Lexaria Bioscience Corp. 10-K

Item 8. Financial Statements and Supplementary Data 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 sheet of Lexaria Bioscience Corp. (the “Company”), as of August 31, 2022, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the year ended August 31, 2022, 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 the results of its operations and its cash flows for the year ended August 31, 2022 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 audit. 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 audit 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 audit 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 audit 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 audit 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 audit 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 year ended August 31, 2022. We served as the Company’s auditor from 2016 to 2022. Vancouver, Canada /s/ DAVIDSON & COMPANY LLP Chartered Professional Accountants November 25, 2022 28 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Lexaria Bioscience Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Lexaria Bioscience Corp. and its subsidiaries (collectively, the “Company”) as of August 31, 2023, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2023, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. 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 audit 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 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 audit 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 audit included performing procedures to assess the risks of material misstatement 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 financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters Critical audit matters 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. We determined that there are no critical audit matters. /s/ MaloneBailey, LLP www.malonebailey.com We have served as the Company's auditor since 2022. Houston, Texas November 17, 2023 29 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED BALANCE SHEETS (Expressed in US Dollars) Year Ended August 31, 2023 2022 ASSETS Current Cash $ 1,352,102 $ 5,813,218 Marketable securities 125,642 347,335 Accounts receivable 175,245 201,784 Inventory - 38,418 Prepaid expenses and other current assets 546,783 576,761 Total Current Assets 2,199,772 6,977,516 Non-current assets, net Right of use assets 167,446 52,444 Intellectual property, net 462,625 488,462 Property & equipment, net 254,143 315,505 Total Non-current Assets 884,214 856,411 TOTAL ASSETS $ 3,083,986 $ 7,833,927 LIABILITIES and STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued liabilities $ 239,941 $ 151,449 Lease liability, current 27,794 42,587 Total Current Liabilities 267,735 194,036 Lease liabilities - non-current 136,173 7,401 TOTAL LIABILITIES $ 403,908 $ 201,437 Stockholders' Equity Share Capital Authorized: 220,000,000 common voting shares with a par value of $ 0.001 per share Common shares issued and outstanding: 8,091,650 and 5,950,998 at August 31, 2023 and August 31, 2022, respectively $ 8,091 $ 5,951 Additional paid-in capital 48,799,454 47,041,481 Accumulated deficit ( 45,763,427 ) ( 39,098,528 ) Equity attributable to shareholders of Lexaria 3,044,118 7,948,904 Non-controlling Interest ( 364,040 ) ( 316,414 ) Total Stockholders' Equity 2,680,078 7,632,490 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,083,986 $ 7,833,927 The accompanying notes are an integral part of these consolidated financial statements. 30 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (Expressed in US Dollars except share amounts) Year Ended August 31, 2023 2022 Revenue $ 226,208 $ 255,397 Cost of goods sold 31,500 71,841 Gross profit 194,708 183,556 Operating expenses Research and development 3,666,721 1,842,675 General and administrative 3,062,009 4,959,920 Total operating expenses 6,728,730 6,802,595 Loss from operations ( 6,534,022 ) ( 6,619,039 ) Other income (loss) Interest income 43,190 - Unrealized loss on marketable securities ( 221,693 ) ( 764,614 ) Total other income (loss) ( 178,503 ) ( 764,614 ) Net loss for the year $ ( 6,712,525 ) $ ( 7,383,653 ) Net loss attributable to: Common shareholders $ ( 6,664,899 ) $ ( 7,269,324 ) Non-controlling interest $ ( 47,626 ) $ ( 114,329 ) Basic and diluted loss per share $ ( 1.01 ) $ ( 1.24 ) Weighted average number of common shares outstanding - Basic and diluted 6,614,066 5,885,245 The accompanying notes are an integral part of these consolidated financial statements. 