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
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.
Effective at the opening of trading on October 28, 2009, our
shares of common stock began trading on the Canadian Securities Exchange
(formerly, Canadian National Stock Exchange) under the trading symbol LXX.
Our common stock is quoted on the OTCQB under the symbol "LXRP"
and on the Canadian Securities Exchange under the symbol LXX. Subsequent to
period end on January 4, 2018, we announced trading on the OTCQX and our symbol
remains unchanged.
In 2014, the Company 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.
The Company entered into a joint venture agreement with
Enertopia Corp for a prospective medical marijuana business under the Canadian
Marijuana for Medical Purposes Regulations (MMPR) for a 49% net ownership
interest in the business (Enertopia 51%) utilizing an identified location in
Burlington, Ontario.
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.
The Companys 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. The Companys patented lipid
nutrient infusion technology DehydraTECH
TM
is believed to improve
taste, rapidity and delivery of bioactive compounds that include cannabinoids,
vitamins NSAIDs Nicotine and other molecules compared to what is possible
without lipophilic enhancement technology. This can allow for lower overall
dosing requirements and/or higher effectiveness in active molecule delivery.
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 (granted
June 15 2017 in Australia No. 2015274698), 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 December 12, 2017, the USPTO granted patent number US 9,839,612 B2 for the use of DehydraTECH
TM
technology as a delivery platform for a wide variety of Active
Pharmaceutical Ingredients (APIs) including all cannabinoids including THC;
fat soluble vitamins; non-steroidal anti-inflammatory pain medications
(NSAIDs); and nicotine. The title of the granted patent is Food and Beverage
Compositions Infused With Lipophilic Active Agents and Methods of Use Thereof.
Lexaria hopes to reduce other common but less healthy ingestion methods, such as
smoking, as it embraces the benefits of its technology for public health.
As at November 30, 2017, we have identified two reportable
segments: Intellectual Property Licensing and Consumer Products.
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
Langley, British Columbia and Phoenix, Arizona.
Our common stock is quoted on the OTCQB under the symbol "LXRP"
and on the Canadian Securities Exchange under the symbol LXX. Subsequent to
period end on January 4, 2018, we announced trading on the OTCQX and our symbol
remains unchanged.
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 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 national and international
opportunities for development and distribution of the Companys enhanced
functional food and supplement product offerings; 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 announced issuance
of 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 June 15 2017 No. 2015274698. We announced on
November 2, 2017 a new Notice of Allowance from the USPTO that included the delivery of additional molecules such as psychoactive cannabinoids, vitamins, non-steroidal anti-inflammatories, and nicotine all utilizing our DehydraTECH
TM
delivery technology and eventual patent issuance date of December 12, 2017 of patent number US 9,839,612 B2. We are seeking additional patent protection for what we believe to be a unique process for the nutritional delivery of certain molecules
such as cannabinoids, Nicotine, Non-Steroidal Anti-Inflammatory Drugs (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 three month period ended November 30, 2017, and up to the date of this report, we experienced the following significant corporate developments:
On September 22, 2017, the Company issued 625,000 shares of its common stock from the exercise of warrants previously granted for proceeds of $93,750. All warrants were exercised by third parties who are neither officers nor directors of the
Company.
On October 27, 2017, the Company announced it extended the expiration date of warrants originally issued on January 9, 2017 with a one-year expiration date. The warrant quantity and exercise price remain unchanged. Those same 500,000 warrants remain
exercisable at $0.44 but will now expire on January 9, 2019.
On October 31, 2017, the Company announced it received a Notice of Allowance from the United States Patent and Trademark Office (“USPTO”) for the use of its technology as a delivery platform for all cannabinoids including THC; fat soluble vitamins; non steroidal anti-inflammatory pain medications (“NSAIDs”); and nicotine. The patent application number is 15/225,799, “Food and Beverage Compositions Infused With Lipophilic Active Agents and Methods of Use Thereof” and on December 12, 2017, the USPTO granted patent number US 9,839,612 B2 for the use of DehydraTECH
TM
technology as a delivery platform.
