Lexaria Bioscience Corp. 10-Q

Item 1. Financial Statements LEXARIA BIOSCIENCE CORP. CONSOLIDATED BALANCE SHEET (Expressed in U.S. Dollars) May 31, August 31, 2022 2021 ASSETS (Unaudited) (Audited) Current Cash $ 7,051,083 $ 10,917,797 Marketable securities 288,032 833,841 Accounts receivable 154,868 342,401 Inventory 40,183 29,648 Prepaid expenses and deposit 757,308 319,253 Total Current Assets 8,291,474 12,442,940 Non-current assets, net Lease right of use 62,363 91,041 Intellectual property 440,675 364,623 Property & equipment 343,431 368,213 Total Non-current Assets 846,469 823,877 TOTAL ASSETS $ 9,137,943 $ 13,266,817 LIABILITIES Current Accounts payable and accrued liabilities $ 157,095 $ 105,946 Loan payable 7,906 7,926 Lease payable 41,825 39,404 Total Current Liabilities 206,826 153,276 Long Term Lease payable 18,339 49,989 Total Long Term Liabilities 18,339 49,989 TOTAL LIABILITIES 225,165 203,265 STOCKHOLDERS' EQUITY Share Capital Authorized: 220,000,000 common voting shares with a par value of $ 0.001 per share Issued and outstanding: 5,950,998 common shares at May 31, 2022 and 5,726,699 common shares at August 31, 2021 5,951 5,727 Additional paid-in capital 46,808,608 45,089,114 Deficit ( 37,631,063 ) ( 31,829,204 ) Equity attributable to shareholders of the Company 9,183,496 13,265,637 Non-controlling Interest ( 270,718 ) ( 202,085 ) Total Stockholders' Equity 8,912,778 13,063,552 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,137,943 $ 13,266,817 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 3 of 33 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 Nine Months Ended May 31, May 31, 2022 2021 2022 2021 (Unaudited) (Unaudited) Revenue $ 99,717 $ 204,055 $ 144,247 $ 691,717 Cost of goods sold 18,635 59,989 30,592 155,037 Gross profit 81,082 144,066 113,655 536,680 Expenses Research and development 752,095 454,443 1,486,487 823,102 General and administrative 1,747,325 2,256,175 4,497,660 4,097,765 Total operating expenses 2,499,420 2,710,618 5,984,147 4,920,867 Loss from operations ( 2,418,338 ) ( 2,566,552 ) ( 5,870,492 ) ( 4,384,187 ) Gain on disposal of assets - - - 1,522,704 Discontinued operations - - - ( 22,000 ) Net and comprehensive loss for the period $ ( 2,418,338 ) $ ( 2,566,552 ) $ ( 5,870,492 ) $ ( 2,883,483 ) Net and comprehensive loss attributable to: Common shareholders $ ( 2,382,925 ) ( 2,556,997 ) $ ( 5,801,859 ) ( 2,848,914 ) Non-controlling interest $ ( 35,413 ) ( 9,555 ) $ ( 68,633 ) ( 34,569 ) Basic and diluted loss per share Continuing operations $ ( 0.41 ) $ ( 0.50 ) $ ( 1.00 ) $ ( 0.70 ) Discontinued operations - - - ( 0.01 ) $ ( 0.41 ) $ ( 0.50 ) $ ( 1.00 ) $ ( 0.71 ) Weighted average number of common shares outstanding - Basic and diluted 5,950,998 5,104,332 5,863,086 4,056,755 The accompanying notes are an integral part of these consolidated interim financial statements. Page 4 of 33 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (Expressed in U.S. Dollars) Nine Months Ended May 31, 2022 2021 (Unaudited) Cash flows used in operating activities Net loss and comprehensive loss $ ( 5,870,492 ) $ ( 2,861,483 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation 519,718 410,007 Depreciation and amortization 77,986 83,788 Inventory write-off - 2,482 Bad debt expense - 37,000 Non-cash right of use lease expense 28,678 26,665 Gain on disposal of assets - ( 1,522,704 ) Unrealized loss on marketable securities 823,916 86,810 Shares issued for services 600,000 - Warrants issued for services - 785,895 Lease accretion 4,166 6,179 Change in working capital Accounts receivable ( 90,574 ) ( 1,106 ) Inventory ( 9,196 ) 71,976 Prepaid expenses and deposits 161,945 11,656 Accounts payable and accrued liabilities 56,352 86,981 Due to related parties ( 5,223 ) ( 57,380 ) Deferred revenue - ( 44,255 ) Net cash used in operating activities $ ( 3,702,724 ) $ ( 2,877,489 ) Cash flows used in investing activities