Nanalyze

The High Times IPO – Skunk Buds or Brick Weed?

It was just a few weeks ago that we sent some of our brightest MBAs over to Europe to explore the recreational cannabis culture over there while trying not to get arrested or deported. Turns out, there aren’t many opportunities for investors over there – yet – and experts say the shortest path is the legalization of medical marijuana. That’s something we’re going to take a look at next, but in the meantime we noticed that High Times has announced plans for an IPO. That may present the closest thing to an investment opportunity for cannabis aficionados outside of Canada (aside from all the OTC stocks that have sprouted up like weeds). It’s also a great opportunity to see inside a pretty unique media business that’s graced our bookshelves since high school. Without further ado, let’s open up this sack and give it a big old sniff.

In their own words, “High Times has been the world’s leading source for daily cannabis news, weed information, and marijuana culture since 1974″. That sounds about right, but digging a bit deeper we see that the digital properties under the “High Times Holding Group” actually consist of two major sites. The first site is of course High Times which began publishing their magazine digitally in 2010 and which sees about 4 million unique users a month. The second property is actually the bigger “Green Rush Daily” which sees about 5 million unique users a month. (To put these numbers into perspective, political commentary / tech news site Tech Crunch gets about 12 million unique visitors a month.) In terms of market penetration, High Times estimates that about 30 million Americans puff the magic dragon so they still have some room to grow.

While this all sounds cool on paper, digging deeper into their IPO Filing shows things aren’t all that great. They’re looking to raise about $50 million and that’s mainly because they’ve been burning through some serious cash. From January 1, 2015 through September 30, 2017, they incurred net losses of over $19 million which may explain why they now have about $46.5 million in debt on their books. That debt also includes some “unpaid executive compensation and professional fees” which doesn’t bode well for employee morale. Things may be tight because as of the filing date, they had just $94,000 in cash on hand.

The goal of the IPO is to use all that cash to retire debt and leverage the High Times brand to begin selling merchandise. They own a pretty solid domain from which to sell said products (www.420.com) and that seems like a good plan considering their web properties are just not that lucrative. (As we are finding out the hard way, hiring a bunch of overpriced MBAs to write incredibly insightful articles on technology investing – and giving said articles away for free – isn’t the quickest way to build wealth.) The real money for High Times comes from their events like the High Times Cannabis Cup which takes place all over now, not just in Amsterdam:

These are events that have been held since 1988 and largely revolve around everyone putting up their best skunk in a competition that ultimately gives you a whole lot of bragging rights for your brand. High Times hosted four events in 2016 and 22 events in 2017, including nine Cannabis Cup events. They intend to aggressively increase the number of events they’re holding (that’s where 68% of their revenues came from in 2016). For the first 9 months of 2017, events brought in $9.68 million in revenues with a gross profit of $1.78 million. This might be a good time to crack open the financials which are as follows (note 2017 numbers are just for first 9 months):

If we just crunch some very basic numbers here, we can see that while revenues for events make up 77% of total revenues for High Times Group, the gross profit for events ($1.78 million) is actually less than the gross profit for publishing and print advertising ($1.87 million). Then of course you need to track on the operating expenses which are where things start to go south. Just the “general and administrative” costs alone are enough to remove any possibility of a profit. They’ll need to try and reduce these costs or increase event revenue a lot in order to return to profitability. In case you’re wondering about the huge jump in “professional fees”, that’s largely the result of  “a non-recurring non-cash stock compensation charge” which is just another way of saying that this is a one-time operating expense.

There’s some other convoluted stuff going on that’s not really worth getting into but that makes the High Times Group S-1 filing a bit more difficult to read. In order to make this whole IPO thing happen, they’re doing a reverse merger of sorts which they refer to as the “Origo Merger”. That’s mentioned throughout the document along with their senior lender, Ex Works, with which they have an outstanding loan with some pretty nasty terms – like an interest rate of 15%. Let’s just say that if they don’t make this IPO happen, things could get quite ugly for High Times Group. Then of course there is the political risk associated with the industry they are in (the Keebler Elf factor as one of our MBAs calls it) and also some online competition that’s worth noting.

Ever since marijuana started becoming legalized, everyone and his brother has climbed on the band wagon and decided to write articles about weed. Yes, we did as well, largely because there seems to be a void in voices that educate potential “marijuana investors” about all the pitfalls out there. (If you want to get rich, there are far better ways than punting on marijuana stocks as we’ve pointed out many times before.) Some of the names that High Times lists as competitors include Cannabis Culture, Skunk Magazine, Kush Magazine and 420 Magazine. Sure, there may be an opportunity for some consolidation through acquisition, but as we said before it’s tough to eek out a decent business these days in the world of online publishing.

So after opening up the High Times IPO and taking a big sniff, it’s hard to believe it contains pungent smelling skunk buds. There are far more seeds and stems in that bag than we like so we’ll pass. With that said, the amount of irrational exuberance we’ve seen around the whole marijuana theme has been mind boggling. Just be aware that if this IPO happens and the stock price jumps 100% on opening day, that’s not indicative of future performance. The High Times Holding Group has a long road ahead of them if they hope to get out of the red and into the black by both increasing revenues and decreasing costs, all while making sure they continue paying interest on all that debt they’ve accumulated.

If the IPO goes through, it will trade under the ticker HITM. You’ll need to open a brokerage account if you want to buy shares once it begins trading.

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