|
|
|
Exercised
|
|
(9,713,500
|
)
|
|
0.22
|
|
|
Issued
|
|
7,478,090
|
|
|
0.36
|
|
|
Balance, May 31, 2017
|
|
8,896,681
|
|
|
0.27
|
|
The fair value of warrants granted was
estimated as of the date of the grant by using the Black-Scholes option pricing
model with the following assumptions:
|
|
|
May 31
|
|
|
|
|
2017
|
|
|
Expected volatility
|
|
137% 138%
|
|
|
Risk-free interest rate
|
|
0.65% 0.82%
|
|
|
Expected life
|
|
0.46 1.00
years
|
|
|
Dividend yield
|
|
0.00%
|
|
|
Estimated fair value per warrant
|
|
$0.09 - $0.23
|
|
A summary of warrants outstanding as of
May 31, 2017 is presented below:
|
# of Warrants
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Remaining
|
|
|
Exercise Price
|
|
|
|
|
Contractual Life
|
|
|
$
|
|
|
625,000
|
|
0.29 years
|
|
|
0.15
|
|
|
290,400
|
|
0.53 years
|
|
|
0.27
|
|
|
500,000
|
|
0.61 years
|
|
|
0.23
|
|
|
1,058,525
|
|
1.20 years
|
|
|
0.14
|
|
|
2,839,666
|
|
1.25 years
|
|
|
0.14
|
|
|
2,195,790
|
|
1.84 years
|
|
|
0.60
|
|
|
287,300
|
|
1.84 years
|
|
|
0.42
|
|
|
350,000
|
|
2.01 years
|
|
|
0.14
|
|
|
750,000
|
|
4.36 years
|
|
|
0.14
|
|
|
8,896,681
|
|
1.57 year(s)
|
|
|
0.27
|
|
The Company has established its 2014
Stock Option Plan whereby the board of directors may, from time to time, grant
up to 3,850,000 (post forward stock split) stock options to directors, officers,
employees, and consultants. Stock options granted must be exercised no later
than five years from the date of grant or such lesser period as determined by
the Companys board of directors. The exercise price of an option is equal to or
greater than the closing market price of the Companys common shares on the day
preceding the date of grant. The vesting terms of each grant are set by the
board of directors.
Fiscal 2017 Activity
On October 10, 2016, the Company
granted 250,000 stock options to a consultant for business advisory services.
The exercise price of the stock options is $0.14 per share, vesting immediately
and expiring on October 10, 2018.
During the nine months ended May 31,
2017, a total of 959,125 incentive stock options were exercised for proceeds of
$164,762.
During the nine months ended May 31,
2017, the Company recorded $36,642 (2016 - $37,948) as stock based compensation
of which $17,567 (2016 - $18,873) pertained to the stock options granted during
the period with the remaining being the recognition of expense from previous
grants.
A continuity schedule for stock options
is presented below:
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
Average Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
|
|
|
|
|
$
|
|
|
Balance, August 31, 2015
(vested and outstanding)
|
|
4,070,000
|
|
|
0.15
|
|
|
Expired
|
|
(385,000
|
)
|
|
0.32
|
|
|
Cancelled
|
|
(935,000
|
)
|
|
0.16
|
|
|
Granted
|
|
735,000
|
|
|
0.13
|
|
|
Balance, August 31, 2016
(vested and outstanding)
|
|
3,485,000
|
|
|
0.15
|
|
|
Exercised
|
|
(959,1250
|
)
|
|
0.17
|
|
|
Granted
|
|
250,000
|
|
|
0.14
|
|
|
Balance, May 31, 2017 (vested and outstanding)
|
|
2,775,875
|
|
|
0.12
|
|
The fair value of options granted was
estimated as of the date of the grant by using the Black-Scholes option pricing
model with the following assumptions:
|
|
|
May 31
|
|
|
|
|
2017
|
|
|
Expected volatility
|
|
108%
|
|
|
Risk-free interest rate
|
|
0.83%
|
|
|
Expected life
|
|
2.00 years
|
|
|
Dividend yield
|
|
0.00%
|
|
|
Estimated fair value per option
|
|
$0.07
|
|
A summary of the stock options as at
May 31 2017, is presented below:
|
# of Stock Options
|
|
Weighted
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Intrinsic Value
|
|
|
|
|
Remaining
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
Contractual Life
|
|
|
$
|
|
|
$
|
|
|
247,500
|
|
1.05 years
|
|
|
0.09
|
|
|
69,075
|
|
|
303,375
|
|
2.15 years
|
|
|
0.23
|
|
|
43,300
|
|
|
990,000
|
|
2.56 years
|
|
|
0.10
|
|
|
267,300
|
|
|
275,000
|
|
2.68 years
|
|
|
0.09
|
|
|
76,750
|
|
|
550,000
|
|
2.82 years
|
|
|
0.09
|
|
|
153,500
|
|
|
110,000
|
|
3.30 years
|
|
|
0.17
|
|
|
21,700
|
|
|
300,000
|
|
3.88 years
|
|
|
0.11
|
|
|
78,000
|
|
|
2,775,875
|
|
2.62 years
|
|
|
0.12
|
|
|
709,625
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
May 31
|
|
|
May 31
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
12,932
|
|
|
29,826
|
|
|
Licensing revenue (Note 10)
|
|
37,392
|
|
|
1,181
|
|
|
Freight revenue
|
|
756
|
|
|
1,149
|
|
|
|
|
51,080
|
|
|
32,156
|
|
15.
|
Related Party Transactions
|
|
|
|
During the nine months ended May 31, 2017, the Company
incurred, in fees, $100,000 to C.A.B Financial Services (CAB) (2016 -
$90,000) and to Docherty Management Limited $131,854 (2016 - $118,651).
All fees incurred were included as consulting on the Companys statement
of operations. CAB is owned by the CEO of the Company and Docherty
Management Ltd. (Docherty Management) is owned by the President of the
Company.
|
|
|
|
Pursuant to its agreement with Docherty Management (Note
17), the Company issued 252,000 restricted common shares with a value of
$35,760 and cash compensation of $6,240, upon the 18 month contract
anniversary between the Company and Docherty Management.
|
|
|
|
On July 25, 2016, the Company entered into a loan
agreement with CAB for a principal amount of $50,000. The term of the loan
agreement is 15 months, with an interest free period for the first three
months. For the final 12 months, Lexaria is obligated to pay simple
interest at the rate of 8% per annum. During the nine months ended May 31,
2017, the Company repaid the full $50,000 principal to CAB and also paid
$1,515 in interest.
|
|
|
|
During fiscal 2016, the Company entered into a advisory
agreement with a Company controlled by a director for compensation of
$4,000 per month. During the nine months ended May 31, 2017, the Company
incurred $24,000 in such fees, recorded as consulting on the Companys
statement of operations.
|
|
|
|
During the six months ended February 29, 2016, the
Company incurred $33,424 to BKB Management Ltd, a company owned by the
previous CFO of the Company for management, consulting and accounting
services and $9,000 to a senior vice president for executive management
consulting. Both these agreements were terminated during fiscal
2016.
|
|
|
|
As at May 31, 2017, $7,446 (August 31, 2016 - $331,371)
was payable to related parties. Included in unearned revenue is $2,100 in
advance receipts for product sales from a director of the Company (Note
10).
|
|
|
|
The related party transactions are recorded at the
exchange amount established and agreed to between the related
parties.
|
16.
|
Segment Information
|
|
|
|
The Companys operations involve the development and
usage, including licensing, of its proprietary nutrient infusion
Technology. Lexaria is centrally managed and our chief operating decision
makers, being our president and the CEO, use the consolidated and other
financial information supplemented by revenue information by category of
alternative health products as well as licensing, as a whole, to make
operational decisions and to assess the performance of the Company.
Accordingly, the Company operates in a single
segment.
|
17.
|
Commitments, Significant Contracts and
Contingencies
|
|
|
|
Management Agreements
|
|
|
|
The Company is party to the following contractual
commitments with service providers.
|
|
Party
|
|
Monthly Commitment
|
|
|
C.A.B Financial Services
|
|
$12,000
|
|
|
Docherty Management Ltd.
|
|
CAD$15,000
|
|
C.A.B. Financial
Services
The Company has an agreement with
C.A.B. Financial Services (CAB) for a consulting fee of $12,000 per month. The
term of the agreement is two years but can be terminated by either party by
providing two months notice. The Company may pay Mr. Bunka a bonus from time to
time, at its sole discretion. Mr. Bunka will be entitled to receive common
stock-based and stock option based bonuses upon achieving certain milestones
during the time of his consultancy with the Company. These milestones are during
the first 12 months after the date of the agreement with CAB,:
Revenue Incentive Milestones
(Revenue Incentives A)
|
|
Upon the Company achieving non-refundable revenues of
$200,000 to any single customer in any consecutive 60-day period, CAB
would be entitled to an award of 100,000 restricted common shares of the
Company and after the first 12-month period, expiring after 24 months of
the amended agreement, upon the Company achieving non-refundable revenues
of $200,000 to any single customer in any consecutive 60- day period, CAB
would be entitled to an award of 50,000 restricted common shares of the
Company. These awards are limited to one payment per customer during the
24-month period but payable for each customer that meets the revenue
thresholds.
|
|
|
Upon the Company achieving non-refundable revenues of
$500,000 in any fiscal quarter would result in an award to CAB of 200,000
common shares of the Company and after the first 12 months, expiring 24
months after the amended agreement, the Company achieving non-refundable
revenues of $500,000 in any fiscal quarter would result in an award to CAB
of 100,000 common shares of the Company. These awards are limited to one
payment per fiscal quarter.
|
Intellectual Property Milestones
(IP Incentives B)
|
|
During the term of the agreement, for each provisional
patent application substantively devised by CAB and successfully created,
written and filed with the US Patent Office for the Companys Technology,
CAB will be entitled to an award of 250,000 restricted common shares of
the Company.
|
Docherty Management
Ltd.