31 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in US Dollars) Year Ended August 31, 2023 2022 Cash flows used in operating activities Net loss $ ( 6,712,525 ) $ ( 7,383,653 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation 170,382 752,591 Depreciation and amortization 145,397 102,718 Impairment loss 106,761 - Noncash lease expense 41,564 38,597 Unrealized loss on marketable securities 221,693 764,614 Shares issued for services - 1,200,000 Lease accretion 2,227 5,195 Gain on forgiveness of loan - ( 7,926 ) Change in operating assets and liabilities Accounts receivable 26,539 ( 137,491 ) Inventory 43,069 ( 1,979 ) Prepaid expenses and deposits 29,978 ( 257,508 ) Accounts payable and accrued liabilities 88,492 50,726 Due to related parties - ( 5,223 ) Operating lease liability ( 44,814 ) - Net cash used in operating activities $ ( 5,881,237 ) $ ( 4,879,339 ) Cash flows used in investing activities Intellectual property ( 135,862 ) ( 131,448 ) Purchase of equipment ( 33,748 ) ( 49,192 ) Net cash used in investing activities $ ( 169,610 ) $ ( 180,640 ) Cash flows from/(used in) financing activities Proceeds from issuance of equity 1,589,731 - Lease Payments - ( 44,600 ) Net cash from/(used in) financing activities $ 1,589,731 $ ( 44,600 ) Net change in cash for the year ( 4,461,116 ) ( 5,104,579 ) Cash at beginning of year 5,813,218 10,917,797 Cash at end of year $ 1,352,102 $ 5,813,218 Supplemental information of cash flows: Income taxes paid in cash $ 8,214 $ ( 4,782 ) Marketable securities received on accounts receivable $ - $ 278,108 Remeasurement of operating lease right of use assets and liabilities $ 156,566 $ - The accompanying notes are an integral part of these consolidated financial statements. 32 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended August 31, 2023 and 2022 (Expressed in US Dollars) Additional Non- Common Stock Paid-in controlling Stockholders Shares Amount Capital Deficit Interest Equity 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 Shares sold for cash 2,140,652 2,140 1,587,591 - - 1,589,731 Stock based compensation - - 170,382 - - 170,382 Net loss - - - ( 6,664,899 ) - ( 6,664,899 ) Non-controlling interest - - - - ( 47,626 ) ( 47,626 ) Balance August 31, 2023 8,091,650 $ 8,091 $ 48,799,454 $ ( 45,763,427 ) $ ( 364,040 ) $ 2,680,078 The accompanying notes are an integral part of these consolidated financial statements. 33 Table of Contents LEXARIA BIOSCIENCE CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2023 and 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. Liquidity and Going Concern 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 meet its financial obligations for a period of least 12 months from the date of this report. Since inception, the Company has incurred significant operating and net losses. The losses attributable to shareholders were $ 6.7 million and $ 7.34 million, for the years ended August 31, 2023 and 2022, respectively. As of August 31, 2023, we had an accumulated deficit of $ 45.8 million. 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 from the licensing of our technology, if any, and the receipt of payments under any current or future collaborations we may enter into. The recurring losses and negative cash flows from operations raise substantial doubt as to the Company’s ability to continue as a going concern. During the year ended August 31, 2023, we raised $ 114,456 from the sale of shares pursuant to our ATM offering and on May 11, 2023 we raised an additional $ 2 million pursuant to a brokered registered offering. Net proceeds from these offerings totaled $ 1,589,731 , respectively. On October 3, 2023, the Company closed a registered direct offering resulting in net proceeds of approximately $ 1.29 million. We may offer additional securities for sale during our fiscal year 2024 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. Based on our existing working capital, management believes the Company has sufficient working capital to satisfy the Company’s estimated liquidity needs for the next 12 months. In making this assessment, the Company believes that this alleviates the substantial doubt in connection with the Company’s ability to continue as a going concern. However, there is no assurance that management’s plans will be successful. If the Company is unable to obtain funding, the Company would be forced to delay, reduce or eliminate some or all of its research and development programs, preclinical and clinical testing or commercialization efforts, which could adversely affect its business prospects. 