Exclusive article by Alan Brochstein, CFA
Earlier this month, Hightimes Holding Corp., parent of High Times, revealed that it has abandoned its efforts to list on the NASDAQ, a goal it had been pursuing for since mid-2017. The company launched an offering two years ago at $11 per share through the Reg A+ process, and it reported that it would extend its Reg A+ capital raise until 4.545 million shares had been sold or until March 31st. It disclosed in an SEC filing that it recently sold 363,636 shares at $5.50 in a private placement to Ontario-based Rayray Investments (Raymond Leach, an original investor in MedReleaf), a 50% discount to where it has been selling shares.
In a shareholder letter released yesterday, Executive Chairman Adam Levin suggested that the company will continue to raise capital through the Reg A+ offering while it awaits a listing on the OTCQX rather than the NASDAQ. He admitted that the path to public trading had fallen short of the company’s expectations:
Our largest misgiving is that High Times had hoped to be public by now. But given the market’s volatility in the cannabis sector, we also believe this may have been a blessing in disguise for our company and shareholders alike. We are now more focused and realigned.
Hightimes Holdings
We spent this past year building our new corporate strategy, which we are excited to share. Ultimately, we believe we have found the best way to leverage our global brand and content engine to power the next steps in High Times’s evolution.
Indeed, the company has shifted its strategy to become more plant-touching. It had highly praised its new CEO, media veteran Kraig Fox, when he joined as CEO in early April, but Fox left the company on December 26th. Earlier this month, it named Stormy Simon, former President of Overstock.com, as CEO, “as the company prepares to develop its physical and virtual distribution businesses.” Traditionally, the company has focused on events and media. Simon had served on the Board of Directors of Hightimes Holding Corp. for the past two years. Simon will earn a base salary of $300K per year, though it will be reduced to $215K until the company raises an additional $10 million, with the difference accrued. Her target bonus in 2020 is $225K. She was also granted the right to buy 200 shares at $11.00 and 300K shares as a grant.
On January 16th, the company announced the addition of Paul Henderson, formerly CEO of Grupo Flor, as President. Henderson will also serve as interim CFO, as CFO David Newberg had resigned on January 7th. The company also announced binding letters of intent with holders of dispensary licenses in Las Vegas and Los Angeles that will allow the company to be a cannabis retailer. Henderson’s compensation includes a salary of $300K, an annual targeted bonus of $300K, a grant of 300K shares and an option to acquire 200K shares at $11.00.
While the shift in business strategy towards being a direct cannabis company certainly precludes the company from listing on the NASDAQ, the company wasn’t eligible in any event. Its corporate presentation reveals that the company has raised only $15 million, far short of its goal two years ago to raise $50 million.
We have written extensively about the weak financials of the company in the past, and there has been no improvement. As of mid-2019, the last time it published its financials publicly, six-month revenue was just $10.7 million, with its event business declining while its publishing business expanded following the acquisitions of Dope and Culture magazines. The operating loss in the first half of the year more than doubled to $11.3 million as it used $6.1 million to fund its operations. Capital raising, at $5.5 million, fell short of its use of cash to run its operations during the first half of 2019. The company saw its shareholders equity decrease from -$39.1 million at the end of 2018 to -$44.3 million at mid-year. Its cash balance was just $12K, and its current liabilities were almost 3X its current assets, painting a clear sign of liquidity issues ahead absent more aggressive efforts to raise capital.
As of December 31, the company had 24.85 million shares outstanding and 33.67 million potentially dilutive securities (before incorporating the recent equity sale and the grants to Simon and Henderson). At $11.00, where the company has been selling its stock, the market-cap on a fully-diluted basis, exceeds $650 million, a valuation that doesn’t seem defensible, especially in light of on-going capital raises ahead that will be necessary to fund the new growth initiatives of retail stores and delivery services.