The Company appointed Mr. John Docherty
as President of Lexaria effective April 15, 2015. On March 1, 2017, the Company
executed a twenty four month consulting contract with Docherty Management
Limited, solely owned by Mr. John Docherty with monthly compensation of
CAD$15,000, superseding the previous agreement of monthly compensation of CAD$12,500. The Company
may pay Mr. Docherty a bonus from time to time, at its sole discretion. Pursuant
to the previous agreement, Mr. Docherty received 800,000 stock options and
924,000 restricted common shares of the Company. Mr. Docherty will be entitled
to receive additional common stock-based and stock option based bonuses upon
achieving certain milestones during the time of his consultancy with the
Company. These milestones are during the first 12 months after the date of the
agreement with Docherty Management Ltd.:
|
|
Revenue Incentives A as defined above.
|
|
|
IP Incentives B as defined above.
|
Office Lease
The Company has lease commitments for
its office space for CAD$826 per month. The lease requires a 90-day termination
notice.
Convertible Debenture
The Company has issued a convertible
debenture for $45,000, maturing on August 31, 2020. The convertible debenture
accrues interest at 10% per annum, payable in quarterly installments (Note
11).
Corporate Development
On January 10, 2017, the Company
entered into a entered into a service agreement with an arms length service
provider for corporate development. The agreement is for six months continuing
month to month and may be terminated thereafter with one months notice for
CAD$4,000 per month. The Company may pay the service provider a bonus from time
to time, at its sole discretion. The service provider will be entitled to
receive common stock-based and stock option based bonuses upon achieving certain
milestones during the time of his consultancy with the Company. These milestones
are:
|
|
For new customers sourced by the Consultant during the
first six (6) months after signing; for combined Lexaria Energy and ViPova
products and including all combined sales efforts and/or technology
licensing revenues, achieving non-refundable revenues of $200,000 to any
single customer in any consecutive 60-day period would result in a
restricted common share award of 100,000 Company shares; and, after the
first six months after signing and expiring twelve months after signing;
for combined Lexaria Energy and ViPova products and including all sales
efforts, achieving non-refundable revenues of $200,000 to any single
customer in any consecutive 60-day period would result in a restricted
common share award of 50,000 Company shares; this clause is limited to one
payment per customer during the 12-month period, but payable on each
customer that meets these sales/licensing thresholds;
|
|
|
For new customers sourced by the Consultant during the
first six months after signing; for combined Lexaria Energy and ViPova
products and including all combined sales efforts and/or technology
licensing revenues, achieving non-refundable revenues of $500,000 in any
fiscal quarter would result in a restricted common share award of 200,000
Company shares; and, after the first six months after signing and expiring
twelve months after signing; for combined Lexaria Energy and ViPova
products and including all sales efforts, achieving non-refundable
revenues of $500,000 in any fiscal quarter would result in a restricted
common share award of 100,000 Company shares; this clause limited to one
payment per fiscal quarter;
|
On June 1
st
, 2017, the
Company appointed Mr. Allan Spissinger as acting CFO, Corporate Secretary and
Treasurer. The Company executed a twelve month consulting contract with M&E
Services Ltd., solely owned by Mr. Allan Spissinger with monthly compensation of
CAD$8,000. The Company may pay Mr. Spissinger a bonus from time to time, at its sole discretion. Mr. Spissinger was awarded
200,000 incentive stock options exercisable at $0.37 vesting immediately. Mr.
Spissinger will be entitled to receive additional common stock-based and stock
option based bonuses upon achieving certain milestones during the time of his
consultancy with the Company. These milestones are during the first 12 months
after the date of the agreement with M&E Services Ltd.:
|
|
Revenue Incentives A as defined above (Note
17).
|
On June 19th, 2017, the Company
executed a contract with Alex Blanchard Capital as manager for investor
relations & communications. The agreement is for six months continuing month
to month and may be terminated thereafter with one months notice for CAD$7,500
per month. Mr. Blanchard was granted 200,000 warrants exercisable at $0.29 and
300,000 stock options exercisable at $0.295 vesting 100,000 options at
1
st
3
rd
anniversaries of the contract provided that the
contract is not terminated. Mr. Blanchard will be entitled to receive additional
common stock-based and stock option based bonuses upon achieving certain
milestones during the time of his consultancy with the Company. These milestones
are during the first 12 months after the date of the agreement with Alex
Blanchard Capital:
|
|
Revenue Incentives A as defined above (Note
17).
|
On June 22
nd
, 2017, pursuant
to its agreement with Docherty Management Ltd. and C.A.B. Financial Services
Ltd. the company issued 420,000 restricted common shares and cash compensation
of $23,600.
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
This quarterly report contains forward-looking statements as
that term is defined in the Private Securities Litigation Reform Act of 1995.
These statements relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by terminology such as
"may", "should", "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", 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. Except as required by applicable law, including the securities
laws of the United States, we do not intend to update any of the forward-looking
statements to conform these statements to actual results.
Our unaudited interim consolidated financial statements are
stated in United States Dollars and are prepared in accordance with United
States Generally Accepted Accounting Principles. The following discussion should
be read in conjunction with our financial statements and the related notes that
appear elsewhere in this quarterly report. The following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the forward
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and elsewhere in this
quarterly report, particularly in the section entitled "Risk Factors" of this
quarterly report.
In this quarterly report, unless otherwise specified, all
dollar amounts are expressed in United States dollars. All references to "CAD$"
refer to Canadian dollars and all references to "common shares" and "shares"
refer to the common shares in our capital stock, unless otherwise indicated.
As used in this quarterly report, the terms "Lexaria" "we",
"us", "our" and "Company" mean Company and/or our subsidiaries, unless otherwise
indicated.
General and Historical Overview of Our Business
We were incorporated in the State of Nevada on December 9,
2004. We were an exploration and development oil and gas company engaged in the
exploration for and development of petroleum and natural gas in North America
from the date of incorporation until 2014. We owned various oil and gas
interests in Mississippi and Oklahoma, and produced cash flow from them. At
various times we issued equity to raise capital to acquire or sustain our
interests and operations, and entered various debt agreements for the same
reasons. In December 2014, we completed the sale of our last remaining oil and
gas assets for total consideration of $1,400,000 and repaid all outstanding
loans and debts associated with our tenure in the oil and gas business.
In 2014, we submitted an application to enter the legal medical
marijuana business in Canada and also launched a hemp oil-based food supplement
company in the USA.
We entered into a joint venture agreement with Enertopia Corp.
to source opportunities in the medical marijuana business. We also entered into
a separate joint venture agreement with Enertopia Corp. for a prospective
medical marijuana business under the Marijuana for Medical Purposes Regulations
(MMPR). Our company was to pay 55% of all costs to earn a 49% net ownership
interest in the business and Enertopia was to pay 45% of all costs to earn a 51%
ownership interest in the business. The joint venture identified a production
location in Burlington, Ontario and received municipal approval for the site in
July, 2014.
On June 26, 2015, we entered into a definitive agreement with
Enertopia Corp. and Shaxon Enterprises Ltd. to sell our 49% interest in the
Burlington Joint Venture and the MMPR application number 10MMPR0610. Pursuant to
the agreement, the joint venture received a non-refundable $10,000
deposit and is entitled to receive up to $1,500,000 in milestone payments upon
the Burlington facility becoming licensed under the MMPR. All payments made
pursuant to the agreement would be divided 51% to Enertopia Corp. and 49% to our
Company. Notwithstanding the foregoing, we can neither guarantee nor provide a
meaningful time estimate regarding the grant of a production license for the
Burlington facility.
Our food sciences activities include the development of our
proprietary nutrient infusion technologies for the production of superfoods, and
the production of enhanced food products under our two consumer product brands,
ViPova and Lexaria Energy. In May of 2016 we began outlicensing our patented
lipid nutrient infusion technology that is believed to enable higher
bioavailability rates for cannabinoids; vitamins NSAIDs; Nicotine and other
bioactive molecules than is possible without lipophilic enhancement technology.
This can allow for lower overall dosing requirements and/or higher effectiveness
in active molecule delivery, more rapid delivery to the bloodstream and
taste-masking benefits for orally administered bioactive molecules. Lexaria has
caused to be filed several patent pending applications with the US Patent
Office, and also internationally under the Patent Cooperation Treaty (PCT). On
October 26, 2016, the USPTO issued U.S. Patent No. 9,474,725, Cannabinoid
Infused Food and Beverage Compositions and Methods of Use Thereof, pertaining to
Lexarias method of improving bioavailability and taste of certain cannabinoid
lipophilic active agents in food products. The Company has also received a
Notice of Acceptance from the Australian Patent Office with patent issuance date
expected in June 2017. Lexaria hopes to reduce other common but less healthy
ingestion methods such as smoking as it embraces the benefits of public
health.
As at May 31, 2017, we only had one reporatable segment, being
the development and usage, including licensing of our proprietary nutrient
infusion technology.
We maintain our registered agent's office and our U.S. business
office at Nevada Agency and Transfer Company, 50 West Liberty, Suite 880, Reno,
Nevada 89501. Our telephone number is (755) 322-0626.
