UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30,
2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 001-41616
Lucy Scientific Discovery Inc.
(Exact name of registrant as specified in its
charter)
British Columbia, Canada | | Not Applicable |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification Number) |
301-1321
Blanshard Street
Victoria, British
Columbia, Canada V8W 0B6
(Address of Principal Executive Offices)
(778) 410-5195
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | | Trading symbol | | Name of Exchange on which registered |
Common Shares, no par value | | LSDI | | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No
☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| | Emerging growth company | ☒ |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 13, 2023, there were 17,646,296
common shares of the registrant issued and outstanding.
TABLE OF CONTENTS
Cautionary Note on Forward-Looking Statements
This Quarterly Report on
Form 10-Q, or Quarterly Report, contains forward-looking statements concerning our business, operations and financial performance,
as well as our plans, objectives and expectations for our business operations and financial performance and condition. All statements
other than statements of historical or current facts contained in this Quarterly Report, including statements regarding our future results
of operations and financial positions, business strategy, product candidates, planned preclinical studies and clinical trials, results
of clinical trials, research and development costs, regulatory approvals, commercial strategy, timing and likelihood of success, as well
as plans and objectives of management for future operations, are forward-looking statements. These statements relate to future events
or to our future financial performance and involve known and unknown risks, uncertainties and other important factors that are in some
cases beyond our control, and may cause our actual results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify
forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,”
“is expected to,” “anticipate,” “could,” “intend,” “target,” “project,”
“contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue”
or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. Forward-looking statements
contained in this Quarterly Report, but are not limited to, statements about:
| ● | our
ability to generate commercially viable products through our research, development and cultivation efforts; |
| ● | our
ability to establish and market our planned contract research services; |
| ● | regulatory
developments in Canada, the United States and other countries and changes in the current regulatory regime applicable to psychotropics; |
| ● | estimates
of our addressable market, future revenue, expenses, capital requirements and our needs for additional financing; |
| ● | our
ability to obtain funding for our operations, including funding necessary to complete the expansion of our operations and development
of our products and product candidates; |
| ● | the
expected uses of the net proceeds from our initial public offering, or IPO; |
| ● | the
implementation of our business model and strategic plans for our products, technologies and businesses; |
| ● | our
expectations regarding our ability to establish and maintain intellectual property protection for our products and technologies and our
ability to operate our business without infringing on the intellectual property rights of others; |
| ● | our
expectations regarding the completion of our facility and our manufacturing capabilities; |
| ● | companies
and technologies in our industry with which we may compete; |
| ● | our
ability to attract and retain key scientific and engineering personnel; |
| ● | our
expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act; |
| ● | business
disruptions affecting our operations due to the global COVID-19 pandemic; |
| ● | our
expectations regarding market trends; and |
| ● | other
risks and uncertainties, including those listed under the caption “Risk Factors.” |
We have based these forward-looking statements
largely on our current expectations, estimates, forecasts and projections about our business, the industry in which we operate and financial
trends that we believe may affect our business, financial condition, results of operations and prospects, and these forward-looking statements
are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this Quarterly
Report and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors”
and elsewhere in this Quarterly Report. Because forward-looking statements are inherently subject to risks and uncertainties, some
of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events.
Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we cannot
guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements
will be achieved or occur at all, and our actual results may differ materially from those projected in the forward-looking statements.
Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein
until after we distribute this Quarterly Report, whether as a result of any new information, future events or otherwise.
In addition, statements that
“we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon
information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for
such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted
an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and
you are cautioned not to unduly rely upon these statements.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
LUCY SCIENTIFIC DISCOVERY INC.
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(Expressed in US Dollars, except share amounts)
(unaudited)
| |
September 30, 2023 | | |
June 30, 2023 | |
| |
$ | | |
$ | |
ASSETS | |
| | |
| |
Current assets | |
| | |
| |
Cash | |
| 237,614 | | |
| 1,673,874 | |
Prepaid expenses, current | |
| 1,213,503 | | |
| 1,219,180 | |
Accounts receivable | |
| — | | |
| 7,048 | |
Other assets – GST receivable | |
| 10,062 | | |
| 62,649 | |
Other receivable | |
| — | | |
| 336,706 | |
Deferred financing costs | |
| 128,052 | | |
| 523,041 | |
Total current assets | |
| 1,589,231 | | |
| 3,822,498 | |
| |
| | | |
| | |
Non-current assets | |
| | | |
| | |
Property, plant, and equipment | |
| 667,539 | | |
| 764,650 | |
Prepaid expenses, noncurrent | |
| 1,549,782 | | |
| 1,663,333 | |
Right of use asset | |
| 976,177 | | |
| 1,025,033 | |
Intangible assets | |
| 1,464,901 | | |
| 1,484,250 | |
Long-term deposits | |
| 18,491 | | |
| 18,882 | |
TOTAL ASSETS | |
| 6,266,121 | | |
| 8,778,646 | |
| |
| | | |
| | |
LIABILITIES | |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable and accrued liabilities | |
| 1,198,625 | | |
| 1,291,063 | |
Due to related parties | |
| 628,063 | | |
| 1,019,894 | |
Notes payable | |
| 59,172 | | |
| 60,423 | |
Lease liability, current | |
| 339,974 | | |
| 338,819 | |
Total current liabilities | |
| 2,225,834 | | |
| 2,710,199 | |
| |
| | | |
| | |
Non-current liabilities | |
| | | |
| | |
Lease liability, noncurrent | |
| 1,338,420 | | |
| 1,389,558 | |
TOTAL LIABILITIES | |
| 3,564,254 | | |
| 4,099,757 | |
| |
| | | |
| | |
STOCKHOLDERS’ EQUITY (DEFICIT) | |
| | | |
| | |
Common stock, no par value; unlimited shares authorized; 17,646,296 and 17,462,963 shares issued and outstanding as at September 30, 2023 and June 30, 2023, respectively | |
| 49,032,701 | | |
| 48,934,278 | |
Accumulated deficit | |
| (46,413,848 | ) | |
| (44,415,798 | ) |
Accumulated other comprehensive income | |
| 83,014 | | |
| 160,409 | |
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | |
| 2,701,867 | | |
| 4,678,889 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |
| 6,266,121 | | |
| 8,778,646 | |
The accompanying notes are an integral part
of these condensed consolidated interim financial statements.
LUCY SCIENTIFIC DISCOVERY INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
For the three months ended September 30, 2023
and 2022
(Expressed in US Dollars, except share numbers)
(unaudited)
| |
2023 | | |
2022 | |
| |
$ | | |
$ | |
Operating expenses | |
| | |
| |
Selling, general and administrative expense | |
| 1,510,346 | | |
| 828,559 | |
Impairment loss | |
| 97,111 | | |
| — | |
Total operating expenses | |
| 1,607,457 | | |
| 828,559 | |
Operating loss | |
| 1,607,457 | | |
| 828,559 | |
| |
| | | |
| | |
Non-operating expense (income) | |
| | | |
| | |
Interest expense | |
| 390,604 | | |
| 543,221 | |
Other income | |
| (11 | ) | |
| (39 | ) |
Total non-operating expense (income) | |
| 390,593 | | |
| 543,182 | |
| |
| | | |
| | |
Income tax expense | |
| — | | |
| — | |
Net loss | |
| (1,998,050 | ) | |
| (1,371,741 | ) |
Foreign exchange translation adjustment, net of tax of $nil | |
| (77,395 | ) | |
| 400,780 | |
Comprehensive loss | |
| (2,075,445 | ) | |
| (970,961 | ) |
| |
| | | |
| | |
Net loss per common share | |
| | | |
| | |
Basic and diluted | |
| (0.11 | ) | |
| (0.13 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding | |
| | | |
| | |
Basic and diluted | |
| 17,581,305 | | |
| 10,443,560 | |
The accompanying notes are an integral part
of these condensed consolidated interim financial statements.
