Lexaria Bioscience Corp. 10-K

Item 8. Financial Statements and Supplementary Data 30 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Directors of Lexaria Bioscience Corp. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Lexaria Bioscience Corp. (the “Company”), as of August 31, 2022 and 2021, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the years ended August 31, 2022 and 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Lexaria Bioscience Corp. as of August 31, 2022 and 2021, and the results of its operations and its cash flows for the years ended August 31, 2022 and 2021 in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. We have not identified any critical audit matters for the years ended August 31, 2022 and 2021. We have served as the Company’s auditor since 2016. /s/ DAVIDSON & COMPANY LLP Vancouver, Canada Chartered Professional Accountants November 25, 2022 PCAOB ID - 731 31 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED BALANCE SHEET (Expressed in U.S. Dollars) August 31 August 31 2022 2021 ASSETS Current Cash $ 5,813,218 $ 10,917,797 Marketable securities 347,335 833,841 Accounts receivable 201,784 342,401 Inventory 38,418 29,648 Prepaid expenses and deposit 576,761 319,253 Total Current Assets 6,977,516 12,442,940 Non-current assets, net Right-of-use assets 52,444 91,041 Intellectual property 488,462 364,623 Property and equipment 315,505 368,213 Total Non-current Assets 856,411 823,877 TOTAL ASSETS $ 7,833,927 $ 13,266,817 LIABILITIES Current Accounts payable and accrued liabilities $ 151,449 $ 105,496 Loan payable - 7,926 Lease liabilities 42,587 39,404 Total Current Liabilities 194,036 153,276 Long Term Lease liabilities - long term 7,401 49,989 Total Long Term Liabilities 7,401 49,989 TOTAL LIABILITIES 201,437 203,265 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 August 31, 2022 and 5,726,699 common shares at August 31, 2021 5,951 5,727 Additional paid-in capital 47,041,481 45,089,114 Deficit ( 39,098,528 ) ( 31,829,204 ) Equity attributable to shareholders of the Company 7,948,904 13,265,637 Non-Controlling Interest ( 316,414 ) ( 202,085 ) Total Stockholders’ Equity 7,632,490 13,063,552 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 7,833,927 $ 13,266,817 The accompanying notes are an integral part of these consolidated financial statements. 32 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Expressed in U.S. Dollars except number of shares) August 31 August 31 2022 2021 Revenue $ 255,397 $ 722,738 Cost of goods sold 71,841 175,346 Gross profit 183,556 547,392 Operating Expenses Research and development 1,842,675 1,262,895 General and administrative 5,724,534 4,971,349 Total operating expenses 7,567,209 6,234,244 Loss from operations ( 7,383,653 ) ( 5,686,852 ) Gain on disposal of assets - 1,522,704 Discontinued operations - ( 22,000 ) Net loss and comprehensive loss for the year $ ( 7,383,653 ) $ ( 4,186,148 ) Net loss and comprehensive loss attributable to: Common shareholders $ ( 7,269,324 ) $ ( 4,027,006 ) Non-controlling interest $ ( 114,329 ) $ ( 159,142 ) Basic and diluted loss per share $ ( 1.24 ) $ ( 0.95 ) Basic and diluted earnings (loss) per share from discontinued operations $ - $ ( 0.01 ) Weighted average number of common shares outstanding - Basic and diluted 5,885,245 4,391,446 The accompanying notes are an integral part of these consolidated financial statements. 33 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (Expressed in U.S. Dollars) August 31 August 31 2022 2021 Cash flows used in operating activities Net loss and comprehensive loss $ ( 7,383,653 ) $ ( 4,186,148 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation 752,591 410,007 Depreciation and amortization 102,718 111,718 Inventory write-off - 2,482 Bad debt - 50,500 Amortization on right of use asset 38,597 35,879 Realized loss on disposal of marketable securities - Unrealized loss on marketable securities 764,614 166,255 Gain on asset disposal - ( 1,522,704 ) Common shares issued for services 1,200,000 85,000 Warrants issued for services - 785,895 Lease accretion 5,195 7,912 Gain on forgiveness of loan ( 7926 ) Change in working capital Accounts receivable ( 137,491 ) 189,580 Inventory ( 1,979 ) 95,037 Prepaid expenses and deposits ( 257,508 ) ( 137,158 ) Accounts payable and accrued liabilities 50,726 13,803 Due to related parties ( 5,223 ) ( 53,481 ) Deferred revenue - ( 44,255 ) Net cash used in operating activities $ ( 4,879,339 ) $ ( 3,989,678 ) Cash flows from (used in) investing activities Intellectual property ( 131,448 ) ( 79,493 ) Asset disposition ( 49,192 ) 273,373 Net cash from (used in) investing activities $ ( 180,640 ) $ 193,880 Cash flows from (used in) financing activities Long term loan - ( 22,744 ) Lease payments ( 44,600 ) ( 43,950 ) Proceeds from issuance of equity - 9,471,497 Proceeds from warrant exercises - 4,015,043 Net cash from (used in) financing activities $ ( 44,600 ) $ 13,419,846 Increase in cash ( 5,104,579 ) 9,624,048 Cash, beginning of year 10,917,797 1,293,749 Cash, end of year $ 5,813,218 $ 10,917,797 Supplemental information of cash flows: Income taxes paid in cash $ ( 4,782 ) $ ( 16,297 ) Marketable securities received on accounts receivable $ 278,108 $ 893,493 The accompanying notes are an integral part of these consolidated financial statements. 