The address of our principal executive office is 156 Valleyview
Rd, Kelowna BC Canada V1X3M4. We have administrative functions located in
Vancouver, British Columbia and Phoenix, Arizona.
Our common stock is quoted on the OTC Bulletin Board under the
symbol "LXRP" and on the Canadian Securities Exchange under the symbol LXX.
Due to the implementation of British Columbia Instrument 51-509
on September 30, 2008 by the British Columbia Securities Commission, we have
been deemed to be a British Columbia based reporting issuer. As such, we are
required to file certain information and documents at
www.sedar.com
.
Our Current Business
Our companys business plan is currently focused in the USA, on
the development of strategic partnerships with licensees for our patented
technology in exchange for up front and/or staged licensing fees over time.
Secondarily and more generally, we continue to investigate expansions and
additions to our intellectual property portfolio; and, to search for additional
opportunities in alternative health sectors. This includes the acquisition or
development of intellectual property if and when we believe it advisable to do
so. We were issued our first patent by the U.S. Patent and Trademark Office
(USPTO) on October 26, 2016 and have received a Notice of Acceptance from the
Australian Patent Office with related patent issuance date expected in June
2017. We are seeking additional patent protection for what we believe to be a
unique process for the nutritional delivery of certain bioactive molecules such
as cannabinoids, Nicotine, NSAIDs, and Vitamins. To achieve sustainable and
profitable growth, our company intends to control the timing and costs of our
projects wherever possible.
During the nine-month period ended May 31, 2017 and up to the
date of this report, we experienced the following significant corporate
developments:
On September 8th, 2016, the Company announced signing new
definitive technology licensing and private label agreements. Lexaria will earn
a pre-defined premium to costs on all raw ingredient sourcing and manufacturing,
and will further earn a pre-defined royalty rate on all gross product sales
revenues earned by Timeless Herbal Care Limited. The agreement is for an initial
term of 5 years.
On October 11, 2016, the Company retained a consultant to
provide market maintenance service for the Company in compliance with regulatory
guidelines. The consultant trades shares of the Company on the Canadian
Securities Exchange for purposes of maintaining a reasonable market and
improving the liquidity of Lexarias shares.
On October 11, 2016, in exchange of business advisory services
including marketing strategies and assistance in preparing presentation
materials, dissemination of information and other business and capital advisory
services, the Company granted 250,000 stock options to a consultant with a
strike price of $0.14 per share, and expiry term of two years. The Company also
pays a compensation of CAD$5,000 to the consultant. This contract was terminated
December 12, 2016.
On October 11, 2016, pursuant to its agreement with Docherty
Management Ltd., the Company issued 252,000 restricted common shares and cash
compensation of $6,240.
On October 11, 2016, the Company issued 750,000 warrants with
an exercise price of $0.14 per share and valid for five years, in return for
consulting services provided in August, September, and October.
On October 11, 2016, the Company reached an agreement with a
director to settle the outstanding amount pursuant to a marketing agreement with
him, through issuance of common shares of the Company. To settle the outstanding
amount of $16,000 for four months to October 31, 2016, the Company issued
114,286 shares of its common stock at a value of $0.14 per share.
On October 26, 2016, the USPTO issued U.S. Patent No. 9474725,
Cannabinoid Infused Food and Beverage Compositions and Methods of Use Thereof,
pertaining to Lexarias method of improving bioavailability and taste of certain
cannabinoid lipophilic active agents in food products.
On October 27, 2016, the Compay received approval to offer
existing warrant holders an incentive to exercise warrants early. For each
exercise, in addition to the shares, the warrant holders were offered an
additional warrant with identical terms. During the period ended February 28,
2017, a total of 3,245,000 warrants were exercised at a weighted average price
of $0.2273 and the Company issued 3,245,000 common shares and 3,245,000 warrants
with a weighted average exercise price of $0.2273 to buy one additional common
share of the Company, expiring May 14, 2017. Total proceeds raised from such
incentive amounted to $737,500.
On November 1, 2016, the Company issued 56,250 shares of its
common stock in settlement of $9,000, previously recognized within accounts
payable and accrued liabilities.
On November 1, 2016, the Company issued 500,000 warrants to a
consultant. Each warrant is valid for purchase of one new common share of the
Company at a price of $0.31 per share with and expiration date of May 31, 2017.
On November 22, 2016, the Company signed a Memorandum of
Understanding with NeutrisSci International Inc. (Neutrisci) for forming a
50/50 joint venture to develop, produce, and sell a line of healthy edible
cannabinoid products using Lexarias patented technology and Neutriscis
proprietary pterostilbene tablet formula and international distribution network.
The joint venture expects to commercialize any newly created cannabinoid edible
products through distribution programs and existing strategic partners.
On November 29, 2016, the Company announced the entry of a
letter of intent for the licensing of its proprietary absorption and
palatability enhancing technology to Hempco Food and Fiber Inc. (Hempco). It
is expected that the letter of intent will advance into a definitive agreement,
however an assurance cannot be provided to this effect.
On December 1, 2016, the Company amended its agreement with CAB
for a revised consulting fee of $12,000 per month. The term of the amended
agreement is two years but can be terminated by either party by providing two
months notice.
On December 19, 2016, the Company filed to internationally
expand its U.S patent number 9474725, granted on October 26, 2016. National
filing patent applications in Canada, Australia, Japan, China, India and all 37
countries belonging to the European Patent Convention were filed. All of these
filings follow the Companys initial international Patent Cooperation Treaty
patent application.
On December 22, 2016, the Company extended the services of
Frontier Merchant Capital Group (Frontier) for a period of three months, for a
total fee of CAD$25,000. Frontier will assist the Company by increasing market
awareness utilizing a number of financial market communication initiatives
including media outreach, facilitating in-person introduction for the Company
with institutional and retail brokers and investors in cities across Canada and
the U.S., and more.
On January 10, 2017, the Company issued 500,000 incentive
warrants to an arms length party in exchange for corporate development
services. The exercise price of the incentive warrants is $0.44, vesting
immediately, and expiring on January 9, 2018.
On January 19, 2017, the Company and NeutriSci International
Inc. announced the successful development and initial trial of the industrys
first zero-sugar cannabinoid / pterostilbene edible tablet utilizing both
Neutriscis and Lexarias proprietary and patented technologies. NeutriSci and
Lexaria confirmed that the companies expect to officially bind the JV agreement
to market and commercialize a line of edible products.
On February 8, 2017, the Company through its wholly owned
Canadian subsidiary Lexaria Canpharm Corp., signed and entered a master
collaborative research agreement with the National Research Council of Canada
(NRC) to investigate technical aspects and new opportunities associated with
bioavailability enhancement of lipophilic active ingredient compositions. Under
the agreement, the Company and the NRC will both provide up to CAD$125,000 in
funding for this research, a total investment of up to CAD$250,000. The master
research agreement has an 18-month term, during which a number of shorter-term
studies will be undertaken. The collaboration will investigate and define the
chemical nature of the molecular association that Lexaria`s patented technology
is believed to effectuate between lipophilic active agents and fatty acids as
solubility and bioavailability enhancing agents.
On February 8, 2017, the Company issued 29,091 shares of its
common stock in settlement of $16,000 service fee, previously recognized within
accounts payable and accrued liabilities.
On February 27, 2017, the Company received a Notice of
Acceptance from the Australian Patent Office that Lexarias Australian patent
application 2015274698 was accepted with a patent issuance date expected in
June, 2017. The Notice of Acceptance covers Lexaria patent application entitled
Food and beverage compositions infused with lipophilic active agents and
methods of use thereof, which has been accepted with the same set of claims
previously issued in US Patent No 9,474,725 specific to non-psychoactive
cannabinoids.
On March 14, 2017, the Company commenced the formal design
phase for studies to be conducted under the master collaborative research
agreement with the NRC. A number of studies have been proposed and are currently
being evaluated , with the intention to begin work and produce results over
multiple intervals in the coming months. In aggregate, results from these
studies will add to the understanding of the physical and biochemical
characteristics imparted on molecules that have been subjected to Lexarias
technology, with a view to further demonstrating the power of the technology to
prospective commercial partners across the various consumer product sectors the
Company is targeting.
On March 24, 2017, the Company executed a twelve month
marketing and lead generation campaign with Dig Media Inc. Investing News
Network for $48,000.
On April 27, 2017, the Company issued 1,075,000 shares of its
common stock from the exercise of warrants previously granted for proceeds of
$242,047.50. All warrants were exercised by third parties who are neither
officers nor directors of the Company.
On June 1
st
, 2017, the Company appointed Mr. Allan
Spissinger as acting CFO, Corporate Secretary and Treasurer. The Company
executed a twelve month consuling contract with M&E Services Ltd., solely
owned by Mr. Allan Spissinger with monthly compensation of CAD$8,000. The
Company may pay Mr. Spissinger a bonus from time to time, at its sole
discretion. Mr. Spissinger was awared 200,000 incentive stock options
exercisable at $0.37 vesting immediately.
On June 19th, 2017, the Company entered into a entered into an
agreement with a third party researcher for CAD$3,854 per month for a period of
twelve months and continuing month to month and may be terminated thereafter
with sixty days notice.
On June 19th, 2017, the Company executed a contract with Alex
Blanchard Capital as manager for investor relations & communications. The
agreement is for six months continuing month to month and may be terminated
thereafter with one months notice for CAD$7,500 per month. Mr. Blanchard was
granted 200,000 warrants exercisable at $0.29 and 300,000 stock options
exercisable at $0.295 vesting 100,000 options at 1
st
3
rd
anniversaries of the contract provided that the contract is not terminated.