LUCY SCIENTIFIC DISCOVERY INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
STOCKHOLDERS DEFICIT
(Expressed in US Dollars, except share numbers)
(unaudited)
|
|
Common shares |
|
|
|
|
|
Accumulated Other |
|
|
Total |
|
|
|
Number of |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Equity |
|
|
|
shares |
|
|
capital |
|
|
deficit |
|
|
income (loss) |
|
|
(deficit) |
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Balance, June 30, 2022 |
|
|
10,443,560 |
|
|
|
30,790,410 |
|
|
|
(35,427,342 |
) |
|
|
(141,018 |
) |
|
|
(4,777,950 |
) |
Foreign exchange translation adjustment, net of tax of $nil |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
400,780 |
|
|
|
400,780 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
(1,371,741 |
) |
|
|
— |
|
|
|
(1,371,741 |
) |
Balance, September 30, 2022 |
|
|
10,443,560 |
|
|
|
30,790,410 |
|
|
|
(36,799,083 |
) |
|
|
259,762 |
|
|
|
(5,748,911 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2023 |
|
|
17,462,963 |
|
|
|
48,934,278 |
|
|
|
(44,415,798 |
) |
|
|
160,409 |
|
|
|
4,678,889 |
|
Shares issued for settlement of due to related parties |
|
|
100,000 |
|
|
|
98,000 |
|
|
|
— |
|
|
|
— |
|
|
|
98,000 |
|
Shares issued for consulting agreement |
|
|
187,500 |
|
|
|
177,188 |
|
|
|
— |
|
|
|
— |
|
|
|
177,188 |
|
Shares cancelled for donation cancellation agreement |
|
|
(104,167 |
) |
|
|
(257,032 |
) |
|
|
— |
|
|
|
— |
|
|
|
(257,032 |
) |
Warrants issued for consulting agreement |
|
|
— |
|
|
|
80,267 |
|
|
|
— |
|
|
|
— |
|
|
|
80,267 |
|
Foreign exchange translation adjustment, net of tax of $nil |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(77,395 |
) |
|
|
(77,395 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
(1,998,050 |
) |
|
|
— |
|
|
|
(1,998,050 |
) |
Balance, September 30, 2023 |
|
|
17,646,296 |
|
|
|
49,032,701 |
|
|
|
(46,413,848 |
) |
|
|
83,014 |
|
|
|
2,701,867 |
|
The accompanying notes are an integral part
of these condensed consolidated interim financial statements.
LUCY SCIENTIFIC DISCOVERY INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
CASH FLOWS
For the three months ended September 30, 2023
(Expressed in US Dollars)
(unaudited)
| |
2023 | | |
2022 | |
| |
$ | | |
$ | |
Operating activities | |
| | |
| |
Net loss | |
| (1,998,050 | ) | |
| (1,371,741 | ) |
Items not involving cash: | |
| | | |
| | |
Amortization expense | |
| 47,195 | | |
| 19,072 | |
Interest expense | |
| 387,192 | | |
| 536,790 | |
Impairment loss | |
| 97,111 | | |
| — | |
Amortization of debt discount | |
| — | | |
| 2,842 | |
Shares issued for services | |
| — | | |
| 43,688 | |
Shares issued for consulting agreement | |
| 177,188 | | |
| — | |
Share cancelled for donation cancellation agreement | |
| (257,032 | ) | |
| — | |
Shares to be issued for consulting agreement | |
| 18,000 | | |
| — | |
Warrants issued for consulting agreement | |
| 80,267 | | |
| — | |
Unrealized foreign exchange transaction adjustment | |
| — | | |
| 255,915 | |
Changes in non-cash working capital: | |
| | | |
| | |
Prepaid expenses | |
| 60,192 | | |
| (11,189 | ) |
Accounts receivable | |
| 7,048 | | |
| — | |
Other assets – GST receivable | |
| 51,695 | | |
| 1,691 | |
Other receivable | |
| 332,339 | | |
| — | |
Accounts payable and accrued liabilities | |
| 96,340 | | |
| 184,722 | |
Lease liability | |
| (14,299 | ) | |
| (70,240 | ) |
Due to related parties | |
| (373,639 | ) | |
| 161,921 | |
Net cash flows used in operating activities | |
| (1,288,453 | ) | |
| (246,529 | ) |
| |
| | | |
| | |
Investing activities | |
| | | |
| | |
Sale of digital assets | |
| — | | |
| 34,106 | |
Purchase of intangible assets | |
| (123,000 | ) | |
| — | |
Net cash (used in) provided by investing activities | |
| (123,000 | ) | |
| 34,106 | |
| |
| | | |
| | |
Financing activities | |
| | | |
| | |
Net proceeds from Convertible Notes | |
| — | | |
| 200,000 | |
Deferred share issuance costs | |
| — | | |
| (25,352 | ) |
Net cash flows provided by financing activities | |
| — | | |
| 174,648 | |
Effect of foreign exchange on cash | |
| (24,807 | ) | |
| 794 | |
Decrease in cash | |
| (1,436,260 | ) | |
| (36,981 | ) |
Cash, beginning of period | |
| 1,673,874 | | |
| 53,379 | |
Cash, end of period | |
| 237,614 | | |
| 16,398 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Interest paid in cash | |
| 3,412 | | |
| — | |
Income taxes paid in cash | |
| — | | |
| — | |
| |
| | | |
| | |
Non-Cash activities for financing activities: | |
| | | |
| | |
Shares issued for settlement of due to related parties | |
| 98,000 | | |
| — | |
Renewal of lease | |
| — | | |
| 1,144,349 | |
Deferred offering costs accrued but unpaid | |
| — | | |
| 8,407 | |
The accompanying notes are an integral part
of these condensed consolidated interim financial statements.
LUCY SCIENTIFIC DISCOVERY INC.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
(unaudited)
NOTE 1 — NATURE OF THE ORGANIZATION AND
BUSINESS
Lucy Scientific Discovery
Inc. (“we,” “our,” “us,” or the “Company”) was incorporated under the Business Corporations
Act (British Columbia) on February 17, 2017. The Company previously specialized in developing supply chain products, services, and
distribution channels for the cannabis industry in the areas of cannabis production, cannabis extracts, edibles and other pharmaceutical
grade products. The Company changed its name from Hollyweed North Cannabis Inc. to Lucy Scientific Discovery Inc. and, under a new business
model, is engaged in the research, manufacturing and commercialization of psychedelic products. The Company’s registered office
is Suite 301 — 1321 Blanshard Street, Victoria, British Columbia, Canada.
Subsidiaries that are active
and wholly-owned by the Company to facilitate its business activities include:
| ● | TerraCube
International Inc. — On October 4, 2017, the Company acquired control of TerraCube International Inc. (“TerraCube”),
formerly Crop2Scale International Inc. which was incorporated under the Business Corporations Act of British Columbia. TerraCube
innovates, develops and produces highly controlled agricultural grow environments for plant manufacturing and replication. |
| ● | LSDI Manufacturing Inc. — On June 29, 2017, the Company
incorporated LSDI Manufacturing Inc. (“LMI”), under the Business Corporations Act of British Columbia for the purposes of
cannabis extraction and manufacturing of adult-use and pharmaceutical products. LMI held a Health Canada Processor’s License under
the Cannabis Act but has never engaged in plant-touching activities up to the date the Board of Directors approved these consolidated
financial statements. On August 10, 2021, the Health Canada Standard Processor’s License was voluntarily withdrawn by LMI with
the revocation effective September 3, 2021. In August 2021, Health Canada’s Office of Controlled Substances granted us
a Controlled Drugs and Substances Dealer’s Licence under Part J of the Food and Drug Regulations promulgated under the Food
and Drugs Act (Canada), or a Dealer’s Licence. The Dealer’s Licence authorizes us to develop and produce (through cultivation,
extraction or synthesis) certain restricted substances. The Company intends to develop and produce these restricted substances as pharmaceutical-grade
active pharmaceutical ingredients and their raw material. |
| ● | LSDI
Retail Inc. — On June 5, 2023, the Company incorporated LSDI Retail Inc. under the laws of the state of Delaware for the
purpose of the sale of the Company’s products through online distribution platform. |
| ● | Lucy
Therapeutic Discoveries Inc. — On June 15, 2023, the Company incorporated LSDI Therapeutics Inc. under the laws of the state
of Delaware to facilitate the acquisition of intellectual property from Wesana Health Holdings Inc. (“Wesana”) on June 30,
2023, as further described in Note 7. |
| ● | Lucy
Scientific Discovery USA Inc. — On November 17, 2022, the Company incorporated Lucy Scientific Discovery USA Inc. under
the laws of the state of Delaware for the purpose of entering into employment agreements with key executive officers of the Company. |
Impact of COVID-19
In March 2020, the World
Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related
adverse public health developments, has adversely affected workforces, economies, and financial markets globally, and led to an economic
downturn. To date, COVID-19 has not had any material impact on the Company’s operations; however, it is possible that estimates
in these unaudited condensed consolidated interim financial statements may change in the near term as a result of COVID-19 variants.
Going Concern
The Company has incurred
net losses in recent periods and has accumulated a deficit of $46,413,848 as of September 30, 2023. The Company has funded operations
in the past primarily by the sale and issuance of our common shares, from the issuance of convertible and non-convertible promissory notes,
and our initial public offering (“IPO”). We will continue to be dependent upon equity and debt financings or collaborations
or other forms of capital at least until we are able to generate positive cash flows from product sales, if ever.
