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 December 31, 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)

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:

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.

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 February 13, 2024, 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:

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)

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 and six months ended December 31, 2023 and 2022

(Expressed in US Dollars, except share numbers)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

LUCY SCIENTIFIC DISCOVERY INC.

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

(Expressed in US Dollars, except share numbers)

(unaudited)

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 six months ended December 31, 2023

(Expressed in US Dollars)

(unaudited)

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)

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 were initially founded in 2017 as Hollyweed North Cannabis, Inc., or HNCI. In May 2018, our newly-constructed facility was inspected by Health Canada, and we received our Controlled Substances dealer’s licence in June of that year. Shortly thereafter, our wholly-owned subsidiary TerraCube was founded, and the first TerraCube prototype was constructed. Later that same year, HNCI obtained a Health Canada Cannabis Standard Processing Licence. On August 10, 2021, the Health Canada Standard Processor’s License was voluntarily withdrawn with the revocation effective September 3, 2021.

In May of 2020, we submitted an application to Health Canada for a Controlled Substances Dealer’s Licence (the “Dealer’s License”) for the ability to produce and conduct research using psilocybin, psilocin, N,N-DMT, and mescaline. In parallel, we began the process of rebranding to our current name, Lucy Scientific Discovery, Inc (“Lucy”). In February 2021, the Health Canada Office of Controlled Substances completed the inspection, and the Dealer’s Licence was obtained by Lucy in August 2021. In October 2021, we filed an amendment with Health Canada to add the ability to sell, send, transport, and deliver the substances currently included on our licence and add MDMA, LSD, and 2C-B to our license, which was approved on December 17, 2021. In November 2023, we surrendered the Dealer’s Licence, to better manage our costs. The Company intends to monitor the psychedelic marketplace and revisit the Dealer License when the regulatory landscape provides for a clearer path to meaningful revenues.

On June 30, 2023, pursuant to an asset purchase agreement dated June 30, 2023, the Company closed on the acquisition of intellectual property and related assets relating to Wesana psilocybin and cannabidiol combination investigational therapy, SAN-013.

In addition, the Company is engaged in the sale of psychotropic products under the names Mindful by Lucy and Twilight by Lucy.

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 $4,617,577 for the six months ended December 31, 2023. As of December 31, 2023, we had an accumulated deficit of $49,033,375 and we had cash and cash equivalents of $211,120. 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:

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 Chief Executive Officer.

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.

On September 21, 2023, we received a deficiency letter (the “Notice”) from the Listing Qualifications Department of Nasdaq notifying the Company that, based upon the closing bid price of the Common Shares, for the last 30 consecutive business days, the Company was not in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”).

The Notice had no immediate effect on the continued listing status of the Common Shares on Nasdaq, and, therefore, the Company’s listing remains fully effective. We were provided a compliance period of 180 calendar days from the date of the Notice, or until March 19, 2024, to regain compliance with the Minimum Bid Requirement. If the Company is not in compliance with the Minimum Bid Requirement by March 19, 2024, the Company may be afforded a second 180 calendar day compliance period. To qualify for this additional compliance period, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq, with the exception of the Minimum Bid Price requirement.

The Company will continue to monitor the closing bid price of its Common Shares and seek to regain compliance with all applicable Nasdaq requirements within the allotted compliance period. However, there can be no assurance that the Company will regain compliance with the Minimum Bid Requirement within the allotted compliance period, including any extensions that may be granted by Nasdaq. If the Company does not regain compliance, Nasdaq will provide notice that the Common Shares will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel.

On December 12, 2023, the Company entered into a securities purchase agreement (“SPA”) with three purchasers (each a “December Note Purchaser”) for the sale of convertible notes (the “Notes”), having an aggregate principal amount of up to $2,000,000 and convertible into the Company’s common shares. The Notes carry an original issue discount of up to a total of $200,000. The aggregate purchase price of the Notes is $1,800,000. One of the December Note Purchasers is Whistling Pines LLC. The biological son of Paul Abramowitz, one of our directors, is a beneficial owner of Whistling Pines LLC. Refer to “Liquidity and Capital Resources” for additional disclosure with respect to the Notes.

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.

Interest Expense

Interest expense primarily relates to interest charges associated with warrants issued under our line of credit. The warrants were fully expensed in November 2023, which will result in a reduction of interest expense in future periods.

Loss on Issuance of Convertible Notes

Loss on issuance of convertible notes relates to the December 12, 2023 convertible note issuance since the financial liabilities at fair value exceeded the proceeds resulting in a loss on issuance.