On June 22
nd
, 2017, pursuant to its agreement with
Docherty Management Ltd. and C.A.B. Financial Services Ltd. the company issued
420,000 restricted common shares and cash compensation of $23,600.
During the period from September 1, 2016 to July 14, 2017, the
Company received $3,854,342 from exercise of 959,125 stock options, 9,713,500
warrants and private placements.
Technology
Lexaria Bioscience Corp. has developed and out-licenses its
proprietary technology for improved taste, rapidity, and delivery of bioactive
compounds. Lexaria is focusing its capital and management time on its pursuit of
intellectual property, technology licensing opportunities, and an expanding
portfolio of patent pending applications.
Lexaria has multiple patents pending in over 40 countries
around the world and was granted its first patent in the USA in October, 2016.
Lexarias technology provides increases of up to 10x in intestinal absorption
rates; more rapid delivery to the bloodstream; and important taste-masking
benefits, for orally administered bioactive molecules including but not limited
to cannabinoids, vitamins, NSAIDs, and nicotine.
On November 11, 2014, our Company acquired 51% of PoViva Tea
LLC and executed an operating agreement to develop a business of legally
producing, manufacturing, importing/exporting, testing, researching and
developing, a line of hemp oil with cannabidiol-infused teas, drinks and foods.
Lexaria oversees all aspects of the business including, but not limited to,
production, product quality, licensing, testing, product legality, accounting,
marketing, capital investment, capital raising, sales, branding, advertising and
fulfillment. Pursuant to the agreement, there is a Management Committee, whereby
there are two representatives from Lexaria and one of the founding members of
PoViva.
In the production of the products, for each batch of hemp oil
purchased as a raw material to be used in ViPova branded products, we assess if
the product inputs and the completed products comply with all applicable food
and drug laws, and that the inputs and the finished products meet all applicable
legal and quality standards including and as it relates to hemp oil content; THC
content; molds and mildews; heavy metals; and may measure additional components.
The US Federal government, through the US Department of Health
and Human Services, owns US Patent #6630507, which among other things, claims
that
Cannabinoids have been found to have antioxidant
properties, unrelated to NMDA receptor antagonism.
This new found
property makes cannabinoids useful in the treatment and prophylaxis of
wide variety of
oxidation associated diseases, such as ischemic,
age-related, inflammatory and autoimmune diseases. The
cannabinoids
are found to have particular application as neuroprotectants, for example
in limiting
neurological damage following ischemic insults, such as
stroke and trauma, or in the treatment of
neurodegenerative
diseases, such as Alzheimer's disease, Parkinson's disease and HIV
dementia.
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For reference, cannabinoids are compounds that affect
cannabinoid receptors located on many human cells. CB1 receptors are widely
found within the human brain; and CB2 receptors are found with the human immune
system and have been linked to anti-inflammatory and other responses.
Despite independent scientific findings in many locations
around the world, some regulatory agencies do not officially recognize that a
human endocannabinoid system exists.
Eighty-five different cannabinoids have been isolated from the
cannabis plant, most of which do not have psychoactive properties. One that does
have psychoactive properties is tetrahydrocannabinol (THC). Endocannabinoids are
produced naturally in the human body while phytocannabinoids are produced in
several plant species, most abundantly in the Cannabis plant.
Cannabidiol is one of the major phytocannabinoid forms of
cannabinoids, contributing more than 35% of the extracts from the cannabis plant
resin. Cannabidiol occurs naturally in other plant species beyond cannabis. For
example, the most widely acknowledged alternative source of phytocannabinoid is
in the better understood Echinacea species, in widespread use as a dietary
supplement. Most phytocannabinoids are virtually insoluble in water but are
soluble in lipids and alcohol.
The Alternative Health sector is large and growing. A long term
Medical Expenditure Panel Survey was conducted from 2002 until 2008 with at
least 29,370 subjects asked repeatedly if they had seen any kind of health care
practitioner in the previous six months. The survey recorded whether the health
care provider was a complementary and alternative medicine care professional,
including homeopathic, naturopathic, or herbalist.
Between 5.3% and 5.8% of the survey group at any one time
reported that they had seen a complementary or alternative medicine provider.
Based on the US population of ~319,000,000, this suggests between 16.9 million
and 18.5 million Americans are seeking an alternative health care professional
at any given time.
Meanwhile the Centers for Disease Control and Prevention, in an
April 2011 NCHS Data Brief, reported that more than 50% of the population uses
dietary supplements of one kind or another. Detailed findings from that report
included:
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Use of dietary supplements is common among the U.S. adult
population. Over 40% used supplements in 19881994, and over one-half in
20032006.
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Multivitamins/multiminerals are the most commonly used
dietary supplements, with approximately 40% of men and women reporting use
during 20032006.
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Use of supplemental calcium increased from 28% during
19881994 to 61% during 20032006 among women aged 60 and over.
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Status of Operations
More than 150 million Americans drink tea every day, amounting
to some 79 billion servings of tea in America every year. Our launch of ViPova
Tea brand is meant to tap into this existing demand. Part of our corporate strategy is to build national brands through products that
large groups of potential customers are already familiar and comfortable
with.
PoViva Tea LLC has filed patents pending, and has received one
granted patent and one Notice of Acceptance of the patent, to bind active hemp
oil ingredients with a lipid, potentially allowing for more efficient and
comforting delivery of the CBD.
We began producing cash flows from our products in January
2015; focused on the immediate opportunities in the CBD-sectors derived from
hemp oil that is federally legal. Cannabinoids have been found by many
researchers to have antioxidant properties and Lexaria plans to use the patented
process it has acquired with ViPova teas, to infuse CBDs into a number of
popular food and beverages.
Lexaria has launched a line of premium products, always relying
on our patented hemp oil-infusion process, to bring hemp oil into the
mainstream. Because hemp oil does not have psychoactive properties we expect our
products to appeal to the widest possible customer base. Initially we will focus
our sales efforts across the continental USA. Some studies have found that 3% of
the Canadian population regularly consumes hemp food products, while 1% of the
American population regularly consumes hemp food products. We believe the
consumption of hemp based food products offers exceptional growth possibilities.
According to Nutrition Business Journal, the Organic Food
sector was a $246 billion industry in the USA during 2014, while Dietary
Supplements was a $34.6 billion industry. According to Arcview, Legal Cannabis
was a $4.7 billion US industry in 2015 but is clearly a much smaller industry
sector than the more established food sectors. Lexaria has not yet determined
whether our hemp oil-infused products will be accepted into any or all three of
these particular sectors.
Lexaria commissioned three new websites in 2015 one for
ViPova-branded food products, another for a new Lexaria corporate website, and
a third for Lexaria Energy branded food products - which were completed
throughout 2015. All the sites are in operation and the two food products
websites allow customers to place orders and interact with normal e-commerce
capabilities. The majority of our product have taken place through these
websites. A contracted national distribution center ensures rapid and accurate
fulfillment of all orders. A 1-800 ordering center has also been placed into
operation.
In 2015 Lexaria launched the LexariaEnergy brand that is
100% owned by the Company. Lexaria has had manufactured products such as protein
energy bars and hemp oil supplements that are designed for people with active
lifestyles. The Lexaria Energy brand utilizes the same patented infusion process
as does the Vipova line. Because all manufacturing has been conducted through
licensed third-party facilities, Lexaria cannot control precise manufacturing
schedules and is currently without a suitable location to manage additional
protein energy bars. Lexaria is considering additional product lines such as
additional fitness products as protein shakes and protein powders, and other
supplements including various herbal ingredients, but has not made any final
decisions regarding such products at this time.
Lexaria has not secured any widespread distribution for any of
its products and needs to do so before product sales can be considered a viable
long term business endeavor. Achieving distribution for its products is a goal
for Lexaria in upcoming quarters.
Through the November 2014 acquisition of 51% of Poviva Teas
LLC, Lexaria acquired control of certain patents pending with the United States
Patent Office. Lexaria has worked to broaden the patents and extend their
utility to molecules other than those originally named.
On June 11, 2015, Lexaria initiated the simultaneous filing of
a U.S. utility patent application and an International patent application under
the Patent Cooperation Treaty (PCT) procedure, both at the U.S. Patent and
Trademark Office (USPTO). These applications follow the Companys 2014 and
2015 family of provisional patent application filings in the U.S. and serve two
additional broad purposes:
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1)
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Lexaria is seeking protection of its intellectual
property under international treaties. To this end Lexaria has filed for
PCT patent application protection. There are 148 countries that are
signatories to the Patent Cooperation Treaty, including such major markets
as Canada, China, India, much of Europe and the Middle East, the United
Kingdom and Japan among others.
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2)
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Lexaria believes its lipid infusion technology has
applications beyond the delivery of just cannabinoids. Based on further
formulation testing, Lexaria has included additional lipophilic molecules
that may be delivered via food and beverage formats utilizing its
technology, widely encompassing three major new market opportunities for
the Company: Nicotine; Nonsteroidal Anti-Inflammatories (NSAIDs); and
Vitamins.
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On October 26, 2016, the USPTO issued U.S Patent No. 9474725,
Cannabinoid Infused Food and Beverage Compositions and Methods of Use Thereof,
pertaining to our method of improving bioavailability and taste of certain
cannabinoid lipophilic active agents in food products. This is the Companys
first patent granted and has a publish date of October 27, 2016 and protects our
technology for twenty years.