34 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Expressed in U.S. Dollars except number of shares) SHARES AMOUNT $ ADDITIONAL PAID-IN CAPITAL $ DEFICIT $ NCI $ TOTAL STOCKHOLDERS’ EQUITY $ Balance August 31, 2020 3,001,476 3,001 30,324,398 ( 27,802,198 ) ( 42,943 ) 2,482,258 Shares issued for services 12,178 12 84,988 - - 85,000 Stock based compensation - - 410,007 - - 410,007 Warrants issued for services - - 785,895 - - 785,895 Exercise of stock options 610,189 610 4,014,433 - - 4,015,043 Private Placements 2,102,856 2,104 9,469,393 - - 9,471,497 Net loss - - - ( 4,027,006 ) - ( 4,027,006 ) Non-controlling interest - - - - ( 159,142 ) ( 159,142 ) Balance August 31, 2021 5,726,699 5,727 45,089,114 ( 31,829,204 ) ( 202,085 ) 13,063,552 Shares issued for services 224,299 224 1,199,776 - - 1,200,000 Stock based compensation - - 752,591 - - 752,591 Net loss - - - ( 7,269,324 ) - ( 7,269,324 ) Non-controlling interest - - - - ( 114,329 ) ( 114,329 ) Balance August 31, 2022 5,950,998 5,951 47,041,481 ( 39,098,528 ) ( 316,414 ) 7,632,490 The accompanying notes are an integral part of these consolidated financial statements. 35 Table of Contents LEXARIA BIOSCIENCE CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2022 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 (“API”) using our proprietary DehydraTECH drug delivery technology. Revenues are generated from licensing contracts for the Company’s patented DehydraTECH technology based on the terms of use and defined geographic and licencing arrangements. We derive income from our third party contracted manufacturing of B2B DehydraTECH enhanced products made to customer specifications that are sold online and in-store in the US and Canada. We also perform contract services in R&D for customer specific formulations that are used in comparison testing to customers existing products. Going Concern Consideration 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 Report. Since inception, the Company has incurred significant operating and net losses. The losses attributable to shareholders were $ 7.34 m, $ 4.2 m and $ 4.1 m for the years ended August 31, 2022, 2021 and 2020, respectively. As of August 31, 2022, we had an accumulated deficit of $39.1m. 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 corporate expenditures, additional revenues received the licencing of our technology, if any, and the receipt of payments under any current or future collaborations we may enter into. On January 12, 2021, the Company closed an underwritten public offering with 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. We did not receive any proceeds from the sale of shares or exercise of convertible securities in the year ended August 31, 2022. We may offer additional securities for sale during our fiscal year 2023 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 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 August 31, 2022, the Company had cash and cash equivalents of approximately $ 5.8 m and carries no significant debt other than amounts payable in the short term. We believe this will sufficiently enable the Company to fund its operating and R&D expenses and any capital expenditure requirements through one year from the issuance date of the audited consolidated financial statements. 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 August 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 timely procurement of ingredients and supplies used in both our R&D activities and B2B 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. There may be further actions we must take 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 other third parties with which we do business. We do not know when it will become practical to relax or eliminate some or all these measures entirely. The economic effect of a prolonged pandemic is difficult to predict and could result in material financial impact in the Company’s future reporting periods. During the year ended August 31, 2020, we were in receipt of 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 have repaid C$ 30,000 of the loan in fiscal 2021. The remaining C$ 10,000 was forgiven and included as net loss in 2022. 