Lexaria Bioscience Corp. 10-K

Item 8. Financial Statements and Supplementary Data 31 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, 2024 and 2023, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years 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, 2024 and 2023, and the results of their operations and their cash flows for the years 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 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 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 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 audits 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 audits provide 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 26, 2024 32 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED BALANCE SHEETS (Expressed in US Dollars) August 31, August 31, 2024 2023 ASSETS Current Cash $ 6,499,885 $ 1,352,102 Marketable securities 55,807 125,642 Accounts receivable 154,477 126,686 Prepaid expenses and other current assets 1,187,817 546,783 Total Current Assets 7,897,986 2,151,213 Non-current assets, net Long-term receivables 63,575 48,559 Right of use assets 134,843 167,446 Property & equipment, net 254,709 254,143 Intellectual property, net 516,676 462,625 969,803 932,773 TOTAL ASSETS $ 8,867,789 $ 3,083,986 LIABILITIES and STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued liabilities $ 1,066,409 $ 239,941 Deferred revenue 4,963 - Lease liability, current 28,047 27,794 Total Current Liabilities 1,099,419 267,735 Lease liability, non-current 109,319 136,173 TOTAL LIABILITIES $ 1,208,738 $ 403,908 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: 15,810,205 and 8,091,650 at August 31, 2024, and August 31, 2023, respectively $ 15,810 $ 8,091 Additional paid-in capital 59,599,178 48,799,454 Accumulated Deficit ( 51,558,772 ) ( 45,763,427 ) Accumulated other comprehensive loss ( 19,816 ) - Equity attributable to shareholders of Lexaria 8,036,400 3,044,118 Non-controlling Interest ( 377,349 ) ( 364,040 ) Total Stockholders' Equity 7,659,051 2,680,078 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,867,789 $ 3,083,986 The accompanying notes are an integral part of these consolidated financial statements. 33 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Expressed in US Dollars except share amounts) Year Ended August 31, 2024 2023 Revenue $ 464,278 $ 226,208 Cost of goods sold 4,822 31,500 Gross profit 459,456 194,708 Operating expenses Research and development 2,360,565 3,666,721 General and administrative 3,852,021 3,062,009 Total operating expenses 6,212,586 6,728,730 Loss from operations ( 5,753,130 ) ( 6,534,022 ) Other income (loss) Interest income 14,311 43,190 Unrealized loss on marketable securities ( 69,835 ) ( 221,693 ) Total other income (loss) ( 55,524 ) ( 178,503 ) Net loss $ ( 5,808,654 ) $ ( 6,712,525 ) Less: Net loss attributable to non-controlling interest $ ( 13,309 ) $ ( 47,626 ) Net loss attributable to Lexaria shareholders $ ( 5,795,345 ) $ ( 6,664,899 ) Other comprehensive income Foreign currency translation adjustment $ ( 19,816 ) $ - Total comprehensive loss $ ( 5,815,161 ) $ ( 6,664,899 ) Basic and diluted loss per share $ ( 0.47 ) $ ( 1.01 ) Weighted average number of common shares outstanding - Basic and diluted 12,383,974 6,614,066 The accompanying notes are an integral part of these consolidated financial statements. 34 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in US Dollars) Year Ended August 31, 2024 2023 Cash flows used in operating activities Net loss $ ( 5,808,654 ) $ ( 6,712,525 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation 492,236 170,382 Depreciation and amortization 76,153 145,397 Impairment loss 57,836 106,761 Bad debt expense 7,760 - Noncash lease expense 32,603 41,564 Unrealized loss on marketable securities 69,835 221,693 Lease accretion 6,672 2,227 Change in operating assets and liabilities Accounts receivable ( 35,551 ) 26,539 Inventory - 43,069 Prepaid expenses and deposits ( 641,034 ) 29,978 Long-term receivables ( 15,016 ) - Accounts payable and accrued liabilities 826,468 88,492 Operating lease liability ( 33,273 ) ( 44,814 ) Deferred revenue 4,962 - Net cash used in operating activities $ ( 4,959,003 ) $ ( 5,881,237 ) Cash flows used in investing activities Intellectual property ( 145,591 ) ( 135,862 ) Purchase of equipment ( 43,014 ) ( 33,748 ) Net cash used in investing activities $ ( 188,605 ) $ ( 169,610 ) Cash flows from financing activities Proceeds from exercise of stock options 2,875 - Proceeds from sale of common shares for cash 4,208,731 1,589,731 Proceeds from exercise of warrants 6,103,601 - Net cash from financing activities $ 10,315,207 $ 1,589,731 Effect of exchange rate changes on cash $ ( 19,816 ) $ - Net change in cash for the period 5,147,783 ( 4,461,116 ) Cash at beginning of period 1,352,102 5,813,218 Cash at end of period $ 6,499,885 $ 1,352,102 Supplemental information of cash flows: Income taxes paid in cash $ 10,042 $ 8,214 Remeasurement of operating lease right of use assets and liabilities $ - $ 156,566 The accompanying notes are an integral part of these consolidated financial statements. 