Lexaria Bioscience Corp. 10-Q

Item 1. Financial Statements LEXARIA BIOSCIENCE CORP. CONSOLIDATED BALANCE SHEET (Expressed in U.S. Dollars) February 28 August 31 2021 2020 ASSETS (Unaudited) (Audited) Current Cash $ 9,346,933 $ 1,293,749 Marketable securities (Note 19) 470,632 19,321 Accounts receivable (Note 7) 627,776 208,925 Inventory (Note 8) 137,282 116,871 Prepaid expenses and deposit (Note 18) 363,746 182,095 Current assets from discontinued operations (Note 20) - 105,250 Total Current Assets 10,946,369 1,926,211 Non-current assets, net Long term receivable (Note 7) 394,479 - Lease right of use (Note 17) 109,306 126,920 Intellectual property (Note 9) 299,049 292,000 Property & equipment (Note 10) 423,205 483,357 Total Non-current Assets 1,226,039 902,277 TOTAL ASSETS $ 12,172,408 $ 2,828,488 LIABILITIES Current Accounts payable and accrued liabilities (Note 11) $ 146,494 $ 86,920 Deferred revenue 1,000 44,255 Due to related parties (Note 15) 206,806 58,704 Loan payable 7,507 - Lease payable (Note 17) 37,582 36,038 Current liabilities from discontinued operations (Note 20) - 250 Total Current Liabilities 399,389 226,167 Long Term Lease payable (Note 17) 70,156 89,393 Loan payable - 30,670 Total Long Term Liabilities 70,156 120,063 TOTAL LIABILITIES 469,545 346,230 STOCKHOLDERS' EQUITY Share Capital (Note 12) Authorized: 220,000,000 common voting shares with a par value of $0.001 per share Issued and outstanding:5,104,332 common shares at February 28, 2021 and 3,001,476 common shares at August 31, 2020 5,104 3,001 Additional paid-in capital (Note 12) 39,859,831 30,324,398 Deficit (28,094,115 ) (27,802,198 ) Equity attributable to shareholders of the Company 11,770,820 2,525,201 Non-controlling interest (67,957 ) (42,943 ) Total Stockholders' Equity 11,702,863 2,482,258 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,172,408 $ 2,828,488 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 3 of 35 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Expressed in U.S. Dollars, except number of shares) THREE MONTHS ENDED SIX MONTHS ENDED February 28 February 29 February 28 February 29 2021 2020 2021 2020 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue (Note 14) $ 192,006 $ 37,549 $ 487,662 $ 99,631 Cost of goods sold 30,570 58,106 95,048 65,959 Gross profit 161,436 (20,557 ) 392,614 33,672 Expenses Accounting and audit 42,282 7,493 57,910 26,529 Depreciation and amortization (Note 9, 10) 27,930 28,282 55,859 55,794 Advertising and promotions 56,867 33,903 84,773 80,171 Bad debt 25,000 - 37,000 - Consulting (Notes 12, 13, 15) 435,786 521,228 691,800 1,005,024 Investor relations 44,187 3,762 78,151 21,277 Legal and professional 160,647 88,002 409,342 140,357 Office and miscellaneous 182,295 61,020 258,812 135,047 Research and development 176,398 186,557 368,659 294,020 Travel 318 21,087 850 42,940 Wages and salaries (Note 17) 72,161 90,768 147,659 178,361 Gain on disposal of assets (Note 20) (1,522,704 ) - (1,522,704 ) - Unrealized (gain)/loss on marketable securities (Note 19) 41,362 (983 ) 16,952 40,591 Inventory writeoff (Note 8) 717 - 2,482 - (256,754 ) 1,041,119 687,545 2,020,111 Net income (loss) from continuing operations 418,190 (1,061,676 ) (294,931 ) (1,986,439 ) Discontinued operations Income (loss) from discontinued operations (Note 20) (25,000 ) 64,184 (22,000 ) 64,184 Net and comprehensive income (loss) for the period $ 393,190 $ (997,492 ) $ (316,931 ) $ (1,922,255 ) Net and comprehensive income (loss) attributable to: Common shareholders $ 404,111 (950,344 ) $ (291,917 ) (1,857,657 ) Non-controlling interest $ (10,921 ) (47,148 ) $ (25,014 ) (64,598 ) Basic and diluted income (loss) per share Continuing operations $ 0.10 $ (0.40 ) $ (0.08 ) $ (0.75 ) Discontinued operations (0.01 ) 0.02 (0.01 ) 0.02 $ 0.09 $ (0.38 ) $ (0.09 ) $ (0.73 ) Weighted average number of common shares outstanding - Basic and diluted 4,052,904 2,663,015 3,524,286 2,663,015 The accompanying notes are an integral part of these consolidated interim financial statements. Page 4 of 35 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (Expressed in U.S. Dollars) SIX MONTHS ENDED February 28 February 29 2021 2020 (Unaudited) (Unaudited) Cash flows used in operating activities Net loss from continuing operations $ (294,931 ) $ (1,986,439 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation 66,041 456,707 Depreciation and amortization 55,859 55,794 Inventory write-off 2,482 - Bad debt expense 37,000 - Noncash right of use lease expense 17,614 - Gain on disposal