36 Table of Contents 2. Significant Accounting Policies Basis of presentation and consolidation These consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States (“US GAAP”) and pursuant to the rules and regulations of the SEC. All amounts, unless otherwise stated, are in U.S. dollars. These consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries; Lexaria Pharmaceutical Corp., Lexaria Hemp Corp., Lexaria CanPharm ULC, PoViva Corp., Lexaria CanPharm Holding Corp., and Kelowna Management Services Corp. The Company owns 83.3% of Lexaria Nicotine LLC and the remaining 16.7% is owned by Altria Ventures Inc. (an indirect wholly owned subsidiary of Altria Group, Inc.). All significant intercompany balances and transactions have been eliminated upon consolidation. On December 9, 2020, the Company completed the sale of the business assets in the THC related segment of our subsidiary Lexaria CanPharm ULC. As a result, the related financial results pertaining to the sale are reflected in our consolidated statement of operations, retrospectively, as discontinued operations beginning in the first quarter of fiscal 2021. Cash and cash equivalents Cash and cash equivalents include cash-on-hand and demand deposits with financial institutions and other short-term investments with maturities of less than three months when acquired and convertible to known cash amounts. The Company had no cash equivalents as at August 31, 2022 or August 31, 2021. Leases We have elected the package of practical expedients allowed under ASC Topic 842, Leases (“ASC 842”) which permits us to account for our existing operating leases as operating leases under the new guidance, without reassessing our prior conclusions about lease identification, lease classification and initial direct cost. As a result of the adoption of the new lease accounting guidance on September 1, 2019, we recognized operating lease right-of-use assets of $ 160,289 and operating lease liabilities of $ 158,773 . We determined the initial classification and measurement of our right-of-use assets and lease liabilities at the lease commencement date and thereafter if modified. The lease term includes any renewal options and termination options that we are reasonably certain to exercise. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, we use our incremental borrowing rate. The incremental borrowing rate is determined by using the rate of interest that we would pay to borrow on a collateralized basis an amount equal to the lease payments for a similar term and in a similar economic environment. Operating lease expenses are recognized on a straight-line basis, unless the right-of-use asset has been impaired, over the reasonably certain lease term based on the total lease payments. They are included in operating expenses in the consolidated statements of operations and comprehensive loss. For operating leases that reflect impairment, we will recognize the amortization of the right-of-use asset on a straight-lined basis over the remaining lease term with rent expense still included in operating expenses in the consolidated statements of operations and comprehensive loss. For all leases, rent payments that are based on a fixed index or rate at the lease commencement date are included in the measurement of lease assets and lease liabilities at the lease commencement date. We have elected the practical expedient to not separate lease and non-lease components. Our non-lease components are primarily related to property taxes and maintenance, which vary based on future outcomes, and thus differences to original estimates are recognized in rent expense when incurred. Intellectual property Capitalized intellectual property represents US registered patents that include legal costs incurred in pursuing patents applications in the United States. When such applications result in patents being issued, the directly related capital cost is amortized over the life of the patent on a straight-line basis. Equipment Equipment is stated at cost less accumulated depreciation and impairment and depreciated using the straight-line method over their useful lives of the various asset classes. Laboratory and computer equipment and office furniture are depreciated over 3 - 10 years. Certain production equipment is depreciated by units of production method. Leasehold improvements are amortized over the term of the related leases. 37 Table of Contents Impairment of long-lived assets Long-lived assets, including equipment and intangible assets, namely the Company’s patents, are assessed for potential impairment when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to the profit or loss. Intangible assets with indefinite lives are tested for impairment annually and in interim periods if certain events occur indicating that the carrying value of the intangible assets may be impaired. Revenue recognition Licensing revenue from intellectual property Our revenues from licenses that grant the right to access our intellectual property, which we consider symbolic licenses of IP, are recognized over time following the transfer and use of our patented infusion technology DehydraTECH . Royalty revenues are recognized in the period in which our licensees sell the related products and recognizes the related revenue, which in certain cases may require us to estimate our royalty revenue. Usage fees from intellectual property We recognize usage fees from B2B clients in the period in which the counterparty completes the manufacturing which incorporates DehydraTECH enabled APIs into the related product. We generally recognize revenue when we have satisfied all contractual obligations and are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue. Product revenue We generally recognize revenue when we have satisfied all