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, Lexaria Nutraceutical Corp., 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. 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 readily convertible to known cash amounts. The Company had no cash equivalents as of August 31, 2023 or August 31, 2022. 34 Table of Contents Marketable Securities The Company’s marketable securities consist of investments in common stock. Investments in equity securities are reported at fair value with changes in unrecognized gains or losses included in other income (loss) on the consolidated statements of operations. Leases The Company accounts for its leases under ASC 842, Leases (“ASC 842”). Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet as both a right of use asset and lease liability. 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. For operating leases that reflect impairment, we will recognize the amortization of the right-of-use asset on a straight-line basis over the remaining lease term with rent expense still included in operating expenses in the consolidated statements of operations. 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 costs include those incurred with respect to both pending and granted patents filed in the United States. When patent applications are filed, the directly related capitalized costs are amortized on a straight-line basis over an estimated economic life of 20 years. Equipment Equipment is stated at cost less accumulated depreciation and impairment and depreciated using the straight-line method over the 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, or the economic life of the improvements, whichever is shorter. 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 recoverable. 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 recognize the related 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. Non-refundable minimum fees are recognized as revenue over the period to which they apply. 35 Table of Contents 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 Non-capitalizable 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 consolidated statements of operations based on the fair value at grant date subject to vesting dates and amortized over the related vesting period. 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. 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 is 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. 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. 36 Table of Contents 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 rate changes for USD/CAD dollars is not expected to be material. Credit risk and customer concentration The Company places its cash with a high credit quality financial institution. Periodically, the Company may carry cash balances at such financial institution in excess of the federally insured limit of $ 250,000 . The Company has not experienced losses on these accounts and management believes, based upon the quality of the financial institution, that the credit risk with regard to these deposits is not significant. In the year ended August 31, 2023, four customers accounted for 95% (2022 – one customer was accounted for 100%) of consolidated revenues. At fiscal year-end 2023, we had $ 24,635 (2022 - $ 37,248 ) in license fees receivable. The Company did not incur any bad debt expense in fiscal 2022 or 2023. As of August 31, 2023, the Company had $ 102,051 (2022 - $ 84,162 ) in sales tax receivable. The Company considers its credit risk to be low for such receivables. 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. Reclassifications Certain amounts in the prior period have been reclassified to conform with current period presentation. 