of assets (1,522,704 ) - Unrealized loss on marketable securities 16,952 40,591 Warrants issued for services - 70,752 Change in working capital Accounts receivable (69,264 ) 167,571 Inventory (16,883 ) 3,108 Prepaid expenses and deposits (181,651 ) 4,170 Accounts payable and accrued liabilities 59,574 (74,721 ) Due to related parties 148,102 (46,496 ) Operating lease liability (17,693 ) - Deferred revenue (43,255 ) - Net cash used in operating activities $ (1,742,757 ) $ (1,308,963 ) Cash flows used in investing activities Intellectual property (8,766 ) (5,711 ) Disposal of Assets (Note 20) 273,375 - Net cash used in investing activities $ 264,609 $ (5,711 ) Cash flows from financing activities Repayment of loan payable (23,163 ) - Proceeds from issuance of equity 9,471,495 827,020 Net cash from financing Activities $ 9,448,332 $ 827,020 Net cash from discontinued operations $ 83,000 $ (57,508 ) Net Change in cash for the period 8,053,184 (545,162 ) Cash at beginning of period 1,293,749 1,285,147 Cash at end of period $ 9,346,933 $ 739,985 Supplemental information of cash flows: Income taxes paid in cash $ 3,540 $ 957 Non-cash consideration on asset disposal $ 1,171,599 $ - The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 5 of 35 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Expressed in U.S. Dollars) ADDITIONAL TOTAL COMMON STOCK PAID-IN STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT NCI EQUITY $ $ $ $ $ Balance August 31, 2019 2,626,236 2,626 26,248,614 (23,868,202 ) 107,674 2,490,712 Stock based compensation - - 162,414 - - 162,414 Warrants issued for services - - 70,752 - - 70,752 Private placement 60,792 61 815,959 816,020 Net loss - - - (907,313 ) - (907,313 ) Non-controlling interest - - - - (17,450 ) (17,450 ) Balance November 30, 2019 2,687,028 2,687 27,297,739 (24,775,515 ) 90,224 2,615,135 Stock based compensation - - 294,293 - - 294,293 Exercise of stock options 3,667 4 10,996 - - 11,000 Net loss - - - (950,344 ) - (950,344 ) Non-controlling interest - - - - (47,148 ) (47,148 ) Balance February 29, 2020 2,690,695 2,691 27,603,028 (25,725,859 ) 43,076 1,922,936 Stock based compensation - - 682,563 - - 682,563 Warrants issued for services - - 98,081 - - 98,081 Private placement 295,540 296 1,887,310 - - 1,887,606 Net loss - - - (1,361,381 ) - (1,361,381 ) Non-controlling interest - - - - (29,272 ) (29,272 ) Balance May 31, 2020 2,986,235 2,986 30,270,983 (27,087,240 ) 13,804 3,200,533 Exercise of stock options 3,667 4 19,026 - - 19,030 Shares issued for service 11,574 12 99,988 - - 100,000 Private placement - - (65,600 ) - - (65,600 ) Net loss - - - (714,958 ) - (714,958 ) Non-controlling interest - - - - (56,747 ) (56,747 ) Balance August 31, 2020 3,001,476 3,001 30,324,398 (27,802,198 ) (42,943 ) 2,482,258 Stock based compensation - - 48,887 - - 48,887 Warrants issued for services - - - - - - Private placement - - - - - - Net loss - - - (696,028 ) - (696,028 ) Non-controlling interest - - - - (14,093 ) (14,093 ) Balance November 30, 2020 3,001,476 3,001 30,373,285 (28,498,226 ) (57,036 ) 1,821,024 Stock based compensation - - 17,154 - - 17,154 Brokered placement, net 2,102,856 2,103 9,469,392 - - 9,471,495 Net Income - - - 404,111 - 404,111 Non-controlling interest - - - - (10,921 ) (10,921 ) Balance February 28, 2021 5,104,332 5,104 39,859,831 (28,094,115 ) (67,957 ) 11,702,863 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 6 of 35 Table of Contents LEXARIA BIOSCIENCE CORP. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS February 28, 2021 (Expressed in U.S. Dollars) 1. Organization, Business and Going Concern Lexaria Bioscience Corp. (“Lexaria”, or the “Company”) was formed on December 9, 2004 under the laws of the State of Nevada. In March of 2014, the Company began work in the fields of enhanced delivery of active ingredients and drugs. In May 2016, the Company commenced out-licensing its patented DehydraTECH™ technology (the “Technology”) for improved delivery of bioactive compounds that promotes healthy ingestion methods, lower overall dosing and higher effectiveness in active molecule delivery. The Company has its office in Kelowna, BC, Canada. The Company’s unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles (US GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for a full year. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated annual financial statements and notes thereto included in our annual report filed on Form 10-K for the year ended August 31, 2020. The Company’s unaudited interim consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has recurring losses from operations and net capital deficiency. On January 12, 2021 the Company closed an underwritten public offering for net proceeds of $9,471,495 (Note 12). The Company will require additional funds or revenues to maintain its operations and developments in the future. Management’s plans in this regard are to raise equity and debt financing as required, but there is no certainty that such financing will be available or that it will be available at acceptable terms in the future. The outcome of these matters cannot be predicted at this time. In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak and any related adverse public health developments may adversely affect workforces, economies, and financial markets globally, potentially leading to an economic downturn. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or results of operations at this time. During November of 2020, our Board of Directors ("Board") approved a plan to sell the businesses assets underlying our Canpharm THC related segment. As a result, the related financial results were reflected in our consolidated statement of operations, retrospectively, as discontinued operations beginning in the first quarter of fiscal 2021. On November 18, 2020, we signed a definitive agreement to sell the assets and the transaction was completed during December 2020. As a result, the related assets and liabilities associated with the discontinued operations in the prior year consolidated balance sheet are classified as discontinued operations. See "Note 20 - Discontinued Operations" for additional information. Page 7 of 35 Table of Contents On January 11, 2021, the Company approved a 30:1 reverse stock split with no fractional shares issued. All share and per share information within these condensed interim consolidated financial statements have been retroactively restated to reflect the effects of the approved reverse stock split. 2. Business Risk and Liquidity The Company is subject to several categories of risk associated with its operating activities. Although we intend to develop our businesses in accordance with best ethical practices, we may suffer negative publicity if we, our partners, contractors, or customers are found to have engaged in any environmentally insensitive practices or other business practices that are viewed as unethical. Our operations may require licenses and permits from various governmental authorities. We believe that we will be able to continue to obtain all necessary licenses and permits under applicable laws and regulations for our operations and believe we will be able to comply in all material respects with the terms of such licenses and permits. However, such licenses and permits are subject to change in various circumstances. There can be no guarantee that we will be able to obtain or maintain all necessary licenses and permits and failing to obtain or retain required licenses could have a materially adverse effect on the Company. Lexaria and its subsidiaries are not involved directly or indirectly in the cultivation, processing, distribution, or utilization of cannabis or cannabis derived components. Lexaria does have an ancillary involvement risk via out-licensing of its patented technology to licensees that choose to utilize DehydraTECH to manufacture products that contain locally or state approved but federally regulated and controlled contents. There can be no guarantee that changes in the regulatory framework and environment will not occur and such changes could have a materially adverse effect on the Company. Lexaria and its subsidiaries are not involved directly or indirectly in the production or sale of any products containing nicotine. Products containing nicotine have historically been involved in litigation in the USA. Lexaria’s corporate licensee may introduce products containing nicotine that utilize DehydraTECH to the US consumer market, which could therefore introduce third-party risks to Lexaria. Lexaria and its subsidiaries are not involved directly or indirectly in the production or sale of any pharmaceutical or antiviral products. Licensees may enhance their product’s delivery using our Technology, which could therefore introduce third-party risks to Lexaria. 3. Significant Accounting Policies The significant accounting policies of the Company are consistent with those of our audited financial statements on Form 10-K for the year ended August 31, 2020. 