Market overreacting to Lexaria accounting concerns

Lexaria Bioscience (OTCQX: LXRP) stock has been hit recently, apparently due to concerns relating to a financial statement figure indicating they spent $3 million on ‘consulting fees last year.’ This is one of those accounting treatments that can be highly misleading. Here is how the $3 million breaks down:

• 250,000 warrants were issued at strike price of US $1.55 per share that was one cent above the market. There were no shares issued and no money received and even though you can argue there was no cost, from an accounting perspective Lexaria had to report an “accounting cost” of $320,000.

• 1,725,000 options were issued at a strike price of US $1.53 per share that was one cent above the market. There were no shares issued and no money received and even though you can argue there was no cost, from an accounting perspective, Lexaria had to report an “accounting cost” of $1,980,000.

• Additional warrants issued, similar details, no actual cost to the company but an “accounting cost” of $51,500.

• The total of these items is $2,350,000.

• The final $640,000 was a common share issue to Chris Bunka, CEO and John Docherty, President as compensation for patent awards. This was an issue of 250,000 common shares at $1.24 and another 250,000 common shares at $1.32 per share. We know Bunka and Docherty have taken cash salaries probably 50% or more below market and always have. So they take lower base salaries and receive bonus compensation paid in shares if it is earned. We think this is a better compensation plan for shareholders and as a close follower of Lexaria, we think they earned it. We think this is a fair way to conserve company cash but still retain top-quality people.

• Including the stock options above, Lexaria has about 4.7 million stock options issued. That is around 6.5% of shares outstanding whereas many companies have 10% or more reserved as stock options. At the same time, management has also been careful to avoid excessive stock issuances that tend to dilute shareholders’ value.

If you agree the $3 million in “consulting fees” is an accounting figure and not an actual expense and in any case it was excellent business practice to use options and shares as bonuses to conserve cash, then you will agree the market has overreacted and this is a real buying opportunity.