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 . This Accounting Standards Update represents a significant change in the accounting for credit losses model by requiring immediate recognition of management’s estimates of current expected credit losses (CECL). Under the prior model, losses were recognized only as they were incurred. The Company has determined that it has met the criteria of a smaller reporting company ("SRC") as of November 15, 2019. As such, ASU 2019-10, Financial Instruments-Credit Losses, Derivatives and Hedging, and Leases: Effective Dates amended the effective date for the Company to be for reporting periods beginning after December 15, 2022. The Company will adopt ASU 2016-13 effective September 1, 2023. 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 reflects 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: 37 Table of Contents 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, valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. 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. Disposals of Assets - Value of Note Receivable The Asset Purchase Agreement for the sale of assets to Hill Inc. Beverages included C$ 2 million 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 of August 31, 2023 and 2022 that the value of the note to be notional and recorded the note at a zero value for accounting purposes. During fiscal 2023, we received interest income on the note totaling $ 43,190 (2022 - $ 29,060 ). Hill Inc. continues to operate and make ongoing interest payments to us in relation to this Note. Impairment of Long-Lived Assets The Company evaluated its patent portfolio and determined that certain pending applications had been abandoned or would not be pursued. As such, during the year ended August 31, 2023, the Company recognized an impairment loss of $ 106,761 related to those abandoned applications. 5. Marketable Securities The components of Marketable Securities were as follows: Cost Basis Unrealized Gains Unrealized Losses Fair Value August 31, 2021 $ 1,037,025 $ 16,243 $ ( 219,427 ) $ 833,841 Common stock 278,107 118,196 ( 882,809 ) ( 486,506 ) August 31, 2022 $ 1,315,132 $ 134,439 $ ( 1,102,236 ) $ 347,335 Common stock - 1,856 ( 223,549 ) ( 221,693 ) August 31, 2023 $ 1,315,132 $ 136,295 $ ( 1,325,785 ) $ 125,642 Marketable securities represented the common shares of Hill Inc. held by Lexaria. which are carried at fair value using Level 1 inputs. 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, 2023, unrealized losses represent temporary impairments. 38 Table of Contents 6. Accounts and Other Receivables Accounts receivable at August 31, 2023 and August 31, 2022 consist of the following: August 31, 2023 August 31, 2022 Trade and deposits $ 48,559 $ 80,374 Territory license fees 24,635 37,248 Sales tax 102,051 84,162 $ 175,245 $ 201,784 7. Inventory Inventory of raw materials on August 31, 2023, and August 31, 2022, consist of the following: August 31, 2023 August 31, 2022 Raw materials $ - $ 38,418 $ - $ 38,418 In the year ended August 31, 2023, raw materials inventory valued at $ 38,418 was expensed to R&D. 8. Prepaid Expenses and Other Current Assets Prepaid expenses consist of the following at August 31, 2023 and August 31, 2022: August 31, 2023 August 31, 2022 Advertising & conferences $ 40,342 $ 359,863 Legal & accounting fees 36,795 25,000 License, filing fees, dues 15,668 15,000 Office & insurance 97,167 80,863 Consulting 331,811 - Capital financing 25,000 96,035 $ 546,783 $ 576,761 9. Intellectual Property, net 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 #1 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 #18 Compositions and Methods for Enhanced Delivery of Antiviral Agents US 11,700,875 07/18/2023 #20 Compositions and Methods for Sublingual Delivery of Nicotine US 11,666,544 06/06/2023 #21 Compositions and Methods for Treating Hypertension US 11,666,543 06/06/2023 39 Table of Contents A continuity schedule for capitalized patents is presented below: August 31, August 31, 2023 2022 Balance – beginning $ 488,462 $ 364,623 Addition 135,862 131,448 Impairment ( 106,761 ) - Amortization ( 54,938 ) ( 7,609 ) Balance – ending $ 462,625 $ 488,462 At August 31, 2023 the Company has capitalized a total of $ 462,625 of patents. Included in the capitalized costs is $ 457,445 of costs associated with patents and licenses that have been filed. Also included in the capitalized costs is $ 5,180 of costs associated with provisional patents and pending applications which have not yet been filed. The Company evaluated its patent portfolio and determined that certain pending applications had been abandoned or would not be pursued. As such, during the year ended August 31, 2023, the Company recognized an impairment loss of $ 106,761 (2022 - $Nil) related to those abandoned applications. The Company recognized $ 54,938 of amortization expense related to patents and licenses in the year ended August 31, 2023 (2022 - $ 7,609 ). 