contractual obligations and are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue. Cost of sales Cost of sales includes all expenditures incurred in bringing the goods to the point of sale This includes third-party manufacturing and handling costs, direct costs of the raw material, inbound freight charges, warehousing costs, and applicable overhead expenses. Research and development Research and development costs are expensed as incurred. These expenditures are comprised of both in-house research programs and through third-party contracts including consultants, academic and non-profit institutions, contract manufacturing, and other expenses. Intellectual property expenses Costs associated with intellectual property-related matters are expensed as incurred and included in general and administrative expenses within the consolidated statements of operations. Stock-based compensation The Company accounts for its stock-based compensation awards whereby all stock-based grants are recognized as expenses in the statements of operations based on the fair value at grant date subject to vesting dates. The grant date fair value of each option award is estimated using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. 38 Table of Contents Foreign currency translation The Company maintains its accounting records in US dollars. At the transaction date, each asset, liability, revenue, and expense that was acquired or incurred in a foreign currency is translated into US dollars by using the exchange rate in effect at that date; at the year end, monetary assets and liabilities are translated at the exchange rate in effect at that date. The resulting foreign exchange gains and losses are included within the consolidated statements of operations. Loss per share The calculation of loss per share uses the weighted average number of shares outstanding during the year. Diluted net income per share includes the effect, if any, from the potential exercise or conversion of securities, such as restricted stock and stock options, which would result in the issuance of incremental shares of common stock. Diluted loss per share is equivalent to basic loss per share if the potential exercise of the equity-based financial instruments was anti-dilutive. Income taxes The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the year in which the differences are expected to reverse. Comprehensive loss The Company discloses comprehensive loss, its components, and accumulated balances on its Statement of Stockholders’ Equity. Comprehensive loss comprises equity changes except those transactions resulting from investments by stakeholders and owners and distributions to owners, if any. Financial instruments When measuring fair value, the Company seeks to maximize the use of observable inputs and minimize the use of unobservable inputs. This establishes a fair value hierarchy based on the level of independent objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Inputs are prioritized into three levels used to measure fair value: · Level 1 - Quoted prices in active markets for identical assets or liabilities; · Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and · Level 3 - Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. The Company’s financial instruments consist primarily of cash, marketable securities, accounts receivable and payable, accrued liabilities and loan payable. The carrying amounts of instruments approximate their fair values due to their short maturities or quoted market prices. The Company’s headquarters and operations are located in Canada which results in exposure to market risks from fluctuations in foreign currency rates. The foreign currency exchange risk is the financial risk to the Company’s operations that arise from fluctuations in foreign exchange rates and the degree of volatility of these rates. Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk as the impact of a rate changes for USD/CAD dollars is not expected to be material. Credit risk and receivable concentration The Company places its cash with a high credit quality financial institution. As of August 31, 2022, the Company had approximately $ 5.8 m on deposit. (August 31, 2021: $ 10.9 m). In the year ended August 31, 2022, one licensee accounted for 100 % (2021 – 72 %) of revenues. At fiscal year end 2022, we had $ 37,248 (2021 - $Nil) in licence fees receivable. The Company incurred a bad debt in fiscal 2021 ($ 50,500 ) primarily due to cancellations of IP license agreements. As at August 31, 2022, the Company had $ 84,162 (2021 - $ 47,741 ) in sales tax receivable. The Company considers its credit risk to be low for such receivables. 39 Table of Contents Commitments and contingencies The Company policy is to record accruals for any such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In the event that estimates, or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information. The Company, from time to time, may be subject to legal claims and proceedings related to matters arising in the ordinary course of business. Management has no knowledge of any such claim against the Company with, at minimum, a reasonable possibility that a material loss may be incurred. 