35 Table of Contents LEXARIA BIOSCIENCE CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended August 31, 2024 and 2023 (Expressed in US Dollars) (Audited) Accumulated Additional Non- Other Common Stock Paid-in controlling Comprehensive Stockholders Shares Amount Capital Deficit Interest (Loss) Income Equity 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 Shares sold for cash 2,334,013 2,334 4,206,397 - - - 4,208,731 Shares issued from exercise of warrants 5,382,042 5,382 6,098,219 - - - 6,103,601 Shares issued from exercise of options 2,500 3 2,872 - - - 2,875 Stock based compensation 492,236 - - - 492,236 Foreign currency translation loss ( 19,816 ) ( 19,816 ) Net loss ( 5,795,345 ) ( 5,795,345 ) Non-controlling interest ( 13,309 ) ( 13,309 ) Balance August 31, 2024 15,810,205 $ 15,810 $ 59,599,178 $ ( 51,558,772 ) $ ( 377,349 ) $ ( 19,816 ) $ 7,659,051 The accompanying notes are an integral part of these consolidated financial statements. 36 Table of Contents LEXARIA BIOSCIENCE CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2024 and 2023 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. Our current focus is the investigation of the incorporation of our DehydraTECH drug delivery technology with GLP-1 and GIP drugs to enhance absorption and reduce adverse side effects. Revenues are generated from licensing contracts for the Company’s patented DehydraTECH technology based on the terms of use and defined geographic and licensing 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 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 at 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 $ 5.8 million and $ 6.7 million, for the years ended August 31, 2024 and 2023, respectively. As of August 31, 2024, we had an accumulated deficit of $ 51.6 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. During the year ended August 31, 2024, we raised an approximate aggregate $ 10.3 million in net proceeds from the sale of securities pursuant to our equity financings from October 3, 2023, February 14, 2024 and April 30, 2024 and from the exercise of warrants. Subsequent to August 31, 2024, we raised an additional $ 4.5 million in net proceeds in a registered direct offering. We may offer additional securities for sale during our fiscal year 2025 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 existing cash resources, management believes that current funding will be sufficient to meet the Company’s financial obligations for a period of at least twelve months from the date of this report. 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., Lexaria (AU) Pty Ltd 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. 37 Table of Contents 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, 2024 or August 31, 2023. 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 and Comprehensive Loss. 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 and Comprehensive Loss. 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 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 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. Property and equipment Property and 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 periods ranging from 3 to 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 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. 