Investing in High Times: Puff or Pass?
High Times, the OG of cannabis culture and, more recently, a leading producer of events such as the Cannabis Cup, announced its sale last year to L.A.-based private equity firm Oreva Capital. The deal valued the parent company, Hightimes Holdings, at $70 million.
If a recently announced private investment offering comes through, members of the public can soon invest in High Times at a price that values the company in excess of $340 million.
While the preliminary prospectus, filed on January 25th, hasn’t cleared the SEC yet, the deal, which has been structured as a Regulation A+ (Reg A+) offering, will be open to almost anyone.
Let’s dive in and consider the pros and cons.
More Than a Magazine
While most people are familiar with the magazine, which has published monthly since 1974, High Times also includes the Cannabis Cup and a digital publishing division.
In the first nine months of 2017, the company’s events division represented 78% of total sales revenue, while most of the balance came from publishing.
How the Deal Works
Reg A+ is a relatively new type of offering that permits private companies to raise up to $50 million from the public.
Reg A+ offerings allow a private company to raise up to $50 million from the general public, including non-accredited investors.
Unlike most private placements, Reg A+ doesn’t require investors to be “accredited,” a term that means the investor has a verified annual income in excess of $200,000 or a net worth in excess of $1 million.
In the case of Reg A+ offerings, anyone can invest up to 10% of their annual income or net worth. A company that raises capital through Reg A+ remains private, and this is perhaps a precursor to High Times trading publicly in the event its pending acquisition by Origo Acquisition, which the company expects to complete before April 2018, fails to close.
Hightimes Holdings is offering up to 4.545 million shares at $11 per share, with a minimum of $5 million. If the company raises $50 million, it will receive $43-44 million after $4 million in commissions and $2-3 million in expenses. Hightimes Holdings suggests that it will list potentially on the NASDAQ with the symbol “HITM”, or, if not accepted, on the OTC, but there is no assurance that investors will end up owning a public company.
What do the financials look like? High Times has experienced slow revenue growth and large operating losses. Its balance sheet shows substantial debt relative to its assets.
Growth in revenue from events like Cannabis Cups offset declining publishing sales in 2017.
Sales in 2016 fell 19% to $14.6 million, and the $12.46 million in sales in the first three quarters of 2017 was up only 0.5% over the same period in 2016. In fact, publishing sales declined during that period by 20%, with the growth in events revenue offsetting it.
The company is bleeding red ink as well. In the first nine months of 2017, it posted an operating loss of $9.4 million, compared to a loss of $2.8 million over the same period in 2016. To be fair, the 2017 loss would have been $2.7 million were it not for a one-time charge related to compensation, but the company is far from profitable nonetheless.
High Times is burdened with debt, a lot of it related to the acquisition last June. The $42 million investment from Oreva Capital was funded with only $12 million; the balance was debt. The company lists total debt of $46.55 million as of September 30, 2017, with over $22 million due by 2018. Assets at that time were $3.5 million, including cash and investments of $1.1 million. In the first nine months of 2017, High Times used $4.76 million to fund its operations, so the near-term liquidity is very poor.
The number of shares outstanding, if the company sells all of the shares offered, including the conversion of certain debt obligations and all stock options, would be 31.17 million shares. That means the Reg A+ investors would be investing at a valuation of $343 million, which is likely more than 20 times annual sales. This is a valuation typically reserved for fast-growing startups.
It’s difficult to find relevant comparisons, but World Wrestling Entertainment, for example, which derives revenue from live events, trades at about 3 times sales as a public company. By comparison, two slower-growing legacy media companies, Entravision and Scripps, trade at 2.3X sales and 1.1X sales, respectively.
Even adjusting for the repayment of debt, the number of shares would be 28 million on a fully diluted basis, suggesting a valuation of $308 million. In order to justify awarding such a high valuation, an investor would likely need to expect sales in the next few years to be sharply higher and producing considerable profits. The preliminary prospectus indicates that there has been no review by independent professionals to “protect the interest of the investors.”
One red flag highlighted above is the amount of debt. Potential investors in the company should be aware that a portion of the capital raise will be dedicated to paying it off. In other words, the new investors in Hightimes Holdings will be, in effect, paying off the bet placed by the previous investors. In the event the company doesn’t raise enough money and isn’t successful in extending the maturity date, the holders of the debt have the ability to foreclose on all the assets of the company.
Many competitors have entered the cannabis media space in the last five years.
A second area of concern is that the company has so little revenue from outside the United States—just 4% during the first three quarters of 2017. The company recorded zero revenue from outside the US in 2016. High Times has squandered an opportunity to extend its brand globally and doesn’t appear to have a plan to address it.
Additionally, the vast majority of sales revenue (78%) comes from its events, which have a low barrier to entry and are vulnerable to shut-down actions or restrictions from local municipal authorities. These events are geared towards a certain demographic that likely doesn’t represent the future growth of the cannabis industry, and it’s not clear that High Times will be able to cater to a broader demographic.
Finally, the cannabis-focused B2C media is extremely competitive and getting more crowded. High Times faces stiff competition from publishers like Merry Jane, Green Flower, Herb, Leafly, Dope Media, Culture, Sensi and others that are focused solely on cannabis. Lifestyle media companies like Civilized and Fresh Toast also have a strong cannabis focus within their broader perspective.
The Positive Spin
While the current financial situation looks challenging, with additional capital the company could shore up its balance sheet and invest in growth initiatives.
New management has shared a growth strategy that involves more Cannabis Cups and other events, expanding its digital publishing to sell cannabis-related products, and selling more branded merchandise. While this doesn’t sound especially promising, the company has been poorly managed for many years, and new management should be able to improve its operations.
Bottom line: Investors may soon have the opportunity to own a piece of High Times, a well-known brand but a company that hasn’t been successful in recent years. It appears to be financially challenged, but a successful capital raise and changes implemented by new management could improve its prospects.
Before investing, all interested parties should read the prospectus and understand the risks, of which there are some substantial ones.
Next up: Canadian cannabis producers have captured investor interest ahead of legalization. I will help break down the 27 publicly-traded companies that are licensed by Health Canada.