Making CBD, and the Capital Markets, Bioavailable

Capital Markets

Sponsored Content provided by Lexaria Corp. (OTCQB: LXRP)

Chris Bunka, the CEO and Chair at Lexaria Corp. (CSE: LXX) (OTCQB: LXRP), suspects that market-makers and broker-dealers are engaged in something potentially illegal and certainly untoward in connection with the stock of the company, pressuring the company in the capital markets just as it seems poised for breakthroughs.

Lexaria is a food sciences company that uses proprietary infusion techniques to provide consumers with convenient and healthy ways to receive the benefits of hemp oil edibles: infused coffee, cocoa, protein bars, etc.

Lexaria, a U.S. company headquartered in British Columbia but with all its operations in the U.S., recently released positive study data supporting one of the key premises behind its business plan: this nitric oxide study shows that CBD becomes “bioavailable” to the human body more completely through the ingestion of Lexaria’s products than it does through alternative ingestion methods such as smoking.


The Back and Forth Last Summer

So on the technological front, things are arguably going quite well for Lexaria. That does not show up, though, on the stock price charts. LXRP is an over-the-counter stock that was worth $0.24 a share on June 11, 2015. It had lost more than a third of that value eight days later, hitting $0.15. After a lot of ups and downs, it ended up one penny lower than that on July 23, i.e., at $0.14.

Lexaria slowly rose through August, September, and October, getting back to $0.24 for a short time in mid-November. It seemed that solid corporate performance was slowly being rewarded with higher valuations. It has lost all that ground again since.

The issue, though, is not the jagged stock price chart but the question of whether dubious trading practices lie behind it. There was a lot of short selling during that period: much of it was uncovered, hence the failure-to-deliver (FTD) figures obtained from the SEC. An FTD happens when a party has nominally sold a stock but doesn’t actually own it, and isn’t able to borrow it before the settlement date, so that party has failed to meet its obligations and the deal does not settle. In the normal course of trading, a short seller (the party who sells as-yet unowned stocks) is expected to borrow the stocks before selling, thus having them “covered” and ensuring settlement will ensue.

In June alone there were 369,311 FTDs on LXRP. This was 16.3% of that month’s trading volume. During September, there were FTDs on 19 of 20 trading days. Some days the FTDs only represented a few percentage points of that day’s volume; other times it was 11%, 23%, 60% or more of the daily volume.

Why were 279,961 shares shorted on Aug. 24, and another 230,695 shares shorted the following day? These large figures represent between two and three times normal daily trading volume, and of course short volume should be only a fraction of total daily volume. Was it because Lexaria issued what it considered to be its most important news ever on Aug. 24, revealing stunningly positive in-vitro clinical test results?

Bunka expressed astonishment that “a company that has been publicly traded for roughly a decade, with an established and widespread shareholder base, should be so difficult to find stock to borrow … .” In the broader picture, there have been 9 million FTDs over the past two years.

The above price numbers must be understood with this caveat. The company announced a forward stock split on Nov. 18, on a 1:1.1 basis, with an effective date of Dec. 16.


Latest Developments

On Dec. 14, Lexaria announced the filing of its two newest provisional patent applications with the U.S. Patent Office. This was to protect its “innovative method of combining certain useful payload molecules with certain edible substances within food and beverage compositions.” Again: this seems like welcome news on the technological front and marks a total of six provisional patent applications filed in roughly the past 18 months.

But … the stock price runs into headwinds whenever there are positive corporate developments, seeming to defy economics 101. LXRP crossed the $0.10 price line on Jan. 20, 2016.

A few days before that, on Jan. 15, the company announced that it had brought in experts to study the short selling; specifically, BUYINS.NET, a Regulation SHO compliance monitor, initiated coverage. Analysis of complete trading data shows an incredible 26-million shares shorted since 2009, which is even more than the FTD data reveals, obtained from the SEC.

Bunka said that more than 40% of average daily volume is shorting and that this happens “regardless of stock price or direction” and has been happening for years. In recent months he and the rest of management have begun to discuss and seriously consider all options to protect the company from what they see as the predacious behavior of the shorts. There is no plan to go private, Bunka stressed in an interview. In fact, he spoke of the possibility with distaste, because it seems a backward-looking move and he sees himself as a forward-looking guy. But “I’d be a liar if I said that conversation hasn’t happened.”


Exempt Classifications

One of his grievances is that much of the uncovered short selling is an abuse of the law’s exempt classifications for certain trades. He explained that he had only recently received an education on this point from consultants, to the effect that broker-dealers and market-makers can classify particular short trades as exempt from the requirement that they be covered. That’s right: market-makers can sell shares of stock that do not exist, and they don’t even have to report these short balances to any regulatory body.

The market-makers are supposed to do this pursuant to … well, making a market. That is, if they short at the ask, they are required to get on the next bid for the same amount. But, Bunka said, “many of them do not do so, and are free to use the cash for any purpose they like.” It is the abuse of the exempt classifications that, he believes, lies behind many companies’ difficulties with the capital markets.

Indeed UBS was fined $12 million by FINRA several years ago for millions of shorting violations, and just weeks ago Goldman Sachs was fined $15 million by the SEC for its own shorting violations. Are Wall Street’s powerhouses holding back America’s struggling micro-caps just to earn yet another buck?

Despite the promise of its technology, Lexaria seems unable to realize its full value. But the company is fighting back and hopes to raise the alarm in a way that may “save companies that have not yet begun to run the gauntlet.”

One of the broader lessons for the rest of us may be that as companies in the cannabis orbit become “normal” companies, neither black nor gray market but white/green market, and sometimes publicly listed companies, they’ll also have the “normal” range of problems, including issues with the structure of the capital markets. These are problems that, in the second decade of the 21st century, can strike those on the hurting end of them as quite painfully abnormal.

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