On November 2, 2017, the Company announced it acquired 100% ownership interest in its majority owned subsidiary Poviva Tea, LLC. The Company previously owned a 51% interest in Poviva Tea, LLC and acquired the remaining 49% interest. Compensation was
$70,000, a waiver on certain debts, and a 5%, 20-year royalty on net profits of ViPova Tea
TM
tea, coffee, and hot chocolate sales. No Lexaria stock or options were issued. The 20-year royalty was determined to have a $Nil fair
value as PoViva operates at a loss and future profitability is uncertain. On November 9, 2017, the Company announced it filed a new patent application with the US Patent and Trademark Office utilizing the Lexaria DehydraTECH
TM
technology
for delivery of phosphodiesterase type 5 (PDE5) inhibitors - trade names of existing well-known products include Viagra
®
(sildenafil) and Cialis
®
(tadalafil).
On November 9, 2017, the Company announced it received $69,736 from the exercise of 364,250 warrants at prices of $0.14, $0.42, and $0.60; and 55,000 options were exercised at the price of $0.2273; for a total of 419,250 common
shares being issued. The Company also issued 875 new compensation warrants with an exercise price of $0.60 and expiring April 3, 2019. These compensation warrants were valued at $347 and recorded as a share issue cost and within additional
paid in capital for a net effect of $Nil.
On November 27, 2017, the Company announced filing its annual Form 10-K including financial statements. The company also announced it received $118,915 from the exercise of warrants and compensation warrants previously granted. The compensation
warrants were exercised at the price of $0.42. The warrants were exercised at prices of $0.14, $0.273, and $0.60, for a total of 415,187 common shares being issued. The Company also issued 20,156 compensation warrants with an
exercise price of $0.60 expiring April 3, 2019. These compensation warrants were valued at $7,990 and recorded as a share issue cost and within additional paid in capital for a net effect of $Nil.
Food Science and Technology
Lexaria is a Biotechnology and food science company focused on
developing and out-licensing its proprietary technology for improved taste,
rapidity, and delivery of bioactive compounds in foods and other ingestible
products Lexaria is focusing its capital and management time on its pursuit of
intellectual property, technology licensing opportunities, an expanding
portfolio of patent pending applications, and functional food and supplement
formulations.
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. On November 2, 2017, we announced that we acquired 100% of PoViva Tea
LLC.
The Company introduced an expanding variety of hemp fortified
consumer food products throughout 2015 to demonstrate Lexarias
DehydraTECH
TM
technology to both consumers and potential licensees.
From January 2015 to December 2015, seven (7) flavors of teas; hot chocolate;
coffee, and two (2) flavors of protein energy bars were introduced all
utilizing Lexarias patented technology DehydraTECH
TM
for the more
palatable and efficient delivery of bioactive molecules infused within those
food products.
In the production of the products, for each raw material to be
used in ViPova -branded products, the Company assesses 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.
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.
Over one hundred 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 (CBD) is one of the major phytocannabinoid forms
of cannabinoids and is not psychoactive, often 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 World Anti Doping Agency (WADA) has exempted CBD from its 2018
list of banned substances.
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 ~323,000,000, this suggests between 17.1 million
and 18.7 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:
-
Use of dietary supplements is common among the U.S. adult population. Over
40% used supplements in 19881994, and over one-half in 20032006.
-
Multivitamins/multiminerals are the most commonly used dietary supplements,
with approximately 40% of men and women reporting use during 20032006.
-
Use of supplemental calcium increased from 28% during 19881994 to 61%
during 20032006 among women aged 60 and over.
Status of Operations; Consumer product development and sales
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.
Lexaria began producing cash flows from its products in January
2015; focused on the immediate opportunities in the hemp-oil-sectors that are
federally legal. Cannabinoids have been found by many researchers to have
antioxidant properties and Lexaria plans to use the DehydraTECH
TM
patented process to infuse hemp oils into a number of popular food and
beverages.
Lexaria has launched a line of premium products, always relying
on our DehydraTECH
TM
patented 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. To date 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 and expected to grow to over a $20
billion sector before 2025 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 has a main corporate website as well as smaller
e-commerce focused websites devoted to consumer products. The majority of
product sales have taken place through the e-commerce 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.
Lexaria had previously launched the Lexaria Energy brand that
is 100% owned by the Company. Under this brand, the Company plans to develop
hemp oil-infused food products for people with active lifestyles, such as
protein bars, protein shakes and other similar products. On November 3, 2015,
Lexaria Energy10 protein bars became available for retail sales with two
flavors. The original contract manufacturer of these protein bars was unable to
fulfill additional orders and we have not currently been able to locate and
contract an alternative location to manufacture this more complicated food
product, with the result that the product is temporarily discontinued while we
search for a suitable manufacturing location.