The Company has since expanded this patent internationally.
National filing patent applications in Canada, Australia, China, Japan, and
India and all 37 countries belonging to the European Patent Convention have been
filed. All of these filings follow the initial international PCT patent
application number PCT/US2015/035128. As of February 27, 2017, a Notice of
Acceptance from the Australian Patent Office was received that Lexarias
Australian patent application 2015274698 has been accepted with a patent
issuance date expected in June, 2017. The Notice of Acceptance covers Lexaria
patent application entitled Food and beverage compositions infused with
lipophilic active agents and methods of use thereof, which has been accepted
with the same set of claims previously issued in US Patent No 9,474,725.
INTERNATIONAL PATENT PROTECTION
When Lexaria first began examining the legal medical cannabis
market in 2013, and entered the market in 2014, the Company believed it could
make an impact in perhaps both the Canadian and U.S. marketplaces. Our pursuit
and development of technology has expanded our potential area of impact, both
geographically and by sector. Because of the applicability of our technology to
markets outside of the legal cannabis sector, we have taken the necessary steps
to protect that intellectual property within larger global markets, regardless
of whether they lie within the medical cannabis sector or in other unrelated
sectors.
ADDITIONAL MOLECULES
NICOTINE.
More than 99% of all nicotine that is consumed
worldwide is delivered through smoking cigarettes. Approximately 6,000,000
deaths per year, worldwide, are attributed primarily to the delivery of nicotine
through the act of smoking according to the Centers for Disease Control and
Prevention, which also estimates that over $170 billion per year is spent just
in the USA on direct medical care costs for adult smokers. 69% of U.S. adult
smokers want to quit smoking and 43% of US adult smokers have attempted to quit
in any twelve-month period.
Worldwide, retail cigarette sales were worth $722 billion in
2013, with over 5.7 trillion cigarettes sold to more than 1 billion smokers.
RELEVANCE
: Lexaria postulates that delivery of nicotine
to satisfy current demand, utilizing our patented lipid-delivery technology in
common food groups, could shift demand from smoking cigarettes to alternative
nicotine-based food products. Since most of the adverse health outcomes of
nicotine consumption are associated with the delivery method and only to a
lesser degree to the actual ingestion of nicotine, there could be a vast
positive community health outcome through the reduction in smoking cigarettes.
Additional research and regulatory compliant investigations would need to be
conducted before otherwise healthy foods such as tea, coffee or energy bar
snacks containing nicotine could be introduced. Nicotine is a named molecule in
the latest Lexaria patent applications.
NSAID
. Non-steroidal Anti-inflammatories are the
second-largest category of pain management treatment options in the world. The
global pain management market was estimated at $22 billion in 2011, with $5.4
billion of this market being served by NSAIDs. The U.S. makes up over one-half
of the global market. The opiods market (such as morphine) form the largest single pain management sector but
are known to be associated with serious dependence and tolerance issues.
Some of the most commonly known NSAIDs are ASA (Aspirin),
Ibuprofen (Advil, Motrin), and Acetaminophen (Tylenol). (Acetaminophen is not
accepted by all persons to be an NSAID.) Although NSAIDs are generally a safe
and effective treatment method for pain, they have been associated with a number
of gastrointestinal problems including dyspepsia and gastric bleeding.
RELEVANCE
: Lexaria postulates that delivery of NSAIDs
through a lipid-based mechanism could provide the beneficial properties of pain
relief with lessened negative gastrointestinal effects, and also potentially
deliver lower dosages of active ingredients with similar pain management
outcomes as current pill forms at higher dosages. ASA, Piroxicam, Diclofenac,
Indomethacin, Ibuprofen, and Acetaminophen are all named molecules in the latest
Lexaria patent applications.
VITAMINS.
The global vitamin and supplement market is
worth $68 billion according to Euromonitor. The category is both broad and deep,
comprised of many popular and some lesser known substances. Vitamins in general
are thought to be an $8.5 billion annual market in the U.S. The U.S. is the
largest single national market in the world, and China and Japan are the
2
nd
and 3
rd
largest vitamin markets.
Vitamin E is fat soluble and can be incorporated into cell
membranes which can protect them from oxidative damage. Global consumption of
natural source vitamin E was 10,900 metric tons in 2013 worth $611.9
million.
RELEVANCE
: Lexaria postulates that delivery of fat
soluble vitamins through its patented lipid-based delivery mechanism may result
in less waste and lower dosages required than most current pill forms. As well,
ingestion of pills is an unpleasant experience for many people so it is possible
that vitamin delivery through common food groups could vastly expand market
demand for this sector. Vitamin E is a named molecule in the latest Lexaria
patent applications.
On August 11, 2015, Lexaria signed a license agreement with
PoViva Tea LLC for $10,000, granting Lexaria a 35-year non exclusive worldwide
license to unencumbered use of PoViva Tea LLCs IP Rights, including rights of
resale. This license agreement ensures Lexaria has full access to the underlying
infusion technology.
On August 24, 2015, the Company announced potential
industry-changing achievements in enhanced gastrointestinal absorption of
cannabidiol (CBD) utilizing Lexarias technology. The third-party testing was
conducted in two phases of
in vitro
tests beginning in June and completed
in August, 2015.
The independent laboratory results delivered average CBD
permeability of 499% of baseline permeability, compared to CBD permeability
without Lexarias technology. These results exceed Company expectations. This
was assessed in a strictly controlled,
in vitro
experiment using a human
intestinal tissue model. Samples of Lexarias commercially available
CBD-fortified ViPova black tea were administered in the model compared with
concentration-matched CBD control preparations that lacked Lexarias patented
formulation and process enhancements. Lexaria believes that its
in vitro
findings provide compelling evidence of the intestinal absorption enhancing
capabilities of its technology, based on which it is exploring opportunities to
progress to more advanced, follow-on bioavailability testing in animals.
The tests also showed 325% of baseline gastro-intestinal
permeability of CBD comparing Lexarias CBD-fortified ViPova black tea to a
second control of CBD and black tea combined,
without
Lexarias patented
formulation enhancements. This confirmed that the specialized processing
undertaken by Lexaria during its manufacturing process together with its
formulation enhancements, does indeed significantly improve absorption levels.
The bioavailability of CBD (or of THC) varies greatly by
delivery method. Smoking typically delivers cannabinoids at an average
bioavailability rate of 30% (Huestis (2007) Chem. Biodivers. 4:17701804;
McGilveray (2005) Pain Res. Manag. 10 Suppl. A:15A 22A). By comparison, orally
consumed cannabis edibles typically deliver cannabinoids at an average
bioavailability rate of only 5% (Karschner et al. (2011) Clin. Chem.
57:6675).
The Companys present findings suggest that its technology may
achieve a 5-fold improvement in cannabinoid absorption in edible form over that
which can be achieved without its proprietary process and formulation
enhancements. This conceptually supports that Lexarias technology represents a
significant breakthrough in cannabinoid delivery by approximating the high
absorption levels achieved as though through administration by smoking, but
without the associated negative effects on human health caused by smoking.
The tests were completed in two phases culminating with testing
using simulated intestinal fluid conditions that delivered these findings. These
results were stronger than earlier iterations of the tests that did not use a
simulated intestinal fluid environment and contributed to Lexarias
understanding of the mechanisms at work. For these and other reasons, Lexaria
believes that bioavailability testing in animals is likely to yield even
stronger absorption results in the presence of natural intestinal fluid
conditions.
CBD has been repeatedly found to provide beneficial pain
relieving, anti-inflammatory, anti-anxiety, neuroprotection, anti-psychotic, and
anti-convulsive effects among others. Lexarias patented technology could
significantly reduce individual serving requirements for CBD to consumers. This
could lead to reduced costs of consumption for consumers and increased
profitability for Lexaria.
Lexaria believes that the same technology used to enhance the
absorption of CBD in the recent laboratory tests, is applicable to THC,
nicotine, NSAIDs and other lipophilic compounds that are widely used today.
On November 3, 2015, Lexaria Energy10 protein bars became
available for retail sales with 2 new flavors. The Company sells Cashew Berry
Date vegan bar which is optimal for pre-workout or morning use, with 10 grams of
protein and a combination of dates, cherries and blueberries for energy from
natural sugar sources. The 70-gram bar delivers energy for a workout or for the
day to come. The Chocolate Berry Date bar is optimal for post-workout and for
afternoon or evening use, or anytime one has the munchies. This 82-gram bar has
21 grams of protein and 13 grams of fiber to provide ones body with comfort and
cleansing after strenuous activity.
During January 2015, Lexaria conducted a study of nitric oxide
levels in humans, as a biomarker for absorption of cannabidiol, with the
expectation that it would provide additional evidence of the efficient
absorption of cannabidiol from Lexaria food products enhanced with hemp oil, by
demonstrating the elevation of nitric oxide in the human body in response to
product ingestion.
The study data from human subjects demonstrated significant
elevation of systemic nitric oxide levels as a surrogate biomarker for
cannabidiol (CBD) bioabsorption in response to ingestion of Lexaria's products.
This provided clinical support for the CBD bioavailability enhancing properties
of Lexaria's patented technology, on the premise that bioavailable CBD is known
to elevate levels of the endocannabinoid anandamide in the human body which, in
turn, stimulates release of nitric oxide in the vascular system.