Disposal (acquisition) of assets ( 49,188 ) 273,375 Intellectual property ( 81,407 ) ( 79,493 ) Net cash (used in) provided by investing activities $ ( 130,595 ) $ 193,882 Cash flows from financing activities Repayment of loan payable - ( 23,163 ) Lease payments ( 33,395 ) ( 32,962 ) Proceeds from issuance of equity - 9,471,495 Net cash provided by (used in) financing Activities $ ( 33,395 ) $ 9,415,370 Net cash provided by discontinued operations $ - $ 83,000 Net change in cash for the period ( 3,866,714 ) 6,814,763 Cash at beginning of period 10,917,797 1,293,749 Cash at end of period $ 7,051,083 $ 8,108,512 Supplemental information of cash flows: Income taxes paid in cash $ - $ 3,450 Non-cash consideration on asset disposal $ - $ 1,171,599 Non-cash shares for services included in prepaid expenses $ 600,000 $ - The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 5 of 33 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Expressed in U.S. Dollars, except number of shares) (Unaudited) ADDITIONAL TOTAL SHARE CAPITAL PAID-IN STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT NCI EQUITY $ $ $ $ $ Balance August 2020 3,001,476 3,001 30,324,398 ( 27,802,198 ) ( 42,943 ) 2,482,258 Stock based compensation - - 48,887 - - 48,887 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 2,102,856 2,104 9,469,393 - - 9,471,497 Net Income - - - 404,111 - 404,111 Non-controlling interest - - - - ( 10,921 ) ( 10,921 ) Balance February 28, 2021 5,104,332 5,105 39,859,832 ( 28,094,115 ) ( 67,957 ) 11,702,865 Stock based compensation - - 343,966 - - 343,966 Warrants issued for services - - 785,895 - - 785,895 Net loss - - - ( 2,556,997 ) - ( 2,556,997 ) Non-controlling interest - - - - ( 9,555 ) ( 9,555 ) Balance May 31, 2021 5,104,332 5,105 40,989,693 ( 30,651,112 ) ( 77,512 ) 10,266,174 Exercise of warrants 610,189 610 4,014,433 - - 4,015,043 Shares issued for services 12,178 12 84,988 - - 85,000 Net loss - - - ( 1,178,092 ) - ( 1,178,092 ) Non-controlling interest - - - - ( 124,573 ) ( 124,573 ) Balance August 31, 2021 5,726,699 5,727 45,089,114 ( 31,829,204 ) ( 202,085 ) 13,063,552 Stock based compensation - - 408,544 - - 408,544 Net loss - - - ( 1,993,157 ) - ( 1,993,157 ) Non-controlling interest - - - - ( 10,325 ) ( 10,325 ) Balance November 30, 2021 5,726,699 5,727 45,497,658 ( 33,822,361 ) ( 212,410 ) 11,468,614 Shares issued for services 224,299 224 1,199,776 - - 1,200,000 Net loss - - - ( 1,425,777 ) - ( 1,425,777 ) Non-controlling interest - - - - ( 22,895 ) ( 22,895 ) Balance February 28, 2022 5,950,998 5,951 46,697,434 ( 35,248,138 ) ( 235,305 ) 11,219,942 Stock based compensation - - 111,174 - - 111,174 Net loss - - - ( 2,382,925 ) - ( 2,382,925 ) Non-controlling interest - - - - ( 35,413 ) ( 35,413 ) Balance May 31, 2022 5,950,998 5,951 46,808,608 ( 37,631,063 ) ( 270,718 ) 8,912,778 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 6 of 33 Table of Contents LEXARIA BIOSCIENCE CORP. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS May 31, 2022 (Expressed in U.S. Dollars) 1. Nature of Business Lexaria Bioscience Corp. (“Lexaria”, “we”, “our” or the “Company”) is a biotechnology company pursuing the enhancement of the bioavailability of a diverse and broad range of active pharmaceutical ingredients (“APIs”) using our patented drug delivery technology DehydraTECH TM . Through continued validation of our research and development our focus is on national and international applications for DehydraTECH. Revenues are primarily derived from licensing fees for the use of the Company’s patented technology to partners who pay either a fee to use DehydraTECH in the manufacturing of their own products or through the purchase of DehydraTECH manufactured products made to their specifications by Lexaria. The Company has relationships with several consumer products companies in the CBD and nutraceuticals spaces that use Lexaria’s technology in consumer