38 Table of Contents Revenue recognition The Company recognizes revenue in accordance with ASC 606’s core principle by applying the following five steps: 1. Identify contracts with customers 2. Identify the performance obligations in the contracts 3. Determine the contract price 4. Allocate the contract price 5. Recognize revenue when/as performance obligations are satisfied Licensing revenue from intellectual property Our revenues from licenses that grant exclusive rights to use our intellectual property, which we consider functional IP, are recognized at a point in time following the transfer and use of our patented infusion technology DehydraTECH. Our licensees are also required to pay quarterly fixed non-refundable minimum performance fees which are recognized as revenue over the period to which they apply. Usage fees from intellectual property The Company may also earn sales-based or usage-based royalties from its licensing contracts. The Company recognizes usage fees in the period when our licensees recognize sales of end-products that incorporate our licensed technology. No sales-based usage fees were recognized for the years ended August 31, 2024 and 2023. Third Party Contracted Manufacturing The Company recognizes revenue with respect to contract manufacturing arrangements when the related performance obligations have been satisfied (i.e., when it has completed the related manufacturing work) and in accordance with the five steps described in the ASC 606. Contract Research and Development The Company recognizes revenue from contract research and development arrangements when the related performance obligations have been satisfied and in accordance with the five steps described in ASC 606. The related performance obligation typically entails preparation of customer-specific formulations (i.e., DehydraTECH paired with the customer’s active ingredient) that the customer then uses in comparison testing relative to its existing product(s). Revenue is recognized upon shipment of the formulation to the customer. 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 and Comprehensive Loss. 39 Table of Contents 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 and Comprehensive Loss 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 term of the option, risk-free interest rates and expected dividend yields of the common stock. Foreign currency translation The Company’s reporting currency is the U.S. dollar. The Company has foreign operations whose functional currency is the local currency. Assets and liabilities are translated into U.S. dollars, the reporting currency, at the exchange rate on the balance sheet date. Revenues and expenses are translated into U.S. dollars at the average rates of exchange prevailing during the reporting period. Foreign currency translation adjustments resulting from this process are reported as an element of other comprehensive income (loss) on the consolidated statements of operations and comprehensive loss. Transactions executed in different currencies are translated at spot rates and resulting foreign exchange transaction gains and losses are charged to income. 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, stock options, and warrants, 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. A valuation allowance is established to reduce deferred tax assets to an amount whose realization is more likely than not. Fair Value Measurements 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, and accrued liabilities. 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. 40 Table of Contents The following table provides a summary of financial instruments that are measured at fair value on a recurring basis as of August 31, 2024. Carrying Fair Value Measurement Using Value Level 1 Level 2 Level 3 Total Marketable Securities $ 55,807 $ 55,807 $ - $ - $ 55,807 The following table provides a summary of financial instruments that are measured at fair value on a recurring basis as of August 31, 2023. Carrying Fair Value Measurement Using Value Level 1 Level 2 Level 3 Total Marketable Securities $ 125,642 $ 125,642 $ - $ - $ 125,642 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, 2024, two customers accounted for 99% of consolidated revenues, whereas for the year ended August 31,2023, four customers accounted for 95% of consolidated revenue. At fiscal year-end 2024, we had $ 84,000 in license fees receivable, compared to $ 24,635 as of August 31, 2023. The Company recognized bad debt expense of $ 7,760 and $ 0 for the years ended August 31, 2024 and August 31, 2023, respectively. As of August 31, 2024, the Company had $ 70,477 in sales tax receivable, compared to $ 102,051 as of August 31, 2023. The Company considers its credit risk to be low for such receivables. Commitments and contingencies The Company's policy is to record accruals for any 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 Recently Adopted Pronouncements 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 adopted ASU 2016-13 effective September 1, 2023, and determined that its impact on the accompanying consolidated financial statements is immaterial. 