4. Basis of Consolidation These interim consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries; Lexaria CanPharm ULC, PoViva Corp., Lexaria Hemp Corp., Kelowna Management Services Corp. and Lexaria Pharmaceutical Corp., and our 83.333% subsidiary Lexaria Nicotine LLC (16.667% Altria Ventures Inc., an indirect wholly owned subsidiary of Altria Group, Inc.). All significant intercompany balances and transactions have been eliminated. Page 8 of 35 Table of Contents 5. Estimates and Judgements The preparation of financial statements in conformity with U.S GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of the Company’s accounting policies require us to make subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. These accounting policies involve critical accounting estimates because they are particularly dependent on estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are made. Although we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably could have been used. Changes in the accounting estimates used by the Company are reasonably likely to occur from time to time, which may have a material effect on the presentation of financial condition and results of operations. The Company reviews these estimates, judgments and assumptions periodically and reflect the effects of revisions in the period in which they are deemed to be necessary. We believe that these estimates are reasonable; however, actual results could differ from these estimates. In preparing these unaudited interim consolidated financial statements, the significant judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the audited consolidated financial statements for the year ended August 31, 2020, aside from the following additions: Discontinued Operations Judgement is required in determining whether a subsidiary or group of assets qualifies as a business and as discontinued operations. A business is presumed to be an integrated set of activities and assets capable of being conducted and managed for the purpose of providing economic benefits. The Company determined that the assets sold were a business. The Company derecognizes a subsidiary or a group of assets only when the rights to the cash flows from the asset expire, or when it transfers the subsidiary or group of asset and substantially all the risks and rewards of ownership of the assets to another entity. Determination of the date of recognition was based on the closing date, final clearance, and approval by the TSX of the share issuances forming part of the consideration. As all consideration is in CDN$ and the share value is based on fixed CDN$ values, regardless of the share price of the underlying stock, the amounts were translated at the spot foreign exchange rate on the date of final closing. The valuation of the note receivable was included at its nominal value of $NIL as payment of the note is not determinable. 6. Recent Accounting Guidance In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available for sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. In November 2019 FASB issued ASU No 201910 revised the effective date based on updated criteria with the effective date for fiscal years beginning after December 15, 2022. Application of the amendments is through a cumulative effect adjustment to deficit as of the effective date. The Company is currently assessing the impact of the standard on its consolidated financial statements. Page 9 of 35 Table of Contents 7. Accounts and Other Receivables February 28 August 31 2021 2020 $ $ Trade and deposits receivable 394,325 82,492 Intellectual property fees 160,760 38,250 Sales tax receivable 72,691 88,183 627,776 208,925 Short term trade and deposits receivable includes $390,533 of the current portion receivable from the asset sale (Note 20). $390,533 receivable related to the asset sale is also included in long term receivable as the payment is due greater than one year from February 28, 2021 8. Inventory February 28 August 31 2021 2020 $ $ Raw materials 51,739 51,404 Work in progress 40,692 15,705 Finished goods 44,851 49,762 137,282 116,871 During the period ended February 28, 2021, the Company wrote down $2,482 (2020 - $8,240 full year) of inventory to reflect its net realisable value. 