goods being sold online and at retailers in the US and Canada. The Company is headquartered in Kelowna, British Columbia, Canada. The corporate website is www.lexariabioscience.com Going Concern Analysis The Company’s consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”) applicable to a going concern which assumes the Company will have sufficient funds to pay it operational, research and development and capital expenditures for a period of at least 12 months from the date this financial report. Since inception, the Company has incurred significant operating and net losses. The losses attributable to common shareholders were $ 4.2 m, $ 4.1 m and $ 4.2 m for the years ended August 31, 2021, 2020 and 2019, respectively. As of May 31, 2022, we had an accumulated deficit of $ 37.6 m. We expect to continue to incur significant operational expenses and net losses in the upcoming 12 months. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the stage and complexity of our R&D studies and related expenditures, the receipt of additional payments on the licencing of our technology, if any, and the receipt of payments under any current or future collaborations we may enter. On January 12, 2021, the Company closed an underwritten public offering for net proceeds of $ 9,471,497 . In the fourth quarter of the year ended August 31, 2021, the Company received $ 4,015,043 from the exercise of warrants. Until the Company is able to generate significant product revenue, operations will be supported with equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We may offer additional securities for sale during fiscal year 2022 or thereafter in response to market conditions or other circumstances if we believe such a plan of financing is required to advance the Company’s business plans and is in the best interests of our stockholders. The Company has the option to raise up to one-third of its aggregate market value of its common equity held by non-affiliates through the issuance of securities pursuant to a Registration Statement on Form S-3 (333-262402) as filed with the SEC on January 28, 2022 and declared effective on February 4, 2022. Page 7 of 33 Table of Contents To date, we have obtained cash and funded our operations primarily through equity financings and license agreements. In order to continue the development of our drug candidates, at some point in the future we expect to pursue one or more capital transactions, whether through the sale of equity securities, debt financing, license agreements or entry into strategic partnerships. There can be no assurance that we will be able to continue to raise additional capital in the future. The Company has evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern. As of May 31, 2022, the Company had cash of approximately $ 7 .0m. We believe this is sufficient to enable the Company to fund its operating and R&D expenses and any capital expenditure requirements through one year from the issuance date of these unaudited consolidated financial statements. COVID-19 Impacts of COVID-19 Pandemic The emergence of the COVID-19 pandemic in 2020 continues to present uncertainty and unforecastable new risks to the Company and its business plans. As of May 31, 2022, there has been no material impact on the Company’s financial position as a direct result of the pandemic. However, the Company has experienced some supply chain disruptions and shortages in the procurement of ingredients and supplies used in both our R&D activities and production. Management views this situation as transitory but cannot predict the length of time it may take for these disruptions to dissipate or if there will be a significant economic effect on the Company’s operations. In the interim, it may cause delays in carrying out our research studies and in our production schedules. Restrictions on international travel presents a challenge in carrying out normal