41 Table of Contents Accounting Pronouncements Not Yet Adopted In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280)) – Improvements to Reportable Segment Disclosures, which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This ASU also expands disclosure requirements to enable users of financial statements to better understand the entity’s measurement and assessment of segment performance and resource allocation. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently assessing the effect of this ASU on its consolidated financial statements and related disclosures. In March 2024, the FASB issued ASU 2024-02-Codification Improvements-Amendments to Remove References to the Concepts Statements, that contains amendments to the Codification that remove references to various FASB Concepts Statements. This effort facilitates Codification updates for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or the structure of guidance, and other minor improvements. The amendments are effective for public business entities for fiscal years beginning after December 15, 2024, with early adoption permitted. Early application of the amendments in this ASU is permitted for all entities, for any fiscal year or interim period for which financial statements have not yet been issued (or made available for issuance). If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. The Company is currently assessing the effect of this ASU on its consolidated financial statements and related disclosures. 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: 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 term 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. 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, 2024 and 2023 that the value of the note to be notional and recorded the note at a zero value for accounting purposes. During fiscal 2024, we received interest income on the note totalling $ 14,117 . 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, 2024, the Company recognized an impairment loss of $ 57,836 related to those abandoned applications. 42 Table of Contents 5. Accounts and Other Receivables Accounts receivable at August 31, 2024 and August 31, 2023 consist of the following: August 31, August 31, 2024 2023 Territory license fees $ 84,000 $ 24,635 Sales tax 70,477 102,051 Long term receivable 63,575 48,559 Total Receivables $ 218,052 $ 175,245 6. Prepaid Expenses and Other Current Assets Prepaid expenses consist of the following at August 31, 2024 and August 31, 2023: August 31, August 31, 2024 2023 Advertising & Conferences $ 204,894 $ 40,342 Research and Development 673,126 - Consulting - 331,811 Legal & Accounting Fees 45,600 36,795 License, Filing Fees, Dues 22,925 15,668 Office & Insurance 122,245 97,167 Capital Financing 119,027 25,000 Total Prepaid Expenses and Other Current Assets $ 1,187,817 $ 546,783 43 Table of Contents 7. Intellectual Property, net A continuity schedule for capitalized patents is presented below: August 31, August 31, 2024 2023 Balance – beginning $ 462,625 $ 488,462 Addition 145,591 135,862 Impairment ( 57,836 ) ( 106,761 ) Amortization ( 33,704 ) ( 54,938 ) Balance – ending $ 516,676 $ 462,625 The Company evaluated its patent portfolio and determined that certain pending applications had been abandoned or will not be pursued. As such, during the year ended August 31, 2024, the Company recognized an impairment loss of $ 57,836 related to those abandoned applications. The Company recognized $ 33,704 of amortization expense related to patents and licenses in the year ended August 31, 2024. The following table summarizes expected future amortization of the Company’s patent portfolio as of August 31, 2024: Years Ending December 31, 2025 $ 25,813 2026 25,813 2027 25,813 2028 25,813 2029 25,813 Thereafter $ 387,611 Total $ 516,676 44 Table of Contents 8. Property & Equipment, net Property and equipment, net consists of: Saturday, August 31, 2024 Cost Period Amortization Additions Accumulated Amortization Net Balance Leasehold improvements $ 259,981 $ ( 11,258 ) $ - $ ( 259,981 ) $ - Computers 70,781 ( 2,920 ) - ( 69,076 ) 1,705 Furniture fixtures equipment 31,126 ( 1,870 ) - ( 31,126 ) - Lab equipment 367,423 ( 26,400 ) 43,014 ( 157,433 ) 253,004 Total $ 729,311 $ ( 42,448 ) $ 43,014 $ ( 517,616 ) $ 254,709 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 Total $ 695,563 $ ( 95,172 ) $ 33,748 $ ( 475,168 ) $ 254,143 During the years ended August 31, 2024 and August 31, 2023, amortization of $ 0 and $ 4,651 was included in cost of goods sold. 9. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following as of August 31, 2024 and August 31, 2023: August 31, August 31, 2024 2023 Accounts Payable Vendors payable $ 379,882 $ 225,038 Sales tax payable $ 8,528 $ 14,903 Accrued Liabilities Vendors payable $ 677,999 - Balance Ending $ 1,066,409 $ 239,941 10. Revenues Revenues for the years ended August 31, 2024 and 2023 consist of the following: Year Ended August 31, 2024 2023 IP Licensing $ 457,990 $ 146,800 B2B 5,388 44,167 Other 900 35,241 Total Revenue $ 464,278 $ 226,208 45 Table of Contents Licensing revenue consists of IP licensing fees for transfer of the DehydraTECH technology in line with definitive agreements and includes non-refundable minimum performance fees. The Company recognized $ 457,990 in licensing revenue during the year. The Company recognized B2B product revenues of $ 5,388 that relate to sales of our intermediate products for use by B2B customers in their products. 11. 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, 2024 and 2023: August 31 2024 August 31 2023 $ $ Loss before taxes ( 5,808,654 ) ( 6,712,525 ) Expected income tax recovery ( 1,255,377 ) ( 1,427,529 ) Non-deductible items ( 532 ) ( 831 ) Change in estimates 119,349 4,271 Effect of changes in foreign and long-term tax rates - Change in valuation allowance 1,138,779 1,432,305 Total income taxes 2,219 8,216 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, 2024 and 2023 are comprised of the following: August 31 2024 August 31 2023 $ $ Non-capital losses 8,738,277 8,637,353 Marketable securities ( 14,051 ) ( 14,051 ) Stock based compensation 754,147 650,778 R&D 1,348,082 371,326 PPE and intangibles ( 95,179 ) ( 64,569 ) Total deferred tax assets 10,731,276 9,580,837 Valuation Allowance ( 10,731,276 ) ( 9,580,837 ) Net Deferred tax assets - - The Company has net operating loss carry-forwards of approximately $ 44 million which may be carried forward to apply against future year income tax for U.S. tax purposes. 12. Common Shares and Warrants Fiscal 2024 Activity During the year ended August 31, 2024, the Company entered into Securities Purchase Agreements whereby on February 16, 2024, the Company issued 1,444,741 shares of common stock and 113,702 pre-funded warrants in a registered direct offering. The Company also sold to investors, warrants to purchase up to 1,558,443 shares of common stock. The combined effective offering price for each share of common stock and accompanying warrant was $ 2.31 . The warrants will expire five years from the issuance date, and have an exercise price of $ 2.185 per share. The Company also agreed to partially compensate the placement agent through the issuance of warrants to purchase up to 54,546 shares of common stock. Such warrants will expire five years from the issuance date, and have an exercise price of $ 2.8875 per share. The net proceeds to the Company from the registered direct offering was $ 3 .0 million, after deducting placement agent fees and other offering expenses paid by the Company. As of August 31, 2024, 1,298,702 warrants had been exercised. In addition, all 113,702 pre-funded warrants had been exercised for gross proceeds of $ 11 . 46 Table of Contents During the year ended August 31, 2024, the Company also 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 sold 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 were $ 1.25 million, after deducting placement agent fees and other offering expenses payable by the Company. To date all of the pre-funded warrants have been exercised, resulting in the issuance by the Company of an aggregate 729,058 common shares for gross proceeds of $ 73 . Further, all 1,618,330 warrants had been exercised by August 31, 2024. On April 30 2024, the Company entered into a Warrant Exercise Agreement with an existing accredited investor (the "Investor”) to exercise in full outstanding Common Stock Purchase Warrants (the "Exercise”) to purchase up to an aggregate of 2,917,032 shares of the Company’s common stock (the "Existing Warrant”) for gross proceeds of $ 4,407,444 . Immediately upon full exercise of the Existing Warrant, the Investor received a new unregistered Common Stock Purchase Warrant to purchase up to an aggregate of 2,917,032 shares of the Company’s common stock (the "New Warrant”). The New Warrant was issued to the Investor for consideration of $ 0.125 per share for additional gross proceeds of $ 364,629 . In addition, 102,097 warrants with an exercise price of $ 5.9375 were issued as part of a tail