10. Property & Equipment, net Property and equipment, net consists of: August 31, 2023 Cost Period Amortization Additions Accumulated Amortization Net Balance Leasehold improvements $ 259,981 $ ( 54,037 ) $ - $ ( 248,723 ) $ 11,258 Computers 70,781 ( 4,732 ) - ( 66,156 ) $ 4,625 Furniture fixtures equipment 31,126 ( 6,417 ) - ( 29,257 ) $ 1,869 Lab equipment 333,675 ( 29,986 ) 33,748 ( 131,032 ) $ 236,391 $ 695,563 $ ( 95,172 ) $ 33,748 $ ( 475,168 ) $ 254,143 August 31, 2022 Cost Period Amortization Additions 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 equipment 31,126 ( 6,417 ) - ( 22,837 ) 8,289 Lab equipment 291,235 ( 31,572 ) 42,375 ( 101,047 ) 232,563 $ 646,306 $ ( 101,900 ) $ 49,192 $ ( 379,993 ) $ 315,505 During the year ended August 31, 2023, amortization of $ 4,651 (2022 - $ 3,655 ) was included in cost of goods sold. 40 Table of Contents 11. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following as of August 31, 2023 and August 31, 2022: August 31, August 31, 2023 2022 Accounts Payable Trade payables $ 225,038 $ 57,150 Sales tax payable 14,903 31,303 Accrued Liabilities Trade payables - 62,996 $ 239,941 $ 151,449 12. Revenues Revenues for the years ended August 31, 2023 and 2022 consist of the following: Year Ended August 31, 2023 2022 IP Licensing $ 146,800 $ 54,560 B2B 44,167 113,438 Other 35,241 87,399 $ 226,208 $ 255,397 The Company recognized B2B product revenues of $ 44,167 (2022 - $ 113,438 ) that relate to sales of our intermediate products for use by two B2B customers in their products. Licensing revenue consists of IP licensing fees for transfer of the DehydraTECH technology in line with definitive agreements and includes royalty fees. The Company recognized $ 146,800 (2022 - $ 54,560 ) in licensing revenue during the year. 13. Income Taxes 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, 2023 and 2022: August 31 2023 August 31 2022 $ $ Loss before taxes ( 6,712,525 ) ( 7,383,653 ) Expected income tax recovery ( 1,427,529 ) ( 1,619,854 ) Non-deductible items ( 831 ) ( 280,155 ) Change in estimates 4,271 ( 44,867 ) Effect of changes in foreign and long-term tax rates - 23,625 Change in valuation allowance 1,432,305 1,921,251 Total income taxes 8,216 - 41 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, 2023 and 2022 are comprised of the following: August 31 2023 August 31 2022 $ $ Non-capital losses 8,637,353 7,747,485 Marketable securities ( 14,051 ) 118,175 Stock based compensation 650,778 - R&D 371,326 - PPE and intangibles ( 64,569 ) - Total deferred tax assets 9,580,837 7,865,660 Valuation Allowance ( 9,580,837 ) ( 7,865,660 ) Net Deferred tax assets - - The Company has net operating loss carry-forwards of approximately $ 40 million which may be carried forward to apply against future year income tax for U.S. tax purposes. 14. Common Shares and Warrants Fiscal 2023 Activity During the year ended August 31, 2023, the Company completed the following issuances of common shares and warrants: 1. 34,652 shares were sold pursuant to an at-the-market offering (“ATM”) for gross proceeds of $ 114,456 . Offering costs netted against proceeds amounted to $ 125,122 ; and 2. 2,106,000 units were sold at a price of $ 0.95 per unit, with each unit consisting of one common share and one warrant exercisable to purchase an additional common share at $ 0.95 per share, for net proceeds of $ 1,600,397 . The 2,106,000 warrants are exercisable for a period of five ( 5 ) years. 