The Wolf of Wallstreet, Martin Scorsese's 2013 biographical dark comedy, is one of the best Hollywood films from the last decade. One scene in particular shows Jordan Belfort, the movie's protagonist, who after losing his job as a broker at Rothschild, attends a job interview at a boiler room where he has to push a junk stock.
"Who buys this crap - honestly mostly schmucks."
High Times (HITM), founded in 1974 as a monthly print cannabis magazine, describe themselves as the "original voice in cannabis." The company has about 40 employees working from offices in New York and Los Angeles. So while not a cutting edge hi-tech firm out of the Midwest, buying into the High Times IPO very much carries substantial outsized risk. It would be prudent for potential investors to exercise more care.
The company's Reg A+ IPO can really only be a success if it garners a huge volume of retail investors who lack the ability to analyze financial statements or at the very least complete due diligence beyond the heavily filtered and pre-packaged High Times crowdfunding pitch. Everything about this company from the method it is trying to go public, its financials and its competitive positioning are toxic.
Regulation A+ Democratized A Systematic Destruction Of Investor Wealth
Title IV of the 2012 Jumpstart Our Business Startups (JOBS) Act substantially lowered the regulatory barriers for companies trying to go public. Regulation A+ allowed for small and medium-sized companies to raise money from crowds of non-accredited investors. This essentially democratized to main street the exclusive world of investing in private companies and IPOs.
Seven of the eight companies that went public in 2017 through Reg A+ are on average trading on 42% lower than their offer price. Indeed, writers for Barron's, Alpert, Arends, and Walsh, confidently state most mini-IPOs fail the market test. They lament on the brutal reality of the JOBS Act five years on, as "instead of new jobs and new industries, we've gotten GoFundMe-style websites hawking penny stocks and professional wrestlers shilling shares on TV."
Screenshot from the High Times offering page promising cannabis merch for a $1,100 investment
This systematic destruction of wealth is even sadder against a backdrop of the longest stock market bull run in history. The inherently destructive predisposition of Reg A+ IPOs could not be clearer.
'Nanalyze' headline an article detailing their Reg A+ analysis with a warning, "Why Regulation A+ IPOs Should Be Avoided". They further state that "these Regulation A+ IPOs are not of the caliber that serious institutional investors would be interested in, thus the need to try and raise capital from non-accredited investors". Matthew Smith, CEO of Royalty Exchange, an online platform for buying and selling royalty assets of any type, states "Reg A+ has failed both investors and startups". Wathen, writing for The Motley Fool, states the worst IPOs of 2017 all shared the same trait of raising money through Reg A+. He advises investors who want to avoid the worst IPOs to "write off Reg A+ IPOs in wholesale."
Again, the verdict could not be clearer, Reg A+ has created a route for highly unpleasant companies, some with nefarious backgrounds, to effectively destroy the wealth of naive mom and pop investors, the American middle class. Some of whom were unfortunately baited in by celebrity endorsements paid for by these companies, as was the case with Adomani and wrestler Bill Goldberg. The SEC’s enforcement division has urged investors to exercise caution over stocks that pay celebrities for endorsements. And while there is no evidence High Times have paid any celebrity to endorse their IPO, it concerning nonetheless that Cheech Marin from Up in Smoke, the 1978 cult film that also stars Tommy Chong, can be seen in a video tweet promoting the High Times IPO.
A Suboptimal CEO, The Bebo Disaster, And Bankruptcy
High Times was acquired in March 2017 by a syndicate of investors led by Adam Levin's Oreva Capital, described on Crunchbase as a boutique private equity firm. The syndicate paid over $42 million for a 60% controlling stake, valuing the magazine at $70 million. A few months later in July and High Times announces its intention to go public through a merger with Origo Acquisition Corporation, a special purpose acquisition company (SPAC) listed on the NASDAQ stock exchange. They try to do so at a value of $250 million, 3.6x the valuation from just a few months ago.
The announcement made in a 27 July 2017 SEC filing, stated Origo will acquire 100% of the equity of High Times in exchange for 23,474,178 newly-issued shares of Origo. And that the transaction "is subject to approval by shareholders of High Times and Origo and other customary closing conditions." This path to go public failed after months of delay, leading High Times to go with the Reg A+ route and Origo to get delisted from Nasdaq. In the 23 February 2018 notice of its delisting, Origo cites "failure to complete the proposed merger with High Times" ultimately leading to non-compliance with the Nasdaq listing rule for SPACs to close an acquisition within 36 months of its IPO.
On the 1st February 2012, now High Times CEO sent out a tweet, "Bebo isn't going anywhere! Long Live Bebo!". This was in his capacity as CEO of Bebo, a social networking site, which at the peak of its popularity, in 2007, was more popular than MySpace and Facebook in the UK and Ireland. This led to AOL to acquire the company for $850 million in 2008, ultimately offloading it to a group of investors led by Adam Levin's Criterion Capital Partners in 2010 for $10 million.