9. Intellectual Property The following is a list of US capitalized patents held by the Company: Issued Patent # Patent Certificate Grant Date Patent Family US 9,474,725 B1 10/25/2016 Food and Beverage Compositions Infused With Lipophilic Active Agents and Methods of Use Thereof US 9,839,612 B2 12/12/2017 US 9,972,680 B2 05/15/2018 US 9,974,739 B2 05/22/2018 US 10,084,044 B2 09/25/2018 US 10,103,225 B2 10/16/2018 US 10,381,440 08/13/2019 US 10,374,036 08/06/2019 US 10,756,180 08/25/2020 Page 10 of 35 Table of Contents The Company also holds non-capitalized patents outside the US. A continuity schedule for capitalized patents is presented below: February 28 August 31 2021 2020 $ $ Balance – beginning 292,000 265,127 Addition 8,766 33,645 Amortization* (1,717 ) (6,772 ) Balance – ending 299,049 292,000 *The patents are amortized over their legal life of 20 years. 10. Property & Equipment Six Months Ended February 28, 2021 Cost Period Amortization Disposal Accumulated Amortization Net Balance February 28, 2021 $ $ $ $ $ Leasehold improvements 259,981 (13,509 ) - (113,629 ) 146,352 Computers 63,964 (4,920 ) - (41,709 ) 22,255 Furniture fixtures equipment 34,220 (1,604 ) (3,094 ) (13,212 ) 17,914 Lab equipment 291,235 (9,116 ) - (54,551 ) 236,684 649,400 (29,150 ) (3,094 ) (223,101 ) 423,205 Year Ended August 31, 2020 Cost Period Amortization Accumulated Amortization Net Balance August 31, 2020 $ $ $ $ Leasehold improvements 259,981 (53,268 ) (86,610 ) 173,371 Computers 63,964 (19,681 ) (31,869 ) 32,095 Furniture fixtures equipment 34,220 (7,036 ) (13,097 ) 21,123 Lab equipment 291,235 (27,921 ) (34,467 ) 256,768 649,400 (107,906 ) (166,043 ) 483,357 During the six month period ended February 28, 2021, $6,010 of amortization was included in the cost of inventory. Page 11 of 35 Table of Contents 11. Accounts Payable and Accrued Liabilities February 28 August 31 2021 2020 $ $ Accounts Payable Trades payable 134,633 45,080 Accrued Liabilities Corporate tax payable 2,401 3,834 Trades payable 9,460 38,006 Balance 146,494 86,920 12. Common Shares and Warrants During the quarter ended February 28, 2021 the Company issued the following shares and warrants summarized in the table presented below: Type of Issuance Number of Shares Total Value Placement (1) 2,102,856 $ 11,039,994 (1) Total fees of $1,568,499 were paid for total net receipt of $9,471,495 A continuity schedule for warrants is presented below: Number of Warrants Weighted Average Exercise Price $ Balance August 31, 2019 94,177 41.40 Cancelled/expired (25,000 ) 44.90 Issued 402,431 12.74 Balance August 31, 2020 471,608 16.77 Cancelled/expired (32,493 ) 67.50 Issued 2,330,017 6.58 Balance February 28, 2021 2,769,132 7.87 A summary of warrants outstanding as of February 28, 2021 is presented below: # of Warrants Weighted Average Remaining Contractual Life Weighted Average Exercise Price $ 3,334 0.23 years 28.80 8,334 0.24 years 46.50 25,000 0.61 years 4.20 292 0.71 years 36.00 7,500 1.68 years 24.00 51,814 3.71 years 36.00 8,984` 3.75 years 36.00 16,667 4.05 years 9.00 267,618 4.19 years 10.50 49,572 4.20 years 10.50 2,330,017 4.88 years 6.58 2,769,132 4.70 years 7.87 Page 12 of 35 Table of Contents 13. Stock Options The Company has established the 2014 Stock Option Plan whereby the board of directors may, from time to time, grant up to 62,917 stock options to directors, officers, employees, and consultants; and the 2019 Equity Incentive Plan whereby the board of directors may, from time to time, grant up to 261,290 stock options to directors, officers, employees, and consultants. Stock options granted must be exercised no later than five years from the date of grant or such lesser period as determined by the Company’s board of directors. The exercise price of an option is equal to or greater than the closing market price of the Company’s common shares on the day preceding the date of grant. The vesting terms of each grant are set by the board of directors. The Company granted the following options during the quarter ended February 28, 2021: Quantity Exercise Price $ Life (Years) 3,400 4.80 5 A continuity schedule for stock options is presented below: Options Weighted Average Exercise Price $ Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value $ Balance August 31, 2019 166,767 21.30 Cancelled/expired (149,437 ) 29.51 Exercised (7,333 ) 4.09 Granted 161,600 11.66 Balance August 31, 2020 171,604 11.17 Cancelled (2,000 ) 12.90 Granted 3,400 4.80 Balance February 28, 2021 (Outstanding) 173,004 11.03 3.82 30,812 Balance February 28, 2021 (Exercisable) 164,970 10.30 3.86 41,550 The fair value of share purchase options granted were estimated as of the date of the grant by using the Black-Scholes option pricing model with the following assumptions: February 28 2021 Expected volatility 134 % Risk-free interest rate 0.42 % Expected