3. Recent Accounting Guidance Pronouncements Issued but Not Yet Adopted 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. 4. 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 amount of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenue and expenses during the fiscal 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. Management reviews our estimates, judgments, and assumptions periodically and reflect the effects of any 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. Significant accounting estimates and assumptions are used for, but not limited to: Revenue Recognition The Company records revenue from out-licensing our technology, including the License Agreement with Premier Wellness Science Co. Ltd. Judgment is necessary to determine the appropriate amount of revenue to be recognized as the Company fulfils its obligations under these agreements. The Company has granted the counterparty a license to develop and commercialize the underlying licensed product and these agreements contain license fee payments, sales-based royalty payments and additional performance obligations related to the license after delivery. The Valuation of Deferred Tax Assets Judgment is required in determining whether deferred tax assets are recognized on the balance sheet. The recognition of deferred tax assets requires management to assess the likelihood that the Company will generate taxable income in future periods to utilize the deferred tax assets. Due to the Company’s history of losses, deferred tax assets have not been recognized by Lexaria. Value of Stock Options and Warrants The Company provides compensation benefits to its employees, officers, directors, and consultants, through a stock option plan. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility assumptions used in the model are based on the historical volatility of the Company’s share price. The Company uses historical data to estimate the period of option exercises for use in the valuation model. The risk-free interest rate for the expected term of the option is based on the yields of government bonds. Changes in these assumptions, especially the share price volatility and the expected life determination could have a material impact on the Company’s profit and loss for the years presented. All estimates used in the model are based on historical data which may not be representative of future results. 40 Table of Contents Disposals of Assets - Value of Note Receivable The Asset Purchase Agreement for the sale of assets to Hill Street Beverages included C$2m note (the “Note”) receivable as partial payment of the agreement. The Note does not contain a fixed repayment schedule nor a maturity date. The repayment of the Note is based on the purchaser repaying the outstanding value of the Note and interest from the future revenues generated from an untested market with no existing revenue streams. Therefore, with any repayment being highly doubtful, management determined at that time and as at August 31, 2022 & 2021 that the value of the note to be notional and recorded the note at a $Nil value for accounting purposes. 5. Marketable Securities The components of Marketable Securities were as follows: Cost Basis Unrealized Gains Unrealized Losses Total $ $ $ $ August 31, 2020 56,250 9,441 ( 28,762 ) 19,321 Common Stock 980,775 6,802 ( 190,665 ) August 31, 2021 1,037,025 16,243 (219,427 ) 833,841 Common Stock 278,107 118,195 (822,809 ) August 31,2022 1,315,132 134,438 ( 1,102,236 ) 347,335 Marketable securities represented the common shares of Hill Street Beverage Company Inc. held by Lexaria. Unrealized losses from common stock are due to market price movements. In Management’s opinion based on the evaluation of available information at the year ended August 31, 2022, unrealized losses represent temporary impairments. 6. Accounts and Other Receivables August 31 August 31 2022 2021 $ $ Trade and deposits receivable 80,374 16,553 Territory license fee receivable 37,248 - Sale of assets - shares receivable - 278,107 Sales tax receivable 84,162 47,741 201,784 342,401 7. Inventory August 31 August 31 2022 2021 $ $ Raw materials 38,418 29,648 In the year ended August 31, 2022, inventory valued at $2,465 (2021 $2,482) was written off to reflect its net realisable value. In the year ended August 31, 2021, the Company divested its operations in on-line sales of consumer products and as a result finished goods inventory valued at $44,851 was expensed as advertising and promotion with the goods being donated to a registered charity. 8. Prepaid Expenses Prepaid expenses consist of the following as at August 31, 2022 and August 31, 2021: August 31 August 31 2022 2021 $ $ Advertising and conferences 359,863 168,760 Consulting - 18,750 Legal fees 25,000 31,380 Licence, filing fees, dues 15,000 19,500 Office and insurance 80,863 80,863 Capital Financing 96,035 - 576,761 319,253 41 Table of Contents 9. Intellectual Property The following is a list of capitalized US 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 Schedule of continuity for capitalized patents: August 31 August 31 2022 2021 $ $ Balance – Beginning 364,623 292,000 Addition 131,448 79,493 Amortization ( 7,609 ) ( 6,870 ) Balance – Ending 488,462 364,623 Patents are amortized over their legal life of 20 years. 