Change in Commitment to Issue Common Shares

Change in commitment to issue common shares relates to an obligation to issue common shares with a value of $270,000 in relation to the December 12, 2023 convertible note issuance. The number of common shares to be issued is based on the lowest closing price of the Company’s common shares on the 20 days preceding issuance. As the number of common shares to be issued is variable, the Company recorded the obligation as a financial liability with changes in fair value recorded in profit and loss.

Change in Fair Value of Conversion Feature

Change in fair value of conversion feature relates to the conversion option associated with the December 12, 2023 convertible note issuance. The Company has determined that the conversion feature embedded in the convertible notes constitutes a derivative liability which has been bifurcated from the convertible notes. Changes in fair value of the conversion feature are recorded in profit and loss.

Change in Fair Value of Default Penatly

Change in fair value of default penalty relates to the default penalty associated with the December 12, 2023 convertible note issuance. The Company has determined that the default penalty embedded in the convertible notes constitutes a derivative liability which has been bifurcated from the convertible notes. Changes in fair value of the default penalty are recorded in profit and loss.

Loss from Discontinued Operations

In November 2023, we made the strategic decision to surrender the Dealer’s Licence and vacate our leased warehouse to better manage our costs. The Company intends to monitor the psychedelic marketplace and revisit the Dealer’s License when the regulatory landscape provides for a clearer path to meaningful revenues. In addition, the Company will no longer be pursuing development and commercialization of TerraCube.

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 December 31, 2023 and 2022

The following table summarizes our results of operations for the periods indicated:

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.

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.

Selling, general and administrative expenses. Selling, general and administrative expenses were $868,325 for the three months ended December 31, 2023, compared to $182,043 for the three months ended December 31, 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. The three months ended December 31, 2022 was reduced due to the Company incurring fewer legal, regulatory, and personnel expenses in anticipation of completion of the IPO.

Interest expense. Interest expense was $128,471 for the three months ended December 31, 2023, compared to interest expense of $485,278 for the three months ended December 31, 2022. During the three months ended December 31, 2023, interest expense included $121,119 related to warrants issued in connection with the line of credit. During the three months ended December 31, 2022, interest expense included $382,345 related to the warrants issued in connection with the line of credit. The interest expense related to the warrants decreased due to the maturity of the line of credit on November 5, 2023. Interest expense decreased due to the automatic conversion of convertible notes and repayment and conversion of notes payable on IPO.

Loss on issuance of convertible notes. Loss on issuance of convertible notes was $508,599 for the three months ended December 31, 2023, compared to loss on issuance of convertible notes of $nil for the three months ended December 31, 2022. The amount relates to the issuance of convertible notes on December 12, 2023 where the fair value of financial liabilities exceeded the proceeds of the convertible notes.

Change in commitment to issue common shares. Change in commitment to issue common shares was a gain of $59,493 for the three months ended December 31, 2023, compared to a gain on the change in commitment to issue common shares of $nil for the three months ended December 31, 2022. The gain was the result of an increase in the lowest closing price of the Company’s common shares for the 20 trading days preceding December 31, 2023 to $0.21 as compared to $0.198 for the 20 trading days preceding December 12, 2023.

Change in fair value of conversion feature. Change in fair value of conversion feature was a gain of $139,437 for the three months ended December 31, 2023, compared to a gain on change in fair value of conversion feature of $nil for the three months ended December 31, 2022. The gain was a result of a decline in the price of the Company’s common shares from $0.285 on December 12, 2023 to $0.256 on December 31, 2023.

Change in fair value of default penalty. Change in fair value of default penalty was a loss of $3,099 for the three months ended December 31, 2023, compared to a loss on change in fair value of default penalty of $nil for the three months ended December 31, 2022. The loss was a result of a decline in the volatility and risk-free rate assumptions.

Other income. Other income was $6 for the three months ended December 31, 2023, compared to other income of $5 for the three months ended December 31, 2022.

Loss from discontinued operations. Loss from discontinued operations was $1,315,785 for the three months ended December 31, 2023 as compared to a loss of $266,491 for the three months ended December 31, 2022. The increase in net loss was attributable to an impairment loss of $1,436,459 related to the Company’s property, plant, and equipment, right of use asset and long-term deposits and a loss of $191,540 related to the disposal of property, plant, and equipment. These losses were partially offset by a gain on change in estimated lease term of $588,033 for the Company’s leased warehouse as the Company no longer anticipates exercising the 5-year renewal option and therefore revalued the lease to exclude payments during the renewal period.

Foreign Currency Translation Adjustment. Foreign currency translation adjustment was a loss of $1,182 for the three months ended December 31, 2023, compared to a loss of $101,117 for the three months ended December 31, 2022. The decrease in net loss is due to the weakening of the US Dollar relative to the Canadian Dollar.

Comparison of the Six Months Ended December 31, 2023 and 2022

The following table summarizes our results of operations for the periods indicated:

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.

