Although they've cooled off some, marijuana stocks have been among the hottest issues on the market as a group in recent years.
In an effort to catch a contact high from this buzz, one marijuana-related company with a storied past is attempting to come to the stock market in an IPO that's currently under way. But you should let this one dissolve in its own smoke; here's why.
Time(s) to go public
The company is High Times Holding, and its main asset is the eponymous stoner magazine. Not long ago, the company expanded into other areas such as its famous (to pot cognoscenti, anyway) Cannabis Cup growing competition. It's also acquired related online news outlets such as Culture, a magazine focused on the consumer marijuana scene.
Following the collapse of a plan announced in 2017 to merge with an existing publicly listed entity, Origo, High Times Holding is hoping to go public in a small-scale IPO that would see it ultimately list on the Nasdaq.
It's nice that High Times Holding owns a well-established brand, and that its business has expanded. But there are a host of negatives to the company that would keep me far away from the issue.
A-plus or D-minus?
The first red flag is High Times Holding's previous attempts to go public. Although I was (ahem) somewhat bullish on the initial plan to merge with Origo when I wrote about it last year, in retrospect, it looks dubious. Origo is like a "blank check" company, basically created to park High Times Holding into it.
The proposed High Times Holding/Origo combination didn't feel like such a straightforward way to reach the stock market.
That isn't a straightforward way to go about an IPO; typically, a company wanting to IPO drafts underwriters (usually investment banks) to basically fund the issue, then sell the newly created shares to institutional investors. What's needed for this, of course, is an investment-worthy enterprise that investors would want to put their money in. So this blank check move alone casts suspicion on the enterprise.
As it happened, Origo and High Times Holding weren't able to come together in matrimony. So High Times Holding's plan B is what's known as a Regulation A+ IPO. This can be seen as kind of a micro-IPO, in which a business raises a modest amount of funds by offering shares directly to the public at large, plus institutional investors. The standard IPO, meanwhile, concentrates firmly on the latter.
Initial public disappointment
A read of High Times Holding's offering circular gives us insight as to why. The company has taken on gobs of debt in the hopes of exploiting, in its words, "considerable monetization opportunities [that] present themselves in brand licensing and e-commerce."
That's a fine goal, but the company isn't going anywhere. From full-year 2016 to 2017, revenue dropped slightly (by 1% to just under $14.5 million). The bottom line, whacked with over $4.5 million in interest expense thanks to those heavy borrowings, deepened to almost $22 million in the latter year. The shortfall for 2016 was less than $3 million.
Not surprisingly, it seems High Times Holding is having trouble raising funds through the Regulation A+ IPO -- apparently, only $5.3 million had been raised as of mid-September, according to a report in the New York Post.
The company says it needs to draw in net proceeds of at least $14.7 million in order to be accepted for listing on the Nasdaq. It's currently offering its stock at $11 per share.
Those who might be interested in High Times Holding need to be aware that it's a very speculative investment. It, therefore, carries an extremely high degree of risk; you shouldn't put any money on it that you can't afford to lose.
It's easy to see why High Times Holding would go the IPO route -- any IPO route. There is a lot of money in publicly traded pot. Witness how some of the more popular weed stocks have done since their market debuts:
The major difference between High Times Holding and the trio is that all three have product. In the case of both Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY), these Canadian companies produce and sell medical -- and now recreational -- marijuana. GW Pharmaceuticals (NASDAQ:GWPH), meanwhile, specializes in cannabis-derived medications and was recently granted FDA approval for Epidiolex.
High Times Holdings talks of monetization possibilities. However, branded hats, t-shirts, and water pipes won't excite investors looking at the great potential of Canopy Growth and Tilray selling weed into a freshly legalized market, for example. They also won't impress GW Pharmaceuticals bulls who are encouraged by the company being a pioneer with pot-related medicine.
Actually, it seems by the tepid response to High Times Holding's current IPO effort that not many investors see much potential in it at all. So even if the stock does make its way onto the market, I'd suggest that you allow it to drift away in a soft, wispy cloud.