In summary, consuming Lexaria and ViPova food products
resulted in elevated levels of nitric oxide within the body. The results of the
study indicated that all Lexaria and ViPova food products elicited significant
increases in salivary nitric oxide, achieving levels from 110 µM to as high as
220 µM in the test subjects. The beverage products generally had faster initial
responses in as little as 15 minutes after product ingestion, whereas the
initial responses from the protein-energy bars required 30 minutes. The faster
response time with the beverage products was to be expected, given the relative
ease of digesting liquids versus solids. All products sustained their maximum
levels of nitric oxide detection through to the 60-minute end-points used in the
study, indicating a need for additional study to determine the length of time
that nitric oxide levels remain elevated following production consumption.
The study assessed six flavors of ViPova tea (Yunan Black,
Herbal Cherry Black, Earl Grey, Herbal Bengal Chai, Herbal Masala Chai and Decaf
English Breakfast), ViPova Columbian Supremo Coffee, ViPova Hot Chocolate and
Lexaria Energy Foods Chocolate Berry Date and Cashew Berry Date protein-energy
bars.
Six healthy human subjects (3 male and 3 female) between the
ages of 22 and 65 years of age were recruited for the study. Subjects were
screened for cardiovascular and allergic response to hemp products, were
non-smokers and did not have any history of substance or alcohol abuse. One
product was studied per day across all six subjects, with each subject consuming
a full product serving size. Subjects were required to refrain from eating food
or using vape products for at least 12 hours before test article administration
on each day of the study. Nitric oxide levels in the test subjects were assessed using a commercially available,
colorimetric test kit designed to quantify systemic nitric oxide via a
detectable salivary marker. Immediately before test article administration each
day, all subjects were required to demonstrate a negative baseline nitric oxide
saliva test. Subjects were considered to have a negative test strip reading at a
level of 20 µM according to the test strip scale, and positive readings anywhere
above this. Subjects performed salivary nitric oxide testing at 15, 30, 45 and
60 minutes post-consumption of each product. All subjects remained sedentary
from baseline through to the completion of testing for each product.
On January 28, 2016, Lexaria signed a distribution agreement
with Telluride Coffee Roasters, LLC. That agreement has since expired.
On May 14, 2016, the Company entered into a Licensing Agreement
allowing the Licensee, for a two-year period, to utilize the Companys
technology to create, test, manufacture, and sell marijuana-infused consumable
and/or topical products, in the state of Colorado, with an option of extending
the terms of the Licensing Agreement to Washington, Oregon, and California. In
addition to the granting of the license, the Company will provide support
services to the Licensee in connection with the use of the Companys technology
during the term of the Licensing Agreement. The Licensing Agreement is the first
contracted, predictable, and significant revenue stream to be achieved as a
direct result of Lexarias technological advantage in the marketplace. Under the
terms of the Licensing Agreement, the Licensee will pay a minimum of $122,000 in
pre-defined staged payments to Lexaria over the initial two-year term. As per
the Licensing Agreement, if the Licensee were to introduce certain product lines
utilizing Lexarias technology in each of the four states contemplated, Lexaria
could expect to receive a maximum of $1,064,000 over approximately 3.5 years,
and the Licensee would enjoy semi-exclusivity to introduce its products in each
of those states. This licensee is currently contributing to Lexarias revenues
as expected.
Lexaria has since entered into further letters of intent for
out-licensing its technology and has also collaborated with other parties for
production of other products such as edible tablets and to conduct research to
investigate technical aspects associated with bioavailability enhancement of
lipophilic active ingredient compositions.
The Company does not know and cannot know whether these
strategies will be successful, or if successful, how long it will take to gain
consumer acceptance and customer loyalty. It can be a challenge to be successful
by introducing new consumer products to a competitive retail marketplace, and we
can offer no assurances that our products will be a commercial success.
The continuation of our business interests in these sectors is
dependent upon obtaining further financing, a successful programs of
development, and, ultimately, achieving a profitable level of operations. The
issuance of additional equity securities by us could result in a significant
dilution in the equity interests of our current stockholders. Obtaining
commercial loans, assuming those loans would be available, will increase our
liabilities and future cash commitments.
There are no assurances that we will be able to obtain further
funds required for our continued operations. As noted herein, we are pursuing
various financing alternatives to meet our immediate and long-term financial
requirements. There can be no assurance that additional financing will be
available to us when needed or, if available, that it can be obtained on
commercially reasonable terms. If we are not able to obtain the additional
financing on a timely basis, we will be unable to conduct our operations as
planned, and we will not be able to meet our other obligations as they become
due. In such event, we will be forced to scale down or perhaps even cease our
operations. There is significant uncertainty as to whether we can obtain
additional financing.
Our business plan does not anticipate that we will hire a large
number of employees or that we will require extensive office space. We expect to
be able to utilize contracted third parties for most of our production and
distribution needs, instead focusing on our capital on higher value added
aspects of the business such as research and development, and scientific
testing. We have no current plans to build our own production facility.
Our company relies on the business experience of our existing
management, on the technical abilities of consulting experts, and on the
technical and operational abilities of its operating partner companies to
evaluate business opportunities.
Competition
The legal marijuana industry is comprised of several
sub-sectors, and is legal under different guidelines in many states though it
remains illegal under most federal laws. Notwithstanding, the overall sector is
generally recognized to be one of the fastest growing in the USA, with
state-legal revenue of over $4 billion in 2015. Independent projections and
publicized reports expect revenue of $20 billion or more in 2020, both as the
sector gains in credibility and acceptance, and as more and more states legalize
either medical use or adult recreational use; or both. In any fast growing
industry, competition is expected to be both strong and also difficult to
evaluate as to the most effective competitive threats. While we are an early
adopter within the cannabinoid delivery sector, there are already reports of
more than 300 public companies that have claimed to be involved in the sector in
some fashion; and an unknown number of private companies. Our current strategies
may prove to be ineffective as the sector grows and matures, and if so, we will
have to adapt quickly to changing sectoral circumstances.
Competition in alternative health sectors and in consumer
products in the USA is fierce. We expect to encounter competitive threats from
existing participants in the sector and new entrants. Although PoViva Tea LLC
has filed patent applications to protect intellectual property, there is no
assurance that patents will be granted nor that other firms may not file
superior patents pending. Food supplements, organic foods, and health food
markets are all well established and our Company will face many challenges
trying to enter these markets.
Competition within the federally legal market for medical
marijuana in Canada is intense, with many licensed producers regulated by the
Federal Government of Canada. Many of these companies are well capitalized and
capable of developing competing technologies. There is no way to predict the
outcome of natural competition and how it may affect our Company in Canada.
Compliance with Government Regulation
More than 24 States in the USA have passed some form of
legislation related to that states permission to grow, cultivate, sell or use
marijuana either for medical purposes or for recreational or adult use
purposes; or both. The various state legislation is not necessarily harmonious
with one another, leading to potential conflicts between state laws. It is most
often not legal to transport cannabis-related products across state lines.
Lexaria does not touch the plant in any location within or
outside of the USA. We comply with federal law that provides for certain
exemptions for agricultural (industrial) hemp and certain byproducts to be
manufactured and sold in the US. Our technology may have applications within the
legal marijuana sector and we may seek to license that technology to companies
that have met and comply with state regulations for the sale or distribution of
cannabis related products in any particular jurisdiction.
Lexarias patented technology may also have application in
completely separate sectors such as vitamins, non-steroidal anti-inflammatories,
and nicotine. We have no products nor operations in any of these sectors today.
If we enter any of these sectors at any time, we will be exposed to and of
necessity will have to comply with, all local, state and federal regulations in
each of those sectors. As a result of the possibility of Lexaria being involved
in a number of disparate business sectors, compliance with government
regulations could require significant resources and expertise from our
company.
Significant Acquisitions and Dispositions
We do not intend to purchase any significant equipment over the
twelve months other than office computers, furnishings, and communication
equipment as required, although that strategy could change if food manufacturing
considerations demand it.
Corporate Offices
The address of our principal executive office is 156 Valleyview
Rd., Kelowna, BC, Canada, V1X 3M4. We have 1,500 square feet of office space,
which includes four executive offices for a monthly rate of CAD$826. Our current
locations provide adequate office space for our purposes at
this stage of our development. Additional space may be required if/as the
Company decides it requires additional personnel.
Employees
We primarily use sub-contractors and consultants in the
intellectual property development and licensing, and alternative health product
sectors. We primarily engage with consultants to serve our executive needs.
The Company has an agreement with CAB for a consulting fee of
$12,000 per month. The term of the agreement is two years but can be terminated
by either party by providing two months notice. The Company may pay Mr. Bunka a
bonus from time to time, at its sole discretion. Mr. Bunka will be entitled to
receive common stock-based and stock option based bonuses upon achieving certain
milestones during the time of his consultancy with the Company. These milestones
are:
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During the first 12 months after the date of the
agreement with CAB, upon the Company achieving non- refundable revenues of
$200,000 to any single customer in any consecutive 60-day period, CAB
would be entitled to an award of 100,000 restricted common shares of the
Company and after the first 12-month period, expiring after 24 months of
the amended agreement, upon the Company achieving non-refundable revenues
of $200,000 to any single customer in any consecutive 60-day period, CAB
would be entitled to an award of 50,000 restricted common shares of the
Company. These awards are limited to one payment per customer during the
24-month period but payable for each customer that meets the revenue
thresholds.
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During the first 12 months after the agreement, the
Company achieving non-refundable revenues of $500,000 in any fiscal
quarter would result in an award to CAB of 200,000 common shares of the
Company and after the first 12 months, expiring 24 months after the
amended agreement, the Company achieving non-refundable revenues of
$500,000 in any fiscal quarter would result in an award to CAB of 100,000
common shares of the Company. These awards are limited to one payment per
fiscal quarter.