life 5 years Dividend yield 0 % Estimated fair value per option $ 4.00 Page 13 of 35 Table of Contents 14. Revenues February 28 2021 $ February 29 2020 $ Product sales 231,718 99,191 Licensing revenue 255,844 - Freight revenue 100 440 Income from continuing operations 487,662 99,631 During the six months ended February 28, 2021, the Company recognized $255,844 of usage fees from continuing operations. Revenues are significantly concentrated on one customer. Our intermediate product sales significantly increased to $231,718 with licensees increasing their orders of our intermediate product. Intermediate products are typically a DehydraTECH enabled powder that companies can purchase to include in their products. Intermediate product sales and licensing revenue constituted the majority of our revenue. The licensing fees consist of intellectual property licensing fees for transfer of the Technology with the signing of definitive agreements for the DehydraTECH technology and usage fees. 15. Related Party Transactions Management, consulting and director services February 28, 2021 February 29, 2020 Contract Non Cash Total Contract Non Cash Total $ $ $ $ $ $ CAB Financial Services (1) 136,566 - 136,566 131,557 - 131,557 M&E Services Ltd. (1) 62,559 - 62,559 58,785 - 58,785 Docherty Management Limited (1) 124,987 - 124,987 113,569 187,069 300,638 Directors 37,533 13,612 51,145 35,214 - 35,214 361,645 13,612 375,257 339,125 187,069 526,194 (1) C.A.B. Financial Services is owned by the CEO of the Company, M&E Services Ltd. is owned by the CFO of the Company, and Docherty Management Limited is owned by the President of the Company. All related party transactions pertain to management and director agreements entered into in the normal course of business (Note 17). Due to related parties : Related party transactions are recorded at the exchange amount established and agreed to between the related parties. As at February 28, 2021, $206,806 (August 31, 2020 - $58,704) was payable to related parties and included in due to related parties. Page 14 of 35 Table of Contents 16. Segment Information The Company’s operations involve the development and usage, including licensing, of its proprietary DehydraTECH Technology. Lexaria is centrally managed and its chief operating decision makers, being the president and the CEO, use the consolidated and other financial information supplemented by revenue information by category of alternative health consumer products and technology licensing to make operational decisions and to assess the performance of the Company. The Company has identified two reportable segments: Intellectual Property and Products. Licensing revenues are significantly concentrated on one licensee. IP Licensing $ Products $ Corporate $ Consolidated Total $ Revenue 255,844 231,818 - 487,662 Cost of goods sold - (95,048 ) - (95,048 ) Operating expenses 1,142,518 (278,374 ) (1,551,689 ) (687,545 ) Discontinued operations (22,000 ) - - (22,000 ) Segment income(loss) 1,376,362 (141,604 ) (1,551,689 ) (316,931 ) Total assets 696,493 137,282 11,338,633 12,172,408 Capital Asset by Region Cost US Disposal US Net Balance US Cost Canada Net Balance Canada Total Net Balance Six Months Ended February 28, 2021 $ $ $ $ $ $ Leasehold Improvements - - - 259,981 146,352 146,352 Computers - - - 63,964 22,255 22,255 Furniture Fixtures Equipment 3,094 3,094 - 31,126 17,914 17,914 Lab Equipment 98,050 - 74,843 193,185 161,841 236,684 101,144 3,094 74,843 548,256 348,362 423,205 Capital Asset by Region Cost US Net Balance US Cost Canada Net Balance Canada Total Net Balance Year Ended August 31, 2020 $ $ $ $ $ Leasehold Improvements - - 259,981 173,371 173,371 Computers - - 63,964 32,095 32,095 Furniture Fixtures Equipment 3,094 - 31,126 21,123 21,123 Lab Equipment 98,050 85,263 193,185 171,505 256,768 101,144 85,263 548,256 398,094 483,357 17. Commitments, Significant Contracts and Contingencies Management and Service Agreements: As at February 28, 2021, the Company is party to the following contractual commitments: Party Monthly Commitment Expiry Date C.A.B Financial Services CAD $29,706 January 1, 2022 Docherty Management Ltd. CAD $25,609 January 1, 2022 M&E Services Ltd. CAD $13,997 June 1, 2021 Office Management CAD $10,800 August 15, 2022 Research & Development CAD $3,854 Month to Month Office operating lease (1) CAD $4,823 November 15, 2023 Page 15 of 35 Table of Contents Right of Use Assets - Operating Lease (1) Corporate office and R&D lab space leased in Kelowna, British Columbia, Canada