commission. Placement agent fees and other offering expenses in the amount of $ 209,796 were netted against the proceeds. During the fiscal year ended August 31, 2024, the Company had warrant exercises resulting in the following share issuances: 1,622,250 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 $ 1,541,137 ; 1,618,330 common shares pursuant to the exercise of warrants that were issued under our October 3, 2023, financing, at an exercise price of $ 0.97 per share for gross proceeds of $ 1,569,780 ; 729,058 common shares pursuant to the exercise of pre-funded warrants that were issued under our October 3, 2023, financing, at an exercise price of $ 0.0001 per share for gross proceeds of $ 73 dollars; 1,298,702 common shares pursuant to the exercise of warrants that were issued under our February 16, 2024, financing, at an exercise price of $ 2.185 per share for gross proceeds of $ 2,837,664 ; and 113,702 common shares pursuant to the exercise of pre-funded warrants that were issued under our February 16, 2024, financing, at an exercise price of $ 0.0001 per share for gross proceeds of $ 11 dollars. During the year ended August 31, 2024, 300,000 warrants expired. Presented below is a continuity schedule for warrants: Number of Warrants Weighted Average Exercise Price $ Balance, August 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 Issued 7,093,208 2.76 Expired ( 300,000 ) 7.67 Exercised ( 5,382,042 ) 1.11 Balance, August 31, 2024 5,931,649 5.50 47 Table of Contents Presented below is a summary of warrants outstanding as of August 31, 2024: Number of Warrants Weighted Average Exercise Price ($) Weighted Average Remaining Contractual Life in Years 60,798 36.00 0.20 - 0.24 317,190 10.50 0.68 - 0.69 16,667 9.00 0.54 1,719,828 6.58 1.38 483,750 0.95 3.70 314,287 2.31 4.47 2,917,032 4.75 4.47 102,097 5.94 4.47 5,931,649 5.50 3.25 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 . 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. No warrants have been exercised and 7,500 warrants expired during the year ended August 31, 2023. 48 Table of Contents 13. Stock Options The Company established an Equity Incentive Plan whereby our Board, pursuant to shareholder approved amendments, may grant up to 1,037,544 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 . 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 of or 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. Fiscal 2024 Activity The Company granted the following stock options during the year ended August 31, 2024: Grant Date Granted Quantity Exercise Price Contractual Life (years) 10/26/2023 85,000 $ 1.15 5 3/15/2024 200,000 $ 2.93 5 4/26/2024 151,500 $ 2.36 5 7/26/2024 48,000 $ 3.39 5 7/26/2024 12,000 $ 3.39 2 8/31/2024 200,000 $ 3.92 5 696,500 $ 2.91 4.95 Of the 200,000 options granted on March 15, 2024, 150,000 were subsequently cancelled and 50,000 were fully vested. 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 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. 49 Table of Contents A continuity schedule for stock options is presented below: Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value Balance August 31, 2022 424,836 6.45 Cancelled/expired ( 47,500 ) 2.98 Granted 69,600 1.75 Balance August 31, 2023 446,936 $ 3.32 3.25 $ 3,600 Cancelled/expired ( 196,000 ) $ 2.94 4.27 Exercised ( 2,500 ) $ 1.15 4.16 Granted 696,500 $ 2.91 4.63 Balance August 31, 2024 (Outstanding) 944,936 3.11 3.64 971,959 Balance August 31, 2024 (Exercisable) 734,936 2.88 3.31 971,959 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, 2024 and August 31, 2023 totaled $ 1,267,732 and $ 89,057 , 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, 2024 August 31, 2023 Expected Volatility 92 %- 98 % 98 %- 119 % Risk Free interest rate 3.77 %- 5.03 % 0.78 %- 3.30 % Expected life 2.5 - 4 .0 years 5 .0 years Dividend Yield 0.00 % 0.00 % Estimated fair value per option $ 0.63 -$ 2.57 $ 2.25 -$ 5.10 Stock-based compensation expense for the fiscal years ended August 31, 2024 and August 31, 2023 totaled $ 492,236 and $ 170,382 , respectively. Of the current fiscal year expense, $ 453,119 relates to current year option awards, and $ 39,117 relates to the vesting of options awarded in previous fiscal years. As of August 31, 2024, unrecognized non-cash stock-based compensation expense totaled $ 533,619 related to 210,000 unvested stock options with a weighted average exercise price of $ 3.89 . This expense is expected to be recognized over a weighted average period of 2.26 years. 50 Table of Contents 14. 