Through the November 2014 acquisition of 51% of Poviva Tea LLC,
and the November 2, 2017, announcement of the 100% acquisition, 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:
|
1)
|
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.
|
|
|
|
|
2)
|
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.
|
In December 2015, the Company filed two further provisional
patent applications in the U.S. These new applications served to further broaden
the variety and applicability of base compounds that can be used when
formulating the Companys lipid based technology. The first of these
applications identify compounds like edible starches (e.g., tapioca starch) that
are commonly used in food products today and could, therefore, serve as a base
for formulating and incorporating the Companys Technology into a wide variety
of every day food products. The second of these applications identify emulsifier
compounds like gum Arabic that are commonly used in beverage products today in
order to facilitate similar flexibility for formulating the Companys Technology
in every day, shelf-stable beverages.
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 (June 10 2017 in
Australia No. 2015274698) and protects our technology for twenty years. On December 12, 2017, the USPTO granted patent number US 9,839,612 B2 for the use of DehydraTECH
TM
technology as a delivery
platform.
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.
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 NSAID’s. 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 LLC’s IP Rights, including rights of resale. This license
agreement ensures Lexaria has full access to the underlying infusion technology.
Scientific testing and validation
On August 24, 2015, the Company announced potential industry-changing achievements in enhanced gastrointestinal absorption of cannabidiol (CBD) utilizing Lexaria’s 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 Lexaria’s technology. These results exceed Company expectations. This was assessed in a strictly
controlled,
in vitro
experiment using a human intestinal tissue model. Samples of Lexaria’s commercially available CBD-fortified ViPova™ black tea were administered in the model compared with concentration-matched CBD control
preparations that lacked Lexaria’s 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 Lexaria’s CBD-fortified ViPova™ black tea to a second control of CBD and black tea combined,
without
Lexaria’s 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. 4:1770–1804; 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. 57:66–75).
The Company’s 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 Lexaria’s 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 Lexaria’s 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. Lexaria’s 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.
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.
In addition to the above described scientific testing and validation studies, Lexaria has also conducted various cannabinoid formulation experiments, together with potential DehydraTECH ™ licensee partners, on chocolates, candies, gummies,
mouth-melts, chocolate bars, protein bars, beverages such as beer, spices, tea, coffee, supplements and more over the past several years. Beverage formulations have produced cannabinoid water-based products including de-alcoholized beer that mask
unwanted cannabis flavor and are fast acting. Chocolate formulations were reported as being the fastest acting, most consistent, and best-tasting products relative to comparator control formulations in approximately 70% of cases in a recent 2017
consumer study. As well, on March 22, 2016, Lexaria announced results from another chocolate formulation consumer study in which test subjects ranked those chocolates that had been created with Lexaria’s technology as the best tasting, most
palatable and providing the best overall experience of the chocolates sampled. Furthermore, the test subjects in that study indicated a time of onset of the cannabis oil effects in as little as 15-20 minutes on average. The study included 12
volunteers who were all regular cannabis consumers with experience ingesting conventional edibles. All chocolates used in the study were blinded (unmarked) in order that the subjects could not discern the product formulations applied.
Technology out-licensing
On May 14, 2016, the Company entered into a Licensing Agreement allowing the Licensee, for a two-year period, to utilize the Company’s 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 Company’s 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 Lexaria’s 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 Lexaria’s 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. As of November 30 2017 the company has recorded $55,167 over the life of the contract to date, with $10,000 as a current receivable corresponding to the areas under the license agreement
where the licensee has been active to-date.
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.
We are not yet profitable and have not yet demonstrated our ability to generate significant revenues from our business plan. We will require additional corporate funds if our existing capital is not sufficient to support the Company until potential
future profitability is reached. There are no assurances that we will be able to obtain further funds required for our long-term operations. We do not expect to require additional operating capital during our fiscal 2018 year. 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 longer-term obligations as they become due. In such event, we could be forced to scale down or perhaps even cease our operations. There is uncertainty as to whether we can obtain
additional long-term financing if we do in fact require it.
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 $8 billion in 2016. 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. Accordingly, the Company intends to aggressively pursue technology out-licensing opportunities not only within the
cannabinoids sector where it is already active, but also across other sectors where its DehydraTECH
TM
technology is patent allowed and/or pending, including the opportunities in the vitamin and supplements sector, the pain relief sector and the nicotine products sector.