These unaudited condensed
consolidated interim financial statements have been prepared on a going concern basis, which implies that the Company will continue to
realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern
is dependent upon the continued financial support from its management, its ability to identify future investment opportunities, to obtain
the necessary debt or equity financing, generating profitable operations from the Company’s future operations or the success of
an initial public offering. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern
during the next twelve months. These unaudited condensed consolidated interim financial statements do not include any adjustments to the
recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company
be unable to continue as a going concern.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying condensed
consolidated interim balance sheet as of June 30, 2023, which has been derived from audited consolidated financial statements, and the
unaudited condensed consolidated interim financial statements as of and for the three months ended September 30, 2023 and 2022, have been
prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
regarding interim financial reporting and applicable rules and regulations of the Securities and Exchange Commission (“SEC”)
regarding interim financial reporting. Certain information and footnote disclosures in these unaudited condensed consolidated interim
financial statements, normally included in financial statements prepared in accordance with U.S. GAAP, have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated interim financial statements
reflect all adjustments necessary for a fair statement of the Company’s financial position at September 30, 2023, the Company’s
operating results for the three months ended September 30, 2023 and 2022, and the Company’s cash flows for the three months
ended September 30, 2023 and 2022. The unaudited condensed consolidated interim financial statements and notes should be read in conjunction
with the Company’s audited consolidated financial statements and notes thereto for the year ended June 30, 2023. The unaudited
condensed consolidated interim financial statements include the accounts of the Company and our subsidiaries in which we have controlling
financial interest. All inter-company balances and transactions among the companies have been eliminated upon consolidation.
Use of Estimates
The preparation of the unaudited
condensed consolidated interim financial statements requires management to make estimates and assumptions that affect the reported amounts
of certain assets, liabilities, revenue, and expenses as well as the related disclosures. The Company must often make estimates about
effects of matters that are inherently uncertain and will likely change in subsequent periods. Actual results could differ materially
from those estimates.
Functional and Presentation Currency
The Company’s reporting
currency is the United States Dollar (“USD”). The Company’s functional currency is the local currency, Canadian Dollar
(“CAD”). Assets and liabilities of these operations are translated into USD at the end-of-period exchange rates; income and
expenses are translated using the average exchange rates for the reporting period. Resulting cumulative translation adjustments are recorded
as a component of stockholder’s equity (deficit) in the unaudited condensed consolidated interim balance sheet in accumulated other
comprehensive income (loss).
Significant Accounting Policies
The
Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the years ended June
30, 2023 and 2022, which are contained in the Company’s Form 10-K for the year ended June 30, 2023.
The accounting policies applied in the preparation of these unaudited condensed consolidated interim financial statements are consistent
with those applied and disclosed in note 2 to the annual audited consolidated financial statements except as noted below:
Recently Issued Accounting Pronouncements
From time to time, new accounting
pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. The
Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment
of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition
period for complying with new or revised accounting standards that have different effective dates for public and private companies until
the earlier of the date that it is (i) no longer an emerging growth company or (ii) has affirmatively and irrevocably opt out
of the extended transition period provided in the JOBS Act. As a result, these unaudited condensed consolidated interim financial statements
may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
NOTE 3 — PREPAID EXPENSES AND DEPOSITS
Prepaid expenses and deposits
consist of the following:
| |
September 30, 2023 | | |
June 30, 2023 | |
| |
$ | | |
$ | |
Advertising (a) | |
| 2,187,500 | | |
| 2,187,500 | |
Consulting (b) | |
| 469,494 | | |
| 585,279 | |
Insurance | |
| 53,739 | | |
| 65,140 | |
Other | |
| 52,552 | | |
| 44,594 | |
Total | |
| 2,763,285 | | |
| 2,882,513 | |
Current portion | |
| 1,213,503 | | |
| 1,219,180 | |
Non-current portion | |
| 1,549,782 | | |
| 1,663,333 | |
NOTE 4 — OTHER RECEIVABLE
During the year ended June
30, 2023, a past consultant of the Company obtained a garnishing order in an action against the Company whereby $336,706 (CAD$445,799)
of cash held at the Company’s bank was garnished and paid into the British Columbia Supreme Court. The amount was recorded as restricted
cash as at June 30, 2023 on the audited consolidated statement of financial position. On August 1, 2023 the British Columbia Supreme Court
ordered that the garnished funds be repaid to the Company and the funds were received during the three months ended September 30, 2023.
The Company has no ongoing obligation to the consultant and the legal action has been concluded.
NOTE 5 — DIGITAL ASSETS
During the three months ended
September 30, 2022, the Company sold approximately 34,106 Tether for $34,106 in cash. The 34,106 Tether was acquired during the year ended
June 30, 2021 for cash of $34,106.
NOTE 6 — PROPERTY, PLANT AND EQUIPMENT
On February 25, 2021,
the Company entered an agreement whereby the Company acquired certain equipment for consideration of 990,741 Class B common non-voting
shares with a fair value of $1,687,032 (CAD$2,140,000). At the time of acquisition, the equipment had a fair value of $843,500. The excess
of fair value of the Class B common non-voting shares above the fair value of the equipment of $843,532 was recorded as compensation
expense within selling, general and administrative expenses on the consolidated statement of operations and comprehensive loss during
the year ended June 30, 2021. At June 30, 2023, the equipment had a fair value of $764,650. The excess of carrying value above the fair
value of the equipment of $78,850 was recorded as impairment loss on the consolidated statement of operations and comprehensive loss during
the year ended June 30, 2023. At September 30, 2023, the equipment had a fair value of $667,539. The excess of carrying value of the equipment
of $97,111 was recorded as impairment loss on the unaudited consolidated condensed interim statement of loss and comprehensive loss during
the three months ended September 30, 2023.
The equipment is not in use
and therefore no depreciation has been taken for the three months ended September 30, 2023 and 2022.
NOTE 7 — INTANGIBLE ASSETS
On June 30, 2023, pursuant
to an asset purchase agreement dated June 30, 2023 (the “Agreement”), the Company closed on the acquisition of intellectual
property and related assets relating to Wesana psilocybin and cannabidiol combination investigational therapy, SAN-013 (“Intellectual
Property”) for consideration consisting of: (a) 1,000,000 shares of the Company’s common stock with an aggregate issuance
date fair value of $914,250, and (b) $570,000 in cash. The Company paid $300,000 on March 20, 2023 with the remaining $270,000 due in
the following 4 installments: (i) $123,000 due on or before July 1, 2023; (ii) $48,991 due on or before October 1, 2023; (iii) $48,991
due on or before January 1, 2024; and (iv) $49,018 due on or before April 1, 2024. The instalment payments are included within accounts
payable and accrued liabilities on the unaudited condensed consolidated interim balance sheet.
Under the screen test requirements
under ASC 805, Business Combinations, the Company concluded that the Intellectual Property represented substantially all of the
fair value of the gross assets acquired and, accordingly, determined the set was not considered a business, such that the Company applied
asset acquisition accounting and recorded the acquisition of the Intellectual Property as an intangible asset in the amount of $1,484,250
that will be amortized on a straight-line basis over the remaining weighted average useful life of 19.2 years. During the three months
ended September 30, 2023, the Company recorded amortization expense of $19,349 (three months ended September 30, 2022- $nil) with respect
to the intangible assets.
The estimated future amortization
expense is as follows:
Year ended June 30, | |
Amount | |
2024 | |
$ | 58,046 | |
2025 | |
| 77,395 | |
2026 | |
| 77,395 | |
2027 | |
| 77,395 | |
2028 | |
| 77,395 | |
Thereafter | |
| 1,097,275 | |
| |
$ | 1,464,901 | |
NOTE 8 — RIGHT OF USE ASSET AND
LEASE LIABILITY
The lease liability relates
to a warehouse leased by the Company (the “Warehouse Lease”). The lease commenced on August 1, 2017 with an initial term of
5 years expiring on July 31, 2022. On August 1, 2022, the Company exercised its option to renew for 5 years. The new term starts on August
1, 2022 and ends on July 31, 2027, with an option to extend the lease for an additional five years. The renewal option needs to be exercised
no less than six months from the expiry date. As of lease renewal, the Company anticipated exercising the option to renew and as such
has determined the lease term to be 10 years in determining the lease liability. The discount rate used was 16%, equivalent to the interest
rate the Company would incur to borrow funds equal to the future lease payments on a collateralized basis over a similar term and in a
similar economic environment. As a result, the Company increased its right-of-use asset by $1,144,349 and lease liability by $1,144,349
related to the Warehouse Lease on August 1, 2022. During the three months ended September 30, 2023, the Company recorded amortization
expense of $27,846 (three months ended September 30, 2022- $19,072) with respect to the right of use asset.
Leases with an initial term
of less than 12 months are not recorded on the statement of financial position. We recognize lease expense for these leases on a straight-line
basis over the lease term.
The long-term deposit of
$18,491 (CAD$25,000) relates to a security deposit on the Warehouse Lease which is expected to be returned to the Company at the completion
of the lease, including renewal periods.
The maturity of the lease
liability is as follows:
Year ended June 30, | |
Amount | |
2024 | |
$ | 250,077 | |
2025 | |
| 369,395 | |
2026 | |
| 408,623 | |
2027 | |
| 429,871 | |
2028 | |
| 323,629 | |
Thereafter | |
| 1,281,442 | |
Total lease payments | |
| 3,063,037 | |
Less: Unamortized interest | |
| (1,384,643 | ) |
Total lease liability | |
$ | 1,678,394 | |
NOTE 9 — LINE OF CREDIT
On November 5, 2020,
the Company established a line of credit of $4,937,130 (CAD$6,675,000). The line of credit is secured by the Company’s assets, bears
an interest rate of 8% per annum and matures on November 5, 2023. The Company may draw up to $369,822 (CAD$500,000) per quarter under
the line of credit beginning January 15, 2021. Pursuant to entering the line of credit, the Company issued the lender warrants to
purchase 3,906,209 common shares of the Company at an exercise price of $1.60 (CAD$2.16) per common share until November 5, 2025.