10. Property & Equipment Year Ended Aug. 31, 2022 Cost Amortization Additions Disposals Accumulated Amortization Net Balance $ $ $ $ $ $ Leasehold improvements 259,981 ( 54,037 ) - - ( 194,685 ) 65,296 Computers 63,964 ( 9,874 ) 6,817 - ( 61,424 ) 9,357 Furniture & fixtures 31,126 ( 6,417 ) - - ( 22,837 ) 8,288 Lab equipment 291,235 ( 31,572 ) 42,375 - ( 101,047 ) 232,564 646,306 ( 101,900 ) 49,192 - ( 379,993 ) 315,505 Year Ended Aug. 31, 2021 Cost Amortization Additions Disposals Accumulated Amortization Net Balance $ $ $ $ $ $ Leasehold improvements 259,981 ( 54,038 ) - - ( 140,648 ) 119,333 Computers 63,964 ( 19,681 ) - - ( 51,550 ) 12,414 Furniture & fixtures 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 During the year ended August 31, 2022, amortization of $ 3,655 (2021 - $ 10,926 ) was included in the cost of goods sold. 42 Table of Contents 11. Accounts Payable and Accrued Liabilities August 31 August 31 2022 2021 $ $ Accounts Payable Vendors payable 57,150 59,891 Sales tax payable 31,303 - Accrued Liabilities Corporate tax payable - 1,055 Vendors payable 62,996 45,000 Total 151,449 105,946 12. Related Party Transactions Related party transactions, Aug 31, 2022, ($Nil), Aug 31 2021, ($ 5,223 ) are included in accounts payable and represent expenses incurred in the ordinary course of business. 13. Revenues August 31 2022 $ August 31 2021 $ B2B sales 113,438 383,179 Licensing Revenue 54,560 334,974 Research & Development 54,800 - Other Revenue 32,599 4,585 255,397 722,738 The Company recognized B2B product revenues of $ 113,438 (2021 - $ 383,179 ) that relate to sales of our intermediate products for use by four B2B customers in their products. Licensing revenue consist of IP licensing fees for transfer of the DehydraTECH technology in line with definitive agreements and also includes royalty fees. The Company recognized $ 54,560 (2021 - $ 334,974 ) in licensing revenue during the year. 14. Income Tax The following table reconciles the income tax benefit at the U.S. Federal statutory rate to income tax benefit at the Company’s effective tax rates as at August 31, 2022 and 2021: August 31 2022 August 31 2021 $ $ Loss before taxes ( 7,383,653 ) ( 4,169,832 ) Expected income tax recovery ( 1,619,854 ) ( 800,952 ) Non-deductible items ( 280,155 ) ( 142,895 ) Change in estimates ( 44,867 ) ( 56,316 ) Effect of changes in foreign and long-term tax rates 23,625 - Change in valuation allowance 1,271,207 1,006,256 Total income taxes - 6,093 43 Table of Contents Deferred taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. Deferred tax assets at August 31, 2022 and 2021 are comprised of the following: August 31 2022 $ August 31 2021 $ Non-capital losses 7,747,485 6,580,183 Marketable securities 118,175 14,270 Total unrecognized deferred tax assets 7,865,660 6,594,453 The Company has net operating loss carry-forwards of approximately $ 36,387,000 which may be carried forward to apply against future year income tax for U.S. tax purposes. Year Amount Canada 2026 - 2025 76,000 - 2026 508,000 - 2027 1,056,000 - 2028 720,000 - 2029 753,000 - 2030 552,000 - 2031 538,000 - 2032 252,000 - 2033 344,000 - 2034 3,257,000 - 2035 1,934,000 - 2036 1,150,000 - 2037 1,857,000 - 2038 - - 2039 - - 2040 - 270,000 2041 - - 2042 - 380,000 Indefinite 23,390,000 - Total 36,387,000 650,000 15. Common Shares and Warrants Fiscal 2022 Activity During the year ended August 31, 2022, the Company issued 224,299 restricted shares valued at $ 1,200,000 for payment of contracted services. We did not issue any warrants, no warrants were exercised, and 25,292 warrants expired. A summary of share issuances for the year ended August 31, 2022, is presented below: Type of Issuance Number of Shares Total Value $ Warrant exercise - - Private placement - - Per agreements (1) 224,499 1,200,000 224,499 1,200,000 (1) The Company awarded restricted common shares as required by consulting contracts. 44 Table of Contents Presented below is a continuity schedule for warrants: 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 August 31, 2022 2,421,983 8.04 The fair value of share purchase warrants granted as compensation units, and compensatory warrants, was estimated as of the date of the grant by using the Black-Scholes option pricing model with the following assumptions: August 31 2022 August 31 2021 Expected volatility - 103 % Risk-free interest rate - 0.16 % Expected life - 3 years Dividend yield - % 0 % Estimated fair value per warrant - $ 6.51 Presented below is a summary of warrants outstanding as of August 31, 2022: Number of Warrants Weighted Average Remaining Contractual Life Weighted Average Exercise Price $ 60,798 3.16 years 36.00 7,500 0.18 years 24.00 317,190 2.65 years 10.50 116,667 1.63 - 2.68 years 9.00 200,000 1.63 years 7.00 1,719,828 3.37 years 6.58 