business activities related to corporate finance efforts and the pursuit of new customers throughout North America who might otherwise access the retail products of our licensees. As a result, the pandemic has increased the risk of lower revenues and higher losses. During the year ended August 31, 2020, we received C$ 30,732 in COVID relief under the Canada Emergency Wage Subsidy programs for employees which reduced our employment costs in that year. During fiscal 2020 we also received C$ 40,000 from the Canadian Government sponsored Emergency Business Account loan program. As specified by the terms of this program, we repaid C$ 30,000 of the loan in fiscal 2021. The remaining $ 7,906 (C$10,000) of the loan payable is anticipated to be forgiven as directed under this program in the year ended August 31, 2023. We continue to actively monitor the evolving effects of COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state, provincial, or local authorities, or that we determine are in the best interests of our employees and third parties with which we do business. The economic effect of the pandemic combined with increased geopolitical uncertainty and rising inflation is expected to have an impact on the Company’s future reporting periods. The effects are difficult to predict and could result in material financial impact on the Company’s financial results. Page 8 of 33 Table of Contents 2. 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, 2021. 3. Basis of Consolidation These interim consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries; Lexaria CanPharm ULC, Lexaria CanPharm Holdings Corp., PoViva Corp., Lexaria Hemp Corp., Kelowna Management Services Corp., and Lexaria Pharmaceutical Corp., and our 83.333 % owned 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 upon consolidation. 4. Basis of Presentation The Company’s unaudited interim consolidated financial statements 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 or any subsequent period. 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, 2021. 5. Estimates and Judgments The preparation of financial statements in conformity with US 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. Although we believe that these estimates are reasonable actual results could differ. 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, 2021. Page 9 of 33 Table of Contents 6. Recent Accounting Guidance Pronouncements Issued but Not Yet Adopted In October of 2021, the Financial Accounting Standards Board (FASB) issued an update to Government Assistance (Topic 832) to increase the transparency of government assistance and its disclosure in the notes to the financial statements. Amendments in this update take effect for annual periods beginning after December 31, 2021. Early application of the amendments is permitted. The Company does not expect the adoption of these standards to have a material impact on its consolidated financial statements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2023. These standards require that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, these standards now require allowances to be recorded instead of reducing the amortized cost of the investment. These standards limit the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. The Company does not currently expect the adoption of these standards to have a material impact on its consolidated financial statements. 7. Accounts and Other Receivables May 31, August 31, 2022 2021 $ $ Trade and deposits receivable 51,251 16,553 Sale of assets – shares receivable - 278,107 Sales tax receivable 103,617 47,741 154,868 342,401 8. Inventory May 31, August 31, 2022 2021 $ $ Raw materials 31,366 29,648 Work in progress 8,817 - 40,183 29,648 9. Intellectual Property Patent costs: all non-US based patent-related costs incurred in connection with preparing, filing, maintaining and prosecuting patent applications are expensed as incurred due to the uncertainty in the recovery of the expenditures. Amounts incurred are classified in general and administrative expenses. Page 10 of 33 Table of Contents All related costs for US patents are recognized as Intellectual Property. When a US patent is granted, it is amortized over the remaining useful life. Any subsequent costs incurred for a US granted capitalized patent are expensed as incurred. 