On January 22, 2021, the Company amended the warrants whereby in the event that the Company effects a closing or closings of convertible
notes is the minimum aggregate of (i) $1,000,000, the exercise price of 1,111,112 warrants shall be adjusted to $0.015 (CAD$0.018),
(ii) $2,000,000, the exercise price of 2,222,223 warrants shall be adjusted to $0.015 (CAD$0.018), and (iii) $3,000,000,
the exercise price of 3,333,334 warrants shall be adjusted to $0.015 (CAD$0.018).
The warrants were valued
at $4,775,535 and recorded as deferred financing costs to be recognized over the term of the line of credit. During the three months ended
September 30, 2023, the Company recorded interest expense of $387,192 (three months ended September 30, 2022 — $378,915) related
to the warrants.
On January 22, 2021,
pursuant to the warrant amendment, the Company reclassified 3,906,209 warrants valued at $4,775,535 to warrant liability as the exercise
price became variable based on the amount of convertible notes payable raised. The incremental fair value resulting from the warrant amendment
of $1,079,468 was recorded as interest expense on the condensed consolidated interim statement of operations and comprehensive loss.
On December 8, 2021, the
Company reclassified 3,906,209 warrants valued at $6,392,476 to share capital as the exercise price became fixed for the remaining
warrants outstanding since the Company had successfully raised $3,000,000 in convertible notes, resolving the contingency affecting the
exercise price.
NOTE 10 — STOCKHOLDERS’ EQUITY
Share Capital
Stock Split
On December 1, 2021,
the Company authorized an 18:1 reverse stock split of its issued and outstanding Class B common stock. Also on December 1, 2021,
the Company amended its articles to create a single class of common shares and cancel the Class A voting common shares and Class B non-voting
common shares. Pursuant to the amendment, the Class A voting common shares and Class B non-voting common shares were converted on a one-for-one
basis into common shares of the Company.
Common Stock Issuances and Transfers
During the three months ended
September 30, 2023, the Company had the following common stock transactions:
On July 4, 2023, the Company
issued 100,000 common shares and made a cash payment of $226,586 (CAD$300,000) pursuant to a mutual settlement and release agreement.
On July 5, 2023, the Company
cancelled 104,167 common shares which had previously been issued pursuant to a donation to the Austin Community Foundation.
On August 1, 2023, the Company
issued 187,500 common shares to the former Chief Executive Officer with respect to the settlement of an award equal to the quotient obtained
by dividing (x) $750,000 by (y) the closing price of the Company’s common shares on the closing date of the IPO.
During the three months
ended September 30, 2022, the Company had no common stock transactions.
Share Purchase Options
The following is a summary
of the changes in share purchase options Plan during the three months ended September 30, 2023 and 2022:
| |
Number of options | | |
Weighted average exercise price ($) | |
|
Weighted average remaining life (years) | | |
Aggregate intrinsic value ($) | |
Balance at June 30, 2022 | |
| 621,697 | | |
| 2.34 (CAD3.01 | ) |
|
| 1.91 | | |
| — | |
Expired(1) | |
| (54,266 | ) | |
| 2.35 (CAD3.22 | ) |
|
| — | | |
| — | |
Balance at September 30, 2022 | |
| 567,431 | | |
| 2.18 (CAD2.99 | ) |
|
| 1.82 | | |
| — | |
| |
| | | |
| | |
|
| | | |
| | |
Balance at June 30, 2023 | |
| 561,115 | | |
| 2.20 (CAD2.91 | ) |
|
| 1.74 | | |
| — | |
Balance at September 30, 2023 | |
| 561,115 | | |
| 2.16 (CAD2.91 | ) |
|
| 1.49 | | |
| — | |
During the three months ended
September 30, 2023, the Company recognized share-based payment expense of $nil (three months ended September 30, 2022 - $nil) related
to vested share purchase options. As at September 30, 2023, total unrecognized share-based payment expense related to the outstanding
share purchase options was $nil.
The Company has computed
the fair value of options granted using the Black-Scholes option pricing model. The expected term is the estimated period of time that
options granted are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimate of the
expected term of “plain vanilla” employee option grants. The Company is utilizing an expected volatility figure based on a
review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly
positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury
zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.
In addition to the options
discussed above, the Company plans to issue 1,642,861 share purchase options to various officers and the executive chairman. The exercise
price of these share purchase options will be the closing price of the Company’s common shares on the closing date of an IPO. These
share purchase options will vest as to 25% of the underlying common shares on the grant date, and the balance of these share purchase
options will vest and become exercisable with respect to 45,635 common shares in 36 equal monthly instalments commencing on the 13th
month following the date of grant and continuing until the 48th month following the date of grant, subject to continued employment
with us through each vesting date. No expense has been recorded through September 30, 2023 with respect to these options.
Warrants
The Company has computed
the fair value of warrants issued using the Black-Scholes option pricing model. The expected term used for warrants issued is the contractual
term. The Company is utilizing an expected volatility figure based on a review of the historical volatilities, over a period of time,
equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry. The risk-free
interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the
expected term of the instrument being valued.
Pursuant to entering the
line of credit, on January 15, 2021, the Company issued 3,906,209 warrants to purchase 3,906,209 common shares of the Company
at an exercise price of $1.60 (CAD$2.16) per common share until November 5, 2025. On January 22, 2021, the Company amended the
warrants whereby in the event that the Company effects a closing or closings of convertible notes is the minimum aggregate of (i) $1,000,000,
the exercise price of 1,111,112 warrants shall be adjusted to $0.015 (CAD$0.018), (ii) $2,000,000, the exercise price of 2,222,223 warrants
shall be adjusted to $0.015 (CAD$0.018), and (iii) $3,000,000, the exercise price of 3,333,334 warrants shall be adjusted to
$0.015 (CAD$0.018).
On December 8, 2021, the
Company reclassified 3,906,209 warrants valued at $6,392,476 to share capital as the exercise price became fixed for the remaining warrants
outstanding since the Company had successfully raised $3,000,000 in convertible notes, resolving the contingency affecting the exercise
price. On December 8, 2021, the Company issued 3,477,919 common shares pursuant to the exercise of 3,477,919 warrants with an exercise
price of $0.015 (CAD$0.018) per warrant.
The following is a summary
of the warrants for the three months ended September 30, 2023 and 2022:
| |
Number of options | | |
Weighted average exercise price ($) | | |
Weighted average remaining life (years) | | |
Aggregate intrinsic value ($) | |
Balance at June 30, 2022 | |
| 428,290 | | |
| 1.58 (CAD2.16 | ) | |
| 3.35 | | |
| — | |
Balance at September 30, 2022 | |
| 428,290 | | |
| 1.58 (CAD2.16 | ) | |
| 3.10 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
Balance at June 30, 2023 | |
| 428,290 | | |
| 1.63 (CAD2.16 | ) | |
| 2.35 | | |
| — | |
Granted(1) | |
| 93,750 | | |
| 1.25 | | |
| 4.83 | | |
| — | |
Balance at September 30, 2023 | |
| 522,040 | | |
| 1.54 (CAD2.16 | ) | |
| 2.59 | | |
| — | |
The Company applied the following assumptions
in the Black-Scholes option pricing model:
| |
July 28, 2023 | | |
June 30,
2023 | |
| |
$ | | |
$ | |
Expected life warrants (years) | |
| 5.00 | | |
| — | |
Expected volatility | |
| 100 | % | |
| — | |
Expected dividend yield | |
| 0 | % | |
| — | |
Risk-free interest rate | |
| 4.02 | % | |
| — | |
Black-Scholes value of each warrant | |
| 0.86 | | |
| — | |
NOTE 11 — RELATED PARTY TRANSACTIONS
Included under due to related
parties on our consolidated balance sheet as of September 30, 2023 is $628,063 (June 30, 2023 - $1,019,894) that relates to wages, short-term
benefits and contracted services for key management personnel. The amounts are unsecured and non-interest bearing.
On July 4, 2023, the Company
issued 100,000 common shares and made a cash payment of $226,586 (CAD$300,000) pursuant to a mutual settlement and release agreement.
On August 1, 2023, the Company
issued 187,500 common shares to its former Chief Executive Officer with respect to the settlement of an award equal to the quotient obtained
by dividing (x) $750,000 by (y) the closing price of the Company’s common shares on the closing date of the IPO.
The Company plans to issue
1,642,861 share purchase options to various officers and the executive chairman. The exercise price of these share purchase options will
be the closing price of the Company’s common shares on the closing date of an IPO. These share purchase options will vest as to
25% of the underlying common shares on the grant date, and the balance of these share purchase options will vest and become exercisable
with respect to 45,635 common shares in 36 equal monthly instalments commencing on the 13th month following the date of grant
and continuing until the 48th month following the date of grant, subject to continued employment with us through each vesting
date. No expense has been recorded through September 30, 2023 with respect to these options.