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, 2024 August 31, 2023 $ $ Right of use assets - operating leases 167,446 52,444 Remeasurement related to lease extension - 156,566 Amortization ( 32,603 ) ( 41,564 ) Total lease assets 134,843 167,446 Liabilities: 163,967 49,988 Remeasurement related to lease extension - 156,566 Lease payments ( 33,273 ) ( 44,814 ) Interest accretion 6,672 2,227 Total lease liabilities 137,366 163,967 Operating lease cost 134,843 167,446 Operating cash flows for lease ( 33,273 ) 44,814 Remaining lease term 4.21 Years 5.17 Years Discount rate 7.25 % 7.25 % Pursuant to the terms of the Company’s lease agreements in effect at August 31, 2024, the following table summarizes the Company’s maturities of operating lease liabilities: Fiscal Year Amount 2024 $ - 2025 37,094 2026 37,345 2027 38,641 2028 38,901 2029 8,104 Thereafter - Total lease payments 160,085 Less: imputed interest ( 22,719 ) Present value of operating lease liabilities 137,366 Less: current obligations under leases ( 28,047 ) Total $ 109,319 15. 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. 51 Table of Contents IP B2B Consolidated Year Ended August 31, 2024 Licensing Product R&D Corporate Total Revenue $ 457,990 $ 5,388 $ 900 $ - $ 464,278 Cost of goods sold ( 4,822 ) ( 4,822 ) Operating expenses ( 340 ) ( 1,124 ) ( 2,360,565 ) ( 3,850,557 ) ( 6,212,586 ) Other income/(expense) ( 55,524 ) ( 55,524 ) Segment loss $ 457,650 $ ( 558 ) $ ( 2,359,665 ) $ ( 3,906,081 ) $ ( 5,808,654 ) Total assets $ 164,152 $ 63,131 $ 497,603 $ 8,142,903 $ 8,867,789 IP B2B Consolidated Year Ended August 31, 2023 Licensing 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 52 Table of Contents 16. Subsequent Events Subsequent to the fiscal year end, the Company engaged Mr. Michael Shankman as its Chief Financial Officer to fill the vacancy created when Mr. Cabatuan resigned from this position on July 15, 2024. Pursuant to the Executive Management Agreement entered into between the Company and Mr. Shankman, Mr. Shankman will be compensated with a base annual salary of US$ 120,000 , subject to annual increases of 1.25 x the annual inflation rate as determined by the US Federal Reserve Board, an option grant for the issuance of up to 50,000 common shares vested over three years, and annual performance milestone bonuses of up to 35% during the first year, 40% during the second year and thereafter up to 50% of the base salary. Should Mr. Shankman be terminated without cause, after an initial six months with the Company, he will be entitled to severance pay equal to two (2) months base salary, with such severance pay increasing by a month for each completed year of employment. Mr. Shankman will also be entitled to medical and dental benefits equal in value to up to $2,000 per month and four (4) weeks of paid vacation . Subsequent to the fiscal year end, on September 4, 2024, we entered into an engagement agreement with H.C. Wainwright & Co. LLC (“HCW”), pursuant to which we agreed to sell in a registered direct offering, 1,633,987 shares of common stock at a purchase price of $ 3.06 per share for gross and net proceeds of $ 5.0 million and $ 4.5 million, respectively. Concurrently, the Company issued, by way of a private placement transaction, 4,551,019 share purchase warrants, entitling the holder thereof to purchase up to 4,551,019 shares of common stock at a price of $ 3.06 per share for a period of five years from the date of shareholder approval for such warrant issuance. The securities were issued on October 16, 2024, with the shares registered pursuant to a take down of the Company’s Form S-3 registration statement and the warrants and related warrant shares are required to be registered pursuant to a Form S-1 registration statement As part of the terms and conditions of the warrant issuance, the sole investor agreed to cancel the share purchase warrants that were issued to them in the April 30, 2024 financing. We also issued HCW warrants to purchase up to 57,190 shares at an exercise price of $3.825 per share . HCW was paid 7 % of the gross proceeds and was also reimbursed $ 70,000 for its expenses and $ 15,950 in closing fees. On October 1, 2024, the Company awarded an option grant to an employee for the purchase of up to 12,000 common shares at an exercise price of $ 3.17 per share. In October 2024, the Company sold 8,402 shares of common stock through an At the Market (ATM) offering. Net proceeds from these sales totaled $ 25,359 . 53 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.