42 Table of Contents No warrants have been exercised and 7,500 warrants expired during the year ended August 31, 2023. Presented below is a continuity schedule for warrants: Number of Warrants Weighted Average Exercise Price $ Balance, Aug 31, 2021 2,447,275 8.00 Cancelled/expired ( 25,292 ) 4.57 Balance, Aug 31, 2022 2,421,983 8.04 Cancelled/expired ( 7,500 ) 24.00 Issued 2,106,000 0.95 Balance, August 31, 2023 4,520,483 4.71 Presented below is a summary of warrants outstanding as of August 31, 2023: Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) 60,798 $ 36.00 1.21 - 1.25 317,190 $ 10.50 1.68 - 1.70 116,667 $ 9.00 0.62 - 1.54 200,000 $ 7.00 0.62 1,719,828 $ 6.58 2.38 2,106,000 $ 0.95 4.70 4,520,483 $ 4.71 3.28 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. 15. Stock Options The Company established an Equity Incentive Plan whereby our Board, pursuant to shareholder approved amendments, may grant up to 809,165 stock options to directors, officers, employees, and consultants with such number being increased to up to 10% of the issued share capital at the end of each calendar year, at the discretion of the board, pursuant to an evergreen formula. While these amendments have been approved by the Company’s shareholders, the Company has not filed an S-8 Registration Statement to register these additional securities, accordingly, until such S-8 Registration Statement is filed with the SEC, the Company may only issue up to 510,433 shares under the current registered Equity Incentive Plan . Stock options may be exercised for a maximum period of up to ten ( 10 ) years but to date all currently issued options must be exercised, as determined by our Board, by no later than five years from the date of grant. 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 the Black-Scholes option pricing model. 43 Table of Contents Fiscal 2023 Activity The Company granted the following stock options during the year ended August 31, 2023: Options Weighted Average Exercise Price Contractual Life (years) 41,200 $ 1.96 5 5,000 $ 2.73 5 3,400 $ 3.04 5 20,000 $ 0.87 5 69,600 $ 1.75 (Avg. Contractual Life) 5 Fiscal 2022 Activity The Company granted the following stock options during the year ending August 31, 2022: Quantity Exercise Price $ Contractual 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 During the year ended August 31, 2023, 267,969 previously granted options with exercise prices ranging from $ 9.60 to $ 4.80 were repriced to $ 3 .00 following shareholder approval obtained at the Company’s annual shareholder meeting held on May 9, 2023. 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, 2021 206,170 $ 8.90 Cancelled/expired ( 3,334 ) 9.60 Granted 222,000 4.21 Balance August 31, 2022 424,836 6.45 Cancelled/expired ( 47,500 ) 2.98 Granted 69,600 1.75 Balance August 31, 2023 (Outstanding) 446,936 $ 3.32 3.25 $ 3,600 Balance August 31, 2023 (Exercisable) 435,186 $ 3.32 3.25 $ 3,600 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. The fair value of options awarded during the fiscal years ended August 31, 2023 and August 31, 2022 totaled $ 89,057 and $ 680,511 , respectively. 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 2023 August 31 2022 Expected volatility 93 %- 105 % 98 % – 119 % Risk-free interest rate 3.30 %- 4.69 % 0.78 % – 3.30 % Expected life 2.5 – 5 years 5 years Dividend yield 0 % 0 % Estimated fair value per option 0.33 – 2.32 $ 2.25 – $ 5.10 44 Table of Contents Stock-based compensation expense for the fiscal years ended August 31, 2023 and August 31, 2022 totalled $ 170,382 and $ 752,591 , respectively. Of the current fiscal year expense, $ 89,057 relates to current year option awards, $ 25,194 relates to the repricing of 267,969 options disclosed above, and $ 56,131 relates to the vesting of options awarded in previous fiscal years. 16. 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 which lease was renewed during fiscal 2023 until November 15, 2028. 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, 2023 August 31, 2022 Right of use assets - operating leases $ 52,444 $ 91,041 Amortization ( 41,564 ) ( 38,597 ) Extension-related remeasurement 156,566 Total lease assets $ 167,446 $ 52,444 Liabilities: $ 49,988 $ 89,393 Lease payments ( 44,814 ) ( 44,600 ) Interest accretion 2,227 5,195 Extension-related remeasurement 156,566 Total lease liabilities $ 163,967 $ 49,988 Operating lease cost $ 167,446 $ 52,444 Operating cash flows for lease $ 44,814 $ 44,599 Remaining lease term 5.17 Years 1.17 Years Discount rate 7.25 % 7.25 % Pursuant to the terms of the Company’s lease agreements in effect at August 31, 2023, the following table summarizes the Company’s maturities of operating lease liabilities: 2024 35,840 2025 37,094 2026 37,345 2027 38,642 2028 38,901 2029 6,483 Thereafter - Total lease payments 194,305 Less: imputed interest ( 30,338 ) Present value of operating lease liabilities 163,967 Less: current obligations under leases ( 27,794 ) Non-Current Portion 136,173 45 Table of Contents 17. 