NOTE 12 — FINANCIAL INSTRUMENTS
The Company has established
a fair value hierarchy that reflects the significance of inputs of valuation techniques used in making fair value measurements as follows:
| ● | Level
1: quoted prices in active markets for identical assets or liabilities; |
| ● | Level
2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices)
or indirectly (i.e. from derived prices); and |
| ● | Level
3: inputs for the asset or liability that are not based on observable market data. |
The Company’s financial
assets and financial liabilities are measured at amortized cost. As at June 30, 2023 and June 30, 2022 the carrying value of the cash,
accounts receivable, other assets – GST receivable, accounts payable and accrued liabilities and amounts due to related parties
approximates the fair value due to the short-term nature of these instruments.
The notes payable are categorized
as Level 2 and have been recorded at amortized cost. The carrying value approximates its fair value due to its relatively short-term nature.
It is management’s opinion that the Company is not exposed to significant interest or credit risks arising from these financial
instruments.
NOTE 13 — SUBSEQUENT EVENTS
In connection with the preparation
of the condensed consolidated interim financial statements, the Company evaluated subsequent events through November 13, 2023, which was
the date the condensed consolidated interim financial statements were issued, and determined that the following subsequent events occurred
as of that date:
Other
In October 2023, the Company committed to a plan to sell property, plant and equipment resulting in a reclassification to assets held
for sale in accordance with ASC 360, Property, Plant, and Equipment.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion
and analysis of our financial conditions and results of operations should be read together with our condensed consolidated interim financial
statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and our Form 10-K for the
year ended June 30, 2023, or the Annual Report. In addition to historical information, this discussion and analysis contains forward-looking
statements that involve risks, uncertainties, and assumptions. Some of the information with respect to our plans and strategy for our
business, including forward-looking statements that involve risks and uncertainties. As a result of many factors, including those set
forth in the section entitled “Risk Factors in Part II, Item 1A of this Quarterly Report, our actual results could differ materially
from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should
carefully read the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report to gain an understanding of
the important factors that could cause actual results to differ materially from our forward-looking statements.
Overview
We are an early-stage psychotropics
contract manufacturing company focused on becoming the premier contract research, development, and manufacturing organization for the
emerging psychotropics-based medicines industry. In August 2021, Health Canada’s Office of Controlled Substances granted us a Controlled
Drugs and Substances Dealer’s Licence under Part J of the Food and Drug Regulations promulgated under the Food and Drugs Act (Canada),
or a Dealer’s Licence. A Dealer’s Licence authorizes us to develop, sell, deliver, and manufacture (through extraction or
synthesis) certain pharmaceutical-grade active pharmaceutical ingredients, or APIs, used in controlled substances and their raw material
precursors. Our mission is to make our products and research services available to our clients for the development of medicines and experimental
therapies to address certain psychiatric health disorders and other medical needs. Since current Canadian regulations prohibit the commercial
sales of APIs and other products we intend to produce, APIs and such other products would only be authorized for sale in Canada for clinical
testing purposes in an “institution,” for the purpose of determining the hazards and efficacy of the drug, and for laboratory
research in an institution by qualified investigators. Our mission is to make our products and research services available to our clients
for the development of medicines and experimental therapies to address certain psychiatric health disorders and other medical needs. We
cannot guarantee that we will receive such further approvals from Health Canada, and a failure to receive such further approvals would
have a material adverse effect on our business and result in an inability to generate revenue from said substances. Further, as of the
date of this Quarterly Report, we have not manufactured all of the psychedelics-based products allowable under the Dealer’s Licence.
The success of our
business plan is dependent on our activities being permissible under applicable laws and upon the occurrence of regulatory changes
for psychotropics-based medicines. In Canada, the psychedelic compounds that we are approved to produce under our Dealer’s
Licence, psilocybin, psilocin, lysergic acid diethylamide, or LSD, N,N-Dimethyltryptamine, or N,N-DMT, and
3,4-Methylenedioxymethamphetamine, or MDMA, and 4-Bromo-2,5-Dimethoxybenzeneethanamine, or 2C-B, are regulated under the Controlled
Drugs and Substances Act, or CDSA. Certain psychedelic substances, including psilocybin, psilocin, mescaline and DMT, are classified
as Schedule III drugs and the CDSA prohibits the possession of a Schedule III drug absent authorization under the CDSA or a related
regulation, and are illegal to possess Schedule III substances without a prescription. In the United States, these substances are
classified under the Controlled Substances Act (21 U.S.C. § 811), or the CSA, and the Controlled Substances Import and Export
Act, or the CSIEA, and as such, medical and recreational use is illegal under the U.S. federal laws. Under the CSA, the Drug
Enforcement Agency, or DEA, regulates chemical compounds with a potential for abuse as Schedule I, II, III, IV or V substances.
Schedule I substances may not be prescribed, marketed or sold in the United States. Most, if not all, state laws in the United
States classify psilocybin, LSD, MDMA, DMT and 2C-B as Schedule I controlled substances. For any product containing any of these
substances to be available for commercial marketing in the United States, the applicable substance must be rescheduled, or the
product itself must be scheduled, by the DEA to Schedule II, III, IV or V. If the DEA does not reschedule psilocybin, LSD, MDMA, DMT
and 2C-B as II, III, IV or V, such substances will be subject to individually-allotted manufacturing and procurement quotas, which
may have a material adverse effect on our business and result in an inability to generate sufficient revenue from said substances to
be profitable. Additionally, regardless of the scheduling of a finished, approved therapeutic product, if the API used in the final
dosage form is a Schedule I or II controlled substance, it would be subject to such quotas as the API could remain listed on
Schedule I or II. Moreover, even if the finished dosage form of a psychedelics-based medicine developed by one of our clients is
approved by the FDA, and if such product is listed by the DEA as a Schedule II, III, or IV controlled substance, its manufacture,
importation, exportation, domestic distribution, storage, sale and legitimate use will continue to be subject to a significant
degree of regulation by the DEA.
An increasing number of the
leading universities, hospitals and other public, private, and government institutions throughout the world have launched research programs
and are conducting clinical studies aimed at understanding the therapeutic potential of a range of psychedelic substances, including the
John Hopkins Center for Psychedelic and Consciousness Research at Johns Hopkins University, the Imperial College of London Centre for
Psychedelic Research, the Center for the Science of Psychedelics at the University of California, Berkeley, the Depression Evaluation
Service at Columbia University, the Center for Psychedelic Psychotherapy and Trauma Research at the Icahn School of Medicine at Mount
Sinai Health System, New York City’s largest academic medical system, and the Center for the Neuroscience of Psychedelics at Massachusetts
General Hospital, among many others.
To address mounting demands
for alternative therapies incorporating the use of psychedelics and other psychotropics, we intend to leverage our 25,000 square foot
facility located near Victoria, British Columbia, for research, development, and large-scale production of high-quality biological raw
materials, APIs, and finished biopharmaceutical products. Supported by an executive leadership and advisory team consisting of highly
experienced biotechnology and pharmaceutical industry experts, we will seek to position our company to be at the forefront of new discovery
in this rapidly emerging market.
Since our inception, we have
devoted substantially all of our resources to establishing our 25,000 square foot manufacturing and research facilities, which is located
near Victoria, British Columbia, researching potential products related to psychotropics-based therapies, pursuing the approval of our
Dealer’s Licence from Health Canada, organizing and staffing our company, developing our business strategy, establishing our intellectual
property portfolio, raising capital and engaging in other general and administrative activities to support and expand these efforts. To
date, we have financed our operations primarily with proceeds from the sales of our common shares, convertible and non-convertible promissory
notes, and from a bridge loan agreement. Until such time as we can generate significant revenue from our contract manufacturing and research
services, as to which no assurance can be given, we expect to finance our cash needs through public or private equity or debt financings,
third-party funding and marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements,
or any combination of these approaches. However, we may be unable to raise additional funds or enter into such other arrangements when
needed or on commercially reasonable terms, or at all.
We have incurred net losses
in each year since inception. Our net loss was $1,988,050 for the three months ended September 30, 2023. As of September 30, 2023, we
had an accumulated deficit of $46,413,848 and we had cash and cash equivalents of $237,614. Our net losses may fluctuate significantly
from quarter to quarter and year to year, depending on the timing of our research efforts, the expansion of our product and research offerings
and the timing of our other operating activities. Because of the numerous risks and uncertainties associated with our business, we are
unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. We expect
to incur increased expenses as we:
| ● | complete
the buildout of our manufacturing and research facilities; |
| ● | continue
to establish our contract manufacturing and research services; |
| ● | conduct
research related to potential API and finished product offerings in the psychotropics space; |
| ● | seek
regulatory authorization to distribute and export our product offerings; |
| ● | acquire
or license products or technologies; |
| ● | obtain,
maintain, protect and enforce our intellectual property portfolio; |
| ● | seek
to attract and retain new and existing skilled personnel; |
| ● | create
additional infrastructure to support our operations as a public company and incur increased legal, accounting, investor relations and
other expenses; and |
| ● | experience
delays or encounter issues with any of the above. |
To the extent that that psychotropics-based
medicines receive approval from the FDA or Health Canada and the market for our products expands into commercial-scale projects, we expect
to incur significant additional expenses in connection with product manufacturing, marketing, and distribution.