2,421,983 3.04 years 8.04 Fiscal 2021 Activity On January 11, 2021, the Company filed an amendment and restatement of its articles of incorporation to effectuate a 1-for-30 reverse stock split of the issued and outstanding share of common stock of the Company. During the year ended August 31, 2021, the Company closed an underwritten public offering for an aggregate total of 2,102,856 units priced at $ 5.25 . Each unit consists of one common share and one share purchase warrant entitling the holder to acquire one common share, for a period of five years, at $ 6.58 per share. The Company paid fees of $ 1,568,499 and issued 227,161 broker warrants with a term of 24 months, each exercisable into one common share at $6.58 per share. The net proceeds of the offering were $ 9,471,497 after deducting underwriters discount, fees and expenses. During the year ended August 31, 2021, the Company issued 610,189 common shares on the exercise of warrants for proceeds of $ 4,015,043 . The Company granted 300,000 warrants with an exercise price of $ 9.00 pursuant to consulting agreements in fiscal 2021. Using the Black-Scholes pricing model, the warrants were valued at $ 785,895 and were recorded as a consulting expense. Subsequent to the grant, 200,000 warrants were repriced at $ 7.00 . 16. Stock Options The Company established an Equity Incentive Plan whereby our Board may grant up to 261,290 stock options to directors, officers, employees, and consultants. During the Company’s 2021 Annual Meeting of Shareholders, shareholders voted in favour of increasing the number of allowable stock options by an additional 249,143 options. The aggregate number of shares issuable under the Equity Incentive Plan is 510,433 shares, representing 10% of the Company’s issued share capital at the time of the 2021 Annual General Meeting. 45 Table of Contents Stock options granted must be exercised no later than five years from the date of grant as determined by our Board. 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. Vesting terms are set by our Board. The estimated fair value of each stock option award is estimated on the date of grant using Black-Scholes option pricing model. Fiscal 2022 Activity The Company granted the following stock options in the year ending August 31, 2022: Quantity Exercise Price $ Life (Years) 81,800 6.23 5 36,700 3.39 5 103,500 2.91 5 August 31, 2022 222,000 Average 4.21 5 Fiscal 2021 Activity The Company granted the following stock options in the year ending August 31, 2021: Quantity Exercise Price $ Life (Years) 3,400 4.80 5 12,000 5.04 5 43,500 5.31 5 26,000 5.83 August 31, 2021 84,900 Average 5.41 5 During the year ended August 31, 2021 87,935 previously granted options at a strike price of $9.60 were cancelled and re-issued at $ 7.08 . 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 Expired/Cancelled ( 50,344 ) 10.76 Granted 161,600 5.41 Balance August 31, 2021 206,170 8.90 Expired/Cancelled ( 3,334 ) 9.60 Granted 222,000 4.21 Balance August 31, 2022 (Outstanding) 424,836 6.45 3.69 5,175 Balance August 31, 2022 (Exercisable) 401,333 6.57 3.66 5,175 The intrinsic value of stock option awards that vested during the fiscal year represents the value of the Company’s closing stock price on the last trading day of the fiscal year in excess of the exercise price multiplied by the number of vested options. 46 Table of Contents The fair value of options granted was estimated as of the date of the grant by using the Black-Scholes option pricing model with the following assumptions: August 31 2022 August 31 2021 Expected volatility 98 % – 119 % 133 % – 134 % Risk-free interest rate 0.78 % - 3.30 % 0.42 % – 0.85 % Expected life 5 years 5 years Dividend yield 0 0 Estimated fair value per option $ 2.25 - $ 5.10 $ 4.00 – $ 4.86 17. Commitments, Significant Contracts and Contingencies Right of Use Assets - Operating Lease Corporate offices and R&D lab space is leased in Kelowna, British Columbia, Canada until November 15, 2023, with an optional five-year extension. In addition to minimum lease payments, the lease requires us to pay property taxes and operating costs which are subject to annual adjustments. August 31, 2022 August 31, 2021 $ $ Right of use assets - operating leases: 91,041 126,920 Amortization ( 38,597 ) ( 35,879 ) Total lease assets 52,444 91,041 Liabilities: 89,393 125,431 Lease payments ( 44,600 ) ( 43,950 ) Interest accretion 5,195 7,912 Total lease liabilities 49,988 89,393 Operating lease cost $ 52,444 $ 91,041 Operating cash flows for lease $ 44,599 $ 43,950 Remaining lease term 1.17 Years 2.1 Years Discount rate 7.25 % 7.25 % Pursuant to the terms of the Company’s lease agreements in effect at August 31, 2022, the following table summarizes the Company’s maturities of operating lease liabilities: $ 2023 44,815 2024 7,469 Thereafter - Total lease payments 52,284 Less: imputed interest ( 2,296 ) Present value of operating lease liabilities 49,988 Less: current obligations under leases ( 42,587 ) Total 7,401 18. Segment Information The Company’s operations involve the development and usage, including licensing, of DehydraTECH. 