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 four reportable segments: Intellectual Property Licensing, B2B Production, Research and Development and Corporate. Licensing revenues are concentrated on three licensees. Consolidated Year Ended August 31, 2023 IP Licensing B2B Product R&D Corporate Total Revenue $ 146,800 $ 44,167 $ 35,241 $ - $ 226,208 Cost of goods sold - ( 31,500 ) - - $ ( 31,500 ) Operating expenses ( 70,677 ) ( 282,709 ) ( 3,666,721 ) ( 2,708,623 ) $ ( 6,728,730 ) Other income/(expense) - - ( 178,503 ) $ ( 178,503 ) Segment loss $ 76,123 $ ( 270,042 ) $ ( 3,631,480 ) $ ( 2,887,126 ) $ ( 6,712,525 ) Total assets $ 103,336 $ 65,573 $ 187,532 $ 2,729,545 $ 3,083,986 Consolidated Year Ended August 31, 2022 IP Licensing B2B Product R&D Corporate Total 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 Capital Asset by Region Year Ended August 31, 2023 Cost US Addition US Net Balance US Cost Canada Addition Canada Net Balance Canada Total Net Balance Leasehold Improvements $ - $ - $ - $ 259,981 $ - $ 11,258 $ 11,258 Computers - - - 70,781 - 4,625 4,625 Furniture & Fixtures - - - 31,126 - 1,869 1,869 Lab Equipment 140,490 33,748 122,855 193,185 - 113,536 236,391 $ 140,490 $ 33,748 $ 122,855 $ 555,073 $ - $ 131,288 $ 254,143 Capital Asset by Region Year Ended August 31, 2022 Cost US Addition US Net Balance US Cost Canada Addition Canada Net Balance Canada Total Net Balance Leasehold Improvements $ - $ - $ - $ 259,981 $ - $ 65,296 $ 65,296 Computers - - - 63,964 6,817 9,357 9,357 Furniture & Fixtures - - - 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 18. Subsequent Events On October 3, 2023, the Company entered into a securities purchase agreement with a single healthcare-focused institutional investor to purchase 889,272 shares of common stock and 729,058 pre-funded warrants in a registered direct offering. In a concurrent private placement, the Company also agreed to issue and sell to the investor warrants to purchase up to 1,618,330 shares of common stock. The combined effective offering price for each share of common stock (or pre-funded warrant in lieu thereof) and accompanying warrant was $0.97 (to note the pre-funded warrants were issued at a price of $0.9699 and have an exercise price of $0.0001). The warrants will become exercisable six months from issuance, expire five and a half years from the issuance date, and have an exercise price of $0.97 per share . The net proceeds to the Company from the registered direct offering and concurrent private placement totaled $ 1.29 million, after deducting placement agent fees and other estimated offering expenses payable by the Company. To date all of the pre-funded warrants have been exercised, resulting in an issuance by the Company of an aggregate 729,058 common shares for gross proceeds of approx. $ 73 . The shares issued pursuant to the pre-funded warrant exercises were registered pursuant to an S-3 registration statement (333-262402). Subsequent to the fiscal year end, the Company issued an aggregate 566,661 common shares pursuant to the exercise of warrants that were issued under our May 11, 2023 financing, at an exercise price of $ 0.95 per share for gross proceeds of $ 538,328 of which $29,569 is currently held in Lexaria’s trust account with the warrant agent. The shares issued pursuant to the warrant exercise were registered pursuant to an S-1 registration statement (333-271096). Subsequent to the fiscal year end, the Company issued an aggregate 85,000 options for the issuance of 85,000 shares at an exercise price of $ 1.15 and exercisable for a five-year term expiring October 27, 2028. The options were issued pursuant to the Company’s registered equity incentive plan. 46 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 declined to stand for re-election after the completion of the current audit of our fiscal year 2022. During the two previous years there had 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.