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.

Selling, general and administrative expenses. Selling, general and administrative expenses were $2,254,798 for the six months ended December 31, 2023, compared to $810,675 for the six months ended December 31, 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. The six months ended December 31, 2022 was reduced due to the Company incurring fewer legal, regulatory, and personnel expenses in anticipation of completion of the IPO.

Interest expense. Interest expense was $519,075 for the six months ended December 31, 2023, compared to interest expense of $1,028,499 for the six months ended December 31, 2022. During the six months ended December 31, 2023, interest expense included $508,311 related to warrants issued in connection with the line of credit. During the six months ended December 31, 2022, interest expense included $765,039 related to the warrants issued in connection with the line of credit. The interest expense related to the warrants decreased due to the maturity of the line of credit on November 5, 2023. Interest expense decreased due to the automatic conversion of convertible notes and repayment and conversion of notes payable on IPO.

Loss on issuance of convertible notes. Loss on issuance of convertible notes was $508,599 for the six months ended December 31, 2023, compared to loss on issuance of convertible notes of $nil for the six months ended December 31, 2022. The amount relates to the issuance of convertible notes on December 12, 2023 where the fair value of financial liabilities exceeded the proceeds of the convertible notes.

Change in commitment to issue common shares. Change in commitment to issue common shares was a gain of $59,493 for the six months ended December 31, 2023, compared to a gain on the change in commitment to issue common shares of $nil for the six months ended December 31, 2022. The gain was the result of an increase in the lowest closing price of the Company’s common shares for the 20 trading days preceding December 31, 2023 to $0.21 as compared to $0.198 for the 20 trading days preceding December 12, 2023.

Change in fair value of conversion feature. Change in fair value of conversion feature was a gain of $139,437 for the six months ended December 31, 2023, compared to a gain on change in fair value of conversion feature of $nil for the six months ended December 31, 2022. The gain was a result of a decline in the price of the Company’s common shares from $0.285 on December 12, 2023 to $0.256 on December 31, 2023.

Change in fair value of default penalty. Change in fair value of default penalty was a loss of $3,099 for the six months ended December 31, 2023, compared to a loss on change in fair value of default penalty of $nil for the six months ended December 31, 2022. The loss was a result of a decline in the volatility and risk-free rate assumptions.

Other income. Other income was $17 for the six months ended December 31, 2023, compared to other income of $44 for the six months ended December 31, 2022.

Loss from discontinued operations. Loss from discontinued operations was $1,536,769 for the six months ended December 31, 2023 as compared to a loss of $466,418 for the six months ended December 31, 2022. The increase in net loss was attributable to an impairment loss of $1,533,570 related to the Company’s property, plant, and equipment, right of use asset and long-term deposits and a loss of $191,540 related to the disposal of property, plant, and equipment. These losses were partially offset by a gain on change in estimated lease term of $588,033 for the Company’s leased warehouse as the Company no longer anticipates exercising the 5-year renewal option and therefore revalued the lease to exclude payments during the renewal period.

Foreign Currency Translation Adjustment. Foreign currency translation adjustment was a loss of $78,577 for the six months ended December 31, 2023, compared to a gain of $299,663 for the six months ended December 31, 2022. The 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 $4,696,154 for the six months ended December 31, 2023. As of December 31, 2023, we had an accumulated deficit of $49,033,375 and cash of $211,120. 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 December 31, 2023 and June 30, 2023, we had a working capital deficiency of $2,148,398 and working capital of $1,112,299, respectively, as follows:

Cash Flows

Comparison of the Six Months Ended December 31, 2023 and 2022

The following table summarizes our results of operations for the periods indicated:

Operating Activities – Continuing Operations

Cash used in operating activities of continuing operations during the six months ended December 31, 2023 was $1,619,220. The cash used in operating activities of continuing operations is attributable to the following:

Cash provided by operating activities of continuing operations during the six months December 31, 2022 was $173,852. The cash provided by operating activities of continuing operations is attributable to the following:

Operating Activities – Discontinued Operations

Cash used in operating activities of discontinued operations during the six months ended December 31, 2023 was $408,744. The cash used in operating activities of discontinued operations is attributable to the following:

Cash used in operating activities of discontinued operations during the six months December 31, 2022 was $466,418. The cash used in operating activities of discontinued operations is attributable to the following:

Investing Activities

Cash used in investing activities during the six months ended December 31, 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 six months ended December 31, 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 six months ended December 31, 2023 was $757,003 which was the result of funds raised from the issuance of convertible notes.

Cash provided by financing activities for the six months ended December 31, 2022 was $310,869, which was the result of funds raised from the issuance of convertible notes which was partially offset by deferred issuance costs.