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During the term of the agreement, for each provisional
patent application substantively devised by CAB and successfully created,
written and filed with the US Patent Office for the Companys Technology,
CAB will be entitled to an award of 250,000 restricted common shares of
the Company.
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On September 1, 2014, the Company entered into a contract with
M&E Services Ltd., wholly owned company by Allan Spissinger as Controller
for CAD$2,500 a month plus GST. This contract was amended on December 1, 2014 to
CAD$3,400 a month plus GST. Additional work performed is billed on an hourly
basis.
The Company appointed Mr. John Docherty as President of Lexaria
effective April 15, 2015 and has an agreement with Docherty Management Limited,
solely owned by Mr. John Docherty with monthly compensation of CAD$15,000, plus
additional milestone payments as follows.
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|
During the first twelve months after signing; for
combined Lexaria Energy and ViPova products and including all combined
sales efforts and/or technology licensing revenues, achieving
non-refundable revenues of $200,000 to any single customer in any
consecutive 60-day period would result in a restricted common share award
of 100,000 Company shares; and, after the first twelve months after
signing and expiring twentyfour months after signing; for combined Lexaria
Energy and ViPova products and including all sales efforts, achieving
non-refundable revenues of $200,000 to any single customer in any
consecutive 60-day period would result in a restricted common share award
of 50,000 Company shares; this clause limited to one payment per customer
during the 24-month period, but payable on each customer that meets these
sales/licensing
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|
|
During the first twelve months after signing; for
combined Lexaria Energy and ViPova products and including all combined
sales efforts and/or technology licensing revenues, achieving
non-refundable revenues of $500,000 in any fiscal quarter would result in
a restricted common share award of 200,000 Company shares; and, after the
first twelve months after signing and expiring twenty-four months after
signing; for combined Lexaria Energy and ViPova products and including all
sales efforts, achieving nonrefundable revenues of $500,000 in any fiscal
quarter would result in a restricted common share award of 100,000 Company
shares; this clause limited to one payment per fiscal quarter;
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|
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During the time this Agreement remains in effect, for
each new provisional patent application substantially devised by
Consultant and successfully created, written and filed with the US Patent
Office for Company- owned intellectual property, a restricted common share
award of 250,000 Company shares, this clause not limited to frequency of
payment but each patent application to be approved by the Board of
Directors of the Company, in advance;
|
We do not expect any material changes in the number of
employees over the next 12-month period. We do and will continue to outsource
contract employment as needed. However, with widespread consumer acceptance of
our new products that requires more significant operations, we may retain
additional employees.
Off-Balance Sheet Arrangements
We have no significant 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 generally accepted accounting principles used in
the United States. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. These estimates and assumptions are affected
by management's application of accounting policies. We believe that
understanding the basis and nature of the estimates and assumptions involved
with the following aspects of our financial statements is critical to an
understanding of our financials.
Long-Lived Assets
In accordance with FASB ASC 360 Section S45, Accounting for
the Impairment or Disposal of Long-Lived Assets", the carrying value of
intangible assets and other long-lived assets is reviewed on a regular basis for
the existence of facts or circumstances that may suggest impairment. We
recognize impairment when the sum of the expected undiscounted future cash flows
is less than the carrying amount of the asset. Impairment losses, if any, are
measured as the excess of the carrying amount of the asset over its estimated
fair value.
Revenue Recognition
Product revenue
ViPova product and Lexaria Energy product revenues are
recorded using the sales method whereby our Company recognizes product sales
based on the amount of products sold to purchasers. Cost of goods sold is
recognized in the same period in which the revenue is earned.
Licensing revenue
Pursuant to the license agreements for the Companys patented
technology, the licensee acquired territorial licenses for an upfront fee. The
Company is also required to provide support services in connection with the
licensees use of the technology over the term of the license. As the support
services will not be sold on a stand-alone basis, the Company is unable to
establish vendor-specific objective evidence of their fair value to be able to
allocate the proceeds objectively to such services and the license. Accordingly,
the up-front fee is being recognized ratably over the term of the first license
granted, which is initially for two years.
Convertible Debenture
The Company entered into a convertible debenture agreement on
March 8, 2016 and evaluated the terms of the various conversion options to
assess if separate accounting is required for such embedded features, which are
adjusted to fair value through earnings at each reporting
period. The Company determined that the embedded features within the debenture
do not meet the net settlement provision characteristic of a derivative and as a
result, did not apply the bifurcation requirements for such conversion options.
Going Concern
We have suffered recurring losses from operations. The
continuation of our Company as a going concern is dependent upon our Company
attaining and maintaining profitable operations and/or raising additional
capital. The 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.
As a result of the financings completed this quarter,
management believes it has sufficient funds to meet its obligations as they
become due for the next twelve months.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the
FASB) issued a new standard related to the revenue recognition. Under the new
standard, recognition of revenue occurs when a customer obtains control of
promised goods or services in an amount that reflects the consideration which
the entity expects to receive in exchange for those goods or services. In
addition, the standard requires disclosure of the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with customers. The
FASB has recently issued several amendments to the standards, including
clarification on the accounting for licenses of intellectual property and
identifying performance obligations.
The guidance permits two methods of adoption: retrospectively
to each prior reporting period presented (full retrospective method), or
retrospectively with the cumulative effect of initially applying the guidance
recognized at the date of initial application (the cumulative catch-up
transition method). The Company will apply the full retrospective approach to
adopt the standard but does not anticipate that this standard will have a
material impact on its consolidated financial statements.
In August 2014, the FASB issued new guidance on determining
when and how to disclose going concern uncertainties in the financial
statements. The new guidance requires management to perform interim and annual
assessments of an entitys ability to continue as a going concern within one
year of the date the financial statements are issued. An entity must provide
certain disclosures if conditions or events raise substantial doubt about its
ability to continue as a going concern. The guidance is effective for annual
periods ending after December 15, 2016 and interim periods thereafter. Early
adoption is permitted. Upon adoption, the Company does not believe this guidance
will have a material impact on its consolidated results of operations or
financial position.
In July 2015, FASB issued ASU 2015-11, Simplifying the
Measurement of Inventory (ASU 2015-11). ASU 2015-11 requires that an entity
measure inventory at the lower of cost and net realizable value. This ASU does
not apply to inventory measured using last-in, first-out methodology. ASU
2015-11 is effective for annual reporting periods beginning after December 15,
2016, including interim periods within that reporting period. The Company does
not expect the new standard to have a significant impact on its consolidated
financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet
Classification of Deferred Taxes (ASU 2015-17). ASU 2015-17 requires companies
to classify all deferred tax assets or liabilities as noncurrent on the balance
sheet rather than separately disclosing deferred taxes as current and
noncurrent. This standard is effective for the Company beginning on September 1,
2017 and can be applied either prospectively or retrospectively to all periods
presented upon adoption. The standard is not expected to have any impact on the
Companys financial statements.
In January 2016, FASB issued a new standard to amend certain
aspects of recognition, measurement, presentation, and disclosure of financial
instruments. Most prominent among the amendments is the requirement for changes
in fair value of equity investments, with certain exceptions, to
be recognized through profit or loss rather than other comprehensive income. The
new standard will be effective for the Company beginning September 1, 2018. The
standard is not expected to have any impact on the Companys financial
statements.
In February 2016 FASB issued ASU No. 2016-02, Leases (Topic
842) which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides
principles for the recognition, measurement, presentation, and disclosure of
leases for both lessees and the lessors. The new standard requires the lessees
to apply a dual approach, classifying leases as either finance or operating
leases based on the principle of whether or not the lease is effectively a
financed purchase by the lessee. The classification will determine whether lease
expense is recognized based on an effective interest method or on a
straight-line basis over the term of the lease, respectively. A lessee is also
required to record a right-of-use asset and a lease liability for all leases
with a term of greater than twelve months regardless of classification. Leases
with a term of twelve months or less will be accounted for similar to existing
guidance for operating leases. The standard is effective for annual and interim
periods beginning after December 15, 2018, with early adoption permitted upon
issuance. When adopted, the Company does not expect this guidance to have a
material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock
Compensation (Topic 718), Improvements to Employee Share-Based Payment
Accounting. Under ASU 2016-09, companies will no longer record excess tax
benefits and certain tax deficiencies in additional paid in capital (APIC).
Instead, they will record all excess tax benefits and tax deficiencies as income
tax expense or benefit in the income statement and the APIC pools will be
eliminated. In addition, ASU 2016-09 eliminates the requirement that excess tax
benefits be realized before companies can recognize them. ASU 2016-09 also
requires companies to present excess tax benefits as an operating activity on
the statement of cash flows rather than as a financing activity. Furthermore,
ASU 2016-09 will increase the amount an employer can withhold to cover income
taxes on awards and still qualify for the exception to liability classification
for shares used to satisfy the employers statutory income tax withholding
obligation. An employer with a statutory income tax withholding obligation will
now be allowed to withhold shares with the fair value up to the amount of taxes
owed using the maximum statutory rate in the employees applicable
jurisdiction(s). ASU 2016-09 requires a company to classify the cash paid to a
tax authority when shares are withheld to satisfy its statutory income tax
withholding obligation as a financing activity on the statement of cash flows.