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 US 11,311,559 04/26/2022 Compositions and Methods for Enhanced Delivery of Antiviral Agents A continuity schedule for capitalized patents is presented below: Patents May 31, August 31, 2022 2021 $ $ Balance – beginning 364,623 292,000 Addition 81,407 79,493 Amortization* ( 5,355 ) ( 6,870 ) Balance – ending 440,675 364,623 *Patents are amortized over their legal life of 20 years. Page 11 of 33 Table of Contents 10. Property & Equipment Nine Months Ended Cost Period Amortization Additions Accumulated Amortization Net Balance May 31, 2022 May 31, 2022 $ $ $ $ $ Leasehold improvements 259,981 ( 40,528 ) - ( 181,176 ) 78,805 Computers 63,964 ( 8,691 ) 6,817 ( 60,241 ) 10,540 Furniture fixtures & equipment 31,126 ( 4,813 ) - ( 21,233 ) 9,893 Lab equipment 291,235 ( 19,874 ) 42,375 ( 89,417 ) 244,193 646,306 ( 73,906 ) 49,192 ( 352,067 ) 343,431 For the nine months ended May 31, 2022, amortization of $ 1,339 (May 31, 2021 - $ 9,325 ) was included in the cost of goods sold. Year Ended Cost Period Amortization Disposal Accumulated Amortization Net Balance August 31, 2021 August 31, 2021 $ $ $ $ $ Leasehold improvements 259,981 ( 54,038 ) - ( 140,648 ) 119,333 Computers 63,964 ( 19,681 ) - ( 51,550 ) 12,414 Furniture fixtures & equipment 34,220 ( 6,417 ) ( 3,094 ) ( 16,420 ) 14,706 Lab equipment 291,235 ( 35,008 ) - ( 69,475 ) 221,760 649,400 ( 115,144 ) ( 3,094 ) ( 278,093 ) 368,213 11. Accounts Payable and Accrued Liabilities May 31 August 31, 2022 2021 $ $ Accounts Payable Trades payable 90,047 54,668 Sales tax payable 47,598 - Related party payable 5,599 5,223 Accrued Liabilities Corporate tax payable - 1,055 Trades payable 13,851 45,000 Balance 157,095 105,946 12. Common Shares and Warrants In December of 2021, the Company entered a one-year media outreach agreement to SRAX Inc. and issued 224,299 shares as consideration for an aggregate value of $ 1.2 m of which $ 600,000 are included in prepaid expenses and deposits. Page 12 of 33 Table of Contents During the quarter ended May 31, 2022, the Company issued no warrants. A continuity schedule for warrants is presented below: Number of Warrants Weighted Average Exercise Price $ Balance August 31, 2020 471,608 16.77 Cancelled/expired ( 44,161 ) 67.50 Exercised ( 610,189 ) 6.58 Issued 2,630,017 6.58 Balance August 31, 2021 2,447,275 8.00 Cancelled/expired ( 25,292 ) 4.57 Balance May 31, 2022 2,421,983 8.04 A summary of warrants outstanding as of May 31, 2022, is presented below: # of Warrants Weighted Average Remaining Contractual Life Weighted Average Exercise Price $ 7,500 0.43 years 24.00 100,000 1.88 years 9.00 200,000 1.88 years 7.00 51,814 2.46 years 36.00 8,984 2.50 years 36.00 16,667 2.79 years 9.00 317,190 2.95 years 10.50 1,719,828 3.63 years 6.58 2,421,983 3.28 years 8.04 13. Stock Options The Company has established the Equity Incentive Plan whereby the board of directors may, from time to time, grant stock options up to the equivalent of 10% of the number of common shares issued and outstanding to directors, officers, employees, and consultants . Stock options granted must be exercised within 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. During the quarter ended May 31, 2022, the Company granted 36,700 options at a strike price of $ 3.39 with a contractual life of 5 years. These options were awarded to employees, directors and contractors. Page 13 of 33 Table of Contents 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, 