The recent acquisition of High Times Holding Corp. by Lucy Scientific Discovery Inc. (NASDAQ: LSDI) raised many questions – but the company doesn’t appear to want to answer them.
Green Market Report wrote on Sept. 7 that Lucy agreed to buy at least some of High Times’ assets. The acquisition statement said it would bring Lucy a steady flow of income from licensing and royalties linked to High Times, Cannabis Cup, and 420.com brands.
According to the statement at the time, Lucy said it would transfer 19.9% of its shares to High Times and commit to semiannual payments over the next five years. These payments are based on the profit margins from the acquired IP.
Lucy is also giving High Times back licensing rights to open stores and sell THC products in the U.S. For this, High Times will pay Lucy $1 million a year. If cannabis becomes federally legal, Lucy believes that payment will double.
The deal was expected to be finalized in two weeks, but that deadline is now in the rearview mirror, and there has been no update.
The information provided publicly was notable for its lack of detail. Lucy filed an 8K with the U.S. Securities and Exchange Commission, but there are many questions that Lucy CEO Richard Nanula has yet to answer.
In addition, according to SEC rules, High Times should have filed a document on the announcement within four days, but to date, no acquisition documentation has been submitted. The only punishment from the SEC would be a restriction on further offerings. Since High Times is being acquired, it is unlikely to be bothered by such a punishment.
Red flags abound
Here are some of the red flags Green Market Report identified with regard to the transaction.
Nasdaq listing: Lucy Scientific stock is currently listed on the Nasdaq exchange, but the marketplace remains adamant that it won’t allow U.S. plant-touching companies to trade on its exchange. This position has caused larger companies, such as Canada-based Canopy Growth Corp. (Nasdaq: CGC), to do legal backbends in order to own U.S-based cannabis companies. High Times acknowledges it can’t trade on the Nasdaq, but Nasdaq will not comment on the situation either. If Nasdaq does allow Lucy to buy High Times – a requirement of the deal – that could open the door to other cannabis companies that own dispensaries to list their shares as well.
Stock trading timing: The four days average volume of shares prior to the announcement was approximately 41,500. On Sept. 6, the day before the public announcement, the volume popped to 170,700. In fact, the average volume of trading in Lucy over the next four days jumped to 612,350 a day. Shares in Lucy were selling at roughly 58 cents per share and popped to 78 cents following the announcement. Lately, shares have settled back down to roughly 63 cents.
Share price: High Times stock has never traded publicly, and as such the valuation is solely determined by the company – and it has varied widely. In the initial Reg A+ Offering, shares were priced as high as $11, but the Lucy acquisition filing lists the value as low as $0.0001 per share. While the company has the right to arbitrarily set the price, those original Reg A+ investors who spent $550 to buy 50 shares at $11 a share essentially had those shares wiped out and their investment devalued to a nickel.
Transfer Agent: Another huge mystery, who is the transfer agent for High Times stock? According to Investopedia, a transfer agent handles a host of investor problems, including reissuing lost or stolen certificates, among other responsibilities. Since High Times’ stocks were never publicly traded, this would be the only way for an investor to be assured of their holdings. In February 2022, Vstock said that High Times changed its transfer agent to EQ Shareholder Services. However, one investor stated that the transfer agent services stopped in June. This means shareholders have zero idea where their shares are being held and can’t confirm ownership. And Lucy hasn’t provided any information on who is filling this role.
Ex-Works and debt default: High Times CEO Adam Levin borrowed money from ExWorks to fund his original purchase of the magazine, but he defaulted after neglecting to keep up the payments. High Times Holding Corp. owes ExWorks $28 million, although the Lucy acquisition agreement states that there was an amendment to the forbearance and settlement agreement with ExWorks on Sept. 5. High Times said it provided this information to Lucy but apparently not to the shareholders. The acquisition agreement does state that the debts owed to ExWorks will now be the responsibility of Lucy shareholders.
No revenue: Lucy shareholders are now responsible to pay off High Time’s debts, but Lucy has zero revenue to date. The company claims in the acquisition agreement that High Times revenue will bring in $10 million in 2024. If that were the case, why didn’t High Times pay its own debts? Lucy also said it was also buying Blue Sky Wellness in an all-stock deal valued at $2.5 million, which is expected to add revenue of $20 million in 2024. Why is a company making $20 million selling itself for stock valued at $2.5 million?
Acquisition ratio: Typically in an acquisition, the transfer of shares is a carefully crafted ratio. In the case of High Times and Lucy, all shareholders know is that they will receive 19.9% of Lucy for their shares. High Times does say it has 40,000 shareholders, but never states the amount of outstanding shares – meaning the ratio is impossible to calculate. The company has been printing shares like crazy for years, awarding thousands for compensation, to pay bills, and to pay for acquisitions. At this time High Times shareholders have no idea how many shares of Lucy they will receive.
Pending litigation: The acquisition agreement states that there are no legal proceedings against High Times. However, in April, Green Market Report wrote that Merlin Kaufman sued High Times for reneging on selling the domain name 420.com. That brand name, 420.com is included in the assets being sold to Lucy. There are also lawsuits against the company Moxie Cannabis, also known as MXY Holdings, which High Times acquired in November of last year.
Receiver approval: Since High Times is technically in receivership, it would need received approval for the transaction. To date, the receiver has not responded to our repeated requests regarding High Times.
High Times has a track record of announcing big acquisitions, only to have them quietly go away. It was going to buy the conference companies Spannibus and the Big Industry Show, but neither actually happened. It was going to buy 13 dispensaries from Harvest Health and in the end, only acquired a portion of the planned deal. Its plan to buy Humboldt Heritage also never closed.
Many of these questions were posed to Lucy Scientific’s CEO, but the company hasn’t given any answers as of yet. With so many unanswered questions it isn’t even clear if investors will ever see the true nature of this transaction.
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