Under current U.S. GAAP, it is not specified how these cash flows should be
classified. In addition, companies will now have to elect whether to account for
forfeitures on share-based payments by (1) recognizing forfeiture awards as they
occur or (2) estimating the number of awards expected to be forfeited and
adjusting the estimate when it is likely to change, as in currently required.
The amendments of this ASU are effective for reporting periods beginning after
December 15, 2016, with early adoption permitted but all of the guidance must be
adopted in the same period. The Company does not grant non-statutory stock
options and, as such, does not expect this guidance to have a material impact on
its consolidated financial statements.
In June 2016, the FASB issued a new standard to replace the
incurred loss impairment methodology in current U.S. GAAP with a methodology
that reflects expected credit losses and requires consideration of a broarder
range of reasonable and supportable information to inform credit loss estimates.
For trade and other receivables, loans and other financial instruments, the
Company will be required to use a forward-looking expected loss model rather
than the incurred loss model for recognizing credit losses which reflects losses
that are probable. Credit losses relating to available for sale debt securities
will also be recorded through an allowance for credit losses rather than as a
reduction in the amortized cost basis of the securities. The new standard will
be effective for Lexaria beginning September 1, 2020, with early adoption
permitted. Application of the amendments is through a cumulative-effect
adjustment to deficit as of the effective date. The Company is currently
assessing the impact of the standard on its consolidated financial statements.
Results of Operations Nine Months Ended May 31, 2017 and
2016
The following summary of our results of operations should be
read in conjunction with our financial statements for the period ended May 31,
2017, which are included herein.
Our operating results for the nine months ended May 31, 2017
and 2016 and the changes between those periods for the respective items are
summarized as follows:
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Nine Months
|
|
|
Nine Months
|
|
|
Change
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Between the
|
|
|
|
May 31
|
|
|
May 31
|
|
|
Periods
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Sales
|
|
51,080
|
|
|
32,156
|
|
|
18,924
|
|
Cost of Goods Sold
|
|
24,943
|
|
|
42,929
|
|
|
(17,986
|
)
|
General and Administrative
|
|
1,231,107
|
|
|
905,484
|
|
|
325,623
|
|
Impairment of Inventory
|
|
4,651
|
|
|
34,246
|
|
|
(29,595
|
)
|
Net loss
|
|
(1,209,621
|
)
|
|
(950,503
|
)
|
|
(259,118
|
)
|
Our financial statements report a net loss of $1,209,621 for
the nine month period ended May 31, 2017 compared to 2016 where we incurred a
net loss of $950,503. During the nine month period ended May 31, 2017, our
general and administrative expenses were significantly higher compared to the
nine months ended May 31, 2016, however the increase primarily is a result of
the third party consulting costs that were primarily settled via issuance of
common shares and warrants of the Company, patent and trademark filing costs. A
total value of $309,288 worth of common shares and warrants were issued for
services received during the nine months ended May 31, 2017. As evidenced by
this, the Company continued to focus on the conservation of its cash resources.
We directed our efforts on value creating activities, such as applying for
international extensions for its patents and trademarks, investor relations
programs, and consulting to further intellectual property agreements.
Revenues remain low in a reflection of the unique challenges in
operating in a constantly changing regulatory environment with consumer products
and technology that are new to most consumers. The Company continues to pursue
more widespread distribution possibilities which have the potential to unlock
more significant consumer revenues. Meanwhile the Company continues to record
growing pro-rata amounts of technology licensing revenues.
Readers are cautioned that the Company is still at an early
stage of its development and the revenue of $51,080 represents the start-up of
our entry into a new business sector. The Company is building product sales
channels in internet-based locations and also through the formation and
launching of a direct sales model. Continued efforts are also progressing to
increase exposure of the ViPova brand and of the Lexaria Energy brand. All of
our product sales at this early stage are likely to be non-representative. Our
consumer product sales only accounted for 25% of our total revenues during the
nine months ended May 31, 2017 compared to 93% of our revenue during the same
period in 2016. This is due to our focus on generating revenues through other
avenues such as the licensing of the Companys patented technology.
Our revenue from technology licensing to third parties amounted
to $37,392 (2016 - $1,181) during the nine months ended May 31, 2017,
representing more than 75% (2016 4%) of our total revenues. We expect this
trend to continue in the future. At the time of this report, the Company has one
definitive license agreement and has also entered into additional letters of
intent for similar agreeements. The Company also has several sets of
negotiations ongoing for additional technology licensing agreements and has also
entered into an Memorandum of Understanding to form a joint venture to develop,
produce, and sell a line of healthy edible cannabinoid products using our
patented technology. Due to the service provisions in our licensing agreements,
the Company recognizes it Territorial License fee revenues ratably over the
course of these agreements. During the nine months ended May 31, 2017, the
Company earned $30,000 from its Territorial License fees and $12,000 from its
Usage Fees, of which a total of $37,000 was recognized in its consolidated financial
statements. The revenue recognized in the Companys statement of operations is
therefore not reflective of its cash revenues. Since the inception of the
Companys licensing agreement entered into during the third quarter of its
fiscal 2016, the Company has earned $62,000 of revenue from this sole agreement,
of which, $43,319 has been recognized in its financial statements on a
cumulative basis.
The Companys early-stage revenue figures are not expected to
be representative of longer term trends, and any single commercial order or
technology licensing arrangement could be disruptive to longer term averages. As
the Company does not incur additional costs of sales in conjunction with its
licensing agreements, it expects its gross margin to improve once this sector of
its business reaches a more mature stage.
Results of Operations Three Months Ended May 31, 2017 and
May 31, 2016
The following summary of our results of operations should be
read in conjunction with our financial statements for the period ended May 31,
2017, which are included herein.
Our operating results for the three months ended May 31, 2017
and May 31, 2016 and the changes between those periods for the respective items
are summarized as follows:
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Three Months
|
|
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Three Months
|
|
|
Change
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Between the
|
|
|
|
May 31
|
|
|
May 31
|
|
|
Periods
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Sales
|
|
29,253
|
|
|
6,215
|
|
|
23,038
|
|
Cost of Goods Sold
|
|
9,183
|
|
|
9,309
|
|
|
(126
|
)
|
General and Administrative
|
|
363,430
|
|
|
261,107
|
|
|
102,323
|
|
Impairment of Inventory
|
|
726
|
|
|
-
|
|
|
726
|
|
Net loss
|
|
(344,086
|
)
|
|
(264,201
|
)
|
|
(79,885
|
)
|
The increase in our general and administrative expenses for the
three month period ended May 31 2017 primarily pertains to value creating
activities such as patent and trademark filing fees, marketing, investor
outreach programs, consulting to further intellectual property agreements and
also includes the issue of common shares in exchange for services of
$12,000.
During the three months ended May 31, 2017, the Company
continued its focus on entering into additional agreements for out-licensing its
technology. As described above, as a result of the service provisions in our
licensing agreements, the Company only ratably recognizes its revenue earned
into its consolidated financial statements. Of the total potential revenue of
$10,000 based on the quarterly receipts from its licensee, the Company
recognized $12,569 as revenue. The Company entered into its first technology
licensing agreement during the third quarter of its fiscal 2016. During the
three months ended May 31, 2016, the Companys primary source of revenue was
from its Lexaria Energy and ViPova brand products. As noted above, we expect
our future revenues to be primarily from our out-licensing agreements, however,
we are also expanding our product mix to further enhance our revenues from
bioactive molecule infused consumer products.
Liquidity and Financial Condition
|
|
May 31
|
|
|
August 31
|
|
Working Capital
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Current assets
|
|
3,079,280
|
|
|
510,166
|
|
Current liabilities
|
|
40,002
|
|
|
433,881
|
|
Working capital balance (deficiency)
|
|
3,039,278
|
|
|
76,285
|
|
The Companys working capital balance increased during the nine
months ended May 31, 2017, as a result of its financing activities during the
period, including the provision of early warrant exercise incentives, which
resulted in the Company raising in excess of $737,000 and a private placement
raising over $1,723,000. Other incentive option and warrant exercises in the
period raised an additional $1,576,000. Comparatively, the Company raised
approximately $419,000 during fiscal 2016.
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|
Nine Months
Ended
|
|
|
|
May 31
|
|
|
May 31
|
|
Cash flows
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Cash flows used in operating
activities
|
|
(1,192,574
|
)
|
|
(400,089
|
)
|
Cash flows used in investing activities
|
|
(9,699
|
)
|
|
(15,364
|
)
|
Cash flows provided by financing activities
|
|
3,897,842
|
|
|
192,480
|
|
Increase (decrease) in cash
|
|
2,695,569
|
|
|
(222,973
|
)
|
Operating Activities
The increase in the net cash used in operating activities
during the nine months ended May 31, 2017 is primarily the result of the
Companys relative cash position during the respective periods. The Companys
cash expenditures increased as Lexaria had built a significant payable balance
during the nine months ended May 31, 2016, whereas during the nine months ended
May 31, 2017, the Company settled its liabilities as incurred and paid
outstanding amounts. The Company also increased its pursuit of patent and
trademark filings and investor outreach programs.
Investing Activities
During the nine months ended May 31, 2017, the Company
continued its investment in expanding its patent applications. During the same
period in 2016, the Company also acquired certain office equipment.
Financing Activities
The Company raised a total of $3,854,842 from equity issuances,
from exercise of its outstanding stock options and warrants. In addition,
$93,500 was collected from certain common shares subscribed during fiscal 2016.
The Company also repaid the full $50,000 of the principal amount of the loan
from its chief executive officer. During the nine months ended May 31, 2016, the
Company raised $147,480 from private placements.