By Tom Winnifrith, The Sheriff of AIM | Tuesday 24 May 2016
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I realise that over on the LSE Asylum criticising Highland Natural Resources (HNR) gets the sort of reaction normally reserved for those who suggest that the McCann's are not complete role models when it comes to best practice in babysitting, but a transaction announced back in 2015 looks very odd indeed to me. Any more red flags vicar?
Highland listed its shares on the Standard List on 25 March 2015. I rather missed the fact from its IPO document that two of the men behind it, FD John Davies and fellow founder Eric Boyle were the men behind uber-ramped biotech disaster Stanford Rook, a company that I re-named Stanford Crook as its products flopped and it became a lack of cash shell.
The main man at Highland is Dr Robert Price who - to be fair - invested £600,000 to get 60% of the equity at IPO. On the other hand as well as those 12 million shares which he paid for he was also handed almost 24 million warrants with a five year life exercisable at the same price. Nice.
On May 12 2015 the company announced a deal with a company called Diversion Technologies. It stated
Highlands has entered into an Exclusive Heads of Agreement to acquire 75% of DT's pending patents in exchange for 1,900,000 Highlands' ordinary shares and 30 million warrants, exercisable at 25p (conditional upon all necessary regulatory approvals and appropriate disclosures or documentation being made to the UKLA) .
Okay. there are two things about this that jump out at me. First is that this is a related party deal. Highlands admitted as much stating:
Paul Mendell, the Founder of DT and the inventor of "DT Ultravert" is an advisory board member of Highlands. Robert B. Price is also a shareholder in DT.
Okay so how many shares in DT did Price own? To find out, we had to wait until January 29 when the company was forced to spend £400,000 on a readmission document following a decision that that the DT deal was an RTO. That document also reveals that Highland breached the Companies Act in terms of its lack of independent DD on a related party deal but who cares about the law, this is the London Stockmarket?
Back to the document. We discover in it that price owned 37.5% of DT. The document also makes it clear that the new shares were issued to DT, not to its shareholders, which means that DT must therefore have had a disclosable stake (1.9 million out of 21.998 million shares as at 29 May. Yet I see no TR1 to that effect. Why not?
I put it to you that it is because DT has been selling shares to fund its own costs? That is almost certainly the case because the second thing that strikes me as odd - as you can see here - is that DT was only established on April 8 2015. In other words a deal was struck, the independent NED did full DD on a US company and all the paperwork was put together in just four weeks. That is impressive. Shite, Highlands should be lecturing the world on how to be so ruthlessly efficient.
So to recap, Mr Price owns 37.5% of a start up which - by definition - has minimal value and cash. He gets his UK listed company to give that US company stacks of shares which it can then dump. The more Mr Price promotes Highland shares the more DT can get for its shares as it dumps. So the more DT has to build its business and make Mr Price richer. Fab.
I am sure the PR flunkies at St Brides will also be spinning hard on the rampathon given that they were given 50,000 warrants at 10p. Conflict of interest? er?
I am not saying that Highland is a storming sell - although others have as you can see HERE. But i am saying that this episode makes me sure that I would not want to buy the stock either.
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