2020 171,604 11.17 Cancelled/expired ( 50,334 ) 10.76 Granted 84,900 5.41 Balance August 31, 2021 206,170 8.90 Cancelled ( 3,334 ) 9.60 Granted 81,800 6.23 36,700 3.39 Balance May 31, 2022 (Outstanding) 321,336 6.59 3.46 - Balance May 31, 2022 (Exercisable) 293,836 6.80 3.62 - 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: May 31, 2022 Expected volatility 98 % - 119 % Risk-free interest rate 0.85 % - 1.78 % Expected life 5 years Dividend yield 0 % Estimated fair value per option $ 2.50 - $ 5.10 14. Revenues Nine Months Ended May 31, 2022 $ May 31, 2021 $ Product sales 111,597 360,558 Licensing revenue 16,160 326,474 Other revenue 16,490 4,685 Income from operations 144,247 691,717 Product revenues of $ 112 k and licensing usage fees of $ 16 k represent a significant decrease, year over year, in intermediate product sales and related licensing usage fees during the nine months ended May 31, 2022. 15. 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. To date, licensing revenues have been significantly concentrated on one licensee. Page 14 of 33 Table of Contents Nine Months Ended May 31, 2022 IP Licensing $ Products $ Corporate $ Consolidated Total $ Revenue 16,160 111,597 16,490 144,247 Cost of goods sold - ( 30,592 ) - ( 30,592 ) Operating expenses ( 3,096,910 ) ( 430,951 ) ( 2,456,286 ) ( 5,984,147 ) Segment loss ( 3,080,750 ) ( 349,946 ) ( 2,439,796 ) ( 5,870,492 ) Total assets 958,586 95,389 8,083,968 9,137,943 Nine Months Ended May 31, 2021 IP Licensing $ Products $ Corporate $ Consolidated Total $ External revenue 326,474 360,658 4,585 691,717 Cost of goods sold - ( 155,037 ) - ( 155,037 ) Operating expenses 914,485 ( 402,846 ) ( 3,909,802 ) ( 3,398,163 ) Discontinued operations ( 22,000 ) - - ( 22,000 ) Segment income (loss) 1,218,959 ( 197,225 ) ( 3,905,217 ) ( 2,883,483 ) Total assets 709,155 51,738 9,786,659 10,547,553 Capital Asset by Region Cost US Addition US Net Balance US Cost Canada Addition Canada Net Balance Canada Total Net Balance Nine Months Ended May 31, 2022 $ $ $ $ $ $ $ Leasehold Improvements - - - 259,981 - 78,805 78,805 Computers - - - 63,964 6,817 10,540 10,540 Furniture Fixtures Equipment - - - 31,126 - 9,893 9,893 Lab Equipment 98,050 42,375 106,506 193,185 - 137,686 244,193 98,050 42,375 106,506 548,256 6,817 236,924 343,431 Capital Asset by Region Cost US Disposal US Net Balance US Cost Canada Net Balance Canada Total Net Balance Year Ended August 31, 2021 $ $ $ $ $ $ Leasehold Improvements - - - 259,981 119,333 119,333 Computers - - - 63,964 12,414 12,414 Furniture Fixtures Equipment 3,094 ( 3,094 ) - 31,126 14,706 14,706 Lab Equipment 98,050 - 69,580 193,185 152,180 221,760 101,144 ( 3,094 ) 69,580 548,256 298,633 368,213 16. Commitments, Significant Contracts and Contingencies Right of Use Assets – Operating Lease The Corporate office and R&D laboratory located in Kelowna, British Columbia, Canada is leased until November 15, 2023, with a five-year renewal option. In addition to minimum lease payments, the lease requires us to pay, subject to annual adjustments, property taxes and operating costs. Page 15 of 33 Table of Contents May 31, 2022 August 31, 2021 $ $ Right of use assets – operating leases 126,920 126,920 Amortization ( 64,557 ) ( 35,879 ) Total lease assets 62,363 91,041 Liabilities: 89,393 125,431 Lease payments ( 33,395 ) ( 43,950 ) Interest accretion 4,166 7,912 Total lease liabilities 60,164 89,393 Operating lease cost 62,363 91,041 Operating cash flows for lease 33,395 43,950 Remaining lease term 1.4 Years 2.1 Years Discount rate 7.50 % 7.50 % 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 May 31, 2022: 2022 $ 11,204 2023 $ 44,816 2024 $ 7,469 Thereafter - Total lease payments $ 63,489 Less: imputed interest ( 3,325 ) Present value of operating lease liabilities $ 60,164 Less: current obligations under leases ( 41,825 ) Total $ 18,339 Page 16 of 33 Table of Contents 