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 business-to-business product production and technology licensing to make operational decisions and to assess the performance of the Company. The Company has identified two reportable segments: Intellectual Property Licensing and B2B Production. Licensing revenues are significantly concentrated on three licensees. For year ended August 31, 2022 IP Licensing B2B Product R & D Corporate Consolidated Total $ $ & $ $ External revenue 54,560 113,438 54,800 32,599 255,397 Cost of goods sold ( 71,841 ) ( 71,841 ) Operating expenses ( 307,809 ) ( 731,427 ) ( 1,842,675 ) ( 4,685,298 ) ( 7,567,209 ) Segment loss ( 253,249 ) ( 689,830 ) ( 1,787,875 ) ( 4,652,699 ) ( 7,383,653 ) Total assets 161,307 205,956 247,345 7,219,319 7,833,927 47 Table of Contents For year ended August 31, 2021 IP Licensing $ B2B Product $ Corporate $ Consolidated Total $ External revenue 334,974 297,279 90,485 722,738 Cost of goods sold - ( 175,346 ) - ( 175,346 ) Operating expenses ( 1,864,527 ) ( 1,325,809 ) ( 1,521,187 ) ( 4,711,523 ) Segment loss ( 1,529,553 ) ( 1,203,876 ) ( 1,430,702 ) ( 4,164,131 ) Total assets 526,486 62,291 12,678,040 13,266,817 Capital Asset by Region Cost US Additions US Net Balance US Cost Canada Addition s Canada Net Balance Canada Net Balance Total Year Ended August 31, 2022 $ $ $ $ $ $ $ Leasehold Improvements - - - 259,981 - 65,296 65,296 Computers - - - 63,964 6,817 9,357 9,357 Furniture Fixtures Equipment - - - 31,126 - 8,288 8,288 Lab Equipment 98,050 42,375 100,031 193,185 - 132,533 232,564 98,050 42,375 100,031 548,256 6,817 215,474 315,505 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 ( 3,904 ) - 31,126 - 14,706 14,706 Lab Equipment 98,050 - 69,580 193,185 - 152,180 221,760 101,144 ( 3,904 ) 69,580 548,256 - 298,633 368,213 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 assets for gross proceeds of C$ 3,850,000 . The sale closed on December 10, 2020, with the Company receiving C$ 350,000 in cash, 6,031,363 restricted common shares at a fair value price of C$ 500,000 as the first of three required equity-based payments, a promissory note having a principal amount of C$ 2,000,000 and bearing interest at the rate of 10 % per annum. The promissory note was included at its nominal value of $Nil and any future receipts of interest and principal will be recorded as income in the period. Pursuant to the terms of the transaction the Company will receive equity-based payments in two tranches of C$500,000 in common shares of Hill Street Beverage Company issued at eight months and sixteen months after the closing date. The Company received the second tranche of shares on August 9, 2021 as per the sale agreement. Based on the agreed terms, the value of the 5,882,353 shares issued was $ 390,533 (C$500,000). An over-allotment of 1,693,405 shares with a value of $ 122,426 (C$143,939) were received at this time and was applied to the future issuance of the third tranche with a reduction in the outstanding amount receivable. The third and final tranche of 4,188,948 shares was received on April 8, 2022. The gain on the transaction is presented below: Gain on asset disposal $ Book value of assets sold - Cash consideration 273,373 Shares received 1,249,331 Promissory note - 1,522,704 48 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: August 31 2021 $ Revenue 3,000 Operating expenses ( 25,000 ) Net income (loss) ( 22,000 ) The following table presents cash flows of discontinued operations: August 31 2021 $ Cash flows used in discontinued operating activities Net income ( 22,000 ) Change in working capital 2,500 Net cash provided by (used in) discontinued operating activities 3,000 Net cash provided by (used in) discontinued operations 3,000 20. Subsequent Events On September 2, 2022, Catherine Turkel, PharmD, PhD was appointed to our Board and was awarded 3,400 options at a strike price of $ 3.04 , vesting immediately with a 5 year term and a value of $ 7,757 using the Black Scholes pricing model. Subsequent to the year ended August 31, 2022, the Company issued 41,200 stock options to the Company’s independent directors at a strike price of $ 1.96 , vesting immediately with a 5 year term and a value of $ 61,109 using the Black Scholes pricing model. On November 5, 2022, 7,500 warrants with a strike price of $ 24.00 expired. 49 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure During the year ended August 31, 2022, our principal accountants indicated that they have declined to stand for re-election after the completion of the current audit of our fiscal year 2022. During the past two years there have been no adverse opinions, disclaimer of opinion or qualification or modification as to uncertainty, audit scope or accounting principles. The decision to change accountants was recommended by the Company’s Audit Committee and approved by our Board. There were no disagreements related to accounting principles or practices, financial statement disclosure, internal controls or auditing scope or procedure during the two fiscal years and their respective interim periods.