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 beyond those already issued 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. Lexaria is also aware of various competing technologies that exist in the marketplace that claim to also enhance the bioabsorption of cannabinoids as Lexaria has
demonstrated through repeated
in vitro
and
in vivo
scientific testing with its patented DehydraTECH
TM
technology. By and large, these technologies are all forms of nanotechnology that generally claim to enable the formation
of microencapsulated microemulsions of cannabinoid active ingredients. These technologies can enable exceptional water solubility of cannabinoid ingredients and can impart improved intestinal bioabsorption as a result. However, it is
Lexaria’s belief that its patented DehydraTECH
TM
technology offers a host of benefits beyond what competing technologies can offer, including superior oral palatability, a more appealing and all-natural ingredient compositional
profile from a food and beverage formulation perspective and superior scalability and cost effectiveness from a manufacturing perspective. Lexaria believes that its DehydraTECH
TM
technology is, therefore, significantly distinguished from
competing technologies in these respects, with a view to growing the breadth and number of licensees that will adopt its technology for their product offerings going forward. Lexaria believes that these competitive advantages together with its
wealth of scientific data showing noteworthy bioabsorption enhancements with its DehydraTECH
TM
technology constitute a compelling value proposition for its prospective licensees, and it intends to continue to pursue license arrangements
not only within the cannabinoids edibles sector where it is already active, but also in the various other bioactive ingredient sectors identified in its issued and pending patent applications.
Compliance with Government Regulation
At least 24 States in the USA have passed some form of legislation related to that state’s 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. The DehydraTECH
TM
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.
Lexaria’s position is that, just as a telephone company provides communications services, and an electric company provides electrical power, our provision of technological services to a state-legal cannabis company is in compliance with laws
and required regulations.
Lexaria’s patented DehydraTECH
TM
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.
Contractors
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 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.
|
On June 1, 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., a wholly owned company by
Mr. Allan Spissinger, with monthly compensation of CAD$8,000 superseding the
previously CAD$3,400 plus hourly billing for additional work and applicable
taxes. 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.
|
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 plus applicable taxes,
superseding the previous agreement with monthly compensation of CAD$12,500 plus
applicable taxes. 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.
|
On June 19, 2017, the Company executed a contract with Alex
Blanchard Capital as manager for investor relations and 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 1st 3rd 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.
|
We do not expect any material changes in the number of
contractors over the next 12 month period although individual personnel changes
and fluctuations should always be expected. We do and will continue to outsource
contract employment as needed. However, with product advancement or retail
acceptance of our new products, we may need to retain additional contractors
particularly in the fields of product manufacturing, development, sales and
distribution. It is not possible to accurately project potential needs into the
future based on circumstances that may or may not occur.
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.
Equipment
Equipment is stated at cost less accumulated depreciation, and
depreciated using the straight-line method over its useful life of five years.
Patents
Capitalized patent costs represent legal costs incurred to
establish patents. When patents reach a mature stage, any associated legal costs
are comprised mostly of maintenance fees and are expensed as incurred.
Capitalized patent costs are amortized on a straight-line basis over the
remaining life of the patent.
Revenue Recognition
Product revenue
Revenue from the sale of health products is generally
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collectability is
reasonably assured. In most cases, these conditions are met when the product is
shipped to the customer. The Company reports its sales net of the amount of
actual sales returns and the amount of reserves established for anticipated
sales returns based upon historical return rates. Sales tax collected from
customers is excluded from net sales.
Licensing revenue
Lexaria also enters into agreements to license out its patented technology that can include various combinations of services. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the
respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. The Company uses a hierarchy to determine the fair value to be used for allocating revenue to
elements: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence and (iii) best estimate of selling price (“ESP”). Generally VSOE is the price charged when the deliverable is sold separately
or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace. ESPs are established as best estimates of what the selling prices would be if the
deliverables were sold regularly on a stand-alone basis. Given Lexaria’s early stage of such line of revenue, the Company’s process for determining the VSOE and ESP requires judgment and considers multiple factors that may vary overtime
depending upon the unique facts and circumstances related to each deliverable.
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 during fiscal 2017 and ongoing exercises this quarter, management believes it has sufficient funds to meet its obligations as they become due for the next twelve months.
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 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 Company’s 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 employer’s 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 employee’s
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 broader 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.
Results of Operations – Three Months Ended November 30, 2017 and 2016
The following summary of our results of operations should be read in conjunction with our financial statements for the period ended November 30, 2017, which are included herein.