The Bebo homepage in April 2010
"AOL Broke Bebo, This Man Is Fixing It" read the March 1, 2011, Business Insider interview with Levin. In which he discusses turning around the dying site and making it "cash flow positive." Just over a year later and Bebo shareholders, part of the group that had acquired the site from AOL in 2010 had filed a $5 million lawsuit against Criterion Capital and Adam Levin.
The front page of the Bebo shareholder suit
Adam Levin is accused of "fraudulent" behavior, failing to hold a single board meeting in 20 months of operations, and withholding Bebo's financial statements from shareholders, despite claiming the company was cash flow positive. Cutler, writing for TechCrunch provides further detail on the lawsuit's progression. Levin had allowed the company default on its San Francisco office lease, resulting in its eviction. He had also failed to pay Bebo's review fees to operate as a registered company in Australia, moved the company to Los Angeles without consulting the board, and paid himself $14,000 a month as CEO even though he wasn’t working full-time at the company. Adam Levin, commenting on the lawsuit in 2012, states "We believe this to be a baseless claim and amounts to a fishing expedition." We have attempted to contact both Mr Levin and Criterion Capital for further comments on the lawsuit and fraud allegations but have not received a response.
On May 10, 2013, TechCrunch reports that Bebo filed a voluntary petition for Chapter 11 Bankruptcy in the Central District of California.
A Really Bad Deal On The Back Of Retail Investors
High Times is attempting to sell 4,545,454 shares of their class A common stock for up to $50 million, at an offering price of $11 per share. On their crowdfunding page, the company informs potential investors that they don't need a brokerage account to buy shares and they just need to meet the $99 investment minimum. To an extent, both these factors underlie a virgin investor base without the financial knowledge to adequately analyze an offering circular.
High Times is attempting its Reg A+ IPO at a $225 million valuation. This gives the company a P/S of 15.54 from its financial year (FY) 2017 revenue. This is a stratospheric price to pay for a company that has been operating for over forty-four years and realized a year-over-year revenue decline.
Source: High Times Offering Circular
The company also saw a net loss of $24.7 million in the 2017 FY and a cash burn of $7.7 million during the same year. High Times' financial position has also faced a material deterioration since its acquisition by Oreva capital. The working capital deficit at the end of the 2017 FY was $29.5 million, up from a deficit of $3.86 million a year ago. The pace of this deterioration has also ramped up as the results for the first quarter of 2018 show a 65% collapse in total revenue.
Source: High Times Offering Circular
Against these precarious financials, it is not prudent for Adam Levin, featuring in a video to promote the Reg A+ offering, to describe High Times as "the Amazon of Cannabis" (00:47) which offers prospective investors a "once in a lifetime opportunity to get in early (03:14)."
However, the most damning characteristic of this IPO and the fundamental reason for describing the company as toxic is the extent of its indebtedness.
The offering circular risk factors flags "a significant portion of the gross proceeds of up to $12.5 million will be used to pay accrued and unpaid accrued interest on outstanding purchase notes". This led the company's auditors to flag a "going concern" risk following the audit of its 2015, 2016 and 2017 financial statements. The company owes $13 million to ExWorks Capital Fund I, L.P. ("ExWorks"), their senior lender, with interest payable monthly at 15% per annum. ExWorks is also entitled to an additional fee of $2.8 million when the loan matures on February 28, 2020.
High Times is also obligated through its debt covenants to maintain a 1:1 ratio of funded debt to average total cash and cash equivalents starting from February 28, 2019. The collapse in revenue and subsequent increase in losses in the first quarter of 2018 puts the ability of the company to meet these covenants in doubt. The company states that a failure to maintain their "financial covenants would represent an event of default which may also cause ExWorks to foreclose on our assets prior to the maturity date of the loan."
A Dying Print Publication And Subpar Events Company
As evidenced by its $57.2 million in contractual obligations and the consecutive year-over-year decline in revenue from both "Festivals, events, competition" and "Publishing and advertising", High Times is a dying print publication and subpar events company, at best. Further, the company's comparatively low rate of engagement with its followers on its Instagram platform dampens its claims as a "driving force" of the cannabis industry.
Chart created from Phalanx.com
With Adam Levin, who has moved the High Times headquarters from New York to Los Angeles because "it is closer to his house", as CEO, potential High Times shareholders are taking on significant agency risk. They have placed their wealth at the helm of an individual with a history of failure.
MedMen "Forget Stoner" campaign
High Times is a relic from an era of cannabis most companies within the space want to move on from. The company itself presents a unique set of risks that should be worrisome to any potential investors.
Disclosure: I/we 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 Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.