until November 15, 2023 with an option to extend an additional five years. In addition to minimum lease payments, the lease requires us to pay property taxes and operating costs which are subject to annual adjustments. Right of use assets - operating leases: $ Additions 118,193 Amortization (8,887 ) Total right of use assets (February 28, 2021) 109,306 Liabilities: Additions 116,664 Lease payments (10,987 ) Interest accretion 2,061 Total lease liabilities (February 28, 2021) 107,738 Operating lease cost as at February 28, 2021 Operating cash flows for lease 10,948 Remaining lease term 2.5 Years Discount rate 7.25 % Pursuant to the terms of the Company’s lease agreements in effect, the following table summarizes the Company’s maturities of operating lease liabilities as of February 28, 2021: 2021 21,975 2022 44,599 2023 44,815 2024 7,469 Thereafter - Total lease payments 118,857 Less: imputed interest (11,119 ) Present value of operating lease liabilities 107,737 Less: current obligations under leases (37,582 ) Total 70,156 Page 16 of 35 Table of Contents 18. Prepaid Expenses Prepaid expenses consist of the following at February 28, 2021 and August 31, 2020: February 28 August 31 2021 2020 $ $ Advertising & conferences 170,165 21,878 Investor relations 71,667 - Legal fees - 47,498 Licence, filing fees, dues 59,967 8,541 Office & insurance 36,561 78,792 Research & development 25,386 25,386 363,746 182,095 19. Marketable Securities The components of Marketable Securities were as follows: Cost Basis $ Unrealized Gains $ Unrealized Losses $ Total $ August 31, 2020 Common stock 56,250 9,997 (38,584 ) Total 56,250 9,997 (46,926 ) 19,321 February 28, 2021 Common stock 524,513 24,410 (41,362 ) Total 524,513 34,407 (88,288 ) 470,632 During the period ended February 28, 2021, the Company added $468,263 in marketable securities as a component of the sale of assets (Note 20). Unrealized gains and losses from common stock are due to market price movements. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence. The COVID-19 pandemic has caused significant market turbulence and it is possible that our evaluation will change dependent upon new information as it arises. 20. Discontinued Operations On November 19, 2020 the Company entered a definitive asset sale agreement through its wholly owned subsidiary Lexaria Canpharm ULC to sell certain non-core business assets for gross proceeds of C$3,850,000. On December 10, 2020 the sale closed. The Company received from Hill Street Beverage Company C$350,000 in cash, 6,031,363 restricted common shares at a deemed price of C$0.0829 per share as the first required equity-based payment, a promissory note having a principal amount of C$2,000,000 and bearing interest at the rate of 10% per annum. Pursuant to the terms of the transaction, the Company will receive another C$1,000,000 worth of common shares over a period sixteen months in C$500,000 issuances eight months and sixteen months after the closing date. The C$ were converted at the spot rate of 0.78107 at the closing date. The promissory note was included at its nominal value of $NIL. Page 17 of 35 Table of Contents Gain on asset disposal $ Book value of assets sold - Cash consideration 273,373 Shares received 468,264 Shares receivable 781,067 Promissory note - 1,522,704 The financial results of the group of assets sold are presented as income (loss) from discontinued operations, net of income taxes in our consolidated statement of income. The following table presents financial results of the assets: SIX MONTHS ENDED February 28 February 29 2021 2020 Revenue $ 3,000 $ 69,750 Operating Expenses 25,000 5,566 Net Income $ (22,000 ) $ 64,184 The following table presents cash flows of discontinued operations: SIX MONTHS ENDED February 28 February 29 2021 2020 Cash flows used in discontinued operating activities Net income $ (22,000 ) $ 64,184 Change in working capital 105,000 (99,000 ) Net cash provided by (used in) discontinued operating activities $ 83,000 $ (34,816 ) Net cash provided by (used in) discontinued operations $ 83,000 $ (34,816 ) The following table presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations of the assets: February 28 August 31 2021 2020 Current Assets Accounts receivable $ - $ 105,250 Total assets classified as discontinued operations in the consolidated balance sheet - 105,250 Current Liabilities Accounts payable $ - $ 250 Total liabilities classified as discontinued operations in the consolidated balance sheet - 250 Page 18 of 35 Table of Contents