Recent Developments
On July 11, 2023,
we announced the launch of Twilight by Lucy, a blend of Amanita and Reishi mushrooms that include a variety of other nootropics promoting
improved cognitive function and enhanced sleep quality. This release comes on the heels of the recent launch of Mindful by Lucy. Both
of these products are now available for purchase on the company’s official online store, www.buytrippy.com, as well as through Hightimes.com
and other channels. Twilight by Lucy is a product designed to enhance and optimize consumer’s nightly sleep. The introduction of
Twilight alongside Mindful underscores Lucy’s dedication to providing solutions in the psychotropic marketplace.
On July 24, 2023, Christopher
McElvany resigned from his positions as the Company’s President and Chief Executive Officer and resigned as a member of the
Company’s Board. The Company and Mr. McElvany agreed that his last day of employment was July 14, 2023. Mr. McElvany did not resign
as a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
On July 24, 2023, the Board
ratified the appointment of Richard Nanula (a member of the Board since February 2022) as CEO.
On September 6, 2023, we
entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Hightimes to acquire the intellectual property
of High Times. Hightimes owns all of the issued and outstanding shares of common stock of HT-Lucy Acquisition Corp., a Delaware corporation.
Pursuant to the Stock Purchase Agreement, Hightimes agreed to sell to us all of the common stock of HT-Lucy Acquisition Corp. upon the
terms and subject to the conditions of the Stock Purchase Agreement. In exchange for the common stock of HT-Lucy Acquisition Corp., we
shall pay Hightimes as consideration (i) the number of shares of common stock of the Company that represents 19.9% of the total issued
and outstanding shares of the Company at the closing; and (ii) semi-annual earn-out payments (the “Hightimes Earn-Out Payments”)
payable for the five (5) consecutive fiscal years ending on June 30, 2029, in amounts equal to three (3) times the adjusted EBITDA of
HT-Lucy Acquisition Corp., calculated pursuant to the terms of the Stock Purchase Agreement. We have the discretion to pay the Hightimes
Earn-Out Payments with either Buyer Common Stock or cash. At the closing, we will also cause HT-Lucy Acquisition Corp. to enter into an
intellectual property license agreement pursuant to which HT-Lucy Acquisition Corp. will grant to an affiliate of Hightimes the exclusive
right and license to utilize certain intellectual property rights to operate retail stores and to manufacture and sell THC products in
the United States in return for a license fee of $1.0 million per year, increasing to $2.0 million per year upon Federal legalization.
On September 12, 2023, we
entered into an amalgamation agreement (the “Amalgamation Agreement”) with Bluesky Biologicals Inc. (“Bluesky”)
to acquire the Bluesky. Bluesky, through Bluesky Wellness Inc., owns a portfolio of plant-based wellness brands including Keoni, Keoni
Sport, Blush Wellness and AMMA Healing. Pursuant to the Amalgamation Agreement, Bluesky will amalgamate with a wholly-owned subsidiary
of the Company upon the terms and subject to the conditions of the Amalgamation Agreement. We shall pay Bluesky as consideration (i) the
number of shares of common stock of the Company that represents 19.9% of the total issued and outstanding shares of the Company at the
closing; and (ii) earn-out payments (the “Bluesky Earn-Out Payments”) payable for the four (4) consecutive fiscal years ending
on June 30, 2028, the six (6) month period ended June 30, 2024, and the six (6) month period ending December 31, 2028, in amounts equal
to two and one half (2.5) times the adjusted EBITDA of Bluesky., calculated pursuant to the terms of the Amalgamation Agreement. We have
the discretion to pay the Bluesky Earn-Out Payments with either the Company’s common shares or cash.
COVID-19 Impacts
We are continuing to closely
monitor the impact of the global COVID-19 pandemic on our business, and we are taking proactive efforts designed to protect the health
and safety of our employees and consultants and to maintain the continuity of our business. We believe that the measures we are implementing
are appropriate, and we will continue to monitor and seek to comply with guidance from governmental authorities and adjust our activities
as we deem appropriate.
While the COVID-19 pandemic
has not yet resulted in a significant impact to the development of our business and operations, as the pandemic continues, we could see
an impact on our ability to advance our manufacturing and research programs, obtain supplies from key suppliers or interact with regulators,
ethics committees or other important agencies due to limitations in regulatory authority, employee resources or otherwise. In any event,
if the COVID-19 pandemic continues and persists for an extended period of time, we could experience significant disruptions to our development
timelines, which would adversely affect our business, financial condition, results of operations, and growth prospects.
In addition, while the potential
economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, the pandemic could result
in significant and prolonged disruption of global financial markets, reducing our ability to access capital, which could in the future
negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially
affect our business and the potential value of our common shares.
The extent of the impact
of the COVID-19 pandemic on our efforts, our ability to raise sufficient additional capital on acceptable terms, if at all, and the future
value of and market for our common shares will depend on future developments that are highly uncertain and cannot be predicted with confidence
at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure
requirements in Canada, the United States and in other countries, and the effectiveness of actions taken globally to contain and treat
COVID-19.
Components of Operating Results
Net Product Sales
Net product sales consist
primarily of sales of Mindful by Lucy which was launched in March 2023 and Twilight by Lucy which was launched in July 2023. The online
order and receipt of full payment creates the customer contract. Revenue is measured based on the amount of consideration that we receive
from customers when they place an order, reduced by estimates for return allowances. Performance obligation is the delivery of the ordered
product to the customer and the performance condition is satisfied, and revenue is recognized, when control of the goods is transferred
to the customer, which generally occurs upon our delivery to a third-party carrier. There were no product sales during the three months
ended September 30, 2023 as the Company was changing its payment processor. Sales commenced again in October 2023.
Cost of Sales
Cost of sales primarily consists
of the purchase price of Mindful by Lucy and Twilight by Lucy, shipping costs, payment processing and related transaction costs, and applicable
sales taxes. . There were no product sales during the three months ended September 30, 2023 as the Company was changing its payment processor.
Sales commenced again in October 2023.
Selling, General and Administrative Expenses
Selling, general and administrative
expense consists primarily of employee-related expenses, including salaries, share-based compensation expense, benefits, and travel for
our personnel in executive, finance and accounting, human resources, and other administrative functions, as well as fees paid for accounting,
legal and tax services, consulting fees and facilities costs. General and administrative expense also includes corporate facility costs,
including allocated rent and utilities, insurance premiums, legal fees related to corporate matters, and fees for auditing, accounting,
and other consulting services.
Impairment loss
Impairment loss relates to
the Company’s equipment as fair market value exceeded the carrying amount.
Interest Expense
Interest expense relates
to interest charges associated with warrants issued under our line of credit. We anticipate that the warrants will be fully expensed in
November 2023, which will result in a reduction of interest expense in future periods.
Foreign Currency Translation Adjustment
The amount of foreign currency
translation adjustment will fluctuate from period to period with changes in foreign exchange rates between Canadian dollars and U.S. dollars.
Results of Operations
Comparison of the Three Months Ended
September 30, 2023 and 2022
The following table summarizes
our results of operations for the periods indicated:
For the three months
ended September 30: | |
2023 | | |
2022 | |
| |
$ | | |
$ | |
Selling, general and administrative expense | |
| 1,510,346 | | |
| 828,559 | |
Impairment loss | |
| 97,111 | | |
| — | |
Total expenses | |
| 1,607,457 | | |
| 828,559 | |
| |
| | | |
| | |
Other expense (income) | |
| | | |
| | |
Interest expense | |
| 390,604 | | |
| 543,221 | |
Other income | |
| (11 | ) | |
| (39 | ) |
Net loss | |
| (1,998,050 | ) | |
| (1,371,741 | ) |
Foreign currency translation adjustment, net of tax of $nil | |
| (77,395 | ) | |
| 400,780 | |
Comprehensive loss | |
| (2,075,445 | ) | |
| (970,961 | ) |
Selling, general and administrative
expenses. Selling, general and administrative expenses were $1,510,346 for the three months ended September 30, 2023, compared
to $828,559 for the three months ended September 30, 2022. The increase is attributable to increased expenses as a result of operating
as a public company, including expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance
with SEC rules and regulations and those of any national securities exchange on which our securities are traded, additional insurance
expenses, investor relations activities and other administrative and professional services.
Impairment loss.
Impairment loss was $97,111 for the three months ended September 30, 2023 related to the Company’s equipment as fair market
value exceeded the carrying amount, compared to impairment loss of $nil for the three months ended September 30, 2022. The increase in
impairment loss is attributable to a surplus of equipment in the marketplace.