Our operating results for the three months ended November 30, 2017 and 2016 and the changes between those periods for the respective items are summarized as follows:
|
|
Three Months
|
|
|
Three Months
|
|
|
Change
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Between the
|
|
|
|
November 30
|
|
|
November 30
|
|
|
Periods
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Sales
|
|
24,635
|
|
|
9,225
|
|
|
15,410
|
|
Cost of Goods Sold
|
|
6,099
|
|
|
888
|
|
|
5,211
|
|
General and Administrative
|
|
593,703
|
|
|
405,466
|
|
|
188,237
|
|
Impairment of
Inventory
|
|
3,546
|
|
|
3,424
|
|
|
122
|
|
Net loss
|
|
(578,713
|
)
|
|
(400,553
|
)
|
|
(178,160
|
)
|
Our financial statements report a net loss of $578,711 for the
three month period ended November 30, 2017 compared to 2016 where we incurred a
net loss of $400,553. During the three month period ended November 30, 2017, our
general and administrative expenses were significantly higher compared to the
three months ended November 30, 2016, which is a result of the increases in
advertising and promotion to potential licensees and partners, patent and
trademark filing costs and increasing R&D expenditures. These increases are
in line with expectations for executing our business plan.
Revenue increases were primarily based on Licensing fees in
line with contract requirements, while consumer product sales remain low due to
challenges in securing expansive distribution opportunities, production
challenges and payment processing changes. The Company continues to pursue more
widespread distribution possibilities which have the potential to unlock more
significant consumer revenues.
The trend of hemp oil fortified foods, and hemp seed products,
gaining consumer acceptance continued through the period ended November 30,
2017, and provides a reason to believe that sales could increase. Those trends
should support higher potential consumer product sales. Release of the TurboCBD
product in fiscal 2017 was successful but ongoing sales were limited by changes
to payment processing services outside of the Companys control. At the time of
this report the Company had extinguished its supplies of certain products like
protein bars and the lack of inventory was also a negative impact on consumer
product sales potential.
For fiscal 2018 the Company expects to derive ever larger
proportions of its revenues from technology licensing to third parties. At the
time of this report the Company has entered more than 10 formal letters of
intent or definitive agreements and is negotiating more. The Company also has
formed a joint venture to develop, produce, and sell a line of healthy edible
cannabinoid products using our patented technology. It is the Companys view
that the November 2017 grant of patent 9839612 and its expanding patent
portfolio is a positive step in enabling the generation of more significant
revenues during fiscal 2018.
We do not expect that all of the Letters of Intent into which
we enter will result in definitive agreements with paying customers and cannot
predict how many will. We believe that strengthening and expanding our
intellectual property portfolio and conducting supportive R&D will jointly
contribute to strengthening revenue prospects.
Liquidity and Financial Condition
|
|
November 30
|
|
|
August 31
|
|
Working Capital
|
|
2017
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
Current assets
|
|
2,417,202
|
|
|
2,795,495
|
|
Current
liabilities
|
|
95,705
|
|
|
92,347
|
|
Working capital balance (deficiency)
|
|
2,321,497
|
|
|
2,703,148
|
|
The Companys working capital balance decreased during the
three months ended November 30, 2017, as a result of its executing its operating
plan via increased activities in potential licensee outreach, research and
development and other aspects of our business plan utilizing funding from
financing activities during fiscal 2017 and the ongoing exercises of options and
warrants.
|
|
Three Months Ended
|
|
|
|
November 30
|
|
|
November 30
|
|
Cash flows
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Cash flows used in operating activities
|
|
(570,321
|
)
|
|
(100,987
|
)
|
Cash flows used in investing activities
|
|
(85,715
|
)
|
|
(13,684
|
)
|
Cash flows provided by financing activities
|
|
282,401
|
|
|
145,508
|
|
Increase
(decrease) in cash
|
|
(323,635
|
)
|
|
30,837
|
|
Operating Activities
The increase in the net cash used in operating activities
during the three months ended November 30, 2017, is primarily the result of the
Companys execution of its operating plan with available funding compared to
cost containment during the period ended November 30, 2016. This difference was
largely due to the increased costs pertaining to consulting, advertising and
promotion, patent and trademark related filings, research and development, and
travel.
Investing Activities
During the three months ended November 30, 2017, the Company
continued its investment in expanding its patent applications and acquired 100%
ownership of our subsidiary PoViva Tea LLC.
Financing Activities
During the period ended November 30, 2017, the Company raised a
total of $282,401 from equity issuances, relating to the exercise of its
outstanding stock options and warrants.