Indebtedness

The company had the following indebtedness during the six months ended December 31, 2023 and 2022:

Credit Facility

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. In November 2023 the Origo Credit Agreement matured and is no longer available to the Company.

Convertible Notes

On December 12, 2023, the Company entered into a SPA with three December Note Purchasers for the sale of Notes, having an aggregate principal amount of up to $2,000,000 and convertible into the Company’s common shares. The Notes carry an original issue discount of up to a total of $200,000. The aggregate purchase price of the Notes is $1,800,000. One of the December Note Purchasers is Whistling Pines LLC. The biological son of Paul Abramowitz, one of our directors, is a beneficial owner of Whistling Pines LLC.

On December 12, 2023, the Company received a total of $850,003, before closing costs, at the closing of the first tranche of the financing (the “First Tranche”). The First Tranche’s original issue discount, added to the principal amount owed by the Company, was a total of $94,445, for a total principal balance of $944,447. Closing costs including legal fees and a brokerage fee were $92,999. The Notes are repayable on December 12, 2024 and accrue interest at a rate of 10.0% per annum. The payment of further consideration by the December Note Purchasers to the Company, pursuant to the SPA and the Notes, is at the December Note Purchasers sole discretion (the “Subsequent Tranches”). The obligations of the Company under the Notes are secured by all of the Company’s assets pursuant to the terms of the security and pledge agreements by and between the Company and each December Note Purchaser.

Pursuant to the SPA, in connection with the payment of the First Tranche, the December Note Purchaser received warrants to purchase up to an aggregate of 1.500,000 common shares at an exercise price of $0.25 for a term of 5 years (the “Warrants”).

On the earliest date that the common shares underlying the Note would be eligible to be unrestricted in the hands of the December Note Purchasers (either pursuant to registration, Rule 144, or any other applicable exemption from registration), the Company shall issue to the December Note Purchaser s a number of common shares so that the value of such common shares is equal to a total of $450,000 (the “Equity Interest Value”) based on the lowest daily closing price of the Company’s common shares during the 20 trading days preceding the date of issuance (the “Equity Interest”). The Equity Interest Value related to the First Tranche was $270,000.

The Company may prepay the Notes at any time prior to the Maturity Date, upon 30 days’ notice to the December Note Purchaser’s in an amount equal to 110% multiplied by the sum of (i) the outstanding principal amount, (ii) all accrued and unpaid interest, (iii) all accrued interest through the remainder of the Note term, and (iv) any other amounts due under the Note. The Company is required to make monthly interest payments to the December Note Purchasers, starting in January 2024, until the principal amount is due in December 2024.

The Notes are convertible at the December Note Purchasers option (in whole or in part) at any time into the number of common shares equal to the sum of (1) the principal amount of the Note to be converted in such conversion; plus (2) at the Investor’s option, accrued and unpaid interest, provided, however, that at the option of December Note Purchaser, the accrued and unpaid interest can be converted prior to any other amounts under the Note, if any, on such principal amount at the interest rates provided in the Note to the conversion date (as defined in the Notes); plus (3) at the December Note Purchasers option, the lesser of the rate of 24% per annum or the maximum legal amount permitted by law (the “Default Interest”), if any, on the amounts referred to in the immediately preceding clauses (1) and/or (2); plus (4) the Investor’s expenses relating to a conversion, including but not limited to amounts paid by Investor on the Company’s transfer agent account; and (5) at the December Note Purchasers option, any amounts owed to the Investor pursuant to Sections 2.3 and 2.4(g) of the Notes.

Under the terms of the Notes and the Warrants and other warrants, if any, held by the December Note Purchasers, the December Note Purchasers may not convert any such Notes or exercise any such Warrants to the extent such exercise would cause the December Note Purchasers, together with its affiliates and attribution parties, to beneficially own a number of common shares which would exceed 9.99%, or 4.99% in certain cases, of our then outstanding common shares following such conversion or exercise, excluding for purposes of such determination common shares issuable upon conversion of such Notes or exercise of such warrants which have not been converted or exercised.

The Notes set forth certain standard events of default (such event, an “Event of Default”), subject to certain cure periods. Upon the occurrence of an Event of Default (after the expiration of any applicable cure period), (i) interest shall accrue at the Default Interest rate (as defined in the Notes); (ii) the Notes shall become immediately due and payable and the Company shall pay to the December Note Purchasers an amount equal to the sum of the principal amount then outstanding plus accrued and unpaid interest through the date of the Event of Default, plus unaccrued interest through the remainder of the term of the Notes, together with all costs, including, without limitation, legal fees and expenses of collection and Default Interest through the date of full repayment; and (iii) a liquidated damages charge equal to 25% of the outstanding balance due under the Notes will be assessed and will become immediately due and payable to the December Note Purchasers.