Interest expense. Interest
expense was $390,604 for the three months ended September 30, 2023, compared to interest expense of $543,221 for the three months ended
September 30, 2022. During the three months ended September 30, 2023, interest expense included $387,192 related to warrants issued in
connection with the line of credit. During the three months ended September 30, 2022, interest expense included $378,915 related to the
warrants issued in connection with the line of credit. Interest expense decreased due to the automatic conversion of convertible notes
and repayment and conversion of notes payable on IPO.
Other income. Other
income was $11 for the three months ended September 30, 2023, compared to other income of $39 for the three months ended September 30,
2022.
Foreign Currency Translation
Adjustment. Foreign currency translation adjustment was a loss of $77,395 for the three months ended September 30, 2023, compared
to income of $400,780 for the three months ended September 30, 2022. The increase in net loss is due to the strengthening of the US Dollar
relative to the Canadian Dollar.
Liquidity and Capital Resources
Sources of Liquidity
Since inception, we have
incurred operating losses and negative cash flows from our operations. Our operations have been financed primarily by the sale and issuance
of our common shares, from the issuance of convertible and non-convertible promissory notes, and our IPO. We will continue to be dependent
upon equity and debt financings or collaborations or other forms of capital at least until we are able to generate positive cash flows
from product sales, if ever.
Our comprehensive loss was
$2,075,445 for the three months ended September 30, 2023. As of September 30, 2023, we had an accumulated deficit of $46,413,848 and cash
of $273,614. Our primary use of cash is to fund operating expenses, which consist primarily of selling, general and administrative expenditures
and expenditures for research and development activities when liquidity permits. Cash used to fund operating expenses is impacted by the
timing of when we pay these expenses, as reflected in the change in accounts payable and accrued expenses. Our strategy for managing liquidity
over the long-term is based on achieving positive cash flows from operations to internally fund operating and capital requirements. We
continually monitor factors that may affect our liquidity. These factors include research and development costs, operating costs, capital
costs, income tax refunds, foreign currency fluctuations, seasonality, market immaturity and a highly fluid environment related to state
and federal law passage and regulations.
Working Capital
At September 30, 2023 and
June 30, 2023, we had a working capital deficiency of $636,603 and working capital of $1,112,299, respectively, as follows:
As of: | |
September 30, 2023 | | |
June 30, 2023 | |
| |
$ | | |
$ | |
Cash | |
| 237,614 | | |
| 1,673,874 | |
Prepaid expenses and deposits | |
| 1,213,503 | | |
| 1,219,180 | |
Accounts receivable | |
| — | | |
| 7,048 | |
Other assets – GST receivable | |
| 10,062 | | |
| 62,649 | |
Other receivable | |
| — | | |
| 336,706 | |
Deferred financing costs, current | |
| 128,052 | | |
| 523,041 | |
Total current assets | |
| 1,589,231 | | |
| 3,822,498 | |
Accounts payable and accrued liabilities | |
| 1,198,625 | | |
| 1,291,063 | |
Due to related parties | |
| 628,063 | | |
| 1,019,894 | |
Notes payable, current | |
| 59,172 | | |
| 60,423 | |
Lease liability, current | |
| 339,974 | | |
| 338,819 | |
Total current liabilities | |
| 2,225,834 | | |
| 2,710,199 | |
Working capital (deficiency) | |
| (636,603 | ) | |
| 1,112,299 | |
Cash Flows
Comparison of the Three Months Ended September
30, 2023 and 2022
The following table summarizes
our results of operations for the periods indicated:
Net cash provided by (used in) | |
September 30, 2023 | | |
September 30, 2022 | |
| |
$ | | |
$ | |
Operating activities | |
| (1,288,453 | ) | |
| (246,529 | ) |
Investing activities | |
| (123,000 | ) | |
| 34,106 | |
Financing activities | |
| — | | |
| 174,648 | |
Effect of exchange rate changes on cash | |
| (24,807 | ) | |
| 794 | |
Cash, beginning of period | |
| 1,673,874 | | |
| 53,379 | |
Cash, end of period | |
| 237,614 | | |
| 16,398 | |
Operating Activities
Cash used in operating activities
during the three months ended September 30, 2023 was $1,288,453. The cash used in operating activities is attributable to the following:
| ● | Net loss of $1,988,050 due primarily to spend on selling, general and
administrative expenses and non-cash interest expense. Included in net loss are non-cash items of $549,921 for the three months ended
September 30, 2023. |
| ● | Movements
in prepaid expenses and deposits increased cash by $60,192 related to insurance payments and warrants issued for consulting. |
| ● | Movements
in accounts receivable which increased cash by $7,048 due to timing of receipt from product sales. |
| ● | Movements
in other assets including GST receivable which increased cash by $51,695 due to timing of receipt from the Canadian government. |
| ● | Movements
in other receivable which increased cash by $332,339 due to timing of receipt of funds garnished and paid into the British Columbia Supreme
Court and subsequently received by the Company. |
| ● | Movements in accounts payable and accrued liabilities which increased
cash by $96,340 due to timing of payments to vendors. |
| ● | Movements
in lease liability which decreased cash by $14,299 due to contractual lease payments. |
| ● | Movements
in due to related parties which decreased cash by $373,639 due to payments for various related parties and a mutual settlement and release
agreement. |
Cash used in operating activities
during the three months September 30, 2022 was $246,529. The cash used in operating activities is attributable to the following:
| ● | Net
loss of $1,371,741 due primarily to spend on selling, general and administrative expenses and non-cash interest and change in fair value
of warrant liability. Included in net loss are non-cash items of $858,307 for the three months ended September 30, 2022. |
| ● | Movements
in prepaid expenses and deposits decreased cash by $11,189. |
| ● | Movements
in other assets including GST receivable which increased cash by $1,691 due to timing of receipt from the Canadian government. |
| ● | Movements
in accounts payable and accrued liabilities which increased cash by $184,722 due to timing of payments to vendors. |
| ● | Movements
in lease liability which decreased cash by $70,240 due to contractual lease payments. |
| ● | Movements
in due to related parties which increased cash by $161,921 due to deferral of payments for various related parties. |
Investing Activities
Cash used in investing activities
during the three months ended September 30, 2023 was $123,000 related to payment of balances due on the acquisition of intellectual property
and related assets of Wesana Health Holdings Inc.
Cash provided by investing
activities during the three months ended September 30, 2022 was $34,106 related to the sales of digital assets which had been purchased
through funds received on issuance of convertible notes.
Financing Activities
Cash provided by financing
activities for the three months ended September 30, 2023 was $nil.
Cash provided by financing
activities for the three months ended September 30, 2022 was $174,648, which was the result of funds raised from the issuance of convertible
notes which was partially offset by deferred issuance costs.
Indebtedness
In November 2020, we entered
into a credit agreement with Origo BC Holdings Ltd., (“the Origo Credit Agreement”). Under the Origo Credit Agreement, we
obtained a line of credit in an aggregate principal amount of up to $4,937,130, of which we can request an advance of up to $369,822 in
any calendar quarter. The Origo Credit Agreement has a term of three years, and all borrowings thereunder bear interest at a rate of 8%
per annum. In the event of default, all outstanding indebtedness under the Origo Credit Agreement will bear interest at a rate of 15%
per annum. As of September 30, 2023, there were no amounts outstanding under the Origo Credit Agreement.
Funding Requirements
We have incurred significant
operating losses since our inception and expect to continue to incur significant operating losses for at least the next several years.
Moreover, we expect our losses to increase as we enhance our manufacturing and research facilities and product offerings. We may also
incur expenses in connection with the in-licensing or acquisition of additional product candidates. Furthermore, following the completion
of the IPO on February 13, 2023, we expect to incur additional costs associated with operating as a public company, including significant
legal, accounting, investor relations and other expenses that we did not incur as a private company. Our primary uses of capital are,
and we expect will continue to be, compensation and related expenses, manufacturing and development services, manufacturing costs, legal
and other regulatory expenses and general overhead costs.
At the time of issuance of
our financial statements as of and for the three months ended September 30, 2023, we concluded that there was substantial doubt about
our ability to continue as a going concern for one year from the issuance of the consolidated financial statements. We have based our
projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital
resources sooner than we expect. Because of the numerous risks and uncertainties associated with our research and manufacturing efforts,
we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements depend on many factors,
including, but not limited to:
| ● | any
necessary enhancements to our manufacturing and research facilities; |
| ● | our
need to purchase additional equipment; |
| ● | our
acquisition or development of additional intellectual property or technologies; |
| ● | the
cost of commercialization activities, including marketing, sales and distribution costs; |
| ● | our
ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements
that we may enter into; |
| ● | the
expenses needed to attract and retain skilled personnel; |
| ● | our
need to implement additional internal systems and infrastructure, including financial and reporting systems, and other costs associated
with being a public company; |
| ● | the
costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our intellectual property portfolio; and |
| ● | the
impact of the COVID-19 pandemic. |
Further, our development
and commercialization operating plans may change, and we may need additional funds to meet operational needs and capital requirements
for manufacturing or research and development activities and commercialization of our products. Because of the numerous risks and uncertainties
associated with the development, manufacturing and commercialization of our products, we are unable to estimate the amounts of increased
capital outlays and operating expenditures associated with our current and anticipated operations.