17. Prepaid Expenses and Deposits Prepaid expenses consist of the following at May 31, 2022, and August 31, 2021: May 31, August 31, 2022 2021 $ $ Advertising & conferences 684,820 168,760 Consulting - 18,750 Legal fees 25,000 31,380 Licence, filing fees, dues 26,250 19,500 Office & insurance 21,238 80,863 757,308 319,253 18. Marketable Securities The components of Marketable Securities were as follows: Cost Basis $ Unrealized Gains $ Unrealized Losses $ Total $ August 31, 2021 Common stock 1,037,025 16,243 ( 219,427 ) Total 1,037,025 16,243 ( 219,427 ) 833,841 May 31, 2022 Common stock 278,107 58,893 ( 882,809 ) ( 545,809 ) Total 1,315,132 75,136 ( 1,102,236 ) 288,032 Unrealized gains and losses on marketable securities are derived from Hill Street Beverage Company Inc. (“Hill Street”) (TSX-V: HILL) common stock holdings and are due, in Managements opinion, to economic uncertainties in the market sector. Management views the unrealized losses as temporary impairments based on our evaluation of available evidence. 19. 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 to Hill Street for gross proceeds of C$ 3,850,000 . With the closing of the sale on December 10, 2020, the Company received C$ 350,000 in cash, 6,031,363 restricted common shares at a fair value at C$ 500,000 as the first required equity-based payment, and a C$ 2,000,000 promissory note bearing interest at 10 % per annum. The promissory note was included at its nominal value of $NIL. To date, minimal interest payments have been received and are included in Other Income. Pursuant to the terms of the transaction, the Company received an additional C$ 1,000,000 worth of common shares of Hill Street and are included in Marketable Securities. 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 Page 17 of 33 Table of Contents 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: Nine Months Ended May 31, 2022 2021 Revenue $ - $ 3,000 Operating Expenses - 25,000 Net Income (loss) $ - $ ( 22,000 ) The following table presents cash flows of discontinued operations: Nine Months Ended May 31, 2022 2021 Cash flows used in discontinued operating activities Net income $ - $ ( 22,000 ) Change in working capital - 105,000 Net cash used in discontinued operating activities $ - $ 83,000 Net cash provided by discontinued operations $ - $ 83,000 20. Subsequent Events As disclosed on our Form 8-K filed on June 9, 2022, Lexaria successfully filed a pre-Investigational New Drug (“IND”) meeting request with the US Food and Drug Administration (“FDA”). The filing has been confirmed and a target date of July 30, 2022 for the meeting has been provided by the FDA, subject to certain conditions being met. The request for a pre-IND meeting formally initiates communications with the FDA regarding development of Lexaria's DehydraTECH-CBD for the treatment of hypertension. The purpose of the pre-IND meeting will be to confirm the details and acceptability of Lexaria's ongoing IND-enabling development program to be completed thereafter prior to proceeding with its full IND application filing. As disclosed on our Form 8-K filed on June 3, 2022, the Company announced the signing of a commercial licensing agreement with Premier Wellness Science Co., Ltd. of Japan (“Premier”). Minimum quarterly payments to Lexaria will begin September 1, 2022, and, during the first five years of the Agreement, amount to US$ 4,527,500 . Under the terms of the Agreement, Premier is purchasing the rights to DehydraTECH technology for the Japanese non-pharmaceutical market for use with cannabidiol (“CBD”) and hemp ingredients in oral liquid and non-liquid products, as well as for topical, hair-care, lip-care and cosmetics products. Premier Wellness Science Co., Ltd. is a wholly-owned subsidiary of Premier Anti-Aging Co., Ltd. which is listed on the Tokyo Stock Exchange Mothers division with securities code 4934. Page 18 of 33 Table of Contents