We may finance our cash needs
through public or private equity or debt offerings or other sources such as strategic collaborations. However, we may be unable to raise
additional funds or enter into such other arrangements when needed or on terms that are acceptable to us, or at all. To the extent that
we raise additional capital by issuing our equity securities, our existing stockholders may experience substantial dilution, and the terms
of these securities may include liquidation or other preferences that could harm the rights of a common shareholder. Any agreements for
future debt or preferred equity financings, if available, may involve covenants limiting or restricting our ability to take specific actions,
such as incurring additional indebtedness, making capital expenditures or declaring dividends. If we raise additional funds through collaborations,
strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable
rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be
favorable to us. We may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have
sufficient funds for our current or future operating plans.
Despite the risks and uncertainties,
management believes that we will have sufficient working capital to meet our liquidity needs through twelve months from the issuance date
of the financial statements included in this Quarterly Report.
Off-Balance Sheet Arrangements
During the periods presented
we did not have, nor do we currently have, any off-balance sheet arrangements as defined in the rules and regulations of the SEC.
Critical Accounting Policies and Estimates
Our management’s discussion
and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance
with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based
on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting
policies are more fully described in the notes to our audited financial statements included elsewhere in this Quarterly Report, we believe
that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate
to the more significant areas involving management’s judgments and estimates.
Share-Based Payments
We account for our stock-based
compensation as expense in the statements of operations based on the awards’ grant date fair values. We account for forfeitures
as they occur by reversing any expense recognized for unvested awards.
We estimate the fair value
of options granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires inputs based on certain
subjective assumptions, including (a) the expected stock price volatility, (b) the calculation of expected term of the award, (c) the
risk-free interest rate and (d) expected dividends. Due to the historical lack of a public market for our common stock and a lack of company-specific
historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar
companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term
assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar
characteristics to us, including stage of product development and life science industry focus. We use the simplified method as allowed
by the Securities and Exchange Commission, or SEC, Staff Accounting Bulletin, or SAB, No. 107, Share-Based Payment, to calculate the expected
term for options granted to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to
estimate the expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term
of the share purchase options. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans
to pay any dividends on our common stock. The fair value of stock-based payments is recognized as expense over the requisite service period
which is generally the vesting period.
Common Stock Valuation
As there was no public market
for our common stock prior to February 13, 2023, the estimated fair value of our common stock has historically been determined by our
board of directors, with input from management based upon the most recent cash common share offering to arms’ length parties. In
addition to considering the most recent cash arms’ length third party offering, our board of directors considered various objective
and subjective factors to determine the fair value of our common stock as of each grant date, including:
| ● | the
progress of our research and development programs, including the status and results of preclinical studies for our product candidates; |
| ● | our
stage of development and commercialization and our business strategy; |
| ● | external
market conditions affecting the biotechnology industry and trends within the biotechnology industry; |
| ● | our
financial position, including cash on hand, and our historical and forecasted performance and operating results; |
| ● | the
lack of an active public market for our common stock; |
| ● | the
likelihood of achieving a liquidity event or sale of our company in light of prevailing market conditions; and |
| ● | the
analysis of initial public offerings and the market performance of similar companies in the biotechnology industry. |
The assumptions underlying
these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s
judgment. As a result, if we had used different assumptions or estimates, the fair value of our common stock and our stock-based compensation
expense could have been materially different.
Subsequent to February 13,
2023, the fair value of our common stock has been determined based on the quoted market price of our common stock on the date of grant
and discounted for any trading restrictions.
Income Taxes
Significant judgment is required
in determining the provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business
for which the ultimate tax determination is uncertain. We recognize liabilities and contingencies for anticipated tax audit issues based
on our current understanding of the tax law in the relevant jurisdiction. For matters where it is probable that an adjustment will be
made, we record our best estimate of the tax liability including the related interest and penalties in the current tax provision.
We believe that we have adequately
provided for the probable outcome of these matters; however, the outcome may result in a materially different outcome than the amount
included in the tax liabilities. In addition, we recognize deferred tax assets relating to tax losses carried forward only to the extent
that it is probable that taxable profit will be available against which a deductible temporary difference can be utilized. This is deemed
to be the case when there are sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity
which are expected to reverse in the same year as the expected reversal of the deductible temporary difference, or in years into which
a tax loss arising from the deferred tax asset can be carried back or forward. However, utilization of the tax losses also depends on
the ability of the taxable entity to satisfy certain tests at the time the losses are recouped.
Useful Lives of Property, Plant and Equipment
and Intangibles
Property, plant, and equipment
and intangible assets are amortized or depreciated over their useful lives. Useful lives are based on management’s estimate of the
period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can
result in significant variations in the carrying value and amounts charged to the statement of loss and other comprehensive loss in specific
periods.
Impairment
Long-lived assets, including
intangible assets are reviewed for indicators of impairment at each statement of financial position date or whenever events or changes
in circumstances indicate that the carrying amount of an asset exceeds its recoverable amount. For the purpose of impairment testing,
assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing
use that are largely independent of the cash inflows of other assets or groups of assets, or CGU. Judgments and estimates are required
in defining a CGU and determining the indicators of impairment and the estimates required to measure an impairment, if any.
Recently Adopted Accounting Pronouncements
See the section titled “Notes
to Condensed Consolidated Interim Financial Statements — Note 2” included elsewhere in this Quarterly Report for additional
information.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
As a “smaller reporting
company,” as that term is defined in Rule 229.10(f)(1), we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, including
our President and Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting
officer), do not expect that our disclosure controls or our internal control over financial reporting will prevent all error and all fraud.
Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions
or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Our
President and Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period
covered by this Quarterly Report. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer
concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were not effective
to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated
and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, to allow for
timely decisions regarding required disclosures, and recorded, processed, summarized and reported within the time periods specified in
the SEC’s rules and forms.
The
Company has certain material weaknesses in internal controls as described below:
| ● | Company
lacks an effective control environment; |
| ● | Company
has not formally designed and implemented risk assessment controls; |
| ● | Company
has not formally designed and implemented monitoring controls; and |
| ● | Company
lacks segregation of duties in several areas, and its review controls are not considered operating effectively due to historical misstatements. |
Changes in Internal Control
During the three months
ended September 30, 2023, there were no changes in our internal controls over financial reporting, which were identified in connection
with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that materially affected,
or is reasonably likely to have a materially affect, on our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not aware of any pending
legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
We may, from time to time,
become involved in disputes and proceedings arising in the ordinary course of business. In addition, as a public company, we are also
potentially susceptible to litigation, such as claims asserting violations of securities laws. Any such claims, with or without merit,
if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that an adverse result in any future
proceeding would not have a potentially material adverse effect on our business, results of operations, and financial condition.
Item 1A. Risk Factors
There have been no material
changes to the risk factors set forth in the section titled “Risk Factors” included in our Annual Report on Form 10-K for
the year ended June 30, 2023. Our business involves significant risks. You should carefully consider the risks and uncertainties described
in our Form 10-K, together with all of the other information in this Quarterly Report on Form 10-Q, as well as our audited consolidated
financial statements and related notes as disclosed in our Form 10-K. The risks and uncertainties described in our Form 10-K are not the
only ones we face. Additional risk and uncertainties that we are unaware of or that we deem immaterial may also become important factors
that adversely affect our business. The realization of any of these risks and uncertainties could have a material adverse effect on our
reputation, business, financial condition, results of operations, growth and future prospects as well as our ability to accomplish our
strategic objectives. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
Recent Sales of Unregistered Securities
During the three months ended
September 30, 2023, the Company issued the shares of common stock listed below pursuant to the exemption from the registration requirements
of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof for the sale of securities not involving a public offering:
On July 4, 2023, the Company
issued 100,000 common shares and made a cash payment of $226,586 (CAD$300,000) pursuant to a mutual settlement and release agreement.
On July 5, 2023, the Company
cancelled 104,167 common shares which had previously been issued pursuant to a donation to the Austin Community Foundation.
On August 1, 2023, the Company
issued 187,500 common shares to the former Chief Executive Officer with respect to the settlement of an award equal to the quotient obtained
by dividing (x) $750,000 by (y) the closing price of the Company’s common shares on the closing date of the IPO.
Repurchase of Shares
of Company Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
* |
This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing of the registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
Lucy Scientific Discovery Inc. |
|
|
|
Date: November 13, 2023 |
By: |
/s/ Richard Nanula |
|
|
Richard Nanula |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
Date: November 13, 2023 |
By: |
/s/ Brian Zasitko |
|
|
Brian Zasitko |
|
|
Chief Financial Officer
(Principal Financial Officer) |
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In connection with the quarterly report of Lucy
Scientific Discovery Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2023, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Richard Nanula, do hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
In connection with the quarterly report of Lucy
Scientific Discovery Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2023, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Brian Zasitko, do hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: