253G2 1 partii.htm

 

Offering Circular Supplement No. 1 Filed pursuant to Rule 253(g)(2)
To the Offering Circular dated July 26, 2018 File No. 024-10794

 

HIGHTIMES HOLDING CORP.

 

 

This Offering Circular Supplement No. 1 (the “Offering Circular Supplement”) supplements our Offering Circular dated July 26, 2018 (the “Offering Circular”), which forms a part of our Offering Statement on Form 1-A (SEC File No. 024-1-0794) relating to the offer and sale by us of up to 4,545,454 shares of our Class A voting common stock (the “Common Stock”) at a purchase price per share equal to $11.00 (the “Offering”). As at the date of this Offering Circular Supplement, we have sold an aggregate of 1,382,458 shares of our Common Stock and, following the date of this Offering Circular Supplement, we intend to continue to offer and sell additional shares of Common Stock until the first to occur of (a) June 30, 2019, (b) the sale of all 4,545,454 shares, or (c) our election to terminate the offering prior to June 30, 2019.

 

There has been no public trading market for the Common Stock. Upon completion of the Offering, we will attempt to have the shares quoted on either the OTCQX or OTCQB, each operated by OTC Markets Group, Inc. (collectively, the “OTC”), subject to our satisfaction of applicable listing requirements. There is no assurance that the shares of Common Stock will ever be quoted on the OTC. To be quoted on the OTC, a market maker must apply with the Financial Industry Regulatory Authority (“FINRA”) to make a market in our Common Stock. As of the date of this Supplement, we have engaged in discussions with a FINRA market maker regarding participation in a future trading market for our securities; and have made filings with FINRA. However, we have not, as yet received final FINRA approval.

 

Recent Developments

 

This Offering Circular Supplement is being filed to update, amend and supplement the information in the Offering Circular with the information contained in our Annual Report on Form 1-K filed with the Securities and Exchange Commission (the “Commission”) on May 20, 2019 (the “Annual Report”). Accordingly, the Annual Report and this Offering Circular Supplement will be available to potential investors on our website at www.hightimes.com/invest. Any statement contained in the Offering Circular shall be deemed to be modified or superseded to the extent that information in the Annual Report or this Offering Circular Supplement modifies or supersedes such statement. Any statement that is modified or superseded shall not be deemed to constitute a part of the Offering Circular except as modified or superseded by the Annual Report and this Offering Circular Supplement.

 

This Offering Circular Supplement should be read in conjunction with, and may not be delivered or utilized without, the Annual Report and Offering Circular, including any amendments or supplements to it.

 

Investing in our Common Stock involves risks. See “Risk Factors” beginning on page of the Offering Circular.

 

GENERALLY, NO SALE MAY BE MADE TO YOU IN THIS OFFERING TO THE EXTENT THAT THE AGGREGATE PURCHASE PRICE YOU PAY IS MORE THAN 10% OF THE GREATER OF YOUR ANNUAL INCOME OR NET WORTH. DIFFERENT RULES APPLY TO ACCREDITED INVESTORS AND NON-NATURAL PERSONS. BEFORE MAKING ANY REPRESENTATION THAT YOUR INVESTMENT DOES NOT EXCEED APPLICABLE THRESHOLDS, WE ENCOURAGE YOU TO REVIEW RULE 251(D)(2)(I)(C) OF REGULATION A. FOR GENERAL INFORMATION ON INVESTING, WE ENCOURAGE YOU TO REFER TO WWW.INVESTOR.GOV.

 

THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES OF COMMON STOCK ONLY IF YOU CAN AFFORD THE COMPLETE LOSS OF YOUR INVESTMENT. PLEASE REFER TO ‘RISK FACTORS’ BEGINNING ON PAGE 4 OF THE OFFERING CIRCULAR.

 

THE COMMISSION DOES NOT PASS UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION MATERIALS. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

 

The date of this Offering Circular Supplement is May 31, 2019

 

 

 

   

 

 

Filed pursuant to 253(g)(2)

File No. 024-10794

 

 

4,545,454 SHARES OF CLASS A COMMON STOCK

 

 

$50,000,000

 

This is an initial public offering (the “Offering”) of shares of voting Class A Common Stock, par value $0.0001 (the “Class A Common Stock”) of Hightimes Holding Corp., a Delaware corporation (which we refer to as “Hightimes Holding,” the “Company,” “we,” “our,” and “us”). We are offering the Class A Common Stock, at an offering price of $11.00 per share (the “Offering Price”). A minimum of 454,545 shares of our Class A Common Stock (the “Offered Shares”) for $5,000,000 (the “Minimum Offering”) and up to 4,545,454 shares of our Class A Common Stock for up to $50,000,000 (the “Maximum Offering”) are being offered for sale. A Form 1-A Offering Statement of which this Offering Circular is a part (the “Offering Statement”) was qualified by the U.S. Securities and Exchange Commission (which we refer to as the “SEC” or the “Commission”) on March 12, 2018, as amended and further qualified by the SEC on July 26, 2018. Through April 30, 2019, at which time we paused the Offering, we have sold an aggregate of 1,382,458 shares of our Class A Common Stock, which is in excess of the Minimum Offering and, to date, have received, accepted, and closed on an aggregate of $15,207,458 of gross proceeds, representing the sale of 1,382,458 shares of Class A Common Stock to approximately 23,197 stockholders.

 

This Offering Circular Supplement to the July 26, 2018 Offering Statement and related Offering Circular  is being filed with the SEC to (a) include our audited financial statements for the fiscal year ended December 31, 2018, and (b) update and incorporate other material disclosures that were previously included in filings with the SEC on Form 1-U. On May 20, 2019, we also filed with the SEC our annual report on Form 1-K (the “2018 Annual Report”) which includes much of the same disclosures set forth in this Offering Circular Supplement. As a result of our inability to file our 2018 Annual Report by April 30, 2019, we suspended selling our shares of Class A Common Stock on April 30, 2019. We filed our 2018 Annual Report with the SEC on May 20, 2019 and now expect to immediately commence the offer and sale of the Offered Shares and intend to continue selling our shares of Class A Common Stock under our Offering until as late as June 30, 2019 (the “Termination Date”).

 

All of our shares of Class A Common Stock are being offered on a “best efforts” basis pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings. We intend to continue selling our shares of Class A Common Stock up to as late as the Termination Date and intend to hold additional closings of the balance of the maximum 4,545,454 Offered Shares. Prime Trust, of 2300 West Sahara, Suite 1170, Las Vegas, NV 89102, has been and will continue to serve as the escrow agent in this Offering. The minimum subscription that investors may make for the Offering Share is nine shares for $99.00. Subscriptions may be made by either check, wire, credit card or ACH deposits. Checks should be made payable to Prime Trust, as escrow agent for Hightimes Holding Corp.

 

The shares of Class A Common Stock are being offered directly by the Company and its management on a “best efforts” basis. No commissions or other compensation will be paid to Company management with respect to sales initiated by them.

 

On March 27, 2018, the Company engaged NMS Capital Advisors LLC, a registered broker/dealer, as its managing selling agent (the “Selling Agent”). The Selling Agent may engage one or more sub-selling agents or selected dealers. However, under the terms of its engagement agreement with the Company, neither the Selling Agent nor any sub-selling agent shall have any marketing or sales obligations other than to process indications of interest forwarded to the Selling Agent or sub-selling agents by the Company or its management. The Selling Agent is not purchasing any of the shares of Class A Common Stock being offered by the Company in the Offering and is not required to sell any specific number or dollar amount of such shares in the Offering. Under the terms of its engagement agreement with NMS Capital Advisors, the Company has agreed to pay the Selling Agent a commission and fee equal to 3% of all gross proceeds received by the Company in the Offering in consideration for the Selling Agent’s commitment to process orders on behalf of the Company and its management. However, in the event and to the extent that the Selling Agent or any sub-selling agent sells shares of Class A Common Stock in the Offering directly to its clients or customers (“Direct Sales”), the Company has agreed to pay selling commissions on such Direct Sales equal to 7% of the gross proceeds the Company may receive from such Direct Sales of the Offered Shares. The Selling Agent and participating broker-dealers, if any, and others shall be indemnified by the Company with respect to the Offering and the disclosures made by the Company in its Form 1-A and related Offering Circular.

 

   

 

 

Prior to this Offering, there has been no public market for our Class A Common Stock. The Company expects to have our shares of Class A Common Stock initially quoted for trading on the OTCQX Market or the OTCQB Market under the symbol “HITM.” There is no assurance that the shares of Common Stock will ever be quoted on the OTC. To be quoted on the OTC, a market maker must apply with the Financial Industry Regulatory Authority (“FINRA”) to make a market in our Common Stock. As of the date of this Supplement, we have engaged in discussions with a FINRA market maker regarding participation in a future trading market for our securities; and have made filings with FINRA. However, we have not, as yet received final FINRA approval. In the future, we intend to apply to uplist our Class A Common Stock on the NASDAQ Capital Market (“NASDAQ”) as soon as we become eligible. However, in order to meet the minimum initial listing requirements to list our Class A Common Stock on NASDAQ, we will need to receive a minimum of approximately $15,000,000 of equity capital, either from the net proceeds of this Offering and/or from the sale of additional shares of Class A Common Stock in a subsequent private or public offering. For further information, see “Plan of Distribution –Trading Market and Proposed Exchange Listing” on page 91 of this Offering Circular.

 

We are offering our Offered Shares in this Offering based upon a valuation of our Company and its subsidiaries of $225,000,000 prior to this Offering. The $225,000,000 valuation of our currently outstanding shares of Class A Common Stock and the $11.00 per share Offering Price of the Class A Common Stock has been arbitrarily determined by the management of Hightimes Holding and is not based on book value, assets, earnings or any other recognizable standard of value.

 

In order to finance a portion of the purchase price to acquire our subsidiary Trans-High Corporation, a New York corporation (“THC”), in February 2017, issued to the former owners of THC an aggregate of $30,000,000 of convertible notes (the “Purchase Notes”), granted our senior secured lender a warrant to purchase 2.75% of our Class A Common Stock “Deemed Issued” prior to this Offering at an exercise price of $0.01 per share and in February 2018, issued to such lender a second warrant to purchase an additional 2.25% of our Class A Common Stock Deemed Issued prior to this Offering at an exercise price of approximately $5.47 per share. Prior to December 31, 2018, we paid $1,500,000 of principal on the Purchase Notes, an aggregate of $16,875,000 of such Purchase Notes (representing a 25% discount to $22,500,000 in Purchase Notes) were converted into 1,534,091 shares of our Class A Common Stock, we issued a $3,046,098 one year note to such former Purchase Note holders, and the principal amount of such Purchase Notes will be converted into an aggregate of 276,909 additional shares of our Class A Common Stock at such time as our Class A Common Stock is quoted for trading or listed on the OTCQX Market or other securities exchange. In addition, on June 4, 2018, our senior secured lender agreed that upon the first to occur of the completion of this Offering and listing of our Class A Common Stock on NASDAQ, the OTC Market or the Canadian Securities Exchange, that it would exercise both warrants to purchase a total of 1,289,789 shares of our Class A Common Stock and pay an average weighted exercise price of $2.359 through a $3,042,612 reduction of the outstanding principal amount senior secured promissory note owed by us and our consolidated subsidiaries to such lender.

 

Hightimes Holding is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”) and, as such, may elect to comply with certain reduced reporting requirements for this Offering Circular and future filing after this Offering. Following this Offering, Hightimes Holding will be a “controlled company” within the meaning of the corporate governance rules of NASDAQ. See “The Transactions” and “Management—Corporate Governance.”

 

   Price to
Public
  

Maximum

Commissions (1)

   Proceeds to
Issuer (2)
 
Shares Offered by Company            
Per share:  $11.00   $0.77   $10.23 
Total Minimum:  $5,000,000   $350,000   $4,650,000 
Total Maximum:  $50,000,000   $3,500,000   $46,500,000 

 

1 Under the terms of our engagement agreement with NMS Capital Advisors, we have agreed to pay the Selling Agent a commission and fee equal to 3% of all gross proceeds of this Offering in consideration for their processing orders on behalf of the Company and its management. However, to the extent that the Selling Agent or any sub-selling agent directly sells Offered Shares to their clients or customers (“Direct Sales”), we have agreed to pay selling commissions on such Direct Sales of 7% of the gross proceeds we may receive from such Direct Sales of Offered Shares. The Selling Agent will receive no warrants or other securities as compensation for its services to the Company, and the maximum aggregate compensation to the Selling Agent, including reimbursement of its expenses, will not exceed 7% of the gross proceeds of this Offering. The Selling Agent and participating broker-dealers, if any, and others may be indemnified by us with respect to this offering and the disclosures made in this Offering Circular. See “Risk Factors” and see “Plan of Distributionfor additional information regarding the Selling Agent’s compensation.

 

   

 

 

2 Does not include expenses of the Offering, including but not limited to fees and expenses for marketing and advertising of the Offering, media expenses, fees for administrative, accounting, audit and legal services, FINRA filing fees, fees for EDGAR document conversion and filing, and internal website posting costs we will incur, estimated to be in excess of $3,000,000, depending on the funds raised and the term of the Offering. In consideration for Fund America providing its web hosting platform and related services and its affiliate Prime Trust, LLC acting as escrow agent for the $5,000,000 Minimum Offering, Hightimes Holding will pay fees to Fund America and Prime Trust equal to approximately three-quarters of 1.0% of the gross proceeds received from this Reg A+ Offering, up to a maximum amount not to exceed $250,000.

 

THE CLASS A COMMON STOCK OFFERED HEREBY IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. INVESTORS SHOULD NOT INVEST ANY FUNDS IN THIS OFFERING UNLESS THEY CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE “RISK FACTORS” FOR A DISCUSSION OF CERTAIN RISKS YOU SHOULD CONSIDER BEFORE PURCHASING ANY SHARES IN THIS OFFERING.

 

THE U.S. SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION MATERIALS. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

 

The following would apply until we are able to obtain a listing on NASDAQ or other national securities exchange; in which event we will seek for our Class A Common Stock to trade on a platform of the OTC Markets:

 

GENERALLY, IF YOU ARE NOT AN ACCREDITED INVESTOR, NO SALE MAY BE MADE TO YOU IN THIS OFFERING IF THE AGGREGATE PURCHASE PRICE YOU PAY IS MORE THAN 10% OF THE GREATER OF YOUR ANNUAL INCOME OR NET WORTH. DIFFERENT RULES APPLY TO ACCREDITED INVESTORS AND NON-NATURAL PERSONS. BEFORE MAKING ANY REPRESENTATION THAT YOUR INVESTMENT DOES NOT EXCEED APPLICABLE THRESHOLDS, WE ENCOURAGE YOU TO REVIEW RULE 251(d)(2)(i)(C) OF REGULATION A. FOR GENERAL INFORMATION ON INVESTING, WE ENCOURAGE YOU TO REFER TO www.investor.gov.

 

This Offering Circular contains all of the representations by us concerning this Offering, and no person shall make different or broader statements than those contained herein. Investors are cautioned not to rely upon any information not expressly set forth in this Offering Circular.

 

This Offering Circular follows the disclosure format prescribed by Part I of Form S-1 pursuant to the general instructions of Part II(a)(1)(ii) of Form 1-A.

 

 

NMS Capital Advisors LLC

433 North Camden Drive, 4th Floor, Beverly Hills, CA 90210

 

The date of this Offering Circular is May 31, 2019

 

   

 

 

TABLE OF CONTENTS

 

  Page
   
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 1
OFFERING CIRCULAR SUMMARY 2
THE OFFERING 20
RISK FACTORS 22
USE OF PROCEEDS 44
DILUTION 46
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS 48
OUR BUSINESS 58
DIRECTORS, EXECUTIVE OFFICERS & CORPORATE GOVERNANCE 70
EXECUTIVE COMPENSATION 76
CERTAIN RELATIONSHIPS & RELATED PARTY TRANSACTIONS 81
SECURITY OWNERSHIP OF MANAGEMENT & CERTAIN SECURITY HOLDERS 85
DESCRIPTION OF SECURITIES 87
DIVIDEND POLICY 90
PLAN OF DISTRIBUTION 91
ADDITIONAL INFORMATION ABOUT THE OFFERING 93
LEGAL MATTERS 94
EXPERTS 94
WHERE YOU CAN FIND MORE INFORMATION 94
FINANCIAL STATEMENTS 95

 

We are offering to sell, and seeking offers to buy, our securities only in jurisdictions where such offers and sales are permitted. You should rely only on the information contained in this Offering Circular. We have not authorized anyone to provide you with any information other than the information contained in this Offering Circular. The information contained in this Offering Circular is accurate only as of its date, regardless of the time of its delivery or of any sale or delivery of our securities. Neither the delivery of this Offering Circular nor any sale or delivery of our securities shall, under any circumstances, imply that there has been no change in our affairs since the date of this Offering Circular. This Offering Circular will be updated and made available for delivery to the extent required by the federal securities laws.

 

Unless otherwise indicated, data contained in this Offering Circular concerning the business of Hightimes Holding and its direct and indirect subsidiaries are based on information from various public sources. Although we believe that this data is generally reliable, such information is inherently imprecise, and our estimates and expectations based on these data involve a number of assumptions and limitations. As a result, you are cautioned not to give undue weight to such data, estimates or expectations.

 

In this Offering Circular, except for references to “capital stock,” “Class A Common Stock,” Class B Common Stock, “Shares,” “preferred stock” or “stockholders,” which applies only to Hightimes Holding, as used in this Offering Circular, the terms “Company,” “we,” “our” or words of like import mean Hightimes Holding and (a) its direct and indirect subsidiaries, consisting of Tran-High Corporation, a New York corporation (“Trans-High” or “THC”), Wilshire & Veteran Media Corp., a Delaware corporation (“W&V”), which acquired the assets and business of Dope Media Inc., Chalice Holdings, Inc., a Delaware corporation (“CHI”), Culture Pub, Inc., a Delaware corporation (“Culture Pub”), which acquired the assets and business of Culture Magazine, and (b) the subsidiaries of Trans-High consisting of High Times Production Inc., Cannabis Business Digital, LLC, The Hemp Company of America, Inc., Hemp Times, Inc., High Times, Inc., New Morning Productions, Inc. and Planet Hemp, Inc., all of whom are New York corporations or limited liability companies (all such subsidiaries, together with THC, are referred to herein as the “THC Group”). In addition, Hightimes Holding intends to acquire (a) through a merger transaction, BIG Publications LLC, a Florida limited liability company (“BIG”) and (b) through a separate newly formed subsidiary, the assets and businesses of Feria Del Canamo, S.L. (dba “Spannabis”), a corporation organized under the laws of Spain. Hightimes Holding, the THC Group, W&V, CHI, Culture Pub, and, if and when acquired, BIG Publications and Spannabis, are sometimes collectively referred to in this Registration Statement as the “Hightimes Group.”

 

 i 

 

 

USE OF MARKET AND INDUSTRY DATA

 

This Offering Circular includes market and industry data that we have obtained from third-party sources, including industry publications, as well as industry data prepared by our management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge). Management has developed its knowledge of such industries through its experience and participation in these industries. While our management believes the third-party sources referred to in this Offering Circular are reliable, neither we nor our management have independently verified any of the data from such sources referred to in this Offering Circular or ascertained the underlying economic assumptions relied upon by such sources. Furthermore, internally prepared and third-party market prospective information, in particular, are estimates only and there will usually be differences between the prospective and actual results because events and circumstances frequently do not occur as expected, and those differences may be material. Also, references in this Offering Circular to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report, survey or article. The information in any such publication, report, survey or article is not incorporated by reference in this Offering Circular.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Some of the statements under “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and elsewhere in this Offering Circular constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate”, “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negatives of these terms or other comparable terminology.

 

You should not place undue reliance on forward-looking statements. The cautionary statements set forth in this Offering Circular, including in “Risk Factors” and elsewhere, identify important factors that you should consider in evaluating our forward-looking statements. These risks include, but are not limited to, the following:

 

  Enforcement of existing federal or state regulations concerning the cannabis industry or adoption of new regulations that could have a material adverse effect on our business;
     
  Our auditor has included a going concern opinion in its audit report of us;
     
  Our ability to repay significant short-term indebtedness, including installments that are currently due;
     
  Our ability to close pending acquisitions;
     
  Adverse legal actions that could materially adversely affect our business, financial condition and results of operations;
     
  Our ability to effectively execute our business plan and respond to the highly competitive and rapidly evolving marketplace and regulatory environment in which we intend to operate;
     
  Our ability to manage our expansion, growth and operating expenses;
     
  Our ability to evaluate and measure our business, prospects and performance metrics, and our ability to differentiate our business model and service offerings;
     
  Our ability to compete, directly and indirectly, and succeed in the highly competitive and evolving Cannabis industry;
     
  Our ability to deal with anticipated more stringent federal regulations on recreational use of Cannabis which could materially and adversely affect our business; and
     
  Our ability to protect our intellectual property and to develop, maintain and enhance a strong brand.

 

The forward-looking statements in this Offering Circular are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, and many of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those presented in our forward-looking statements. No assurance can be made to any investor by anyone that the expectations reflected in our forward-looking statements will be attained, or that deviations from them will not be material and adverse.

 

These forward-looking statements speak only as of the date of this Offering Circular. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Offering Circular after we distribute this Offering Circular, whether as a result of any new information, future events or otherwise.

 

 

 1 

 

 

OFFERING CIRCULAR SUMMARY

 

This Offering Circular contains a fair summary of the material terms of documents summarized herein. All concepts, goals, estimates and business intentions are revealed and disclosed as such that are known to management as of the date of this Offering Circular. Circumstances may change so as to alter the information presented herein at a later date. This material will be updated by Amendment to this document and by means of press releases and other communications to Shareholders.

 

As used in this Offering Circular, all references to “Hightimes Holding,” “capital stock,” “Class A Common Stock,” Class B Common Stock, “Shares,” “preferred stock” or “stockholders,” applies only to Hightimes Holding Corp. As used in this Offering Circular, the terms “Company,” the “Hightimes Group,” “we,” “our” or words of like import mean Hightimes Holding and its direct and indirect subsidiaries, consisting of Tran-High Corporation, a New York corporation (“Trans-High” or “THC”), Wilshire & Veteran Media Corp., a Delaware corporation (“W&V”), which acquired the assets and business of Dope Media, LLC (“DOPE”), Chalice Holdings, Inc., a Delaware corporation (“CHI”), Culture Pub, Inc., a Delaware corporation (“Culture Pub”) and the subsidiaries of Trans-High consisting of High Times Production Inc., Cannabis Business Digital, LLC, The Hemp Company of America, Inc., Hemp Times, Inc., High Times, Inc., New Morning Productions, Inc. and Planet Hemp, Inc., each a New York corporation or limited liability company (all such THC subsidiaries, together with THC, are collectively referred to herein as the “THC Group”). In addition, Hightimes Holding intends to acquire (a) through a merger transaction, BIG Publications LLC, a Florida limited liability company (“BIG”) and (b) through a separate newly formed subsidiary, the assets and businesses of Feria Del Canamo, S.L. (dba “Spannabis”), a corporation organized under the laws of Spain. Hightimes Holding, the THC Group, W&V, CHI, Culture Pub, and, if and when acquired, BIG Publications and Spannabis, are sometimes collectively referred to in this Registration Statement as the “Hightimes Group.” All references in this Offering Circular to “years” and “fiscal years” means the twelve-month period ended December 31st.

 

As of the date of this Offering Circular Supplement,, Hightimes Holding has authorized for issuance up to 110,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock, of which 100,000,000 shares of Common Stock were designated as Class A voting Common Stock (“Class A Common Stock”) and 10,000,000 shares of Common Stock were designated as Class B non-voting Common Stock (“Class B Common Stock”), and (b) an aggregate of 24,582,774 shares of Class A Common Stock were issued and outstanding. All share and per share information set forth in this Offering Circular gives effect to a 1.9308657-for-one forward stock split that Hightimes Holding consummated as of January 15, 2018 of the 10,294,292 shares of Class A Common Stock that were issued and outstanding prior to such date.

 

Overview

 

Our Company

 

Hightimes Holding was established in December 2016 for purposes of acquiring 100% of the capital stock of Trans-High and its subsidiaries comprising the THC Group. Originally founded in 1974 as High Times Magazine®, the THC Group has been a leading advocate for cannabis reform and has historically engaged in the publication of a monthly print and on-line magazine and the production and sponsorship of trade shows and consumer events. Our strategic goal is to expand our event portfolio and to monetize the intellectual property and “High Times®” brand. The THC Group also contemplates various other e-commerce initiatives and licensing opportunities for the “High Times®” brand, including the development of an e-commerce store offering clothing and other products associated with cannabis.

 

Hightimes and its direct and indirect subsidiaries do not currently cultivate, manufacture or sell cannabis or any derivatives of the cannabis plant, such as oils or edible products, although cannabis and products utilizing or relating to cannabis have been used and sold at the trade shows, festival events and award ceremonies operated by the THC Group since 2010 in states that permit the medical and/or recreational use of cannabis.

 

The Company believes that it has become the highest regarded information source for the cannabis industry. We connect cannabis enthusiasts and cannabis users for both recreational and medical purposes with our iconic brand via our print publication, digital platforms, social media and sponsored live events. In 2018, we had approximately 27.8 million unique visitors to our websites as well as 10.7 million visitors to our social media platforms. Due to its unique positioning in the cannabis space, the Company believes that considerable monetization opportunities present themselves in brand licensing and ecommerce. According to a 2017 survey conducted by Marist College and Yahoo, some 35 million Americans are “regular” cannabis users. The Company intends to leverage its brand and platform to showcase promotions of quality products associated with cannabis to American cannabis enthusiasts, as well as to companies who wish to grow and sell cannabis in states where the growing and dispensing of medical and/or recreational cannabis is permitted. The Company has expanded our Cannabis Cup™ events into jurisdictions where the use of cannabis for both medical and recreational purposes is expressly permitted.

 

The Company’s current revenue base consists of the sale of tickets for admittance to the Cannabis Cup live events, the Cannabis Cup competitions and our entertainment venues, sponsorship of events, and digital marketing from social platforms, and recurring print and on-line subscriptions to, and advertising sales in, High Times Magazine®, Culture® Magazine, DOPE Media, as well as direct merchandising sales, sponsorship sales and licensing fees. The Company manages its licensing businesses through co-sponsorship and strategic partnership arrangements.

 

 

 2 

 

 

The Company operates businesses across a range of media, including:

 

  High Times Magazine: High Times Magazine© is the High Times Group’s inaugural print publication that began doing business as “HIGH TIMES®” in 1974 and has since published more than 500 issues; High Times Magazine© began publishing online in 2008.
     
  The Cannabis Cup: The High Times Cannabis Cup™, which the High Times Group believes is one of the world’s leading marijuana events, celebrates the world of cannabis through competitions, instructional seminars, expositions, celebrity appearances, concerts and product showcases.
     
 

Digital Publishing: Hightimes.com, CannabisCup.com and 420.com, Green Rush Daily, DOPE.com and others are the High Times Group’s domain names. CannabisCup.com is the hub for live events hosted by the High Times Group and 420.com is a new entity which will sell related products that are used in connection with cannabis.

 

Strategic Acquisitions and Relationships.

 

Since its acquisition of the THC Group in February 2017, the Company has sought to aggressively expand the scope of its business through existing and contemplated strategic acquisitions and related relationships, including those described below.

     
  Culture Magazine: On June 9, 2018, Culture Pub, a newly formed Delaware subsidiary of the Company, entered into an agreement to purchase from Southland Publishing, Inc. (“Southland”) certain assets relating to Culture Magazine™, a print and online magazine founded in 2009 that provides information and entertainment for medical-cannabis patients in California, Colorado, Washington, Oregon and Michigan (the “Publication”). Under the terms of the asset purchase agreement, Culture Pub agreed to acquire only the intellectual property, advertiser agreement and print inventory relating to the Publication and assumed an agreement with the printer of the magazine. No cash, accounts payable or other assets will be acquired from Southland and no liabilities will be assumed by Culture Pub, other than a leasehold obligation of Southland related to the Publication and certain obligations following the closing, including obligations to employees of and independent contractors to the publication that Culture Pub elects to hire or engage.
     
    In consideration for the acquired assets, at closing Southland will receive consideration valued at $4,000,000 through the issuance of 370,370 shares of the Company’s Class A Common Stock, or such other number of shares of Class A Common Stock which, when multiplied by the $11.00 initial per share offering price of our Class A Common Stock in the Public Offering shall equal $4,000,000. Consummation of the sale was subject to the consent of ExWorks Capital Fund I, L.P. (“ExWorks”), our senior secured lender (which has been obtained), and consummation of a “Hightimes Holding Liquidity Event,” (defined as the listing of our Class A Common Stock on any one of the New York Stock Exchange, the NYSE American, NASDAQ, the OTC Market or the Canadian Securities Exchange). The closing of the transaction is scheduled to occur within three business days following consummation of a Hightimes Holding Liquidity Event. The Company intends to consummate a Hightimes Holding Liquidity Event following consummation of its Public Offering.
     
    On September 25, 2018, the Company entered into an amendment to the asset purchase agreement with Southland and Culture Pub. Pursuant to the amendment, the parties agreed to consummate the acquisition of the Culture assets effective as of October 1, 2018. In addition, the parties agreed to extend the contractual deadline by which the Company must consummate a Hightimes Liquidity Event until December 1, 2018. The amendment provided that in the event the Company failed to complete a Hightimes Liquidity Event by December 1, 2018, the Company would, at the option of Southland, be required to issue a promissory note to Southland by December 15, 2018 in the amount of $2,000,000 (the “Southland Note”), which Southland Note was to be issued in lieu of 370,370 shares of the Company’s Class A Common Stock. Inasmuch as we did not consummate the Liquidity Event by December 1, 2018, on November 26, 2018, Southland notified Hightimes that it would elect to accept the Southland Note in lieu of Hightimes common stock. The Southland Note bears interest at the rate of 6% per annum and is payable in four installments of $250,000 each due March 15, 2019, June 15, 2019, September 15, 2019 and December 15, 2019 with a final $1,000,000 payment due on March 15, 2020. The Company did not issue the Southland Note to Southland following its demand or pay the first $250,000 installment under the Southland Note that was due on March 15, 2019. Accordingly, on March 27, 2019, Southland commenced a legal action in the Superior Court of Los Angeles to compel the Company to issue the Southland Note and make payment of the $250,000 installment that was due on March 15, 2019.

 

 

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    Hightimes Holding did not deliver the Southland Note to Southland as our senior secured lender, ExWorks Capital fund I, L.P., has not, as yet, agreed to permit Southland to obtain a security interest on any of our assets. Hightimes Holding filed an answer to Southland’s complaint on May 15, 2019 and, although we are seeking to obtain a resolution of this issue, Hightimes Holding believes it has meritorious defenses to the delivery of the Southland Note and the claims of Southland. Nonetheless, there is no assurance that we will be able to settle this dispute. An adverse decision could have a material adverse effect on our business and future prospects.
     
  DOPE Media: On September 21, 2018, Hightimes Holding and W&V, a newly formed acquisition subsidiary of the Company, entered into an agreement with DOPE Media, Inc., a Delaware corporation (“DOPE”), to acquire substantially all of DOPE’s assets and business. DOPE is in the business of operating a consumer media platform delivering content through print, web, social media and live events relating to the cannabis industry in jurisdictions where the growing and sale of cannabis is legal. The assets included all inventory, contracts and contract rights, accounts receivable, intellectual property and employees. At closing of the acquisition, W&V assumed certain scheduled operating liabilities of DOPE. In addition to the assumed liabilities, the purchase price for the DOPE assets and business is valued at $11,200,420, of which $10,000,420 is payable in the form of 909,129 shares of Hightimes Holding’s Class A Common Stock, valued at $11.00 per share (the initial per share offering price in the Company’s Public Offering), $1,000,000 was paid in cash and $200,000 payable in cash ten days after completion of the Public Offering.
     
    On the date of execution of the asset purchase agreement with DOPE, Trans-High made a $1,000,000 secured loan to DOPE to retire certain secured debt of DOPE and provide working capital to the seller. At closing, W&V assumed the $1,000,000 note of DOPE to Trans-High which was deemed part of the purchase price. The $1,000,000 was obtained by virtue of an increase in the existing senior secured credit facility of the Company and its subsidiaries with ExWorks.
     
    The acquisition of the DOPE Media assets was consummated on October 10, 2018, at which time the 909,129 shares of Class A Common Stock were placed in escrow and are subject to increase or decrease to provide $10,000,420 in value following consummation of the Public Offering based on the 10-day volume weighted average per share price of the Class A Common Stock calculated from the date on which trading of such shares commences.
     
  The Chalice Companies: On October 29, 2018, Hightimes Holdings and Chalice Holdings Inc., the Company’s newly formed acquisition subsidiary (“CHI”), entered into an asset purchase agreement with Gemini Finance Corp., a Delaware corporation (“Gemini”), to acquire from Gemini substantially all of the assets and business of Wisdom Apparatus and Chalice Festivals USA, both California corporations (the “Chalice Companies”). Gemini acquired the assets of the Chalice Companies as a result of its foreclosure in September 2018 on a $587,500 secured note issued by the Chalice Companies to Gemini to evidence a loan made to the Chalice Companies pursuant to a loan agreement and related security agreement dated February 2, 2018. The assets included all inventory, contracts and contract rights, accounts receivable, intellectual property (including the “Chalice” Instagram handles) formerly owned by the Chalice Companies. CHI did not hire any employees of the Chalice Companies or assume any liabilities associated with the acquired assets.
     
    The purchase price for the acquired assets was $560,000 paid in the form of a 5% senior secured promissory note of CHI and Hightimes Holding, which note was due on March 29, 2019 (the “Chalice Note”) and is secured by a pledge of the capital stock of CHI and a lien and security interest on the acquired assets. If not paid when due, by its terms, the principal amount of the Chalice Note increased to 120% of the original principal amount. The Chalice Note provides that upon consummation of the Company’s pending Public Offering and the commencement of trading of its Class A common stock on NASDAQ or the OTCQX Exchange, the promissory note would automatically convert into such number of shares of Hightimes Holding Corp. Class A Common Stock at a conversion price of $11.00 per share (the current per share offering price of Hightimes Holding Corp. shares in the Public Offering). On April 29, 2018, Gemini and Hightimes Holding agreed to amend the terms of the Chalice Note to increase the principal amount to $672,000 and extend the maturity date of the Chalice Note to July 1, 2019.
     
    ExWorks, the senior secured lender to the Company, consented to the transaction subject to Gemini’s assignment to ExWorks of the security agreement and pledged capital stock of CHI at such time as the Chalice Note is converted into the Company’s Class A Common Stock.
     
    The Chalice Companies formerly sponsored and conducted music and art festivals in California and other locations where recreational cannabis is legal and at such festivals the on-site cannabis purchases and consumption are made available. Hightimes Holding Corp., through its CHI subsidiary, intends to re-establish the music and art festivals formerly conducted by the Chalice Companies.

 

 

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BIG Publications. On December 5, 2018, Hightimes Holding Corp. and a newly formed acquisition subsidiary (“Mergerco”) entered into a merger agreement with BIG Publications LLC, a Florida limited liability company (“BIG”), and its sole member Gustavo Gonzalez (the “BIG Merger Agreement”). BIG does business as Buyers Industry Guide®, a publication that enables retailers to access a complete list of manufacturers and distributors of products related to the cannabis industry, and is also engaged in the business of sponsoring and operating an annual trade shows known as the BIG Industry Show that target and exhibit various smoke, vape, cannabis and grow products in a business-to-business setting.

     
    Under the terms of the BIG Merger Agreement, BIG will merge with Mergerco with Mergerco remaining as the surviving company following the merger (the “BIG Merger”). At closing Mergerco will change its name to BIG Publications, LLC. In consideration for the BIG Merger, at closing Mr. Gonzalez will receive $2,420,000 in cash, 401,818 shares of Hightimes Holding Corp. Class A Common Stock, and a 6% Hightimes Holding note due December 31, 2019 in the principal amount of $1,339,420. The note will be secured by a pledge of the equity of Mergerco. Consummation of the closing of the BIG Merger, which was originally scheduled to occur as late as February 5, 2019, is subject to a number of conditions, including completion of a satisfactory due diligence investigation by Hightimes Holding, delivery of disclosure schedules, the consent of ExWorks to the transaction and listing or quotation of the Hightimes Holding Class A Common Stock on an acceptable securities exchange, such as the OTCQX or NASDAQ.
     
    On May 17, 2019, Hightimes Holdings Corp. entered into an agreement with BIG and its shareholder to extend the closing date of the proposed acquisition to as late as July 31, 2019. However, in order to consummate the BIG Merger, the Company will be required to raise additional capital or other financing to pay the cash portion of the purchase price. Accordingly, there is no assurance that the Company will otherwise be able to consummate the BIG Merger.
     
  Spannabis. On January 11, 2019, the Company and Spannabis Acquisition Corp., the Company’s newly formed acquisition subsidiary (the “Purchaser”), entered into an asset purchase agreement with Feria Del Canamo, S.L., a corporation organized under the laws of Spain (“Feria”), pursuant to which the Purchaser will acquire Feria’s business assets (the “Asset Purchase”). Feria, which does business under the trade name “Spannabis,” owns and publishes a print magazine known as Cannabis Magazine and has for the past 16 years sponsored and conducted an annual trade show for the worldwide cannabis sector in Barcelona, Spain under the name “World Cannabis Conference.”
     
    Under the terms of the Asset Purchase Agreement, Feria has agreed to sell to the Purchaser the following assets: (i) all cash or marketable securities derived from the operation of the Feria’s business; (ii) all sites, domain registrations, trademarks, trade secrets, copyrights and other intellectual property of Feria’s business; (iii) all rights of Feria under Feria’s outstanding advertising agreements; (iv) all rights of Feria to certain contracts with third parties to provide goods or services in connection with the its business; (v) all inventories and receivables of its business on hand as of the closing date of the Asset Purchase; and (vi) all revenues of its business arising from and after the closing date of the Asset Purchase.
     
    In consideration for the sale of the assets and business (i) the Purchaser has agreed to pay to Feria $3,000,000 in cash due at closing, and (ii) Hightimes Holding has agreed to issue to Feria 363,636 shares of Class A Common Stock (as may be adjusted pursuant to the terms of the Asset Purchase Agreement). In addition, under the terms of the Asset Purchase Agreement, Feria has the right to retain any profits earned from hosting the 2019 World Cannabis Conference regardless of when the closing on the Asset Purchase occurs, and has the further right to receive a total of $500,000 for each of the 2020 and 2021 World Cannabis Conference.
     
   

Consummation of the closing was scheduled to occur as late as May 31, 2019, and remains subject to a number of closing conditions, including, among other things, completion of a satisfactory due diligence investigation by Hightimes, delivery of disclosure schedules by Feria, final Hightimes board approval, and the consent to the transaction of Hightimes’s senior lender, ExWorks Capital Fund I, L.P. In order to consummate the Spannabis acquisition, the Company will be required to extend the closing date beyond May 31, 2019 and raise additional capital or other financing to pay the cash portion of the purchase price. Accordingly, there is no assurance that the Asset Purchase will be consummated. We intend to seek to extend the closing date of the Spannabis acquisition to as late as September 30, 2019.

 

In addition to the proposed BIG Merger and Spannabis acquisition, Hightimes Holdings intends to seek additional strategic acquisition opportunities that we believe will enhance our brand and increase our revenues.

 

 

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The Cannabis Industry and Market Opportunity

 

We believe that we have strong economic prospects by virtue of the following dynamics of the industry and our competitive advantages:

 

  Expanding Legalization of Cannabis: The growing and dispensing of cannabis for medical use is now legal in 33 states, and 10 states plus the District of Columbia have either legalized or decriminalized cannabis for recreational use. California, believed to be the world’s sixth largest economy, began allowing recreational use of cannabis in early 2018. Despite a conservative political environment in Washington, D.C., support for marijuana legalization in the U.S. appears to be rapidly outpacing opposition. According to a 2018 Pew Research Center survey, public support for the legalization of marijuana in the United States has soared from approximately 12% in 1969 to approximately 62% in 2018.
     
  Market Size. Cannabis is the most widely used drug worldwide, both among the general population and youth, with an estimated 192 million past-year users reported in 2016, according to the United Nation’s 2018 World Drug Report. Moreover, the global market in legal cannabis sales is expected to grow to some $146 billion by the end of 2025, according to a report by Grand View Research.
     
  Market Leader: Despite a number of competitors entering the cannabis market space, such as Cloud Magazine, Skunk Magazine, Kush Magazine and 420 Magazine, the High Times Group believes that High Times Magazine® still maintains its position as the premier publication and media creator for cannabis related information. Given our 45-year history, we believe that the High Times is the most recognized brand in the cannabis space globally.

 

Our Growth Strategy

 

Increased Number of Festivals, Events and Competitions: High Times’s vision is to aggressively expand the number of our events, including the Cannabis Cup events. As cannabis rules and regulations change throughout the United States and the world, we believe that the High Times Productions Inc. Group will be able to expand its footprint domestically into more states within the United States as well as internationally. We hosted four events in 2016 and hosted a total of 22 events in 2017, including nine Cannabis Cups of which two were international. In 2018, we held a total of 14 events, including eight Cannabis Cups, of which one was international, and plan on hosting 28 events across all brands in 2019. As of June 1, 2019, the Company will have hosted four Cannabis Cups and three sponsored events. On May 2, 2018, the Bureau of Cannabis Control granted us a license to conduct a recreational Cannabis Cup event in the City of Sacramento on the Cal Expo site in California – the first of its kind — which was held on May 4th and 5th of 2018 and was held on April 20th and 21st of 2019. The Company has sponsored other events in California and according to the Bureau of Cannabis Control, has been the largest sponsor in number of events in California.

 

Expanding Our Digital Publishing Footprint: The demographics on our current digital platform indicates that a majority of our users are millennials (aged 18-34). Increasingly, users are searching for cannabis-related information via Google and other search engines. Given our subject matter expertise and long-standing domain authority, we believe that Hightimes.com continues to appear at the top of search engine results.

 

New Licensing Opportunities: We believe that as cannabis legalization continues to expand globally, there will be demand for brand differentiation, for which we will be well positioned to take advantage of.

 

Our Publications

 

High Times® Magazine

 

Since its founding in 1974 as a print publication, High Times Magazine® has written about topics ranging from cultivation and legalization, entertainment and culture, and hard-hitting new exposes on the War on Drugs. High Times Magazine® is a monthly print and digital publication that has been dedicated to furthering the cannabis industry, including educating the public as to the medicinal benefits of cannabidiol (“CBD”) and cannabinoids as well as the recreational uses of marijuana. Hightimes Holding Corp. believes that High Times Magazine® is, and has been for a number of years, the preeminent publication source for cannabis information. The High Times Magazine© has featured original works from some of the leading names in counterculture and literature including Truman Capote, Hunter S. Thompson, Charles Bukowski, Andy Warhol and William Burroughs.

 

The High Times Magazine® publication is approximately 152 pages per issue, of which approximately 50% is consists of advertising. For the 12-month period from January 1, 2017 to December 31, 2017, High Times Magazine® had advertising revenues of $2,409,020, revenues of $339,934 from newsstand sales, revenues of $420,428 from subscriptions, and revenues of $275,021 from product, licensing, royalties and miscellaneous services. For the 12-month period from January 1, 2018 to December31, 2018, High Times Magazine® had advertising revenues of $2,781,867, revenues of $298,414 from newsstand sales, revenues of $306,770 from subscriptions, and revenues of $387,082 from product, licensing, royalties and miscellaneous services.

 

 

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Our print and on-line publications generate revenue primarily through print and digital advertising sales and through circulation and subscriptions fees generated from the sale of subscriptions to its print and digital products. Advertising revenues are subject to seasonality, with revenues typically being highest in our second fiscal quarter due to the end-of-year holiday season in its main operating geographies.

 

Culture Magazine

 

Culture Magazine® is a premier cannabis lifestyle magazine, covering news entertainment and lifestyle trends. Founded in 2009, the mission of the publication is to bring readers up-to-date coverage on recreational and medical cannabis news and the people behind cannabis culture. The magazine features exclusive interviews with high-end celebrities as its monthly cover feature. Past cover features have included Snoop Lion, Damian Marley, Jay Leno, Lucy Lawless, Kid Cudi, Henry Rollins, Lily Tomlin, Wiz Khalifa, Kathy Griffin and Melissa Etheridge.

 

Each month, Culture Magazine® crafts industry-leading lifestyle content that excites and entertains readers across the country. In addition to local, national and national news coverage, regular content includes profiles on medical cannabis patients, advocates and business leaders, features on musicians and artists who advocate for or use cannabis, columns on cannabis law written by local attorneys, a monthly cultivation column written by Ed Rosenthal, strain, edible and concentrate reviews, trusted product reviews, infused recipes, local events for each.

 

In 2018, annual revenues of Culture Magazine were $1.439 million, of which $0.2 million was in the fourth quarter when the Company took over operations. Culture Magazine has historically relied on its advertising revenues and has been a free magazine to subscribers. We recently began testing a subscription-based service in the fourth quarter of 2018, during which time Culture had total revenues of $850.

 

DOPE Magazine

 

DOPE Magazine® is a monthly print and on-line lifestyle publication, dedicated to creating purposeful, relevant conversations to normalize legal cannabis in society. While cannabis remains to be the central theme of our brand, since 2017 the magazine has built a framework of inclusivity when speaking about gender, race, class, politics, family and culture. The term “DOPE” DOPE is an acronym which stands for “Defending Our Plant Everywhere”—which is exactly what the magazine seeks to. DOPE Magazine® was founded in 2011 when it put the inaugural issue into the hands of HEMPFEST attendees in Seattle. Today, DOPE Magazine connects with consumers through distribution of its monthly print magazines, digital platform, social media handles and events.

 

In 2018, DOPE Magazine® generated annual revenues of $3.355 million. We conducted operations of the magazine in the fourth quarter of 2018, during which time our advertising revenues were $549,472, event revenues were $243,009, and merchandise and other revenues were $25,805. DOPE Magazine® has historically been a free publication. However, we recently began testing subscriptions during the fourth quarter of 2018, during which time we obtained total revenue of $1,357.

 

BIG Publications

 

BIG Publications, based in Hollywood, Florida, publishes the Buyers Industry GuideTM, which is an easy to use advertising guide and industry listing designed for the cannabis dispensary and retailer, to reach wholesaler and manufacturer in your Industry.

 

The publication is organized into categories so retailers can easily find a wide variety of products in any given category. At the end of each category section, there is a quick-reference contact list and a notes page to facilitate the retailers buying experience. BIG is a one of a kind buyers guide, exclusively designed for the buyer. There are no articles, editorials, stories or other distractions to keep the buyer from using this publication for what it is intended for, a true Buyers Guide.

BIG Magazine Is published bi-monthly, and issue dates are in February, April, June, August, October and December with two supplemental issues published annually.

 

In 2018, Buyers Industry GuideTM had approximately 20,000 attendees at its two tradeshows. 2018 Annual revenues were approximately $1,750,000.

 

 

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Festival Events

 

The Cannabis Cup®, produced by the THC Group, has been a leading cannabis trade show, music festival and experiential marketing event, in which people gather at a venue, featuring live musical performances. Participants at these events can participate in the world of cannabis through competitions, instructional seminars, expositions, celebrity appearances, concerts and product showcases. We seek to present our fan base and festival attendees with a unique festival experience that combines live musical performances and cannabis industry trade show presentations, corporate sponsors and vendors.

 

The THC Group does not dispense or sell cannabis or any derivatives of the cannabis plant that are sold by others at the Cannabis Cup Events. Rather, we seek to highlight the promotion of the THC Group and Cannabis Cup brands through its merchandising efforts and through licensing arrangements. Since 2010, THC Group’s U.S. Cannabis Cup® has been produced and presented at various locations in states that permit the medical and recreational use of cannabis and continues to be hosted at rented third-party venues. Prior to hosting events, THC Group receives all required licensing as may be required under state and local law.

 

During 2018, the Cannabis Cup and other festival events generated approximately $10,184,000 or 69.1%, of the total consolidated revenues of the Hightimes Group, This represented a decrease of approximately $853,000 or 7.7% of total consolidated revenues in 2017.

 

Following Hightimes Holding’s acquisition of the THC Group in February 2017, we have undertaken measures to further develop the Cannabis Cup Events and other festivals. These efforts include a change in the strategy roll-out of the Cannabis Cup Events and festivals along with a reorganization of the upcoming scheduling for the 2019 season. For the year ended December 31, 2017, the THC Group conducted 15 live events shows including ten Cannabis Cup Events. Events and festivals reported $11.04 million in revenues and a gross profit of $0.68 million. For the year ended December 31, 2018, the Hightimes Group conducted 14 live event shows including eight Cannabis Cup events and festivals and reported $10.18 million in revenues and an operating loss of $2.00 million. We anticipate that in 2019, the THC Group will produce a total of approximately 28 Cannabis Cup Events and other festivals both in the United States and internationally. The Cannabis Cup Events have included artists such as Nas, Damian Marley, Wu-Tang Clan, 50 Cent, Redman and Method Man.

 

The Company intends to develop and drive traffic and revenues of its events and festivals by dedicating capital and additional corporate resources to target the growing number of cannabis enthusiasts to our events at increasingly sizeable venues. We believe that changing our strategic approach will restore historical financial performance and profitability margins, with the aim of increasing revenues, gross margins and profit above its historical average and peak. As legalization of cannabis for both medical and recreational markets continue to develop, we believe that a strategic shift to larger developed markets and accessibility to sponsor events in higher population density urban locations for our events and festivals will present attractive opportunities.

 

We typically book artists, secure festival sites, provide for third-party production services, sell tickets and advertise the events to attract fans. We also provide or arrange for third parties to provide operational services as needed such as concessions, merchandising and security.

 

We earn revenue primarily from the sale of tickets to the Cannabis Cup Events and other festivals, sponsorship revenue, the sale of entry fees into Cannabis Cup competitions, and through general advertising. We pay performing artists at Cannabis Cup and other event under one of several formulas, including a fixed guaranteed amount and/or a percentage of ticket sales or event profits. For each Cannabis Cup Event, we rent a third-party venue. Revenue is generally influenced by the number of events, popularity of musical entertainment, volume of ticket sales, ticket prices and the number of participants in the Cannabis Cup competitions. Event costs such as artist fees and production service expenses are included in direct operating expenses and are typically substantial in relation to the revenue. As a result, significant increases or decreases in promotion revenue do not typically result in comparable changes to operating income.

 

We also generate revenue primarily from the sale of concessions, parking, premium seating, rental income, venue sponsorships and ticket rebates or service charges earned on tickets sold through our third-party ticketing service providers under ticketing agreements. At our Cannabis Cup Events, we outsource the sale of concessions and we receive a share of the net revenue from the concessionaire, which is recorded in revenue with no significant associated direct operating expenses.

 

We utilize a sales force that creates and maintains relationships with sponsors through a combination of strategic, international, national and local opportunities that allow businesses to reach customers through the Cannabis Cup and other festival events, including advertising on our websites, co-sponsorship arrangements and commercial vendor booths. We drive increased advertising scale to further monetize the Cannabis Cup and other festival event platform through branded media content, corporate sponsorship and vendor booths. We work with our corporate co-sponsorship clients to help create marketing programs that drive their business goals and connect their brands directly with the Cannabis Cup audiences and fans of the High Times brand. We also work with other commercial businesses operating within the cannabis industry under the Cannabis Cup and other festival event vendor program by providing vendor with tables and trade booths to help drive awareness of the vendor’s business by connecting with the THC Group’s dedicated fan base.

 

 

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While the Cannabis Cup Events operate year-round, we generally experience higher revenue during the second and third quarters due to the seasonal nature of shows at our outdoor festivals, which primarily occur from May through October.

 

In furtherance of our Cannabis Cup Event expansion plans, pursuant to an Assignment of Lease and Festival Rights, dated August 10, 2017 (the “Bio Cup Agreement”), we acquired from Bio Cup Canada Music Festival Ltd. (“Bio Cup”) the right to conduct a Cannabis Cup Event at a designated venue in Vancouver, British Columbia, that was held between August 23, 2017 and August 27, 2017, as well as future events we may sponsor at such venue. In addition to up to CDN$200,000 of the 2017 festival expenses we agreed to assume, we paid to the stockholders of Bio Cup the sum of $375,000 in the form of a THC Group’s 4% unsecured convertible promissory note due December 31, 2018 (“Bio Cup Note”). The Bio Cup Note is convertible into shares of Hightimes Holding’s Class A Common Stock or shares of our successor-in-interest and must be converted into common stock if the holders of such common stock can immediately sell such shares for at least $375,000 prior to the December 31, 2018 maturity date. Bio Cup also has registration rights pursuant to the Bio Cup Agreement for shares issuable upon conversion of the Bio Cup Note. On April 30, 2019, the parties agreed to extend the maturity date of the Bio Cup Note to June 30, 2019. Furthermore, on April 30, 2019, Bio Cup also agreed to convert the Bio Cup Note and $26,208 of accrued interest into 36,474 shares of Hightimes Holding Class A Common Stock. The Company is currently evaluating whether it would be in the Company’s best interest to continue to sponsor the Bio Cup event and has not finalized negotiations for any Bio Cup Event in 2019 or beyond.

 

World Cannabis Conference

 

Feria Del Canamo, S.L., doing business as “Spannabis,” owns and publishes, among other things, a print magazine known as Cannabis Magazine™ and has sponsored and conducted an annual trade show in Barcelona, Spain for the cannabis sector worldwide under the name “World Cannabis Conference” which is one of the world’s largest Cannabis industry events. Billed as part trade show and part research conference, Spannabis has returned to Barcelona for its seventh edition of the celebration in March 2019. The World Cannabis Conference, which hosts scientific, medical and political personalities, as well as relevant agents of the cannabis sector, also includes its own award ceremony crowning the best cannabis and cannabis-related products in the region, attracts tens of thousands of consumers from across the globe annually.

 

Feria Del Canamo, S.L., the owner of Spannabis publications and the sponsor of the World Cannabis Conferences believe that it is essential to approach regulation from an international perspective, to analyze in depth the problems experienced by our own country, to approximate the scientific perspective for a better understanding of the potential and viability of standardization, and to understand the medical needs of sick people and the progress that is being made despite restrictions on the sale of cannabis products in many EU countries.

 

For the year ended December 31, 2017 (the last completed year of financials), Feria Del Canamo, S.L. generated revenues of 2,303,387 Euros (approx. US$2,571,000).

 

Other Business Opportunities

 

The Company seeks to license the High Times® and Cannabis Cup® trade names, characters and visual and literary properties to various manufacturers, developers and retailers throughout the world. Branded merchandise is sold by its licensees directly through online distribution channels. We generate revenue primarily from licensing its branded properties, including trademarks and media content, to third parties for use on consumer merchandise. Further, we sell our branded merchandise through its direct to consumer internet shopping sites and e-commerce stores. Significant costs include costs of goods sold and distribution expenses, operating labor and retail occupancy costs, product development and marketing.

 

Our e-commerce websites currently include 420.com, CannabisCup.com and Hightimes.com, with nearly 4.0 million monthly unique users (74% male, 73% millennials (ages: 18-34)). The 420.com website will be a new on-line store, which High Times Group envisions becoming the “everything store” for cannabis-related products.

 

Our licensing operations cover a diverse range of products and live event categories. We license the High Times® and Cannabis Cup® brands and properties for use on third-party products or services. High Times Group earns royalties or participate in revenue sharing arrangements with strategic partners, both of which are usually based on a fixed percentage of the wholesale or retail selling price of the products or services.

 

 

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We intend to increase its efforts to leverage the High Times® and Cannabis Cup® brands. High Times Group is in discussions for the development of branding opportunities, which it will seek to structure as a joint venture, partnership, licensing and royalty agreement.

 

Below is a sampling of the product licensing, category opportunities the High Times Group is exploring:

 

  Licensing to Retail Stores
     
  Licensing to Consumption Lounges (formally legalized in California this election cycle)
     
  Clothing
     
  Rolling Papers
     
  Vaporizers
     
  Shoes
     
  Streetwear
     
  Movies, Documentaries and TV: both Historically Scripted and Reality

 

Intellectual Property

 

We own the registered trademarks “High Times®” and “Planet Hemp®” and the design for the medical Cannabis Cup. In addition, we also use common law marks that have not been, or due to their nature are unable to be, registered, including without limitation:

 

  POT40
     
  COUNTRY FAIR CUP
     
  POT SHOTS
     
  ASK DR. MITCH
     
  TRAILBLAZERS
     
  S.T.A.S.H. AWARD
     
  HIGH FIVE
     
  DANNY DANKO
     
  FREE WEED WITH DANNY DANKO
     
  CULTURE MAGAZINE
     
  DOPE MEDIA

 

We generally rely on trademark, copyright and trade secret laws, and employee and third-party non-disclosure agreements to protect its intellectual property and proprietary rights. We currently own trademark protection for our name and logos in the United States, pursuant to certain trademark and copyright applications and registrations worldwide. Further, we also use common law marks that have not been, or due to their nature are unable to be, registered with the Trade United States Patent and Trademark Office. Although we have been granted registered trademarks by the United States Patent and Trademark Office, there can be no assurance that any trademarks or common law marks relied upon by us, if any, will not be challenged in the future, invalidated or circumvented or that the rights granted thereunder or under licensing agreements will provide competitive advantages to the High Times Group.

 

 

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We are the owner of the intellectual property related to various publication and other visual (including audio visual works and photographs) and written content, which it distributes through the High Times® Magazine and via its digital distribution channels.

 

There can be no assurance that standard intellectual property confidentiality and assignment agreement with employees, consultants and others will not be breached, that we will have adequate remedies for any breach, or that its trade secrets will not otherwise become known to or independently developed by competitors. Furthermore, there can be no assurance that our efforts to protect our intellectual property will prevent others from unlawfully using its trademarks, copyrights and other intellectual property. Our success depends in part, on its continued ability to license its intellectual property. An inability to continue to preserve and protect its intellectual property would likely have a material adverse effect on its business, operating results or financial condition.

 

Properties

 

Effective December 1, 2017, the Company entered into a sublease with the term ending December 2, 2021 of approximately 10,000 square feet of office space at 10990 Wilshire Boulevard, Los Angeles, CA 90024 at a monthly rental of $10,000 plus allocated shared costs. Effective January 1, 2018 the prior agreement with Here Publishing Inc. (Pride Media Inc.) was superseded with a new cost sharing agreement for the office space. The monthly base rent of $49,603and other common costs are to be allocated based on the month end headcount of the two companies. The current allocation for Trans-High Corporation is 38.6%. Parking costs are based on actual costs of spaces used by the Trans-High Corporation employees. The use of the office and cost sharing agreement continues on a month to month basis per Pride Media Inc.’s option. The lessor is Here Publishing, Inc. (Pride Media, Inc.), a corporation controlled by Adam E. Levin, the Executive Chairman of the Company (See “Related Party Transactions”).

 

In November 2017, Trans-High Corporation assumed the lease at 120 West 45th street, Unit #15.10 (approximately 2,550 sq. ft.), New York, New York 10036 from PlanetOut Inc. that terminates on February 29, 2024. This transfer of the lease to Trans-High Corporation was part of Oreva Capital’s (a corporation controlled by Adam E. Levin, the Executive Chairman of the Company) purchase of Pride Media Inc. The monthly base rent is $15,787 and escalates at a rate of 3% per annual term each April 1st plus an additional $744 monthly charge for utilities. In addition, as part of the lease the Company assumed the balance of the leasehold improvement loan of $130,500 that is paid at a rate of $1,740 over the life of the lease.

 

In July 2018, the Company entered into a capital lease for a Ricoh printer for the New York office located at 119 W. 24th Street, New York, NY 10011. The lease became effective when the printer was delivered and put into operation in October 2018. The lease is for 60 months with a term date of September 30, 2023, at a monthly payment of $1, with quarterly payments for usage.

 

Trans-High leases approximately 1,000 square feet of executive offices and production space at 119 West 24th Street – 2nd Floor, NY, NY 10011 under a month-to-month agreement directly with the landlord at a monthly rate of $16,900. This lease was terminated as of May 31, 2019 and offices were moved into 120 West 45th street, Unit #15.10 (see above).

 

In October 2018, as part of the Wilshire & Veteran Media Corp acquisition of the assets of Dope Media Inc. asset purchase, the Company assumed the lease of approximately 7,600 sq. ft. at 203 Sixth Avenue North Building, Suite 200, Seattle, Washington 98102. The monthly base rent is $16,696 and escalates June 1st by approximately 4% with a termination date of May 31, 2021.

 

In October 2018 as part of the Culture Pub, Inc. asset purchase of Culture Magazine, we assumed a month-to-month lease of approximately 2,200 sq. ft. with a base rent of $2,100 per month at 2175 Sampson Avenue, Units 118/119, Corona, CA 92879. In March 2019, the company entered into a 12-month lease with a base rent of $2,376 plus $193 for common costs per month. The lease terminates February 29, 2020.

 

Government Regulation and Federal Policy of Cannabis

 

The possession, consumption, production and sale of cannabis is illegal under U.S. federal law. Nonetheless, a number of states have decriminalized cannabis to varying degrees and other states have created exemptions specifically for medical cannabis. Ten states (including Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington) have legalized the recreational use of cannabis. Those states as well as 33 other states and the District of Columbia have some type of legal status for medicinal cannabis. Variations in laws exist among states that have legalized, decriminalized or created medical cannabis exemptions. In the other states, the cultivation of cannabis for medicinal or personal use continues to be prohibited except for those states that allow small-scale cultivation by the individual in possession of medical cannabis needing care or that person’s caregiver. While the Company has been operating long before any state legislation, the active enforcement of state laws that prohibit personal cultivation of cannabis could have a material adverse effect on the business, reputation, results of operations, and financial condition of the High Times Group. Furthermore, as federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana could result in our inability to continue to execute on certain aspects of our business plans.

 

 

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Under the federal Controlled Substance Act (“CSA”), the policies and regulations of the federal government and its agencies are that cannabis (marijuana) is a Schedule 1 Controlled Substance that is addictive and has no medical benefit. Enforcement of the CSA, including as it relates to cannabis, is subject to prosecutorial discretion and available resources. In the case of cannabis, and particularly in light of the growing legalization of cannabis at the state level, enforcement of the CSA is uncertain and could change rapidly, leaving businesses such as the High Times Group hard pressed to react and operate their businesses.

 

While cannabis is presently considered a Schedule 1 Controlled Substance under federal law, in 2017 Congress enacted an omnibus spending bill which included a provision prohibiting the U.S. Department of Justice (which includes the Drug Enforcement Administration) from using funds appropriated by the spending bill to prevent states from implementing their cannabis laws. This provision was effective only until September 30, 2017 and was subsequently renewed by Congress in 2018. In order to extend the prohibition, it must be specifically included in the fiscal year 2018 Commerce, Justice, and Science (CJS) Appropriations bill. In USA vs. McIntosh, a 2016 decision, the United States Court of Appeals for the Ninth Circuit held that this provision prohibits the U.S. Department of Justice from spending funds from relevant appropriations acts to prosecute individuals who engage in conduct permitted by state cannabis laws and who strictly comply with such laws. However, the Ninth Circuit’s opinion, which only applies to the states of Alaska, Arizona, California, Hawaii and Idaho, also held that persons who do not strictly comply with all state laws and regulations regarding the distribution, possession and cultivation of cannabis have engaged in conduct that is unauthorized, and in such instances the U.S. Department of Justice may prosecute those individuals. As a result, if Congress fails to include the provision prohibiting the U.S. Department of Justice from using funds appropriated by that bill to prevent states from implementing their cannabis laws, and the federal government decides to strictly enforce federal law with respect to cannabis operations, the High Times Group may have difficulty or may be unable to operate all or aspects of its business.

 

In April 2019, a group of bipartisan lawmakers, consisting of 26 initial sponsors in the U.S. House of Representatives and 10 U.S. Senators, introduced the Strengthening the Tenth Amendment Through Entrusting the States Act (also known as “STATES Act”) which, if passed, would amend the Controlled Substances Act to protect persons who are acting in compliance with state cannabis laws from federal prosecution, thus creating a more permanent solution to compliance with federal laws. Thus far, President Trump has voiced support for a prior, similar version of the STATES Act. Furthermore, recently appointed U.S. Attorney General William Barr indicated in his confirmation hearings that he would take a hands-off approach toward state-legalized cannabis businesses.

 

Even if the STATES Act passes both houses of Congress and is signed into law by the President, the sale of marijuana will still remain a Schedule 1 Controlled Substance under the CSA and illegal in those states which have not passed permissive legislation on the production, sale and distribution of cannabis for either or both recreational or medical purposes. In addition, it is unclear to what extent that the STATES Act would improve the ability of cannabis growers, dispensaries and distributors to open bank accounts and otherwise engage in traditional banking activities. It has been reported that only one in 30 banks and credit unions will accept deposits and open accounts from such businesses, although another bill, entitled the SAFE Banking Act is pending before Congress which, if enacted, could conceivably exempt banks from liability for doing business with cannabis industry participants in those states which permit such activities. There can be no assurance that either the STATES Act, or the SAFE Banking Act will be enacted into law.

 

While the High Times Group believes that legalization trends are favorable and create a compelling business opportunity for early movers, there is no assurance that these trends will continue or be realized, that existing limited markets will continue to be available or that any new markets for cannabis and related products will emerge for the High Times Group. The business plan of the High Times Group is based on the premise that cannabis legalization will expand, that consumer demand for cannabis will continue to exceed supply for the foreseeable future, and that consumer demand for cannabis for medical and recreational uses will grow as it becomes legal to possess and use it and its derivative products, such as oils and certain food items. There is no assurance that this premise will prove to be correct or that the High Times Group will be generate increasing revenues or profits in the future. Moreover, if cannabis legalization is scaled back or reversed at the state level, or if the federal government increases its regulation and prosecution of cannabis-related activities, the ability of the High Times Group to generate revenue and profit could materially and adversely impacted.

 

Legal Proceedings

 

The THC Group is involved in a pending litigation in New York State Supreme Court with a former employee who alleges that Trans-High breached his employment agreement and seeks damages of $6,000,000. THC Group has counterclaimed against the former employee. The dispute is in the discovery stage. The High Times Group believes that it has valid defenses and intends to vigorously defend this action.

 

 

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In addition, our subsidiary, High Times Productions, Inc. (“Productions”) is involved in a pending litigation in California State Court pursuant to which an individual with disabilities brought suit against Productions and the California Exposition and State Fair (“Cali Expo”) as a result of alleged violations of the Americans with Disabilities Act and related federal and state statutes. The plaintiff in this action alleges that Productions and Cali Expo failed to provide adequate accommodations for people with disabilities at the High Times Cannabis Cup Event held on May 4 and 5, 2018 at the Cali Expo Fairgrounds in Sacramento, CA. Productions has responded to the complaint and the litigation is ongoing.

 

On September 25, 2018, the Company entered into an amendment to the asset purchase agreement with Southland and Culture Pub. Pursuant to the amendment, the parties agreed to consummate the acquisition of the Culture assets effective as of October 1, 2018. In addition, the parties agreed to extend the contractual deadline by which the Company must consummate a Hightimes Liquidity Event until December 1, 2018. The amendment provided that in the event the Company failed to complete a Hightimes Liquidity Event by December 1, 2018, the Company would, at the option of Southland, be required to issue a promissory note to Southland by December 15, 2018 in the amount of $2,000,000 (the “Southland Note”), which Southland Note was to be issued in lieu of 370,370 shares of the Company’s Class A Common Stock. Inasmuch as we did not consummate the Liquidity Event by December 1, 2018, on November 26, 2018, Southland notified Hightimes that it would elect to accept the Southland Note in lieu of Hightimes common stock. The Southland Note bears interest at the rate of 6% per annum and is payable in four installments of $250,000 each due March 15, 2019, June 15, 2019, September 15, 2019 and December 15, 2019 with a final $1,000,000 payment due on March 15, 2020. The Company did not issue the Southland Note to Southland following its demand or pay the first $250,000 installment under the Southland Note that was due on March 15, 2019. Accordingly, on March 27, 2019, Southland commenced a legal action in the Superior Court of Los Angeles to compel the Company to issue the Southland Note and make payment of the $250,000 installment that was due on March 15, 2019.

 

Hightimes Holding did not deliver the Southland Note to Southland as our senior secured lender, ExWorks Capital Fund I, L.P., has not, as yet, agreed to permit Southland to obtain a security interest on any of our assets. Hightimes Holding believes it has meritorious defenses to the delivery of the Southland Note and any other claims of Southland. We filed an answer to Southland’s complaint on May 15, 2019 and, although we are seeking to resolve this issue, nonetheless, there is no assurance that we will be able to reach a favorable settlement of this dispute. An adverse decision in the litigation could have a material adverse effect on our business and future prospects.

 

Other than the above, from time to time we become the subject of litigation that occurs in the ordinary course of business. To date, no pending or threatened litigation involves a federal or state governmental agency.

 

Terms of the Acquisition of the High Times Group.

 

On December 27, 2016, Hightimes Holding entered into a stock purchase agreement, which was superseded in its entirety by the amended and restated stock purchase agreement, dated February 14, 2017, by and among Hightimes Holding, THC and the stockholders of THC. Pursuant to the agreement, Hightimes Holding Corp. agreed to purchase 100% of the capital stock of THC and its subsidiaries. The acquisition was consummated effective February 14, 2017. The purchase price was $42,200,000, plus 7,723,463 shares of Class A Common Stock of Hightimes Holding to represent at closing 40% of its fully diluted Class A Common Stock, as defined in the stock purchase agreement. The $42,200,000 portion of the purchase price was paid at closing by $12,200,000 in cash, which included approximately $1,200,000 used to retire High Times Group debt to a subordinated lender, plus three-year installment 8% purchase notes payable to the stockholders of THC aggregating $30,000,000 (the “Purchase Notes”). In addition to the $30,000,000 of Purchase Notes, at closing the $12,200,000 of cash payments were paid as follows: (a) $10,904,000 to the former THC stockholders, (b) $1,121,000 was paid to retire a note payable of THC, and (c) $175,000 was paid by Hightimes Holding to the former THC legal counsel.

 

Hightimes Holding financed the closing cash payment and the working capital to acquire the THC Group, through approximately $6,383,000 contributed to Hightimes Holding by 58 accredited investors in consideration for an aggregate of 4,974,134 shares of Class A Common Stock, and a $7,500,000 senior secured debt facility (the “Senior Secured Debt”) provided by ExWorks to Hightimes Holding and each of the members of the High Times Group, as borrowers. Following the THC Group closing, Hightimes Holding has continued to raise funds selling an additional 1,395,373 shares of Class A Common Stock for approximately $5,215,497. As of July 5, 2018, total financing through accredited investors totaled approximately $11,598,948 in consideration for an aggregate of 6,369,514 shares of Class A Common Stock.

 

The original $30,000,000 of Purchase Notes were and remain fully subject and subordinated to the Senior Secured Debt but were secured by a subordinated pledge by Hightimes Holding of the acquired Trans-High capital stock. Interest on the Purchase Notes at the rate of 8% per annum accrued until August 28, 2017. Thereafter, the Purchase Notes were payable in quarterly installments of $1,500,000, commencing August 28, 2017, with final payment of $16,500,000 due on February 28, 2020.

 

As of May 30, 2019, we owe such parties an aggregate of approximately $2,903,000 million, plus accrued interest at the rate of 12% per annum, under non-convertible notes which are due on October 31, 2019. Although we are obligated to prepay such notes based on 20% of the net proceeds we receive from any future public or private financings that we obtain after November 1, 2018 and prior to the October 31, 2019 maturity dates of such Final Notes as of April 30, 2019, we are late in payment of approximately $1,256,000 of such mandatory pre-payments. Acceleration of the notes by the holders would also constitute a default to our senior lender under the senior loan and security agreement which could result in a foreclosure on all of the assets of the High Times Group and the loss of 100% of the equity investments made by holders of Hightimes Holding securities.

 

 

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Under the terms of the stock purchase agreement, upon the occurrence of a “Conversion Event,” all of the then outstanding Purchase Notes were to automatically (and without any further action or consent on the part of the holders of the Purchase Notes) convert into shares of Hightimes Holding non-voting Class B Common Stock. A “Conversion Event” is defined as:

 

(a) Hightimes Holding or another “Issuer” (resulting from a merger or sale of control) listing its Class A Common Stock and Class B Common Stock (collectively, “Common Stock”) for trading on any one of the following security exchanges or inter-dealer quotation systems: (i) the NASDAQ Stock Market LLC (including the NASDAQ Capital Market), (ii) the New York Stock Exchange, (iii) the OTC Markets QX Exchange, or (iv) Toronto Stock Exchange (each a “Qualified Stock Exchange”); and

 

(b) the “market value” (defined as the total number of outstanding shares of Company Common Stock multiplied by the initial offering price of our Class A Common Stock) at the time of the initial listing on a Qualified Stock Exchange being equal or greater than $11,000,000.

 

The conversion price of the Purchase Notes was to be equal to the closing day market price of the Class A Common Stock listed on a Qualified Stock Exchange.

 

Subsequent to the issuance of the Purchase Notes, we entered into a series of agreements with the holders of such Purchase Notes as a result of which approximately $22.5 million of such Purchase Notes (which were discounted by 25% to $16,875,000) were converted into 1,534,090 shares of Class A Common Stock at a conversion price of $11.00 per share. An additional $3.046 million of such Purchase Notes will also be converted into shares of Class A Common Stock at a conversion price of $11.00 per share at such time as our shares are quoted or listed for trading on the OTCQX Market or other securities exchange. See “Related Party Transactions – Agreements with Holders of Purchase Notes” elsewhere in this Offering Circular.

 

Our Senior Secured Financing

 

To partially finance the High Times Group acquisition, Hightimes Holding, Trans-High and each of the other members of the High Times Group, as borrowers, executed a loan and security agreement with ExWorks Capital Fund I, L.P. (“ExWorks”), dated as of February 28, 2017 (the “Senior Loan Agreement”). At the closing of the acquisition of the High Times Group, ExWorks funded $7,500,000 to Hightimes Holding and the other borrowers. Under the terms of the Senior Loan Agreement, interest is payable monthly at the rate of 15% per annum, with principal installments of $100,000 per month payable commencing in September 2017 and the entire outstanding balance of the loan was due and payable on February 28, 2018. The loan is secured by a first priority lien and security interest on all tangible and intangible assets of Hightimes Holding and the High Times Group, and all payments to the Trans-High stockholders under the Sellers Purchase Notes are fully subject and subordinated to the rights of ExWorks and its first lien on the assets of the borrowers. When the loan matures, ExWorks is entitled to an additional fee of $1,200,000. ExWorks also received a warrant, exercisable for nominal consideration ($0.001 per share), commencing six months form the closing of the loan, to purchase shares of Class A Common Stock, representing 2.75% of Hightimes Holding “Class A Common Stock Deemed Outstanding.” The term “Class A Common Stock Deemed Outstanding” means, in substance, all outstanding shares of Class A Common Stock outstanding immediately prior to the Public Offering and all shares issuable upon conversion of outstanding convertible securities and exercise of outstanding options immediately prior to the Public Offering, excluding any Class A Common Stock or other securities issued in connection with any private financing or acquisitions.

 

On August 25, 2017, pursuant to the First Amendment to the ExWorks Loan Agreement, ExWorks granted Hightimes Holding an option, exercisable at any time on or before January 29, 2018, to extend the maturity date of the ExWorks loan to August 28, 2018. If we elected to exercise the option, we would have been obligated to pay ExWorks an additional fee (in addition to the $1,200,000 fee) of $600,000 and issue a second warrant to ExWorks to purchase shares of Class A Common Stock representing 1.375% of Hightimes Holding Class A Common Stock Deemed Outstanding. On the signing of the third amendment on February 8, 2018 (as set forth below) the option right to extend the First Amendment was retired with no additional success fee charged or warrant issued.

 

As of October 31, 2017, ExWorks and the High Times Group entered into a Second Amendment to the ExWorks Loan Agreement pursuant to which ExWorks agreed to loan up to an additional $4,000,000 to the Hightimes Group, thereby increasing the outstanding principal amount of the Indebtedness owed to ExWorks to $11,500,000. The Company used $2,754,000 of the proceeds of the additional loan advance to make the installment payment of principal and accrued interest that was due on August 28, 2017 to the Purchase Noteholders.

 

 

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At the same time, as of October 31, 2017, the parties restated the prior $7,500,000 note payable to ExWorks by issuing to ExWorks a maximum $11,500,000 senior secured note that was due and payable on February 28, 2018, subject to extension at our option as set forth above. The restated note was convertible at any time prior to the maturity date at the option of ExWorks into Class A Common Stock of Hightimes Holding or upon consummation of the Origo Merger (whether or not the note was previously converted) into Origo Shares. The conversion price was the lower of: (i) 100% of the initial per share offering price per share sold to the public in the Public Offering, or (ii) 90% of the per share valuation to Company stockholders in connection with the Origo Merger, or (iii) 90% of the consideration paid per share by any third party in connection with a Sale of Control of Hightimes Holding and its subsidiaries. In consideration for the loan increase, the Company issued to ExWorks 39,351 shares of Class A Common Stock, paid a $25,000 due diligence fee, and agreed upon payment of the loan (in addition to the $1,200,000 success fee provided in the original loan agreement) to pay ExWorks an additional $300,000 Success Fee. Upon completion of the Public Offering, the ExWorks note would be convertible, at the option of the holder, into 1,313,131 additional shares of Class A Common Stock of Hightimes Holding.

 

On February 8, 2018, ExWorks and the Hightimes Group entered into a Third Amendment (the “Third Amendment”) to the ExWorks Loan Agreement. Pursuant to the Third Amendment (a) ExWorks increased the outstanding principal amount of the loan to the Hightimes Group by $1,500,000 from $11,500,000 to $13,000,000, (b) revised the maturity date to February 28, 2020, (c) Hightimes Holding issued to ExWorks an additional five-year warrant to purchase an additional 2.25% of Hightimes Holding Class A Common Stock Deemed Outstanding at an exercise price of approximately $5.47 per share (with the final purchase price to be determined at time of exercise), which would be determined by dividing $135,000,000 by the Class A Common Stock Deemed Outstanding, and (d) we increased the success fee payable to ExWorks under the prior loan agreement from $1,500,000 to $2,800,000; provided, that to the extent that the ExWorks loan remains outstanding after February 28, 2019, such fee is subject to increase by an amount equal to 10% of the then-outstanding debt owed to ExWorks. Under the Third Amendment to the ExWorks Loan Agreement, we will be obligated to meet certain financial covenants including maintaining cash and immediately marketable securities equal to our then-outstanding debt after February 28, 2019.

 

On June 4, 2018, ExWorks agreed that upon the first to occur of the completion of the Public Offering and listing or trading of our Class A Common Stock on any one of NASDAQ, the NYSE American, the OTC Market or the Canadian Securities Exchange, it would exercise both the February 2017 Warrant and the February 2018 Warrant. Based on our Class A Common Stock Deemed Outstanding immediately prior to the Public Offering, exercise of such Warrants would entitle ExWorks to purchase a total of 1,289,774 shares of our Class A Common Stock and pay an average weighted exercise price of $2.359 through a $3,042,612 reduction of the principal amount $17,400,000 Note owed by us and our consolidated subsidiaries to ExWorks.

 

On August 14, 2018, ExWorks and the Company entered into a Fourth Amendment (the “Fourth Amendment”) to the ExWorks Loan Agreement effective as of July 27, 2018. Pursuant to the Fourth Amendment (a) ExWorks increased the outstanding principal amount of the loan to the Borrowers by $1,200,000 from $13,000,000 to $14,200,000. The additional principal amount of $1,200,000 plus a $60,000 amendment fee was due and payable on or before August 10, 2018.

 

On August 31, 2018, ExWorks and the Company entered into a Fifth Amendment to the loan and security agreement whereby ExWorks agreed to extend the date under which the $1,200,000 advance provided in the Fourth Amendment was due and payable to September 14, 2018. On September 20, 2018, the repayment of the additional principal advance and the $60,000 amendment fee was paid, thereby reducing the principal indebtedness owed under the ExWorks loan to $13,000,000.

 

On September 21, 2018, ExWorks and the Company entered into a Sixth Amendment to the loan and security agreement whereby ExWorks made an additional loan advance of $1,000,000 to the company, which was due December 31, 2018, to facilitate the DOPE Publication acquisition. At that time, ExWorks received a new Senior Secured Convertible Promissory Note in the principal amount of $14,000,000.

 

As stated above, (a) at the time of the February 2017 initial closing of the ExWorks loan, we issued to ExWorks a warrant to purchase 2.75% of our Class A Common Stock Deemed Outstanding at an exercise price of $0.01 per share (the “February 2017 Warrant”), and (b) in connection with the February 2018 Third Amendment to the loan agreement, we granted ExWorks a second warrant to purchase an additional 2.25% of our Class A Common Stock Deemed Outstanding at an exercise price of $5.47 (the final purchase price is to be determined on day of exercise) per share (the “February 2018 Warrant”). Such exercise price was calculated by dividing $135,000,000 by the Class A Common Stock Deemed Outstanding immediately prior to the completion of the Public Offering.

 

 

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On November 15, 2018, ExWorks and the Company agreed that the ExWorks warrants would be exercised simultaneous with Hightimes Holding’s listing or quoting of its Class A Common Stock on an approved market, such as NASDAQ, the OTCQB or OTCQX. If and when the warrants are exercised, the exercise price of both warrants will be used to pay off a portion of our indebtedness to ExWorks. Had the warrants been exercised as of December 31, 2018, a total of 1,270,869 shares of Class A Common Stock would have been issued to ExWorks and the blended exercise price of $2.39 per share would have been used to reduce the ExWorks note by $3,043,731.

 

On March 31, 2019, ExWorks and the Borrowers entered into a Seventh Amendment to the Loan and Security Agreement whereby ExWorks waived certain covenant defaults under the loan agreement, as amended, and advanced an additional $2,000,000 to the Borrowers, of which $1,000,000 retired unpaid accrued interest and fees and the balance is available as working capital. The Seventh Amendment to the Loan and Security Agreement increased the outstanding balance owed by the Company to ExWorks to $16,000,000.

 

On May 22, 2019, ExWorks and the Borrowers entered into an Eighth Amendment to the Loan and Security Agreement whereby, in exchange for a $100,000 amendment fee which will be due and payable upon the sooner of (a) expiration or termination of the term of the agreement or (b) payment in full of the obligations owed thereunder, ExWorks agreed to waive all prior defaults and advance an additional $1,400,000 to the Borrowers. As a result, the current outstanding principal balance of the ExWorks loan is now $17,400,000.

 

Inclusive of fees and accrued interest payable on the February 28, 2020 maturity date, or earlier if we are able to prepay the current $17,400,000 principal balance ExWorks convertible note, plus $2,900,000 in success fees which are due to ExWorks. Assuming the warrants are exercised based on the December 31, 2018 pricing, we will be obligated to pay ExWorks not less than $15,756,269 (inclusive of its success fee). There is no assurance that ExWorks will agree to convert all or any part of the ExWorks convertible note into shares of Class A Common Stock, or that we will be successful in refinancing or otherwise retiring the ExWorks loan either prior to the February 28, 2020 maturity date. In addition, we are currently in default of a financial covenant contained in the ExWorks loan agreement and are seeking a waiver of such default. Although we will seek to ameliorate certain of the risks of default under our outstanding indebtedness and obtain additional working capital to achieve our business goals, there can be no assurance that the High Times Group will be able to raise any meaningful net proceeds from additional sources following our Public Offering in amounts needed to reduce our indebtedness to ExWorks and provide necessary expansion and working capital. See “Risk Factors” on page 22 of this Offering Circular.

 

Unsecured Notes

 

Seymour Silverstein Note

  

On June 26, 2018, the Company issued an unsecured note to Seymour Silverstein (the “Silverstein Note”) in the amount of $850,000 to be used for working capital needs and to retire a related party note with Justin Ehrlich for $500,000. The note bears interest at a 12% coupon rate with a maturity date of September 30, 2018. A principal payment of $156,000 was made on November 2, 2018 to bring the balance to $694,000 as of the year ending December 31, 2018 with $49,000 in accrued interest. The note is currently in default and now due on demand.  

 

Kukui Development LLC Note

 

On March 1, 2017, the Company issued a note in the amount of $125,000 (the “Kukui Note”) to be used for working capital. The note bears interest at a 0% coupon rate with a maturity date of March 31, 2017. The note has a default coupon rate of 10%. No payments of interest or principal have been paid during the life of the note. The note is currently in default and now due on demand.

 

Agreements with iHeart Media and Affiliate

 

On September 26, 2018, Hightimes Holding entered into an advertising agreement with iHeart Media + Entertainment, Inc., a Nevada corporation (“iHeart”). Under the terms of the advertising agreement iHeart committed to provide Hightimes with a minimum of $5,000,000 of iHeart advertising media inventory within the United States (collectively, the “iHeart Ad Inventory”), in consideration of the issuance by Hightimes Holding to Broader Media Holdings, LLC, a Delaware limited liability company and an affiliate of iHeart (“BMH”), of the BMH Note (defined below). The advertising agreement also contemplates that the parties may agree upon additional advertising media inventory purchases by Hightimes of an additional $5,000,000 in the aggregate (each, an “Additional iHeart Ad Inventory Tranche”), in consideration of an equal increase in the principal amount of the BMH Note, up to a maximum $10,000,000 in total (excluding the Cash Purchases). Hightimes utilized the Ad Inventory to publicize both its ongoing business and its pending maximum $50.0 million Regulation A+ initial Public Offering.

 

In consideration for the purchases of the iHeart Ad Inventory, the Company issued to BMH an 8% convertible note due on September 26, 2020 (the “BMH Note”), with an initial principal amount of $5,000,000, which since increased to a maximum of $10,000,000 in consideration of iHeart’s providing the Company with additional iHeart Ad Inventory Tranches equal in amount to the amount of such increase in principal amount of the BMH Note. However, upon completion of the Hightimes Pubic Offering, provided that a minimum of $15,000,000 of gross proceeds are raised and Hightimes Class A voting common stock trades on an “Approved Securities Market” (as defined in the convertible BMH Note), all iHeart Ad Inventory purchased and the entire outstanding amount of the BMH Note shall automatically convert into shares of Hightimes Class A common stock at a conversion price equal to the volume weighted average closing prices, as traded on such Approved Securities Market for the 10 trading days immediately following completion of the Hightimes Public Offering.

 

As of April 30, 2019, the date on which we paused the Public Offering, Hightimes Holding has received an aggregate of $15,207,458 of gross proceeds from its Public Offering. Accordingly following commencement of the trading of the Hightimes Class A Common Stock on the OTCQX Market (one of the “Approved Securities Markets”) the $10,000,000 BMH Note shall automatically convert into Hightimes Class A Common Stock.

 

Agreement with Spectrum King

 

On September 11, 2018, Hightimes entered into an agreement with Spectrum King, LLC, pursuant to which Hightimes has licensed to Spectrum the right to use the HightimesTM name, logo and brand in connection with the marketing and distribution of all Spectrum products and granted Spectrum over a period of three years an aggregate of $1,500,000 worth of advertising credits in the Hightimes print and internet magazines and at all festivals sponsored by Hightimes. In consideration, Hightimes received eleven units of Spectrum membership interests, representing 9.9099% of Spectrum’s outstanding equity.

 

 

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Spectrum does business as “SPECTRUM KING LED,” and specializes in designing, manufacturing and selling high-end LED grow lights for indoor and greenhouse applications targeting all variety of growing industries, such as cannabis, leafy greens, tomatoes, ornamental plants and other plants and vegetables.

 

Our Stock Split

 

At the time of the March 1, 2017 closing of the Trans-High acquisition (after giving retroactive effect to our 1.9308657-for-one forward stock split consummated as of January 15, 2018), Hightimes Holding had 18,705,114 shares of its Class A Common Stock issued and outstanding. Between March 2, 2017 and the date of this Offering Circular, and not including the shares sold in our Regulation A+ Public Offering, Hightimes Holding issued an additional 1,395,390 shares of Class A Common Stock to investors, issued 577,651 shares of Class A Common Stock to Green Rush Daily, LLC to complete asset purchase deal, issued 909,120 shares of Class A Common Stock to Dope Media Holdings LLC to complete asset purchase deal, issued 1,534,090 shares of Class A Common Stock to the Purchase Note Holders group on conversion of a partial of their debt, issued 39,600 shares of Class A Common Stock in board approved stock grants, and issued 39,351 shares of Class A Common Stock to ExWorks upon the execution of the amendment to increase loan principal in October 2017 and granted options of which 3,205,122 are active to purchase shares of Class A Common Stock, of which 1,052,426 options are vested).

 

The Hightimes Public Offering

 

On July 26, 2018, the SEC approved Hightimes Holdings Regulation A+ Public Offering (the “Public Offering”) of up to 4,545,455 shares of Hightimes Holding Class A Common Stock at an initial offering price of $11.00 per share. The Public Offering commenced in July 2018 and through April 30, 2019, Hightimes Holding has received subscriptions and payment for a total of 1,382,458 shares of its Class A Common Stock sold at $11.00 per share from 23,197 shareholders and raised an aggregate of $15,207,458 of gross proceeds. We intend to keep the Public Offering open through as late as June 30, 2019, although Hightimes Holding reserves the right to terminate the Public Offering at any time prior to June 30, 2019.

 

Our Public Offering is based on a $225,000,000 valuation of the outstanding shares of Class A Common Stock of Hightimes Holding as of the July 26, 2018 date of the SEC’s approval of our offering circular. Such $225,000,000 valuation and the $11.00 per share Offering Price of the Class A Common Stock had been arbitrarily determined by Hightimes Holding and is not based on book value, assets, earnings or any other recognizable standard of value.

 

Origo Merger Transaction

 

On July 24, 2017, Hightimes Holding entered into an agreement and plan of merger, as amended (the “Origo Merger Agreement”), with Origo Acquisition Corp., a special purpose acquisition corporation (“Origo”). On July 31, 2018, the Company and Origo terminated the proposed merger (the “Origo Merger”) contemplated by the Merger Agreement.

 

Our Corporate Structure

 

The following chart sets forth the current corporate structure:

 

 

 

 

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Our Fully-Diluted Equity.

 

Fully-Diluted Class A Common Stock

 

The following table sets forth the number of shares of Hightimes Holding Class A Common Stock, as of April 30, 2019, to be owned by (a) the current holders of Hightimes Holding Class A Common Stock, (b) holders of Purchase Notes, (c) the holder of Hightimes Holding warrants, (d) ExWorks Capital Fund I, L.P. (“ExWorks”) as holder of a $16,000,000 senior secured note that is convertible into Class A Common Stock, (e) Bio Cup Music as holder of a $375,000 Hightimes Holding convertible note, assuming such note was fully converted into Class A Common Stock, and (f) holders of fully vested stock option grants (the “Stock Options Granted”), (g) Broader Media Holdings as holder of a $10,000,000 note convertible into Class A Common Stock, (h) shares of Class A Common Stock used to purchase Dope Media assets, (i) shares of Class A Common Stock used to purchase Culture Magazine assets, (j) Gemini Finance Corp. as the holder of a $672,000 note that is convertible into Class A Common Stock, and (k) investors in this Regulation A+ Offering, based on the sale of 10% (the Minimum Offering), 25%, 50%, 75% or 100% of the 4,545,454 shares of Hightimes Holding Class A Common Stock being offered in this Regulation A+ Offering. This Offering may be terminated at any time on or before June 30, 2019.

 

Number of Class A Shares Sold     10%       25%       50%       75%       100%  
Existing holders of Class A Common Shares(1)     23,200,316       23,200,316       23,200,316       23,200,316       23,200,316  
Holders of Purchase Notes (1)     276,909       276,909       276,909       276,909       276,909  
Investors in the Reg A+ Offering (2)     454,546       1,136,364       2,272,728       3,409,091       4,545,454  
Stock Options (3)     3,205,122       3,205,122       3,205,122       3,205,122       3,205,122  
Holders of Bio Cup Note (4)     36,745       36,745       36,745       36,745       36,745  
Holders of Purchase Note Warrants (5)     264,945       264,945       264,945       264,945       264,945  
RSU Grants (6)     575,500       575,500       575,500       575,500       575,500  
Broader Media Holdings Convertible Note (7)     949,293       949,293       949,293       949,293       949,293  
Holders Warrant #1 (8)     709,384       709,384       709,384       709,384       709,384  
Holders Warrant #2 (9)     580,405       580,405       580,405       580,405       580,405  
ExWorks Convertible Note (10)     1,177,944       1,177,944       1,177,944       1,177,944       1,177,944  
Gemini Finance Corp. Note (11)     62,395       62,395       62,395       62,395       62,395  
Total    

31,493,004

     

32,174,822

     

33,311,186

     

34,447,549

     

35,583,912

 

 

(1)

Includes 1,534,091 shares of Class A Common Stock issued in 2018 to former holders of $22,500,000 of Purchase Notes (discounted by 25% to $16,875,000), upon conversion of such discounted Purchase Notes at a conversion price of $11.00 per share. Also includes an additional 276,909 shares to be issued upon conversion of an additional $3,046,000 principal amount of Purchase Notes which will be converted into Class A Common Stock at a conversion price of $11.00 per share simultaneous with the exercise of the ExWorks warrants referred to in footnotes (8) and (9) below. Excludes 1,382,458 Reg A shares issued as of April 30, 2019.

   
(2) Total funds received in the Regulation A+ Public Offering through April 30, 2019 was $15,207,458 from the sale of 1,382,458 shares of Class A common stock sold at an offering price of $11 per share. This number is subject to change pending sales of additional shares in the Regulation A+ Public Offering and compliance clearing adjustments.
   
(3) Stock Options granted and effective as of April 30, 2019 was 3,205,122 options of which 1,052,426 options has vested as of May 31, 2019.
   
(4) Bio Cup Music Convertible Note consisting of $375,000 note plus $29,192 of interest as of April 30, 2019, converting at $11 per share.
   
(5) Warrants with an exercise price of $11.00 per share issued to former holders of Hightimes Holding Corp. Purchase Notes in consideration for waiving $2,914,395 of accrued interest previously payable in the form of 264,945 shares of Class A common stock.
   
(6) Represents 500,000 restricted stock units awarded to Kraig G. Fox, Chief Executive Officer, and 75,000 restricted stock units awarded to Neil Watanabe, Chief Operating Officer and Chief Financial Officer.

 

 

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(7) Assumes Broader Media Holdings (an affiliate of iHeart Media) converts a $10,000,000 convertible note plus $442,222 in interest as of April 30, 2019 into Class A Common Stock at an assumed conversion price of $11 per share. Under such note, the conversion price may be increased or decreased (and the number of conversion shares adjusted) based on the volume weighted average price per share during the initial ten trading days of such shares.
   
(8) Warrant exercisable for 2.75% of the shares of Class A Common Stock issued at the time of exercise in accordance with the Deemed Issue calculation as of March 31, 2019.
   
(9) Warrant exercisable for 2.25% of shares of Class A Common Stock issued at the time of exercise in accordance with the Deemed Issue calculation as of March 31, 2019.
   
(10)

Shares issuable under ExWorks convertible note of $16,000,000 principal amount at April 30, 2019 (less warrant conversion proceeds estimated at $3,042,612) convertible at 100% of per share Public Offering price of $11.00 per share.

   
(11) Gemini Finance Corp. Convertible Note consisting of $672,000 note plus $14,342 of interest as of April 30, 2019 converting at $11 per share at such time as Hightimes Holding Class A Common Stock commences trading on the OTCQX Market or another securities exchange.

 

Our Risks

 

An investment in our Class A Common Stock involves a high degree of risk. You should carefully consider the risks summarized below. These risks are discussed more fully in the “Risk Factors” section immediately following this Offering Circular Summary. These risks include, but are not limited to, the following:

 

  Enforcement of existing federal or state regulations concerning the cannabis industry or adoption of new regulations that could have a material adverse effect on our business;
     
  Our auditor has included a going concern opinion in its audit report of us;
     
  Our ability to pay significant indebtedness, including installments that are currently due;
     
  Our ability to close pending acquisitions;
     
  Adverse legal actions that could materially adversely affect our business, financial condition and results of operations;
     
  Our ability to effectively execute our business plan and respond to the highly competitive and rapidly evolving marketplace and regulatory environment in which we intend to operate;
     
  Our ability to manage our expansion, growth and operating expenses;
     
  Our ability to evaluate and measure our business, prospects and performance metrics, and our ability to differentiate our business model and service offerings;
     
  Our ability to compete, directly and indirectly, and succeed in the highly competitive and evolving Cannabis industry;

 

 

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  Our ability to deal with anticipated more stringent federal regulations on recreational use of Cannabis which could materially and adversely affect our business; and
     
  Our ability to protect our intellectual property and to develop, maintain and enhance a strong brand.

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company” as defined in the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

  only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
     
  reduced disclosure about our executive compensation arrangements;
     
  no non-binding advisory votes on executive compensation or golden parachute arrangements; and
     
  exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

 

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of this Offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. We may choose to take advantage of some but not all of these exemptions. We have taken advantage of reduced reporting requirements in this Offering Circular. Accordingly, the information contained herein may be different from the information you receive from other public companies in which you hold stock. In addition, we may delay the adoption of certain accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

REGULATION A+

 

Hightimes Holding is offering its Class A Common Stock pursuant to recently adopted rules by the SEC mandated under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. These offering rules are often referred to as “Regulation A+.” We are relying upon “Tier 2” of Regulation A+, which allows us to offer up to $50 million in a 12-month period.

 

In accordance with the requirements of Tier 2 of Regulation A+, we are required to publicly file annual, semiannual, and current event reports with the SEC after the qualification of the offering statement of which this Offering Circular forms a part.

 

THE OFFERING

 

Issuer:   Hightimes Holding Corp.
     

Shares Offered by

Hightimes Holding (1):

 

  A minimum of 454,545 and maximum of 4,545,454 shares of Hightimes Holding Class A voting common stock, $0.0001 par value per share (“Class A Common Stock”) at an offering price of $11.00 per share, for total minimum gross proceeds of $5,000,000 and maximum gross proceeds of $50,000,000.
     

Number of shares of Common Stock Outstanding before the Offering (1):

  20,717,496 shares of Class A Common Stock and no shares of Class B Common Stock (1)

 

 

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Number of shares of Common Stock to be Outstanding after the Offering – Fully Diluted (2):   A minimum of 31,493,004 and a maximum of 35,583,912 shares of Common Stock.
     
Price per Share:   $11.00
     
Minimum Purchase:   Nine shares of Common Stock for a subscription price of $99.00.
     
Proposed Listing   The Company expects to have our shares of Class A Common Stock quoted on the OTCQX Market or the OTCQB Market under the ticker symbol “HITM.” There is no assurance that the shares of Common Stock will ever be quoted on the OTC. To be quoted on the OTC, a market maker must apply with the Financial Industry Regulatory Authority (“FINRA”) to make a market in our Common Stock. As of the date of this Supplement, we have engaged in discussions with a FINRA market maker regarding participation in a future trading market for our securities; and have made filings with FINRA. However, we have not, as yet received final FINRA approval. Nonetheless, we intend to apply to uplist our Class A Common Stock on the Nasdaq Capital Market (“NASDAQ”) as soon as we become eligible. In order to meet the minimum initial listing requirements to list our Class A Common Stock on NASDAQ, we will need to receive approximately $15,000,000 of equity capital either from the net proceeds of this Offering and/or from the sale of additional shares of Class A Common stock in a subsequent private or public offering.
     
   

We may continue to offer our Class A Common Stock under this Offering Circular until as late as June 30, 2019. As a result, you may experience a delay between the closing of your purchase of shares of our Class A Common Stock and the commencement of exchange trading of such shares on the OTCQX or OTCQB Market.

 

There can be no assurance that the Hightimes Holding Class A Common Stock sold in this Offering will be quoted on the OTC Market or listed on NASDAQ. See “Risk Factors” starting on page 22 of this Offering Circular.

     
Use of Proceeds (3)  

If Hightimes Holding sells all of the 4,545,454 Offered Shares of Class A Common Stock being offered in this Offering at an Offering Price of $11.00 per Share for gross proceeds of $50,000,000. Assuming up to $4,000,000 of maximum selling agent’s fees, and additional estimated marketing and other Offering expenses of between $2,000,000 and $3,000,000, estimated net proceeds to Hightimes Holding will be approximately $43,000,000.

 

We intend to use these net proceeds to (i) finance the acquisitions of BIG Publications and Ferio Del Canamo S.L., (ii) repay the remaining indebtedness of $2,903,000 that we owe to the former holders of our of Purchase Notes, (iii) retire other indebtedness and reduce or retire the $17,400,000 of our outstanding senior secured debt, (iv) to fund our brand development, including expansion of our Cannabis Cup events, marketing and other operating expenses, and (v) to provide working capital to the High Times Group for acquisitions, joint ventures and other general corporate purposes. However approximately 32.3% of the net proceeds we received to date from the sale of 1,382,458 shares of Class A Common Stock were used to defray marketing expenses and costs of the Offering. See the “Risk Factors” and “Use of Proceedssections of this Offering Circular.

     
Risk Factors:   Investing in our Common Stock involves a high degree of risk. See “Risk Factors.”

 

(1) Gives effect to a 1.9308657-for-one forward stock split of Hightimes Holding’s 10,294,292 outstanding shares of Class A Common Stock that was consummated effective as of January 15, 2018, 190,189 Class A Common Stock sold after the stock split.
   
(2)

Includes (a) a minimum of 454,545 and a maximum of 4,545,454 shares of Class A common Stock to be sold in this Offering, (b) up to 1,177,944 shares of Class A Common Stock issuable upon conversion of a $16,000,000 senior secured convertible note reduced by the debt reduction of $3,042,612 from the exercise of ExWorks Warrants, (c) 36,745 shares of Class A Common Stock issuable upon conversion of a $375,000 convertible note and interest held by Bio Cup, (d) up to 1,289,789 additional shares of Class A Common Stock, for the warrants issued to ExWorks Capital Fund I, LLC., (e) 276,909 shares of Class A Common Stock to be issued to the Seller Purchase Note holders upon conversion of $3,046,000 of the original note, (f) 949,293 shares of Class A Common Stock to be issued upon the conversion of the Broader Holdings Note, and (g) 62,395 shares of Class A Common Stock to be issued upon the conversion of the Gemini Note into,

   
(3)

Offering expenses include, in addition to potential selling commissions, fees and expenses for marketing and advertising of the Offering, media expenses, fees for administrative, accounting, audit and legal services, FINRA filing fees, fees for EDGAR document conversion and filing, and website posting fees, estimated to be approximately $3,000,000, depending upon the length of time in which we offer the Offered Shares prior to the Termination Date and the number of Offered Shares we are able to sell in this Offering.

 

 

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RISK FACTORS

 

The Shares offered hereby are highly speculative, and prospective purchasers should be aware that an investment in the Class A Common Stock involves a high degree of risk. Accordingly, prospective purchasers should carefully consider the following risk factors in addition to the other information in this Offering Circular.

 

Cautionary Statements

 

The discussions and information in this Offering Circular may contain both historical and forward-looking statements. To the extent that the Offering Circular contains forward-looking statements regarding the financial condition, operating results, business prospects, or any other aspect of our business, please be advised that our actual financial condition, operating results, and business performance may differ materially from that projected or estimated by us in forward-looking statements. We have attempted to identify, in context, certain of the factors we currently believe may cause actual future experience and results to differ from our current expectations.

 

Risks Relating to Our Business

 

The net income of High Times Group has declined between 2014 and 2017, and the High Times Group also incurred a significant net loss for the twelve months ended December 31, 2018, which may make it difficult for investors to predict future performance based on current operations.

 

During the four-year period from 2014 to 2017, the net income of THC and its subsidiaries declined from $3,421,592 in 2014 to a net loss of ($24,694,206) in 2017, although $8,430,000 of the net loss for the year ending December 31, 2017 resulted from stock compensation charges. For the year ended December 31, 2018, the consolidated net loss of the Company and direct and indirect subsidiaries was ($41,268,000), which was comprised of a loss from operations of ($27,498,000), of which ($17,512,000) was from non-cash charges in respect of advertising credits, impairment of intangibles, depreciation and amortization, and non-cash stock compensation charges. The High Times Group has forecasted a significant reduction in its operating loss for the 2019 fiscal year and expects to make a profit from operations for the 2020 fiscal year. Nonetheless, any forecasts the High Times Group makes about its operations may prove to be inaccurate.

 

The High Times Group must, among other things, determine what constitutes appropriate risks, rewards, and level of investment in its publications and events, respond to economic and market variables outside of its control, respond to competitive developments and continue to attract, retain and motivate qualified employees. There can be no assurance that the High Times Group will be successful in meeting these challenges and addressing such risks and the failure to do so could have a could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. As a result of these risks, challenges and uncertainties, the value of the High Times Group could be significantly reduced or completely lost.

 

The independent public accounting firm for the High Times Group has issued a “going concern” opinion.

 

The ability of the Company to continue as a going concern depends in large measure upon its ability to cause such creditors or their affiliates to convert indebtedness to shares of Class A Common Stock and/or obtaining the necessary financing needed to meet such debt obligation when they come due. Hightimes Holding plans to meet its capital requirements by issuing additional equity or debt securities. No assurance can be given that additional financing will be available when required or on terms acceptable to Hightimes Holding. The outcome of this issue cannot be predicted at this time and there is no assurance that, if achieved, the High Times Group will have sufficient funds to meet its obligations and execute its business plan. Partially as a result of the foregoing, the independent auditors for the High Times Group has issued a “going concern” opinion in connection with the audit of the 2016, 2017 and 2018 financial statements.

 

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The Hightimes Group has substantial indebtedness and is currently in default in payment of certain indebtedness.

 

At December 31, 2018, the High Times Group was indebted to its senior secured lender in the amount of $16,000,000, plus $2,800,000 in success fees payable on the February 27, 2020 maturity date) and up to $19,187,717 of additional indebtedness owed to various creditors. Although we believe that approximately $14,114,787 of such indebtedness will, by their terms, be reduced upon exercise of certain warrants and automatically convert into shares of Hightimes Class A Common Stock on or shortly following the trading of such shares on the OTCQX Market or another approved securities exchange, there can be no assurance that our Class A Common stock will be quoted or listing for trading on any such market or exchange.

 

As at the date of this Offering Circular, the Hightimes Group is in default in payment of certain promissory notes which, inclusive of accrued interest as of April 30, 2019, aggregate approximately $3,513,649 as of April 30, 2019. In addition, we are in arrears in payment of approximately $1.2 million owed to the former THC stockholders under a $2.9 million non-convertible note. None of the holders of these notes have, as yet, declared a default, and Hightimes Holding management is currently working with the note holders to execute agreements and waivers to extend the maturity dates and to waive the default interest rates. Although management does not expect that any of the holders of these notes (certain of whom are affiliates) will declare a default, there can be no assurance that this will be the case. If any one or more note holders declare a default, such action would also constitute a cross-default under the senior secured loan agreement between the Hightimes Group and ExWorks Capital Fund I, L.P. referred to below. Should this occur and should ExWorks elect to accelerate the $16,000,000 principal amount of senior secured indebtedness owed to it and foreclose on all of the assets of the Hightimes Group, the Company and its subsidiaries would have to seek protection under the federal bankruptcy laws.

 

In addition to our obligations owed to ExWorks and the former THC Stockholders, we owe an aggregate amount of $14,393,229 to the former owners of Green Rush Daily, Culture Magazine, Gemini Finance LLC, Bio Cup Music and iHeart Media. In addition, we owe an aggregate amount of $935,483 to the holders of the Silverstein Note and Kukui Note, which is currently in default.

 

The High Times Group may not be able to service its indebtedness.

 

Pursuant to our February 2017 senior loan agreement, as amended, before giving effect to a $3,046,000 reduction in indebtedness through a warrant exercise to be consummated upon the quotation or listing for trading of our Class A Common Stock of the OTC Market or another securities exchange, the High Times Group currently has outstanding an aggregate of $17,400,000 principal amount of senior secured indebtedness owed to ExWorks Capital Fund I, L.P. (“ExWorks”), our senior lender, which indebtedness matures on February 28, 2020. Interest is payable monthly at the rate of 15% per annum. When the loan matures, ExWorks is entitled to an additional fee of $2,900,000. Even after giving effect to the exercise of warrants to reduce such indebtedness, we would still ow ExWorks approximately $17,257,388, plus accrued interest, on the maturity date of the loan. In addition, the loan agreements obligate the borrowers to maintain certain financial covenants including maintaining a debt to equity ratio and, commencing as of February 28, 2019, maintaining a 1:1 ratio of funded debt to average total cash in banks and immediately marketable securities. As of April 30, 2019, the Hightimes Group was not in compliance with this financial covenant but has since received a waiver of such covenant default from ExWorks. There is no assurance that such required waiver will be provided in the event such financial covenant is breached in the future.

 

Our senior secured convertible note owed to ExWorks is secured by a first priority lien on all of the assets of Hightimes Holdings and its direct and indirect subsidiaries. We have been unable to pay any portion of the ExWorks debt from the current net proceeds of our Public Offering and we may be unable to maintain our financial covenants to ExWorks. Failure to maintain our financial covenants or our inability to repay or refinance the ExWorks indebtedness on or before the February 28, 2020 maturity date would represent an event of default; at which time ExWorks may foreclose on our all of our assets.

 

Even if we meet our financial covenants, the maturity date of the ExWorks senior secured loan is February 28, 2020. We anticipate that such debt will either be converted in whole or in part by ExWorks into shares of our Class A Common Stock, refinanced prior to such maturity date by another senior lender or repaid out of the proceeds of future financings. In the event we are unable to refinance such indebtedness or repay such indebtedness on or before the maturity date or ExWorks elects not to convert its note into Hightimes Holding Class A Common Stock, ExWorks will be in a position to foreclose on all of our assets, in which event all existing stockholders, including all investors in the Public Offering, would likely lose their entire investment.

 

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Even after giving effect to the conversion into Class A Common Stock of approximately $25.6 million of Hightimes Holding Purchase Notes payable to the former stockholders of THC, we owe such parties an aggregate of approximately $2.9 million, plus accrued interest at the rate of 12% per annum, under non-convertible notes which are due on October 31, 2019. Although we are obligated to prepay such notes based on 20% of the net proceeds we receive from any future public or private financings that we obtain after November 1, 2018 and prior to the October 31, 2019 maturity dates of such Final Notes as of April 30, 2019, we are late in payment of approximately $1.2 of such mandatory pre-payments. Acceleration of the notes by the holders would also constitute a default to our senior lender under the senior loan and security agreement which could result in a foreclosure on all of the assets of the High Times Group and the loss of 100% of the equity investments made by holders of Hightimes Holding securities.

 

In addition to our obligations owed to ExWorks and the former THC Stockholders, we owe an aggregate amount of $14,393,229 to the former owners of Green Rush Daily, Culture Magazine, Gemini Finance LLC, Bio Cup Music and iHeart Media. In addition, we owe an aggregate amount of $935,483 to the holders of the Silverstein Note and Kukui Note, which is currently in default.

 

The High Times Group will require additional financing.

 

As of April 30, 2019, we have received gross proceeds of $15,207,038 from our Public Offering. After payment of costs of the Public Offering of approx. $4,968,000, including marketing costs, fees to our selling agent, professional fees and fees to our escrow agents, Prime Trust, the net proceeds of our Public Offering as of April 30, 2019 were approximately $10,239,000. The maximum gross proceeds receivable from the sale of 1,382,458 shares of Class A Common Stock in the Public Offering only represent approximately 30.4% of the maximum $50,000,000 of gross proceeds that would have been received were we to sell up to the maximum amount of 4,545,455 shares in the Public Offering. Accordingly, in order to ameliorate certain of the risks of defaults under our outstanding indebtedness and obtain additional working capital to achieve our business goals (including raising approximately $5,500,000 to acquire the assets and businesses of BIG Publications and Spannabis), we will need to obtain a substantial amount of additional financings. There can be no assurance that the High Times Group will be able to consummate any such additional financings or raise any meaningful net proceeds from other debt or equity sources in the amounts needed to repay our indebtedness and provide necessary expansion, working capital and acquisition capital. If we are unable to achieve sufficient liquidity, we may be forced to cease doing business or seek protection from our creditors under the federal bankruptcy laws, in which event our stockholders, including all investors in this Public Offering, would likely lose their entire investment.

 

As of December 31, 2018, the High Times Group had a significant negative stockholder’s equity. In order for Hightimes Holding to meet the net stockholders’ equity requirements to list its shares of Class A Common Stock on NASDAQ, the Company must have all existing and certain projected debt to equity conversions and acquisitions occur and sufficient Regulation A+ offering net proceeds to comply with certain NASDAQ listing requirements.

 

While our aim is to ultimately list our Class A Common Stock on NASDAQ, Hightimes Holding may initially elect to cause its shares of Class A Common Stock to be quoted for trading on the OTCQX Market. Should we elect to seek to “uplist” to NASDAQ, in order to meet one of the NASDAQ initial listing requirements the Hightimes Group must have a minimum $4,000,000 positive consolidated net worth. The consolidated balance sheet of the High Times Group as of December 31, 2018 reflected a negative stockholders’ equity of approximately ($39,135,000). Even after giving pro-forma effect to an estimated $30,028,000 increase in our consolidated stockholders’ equity resulting from (a) the conversion of approximately $3,046,000 remaining balance of the Purchase Notes into Class A Common Stock at a conversion price of $11.00 per share, (b)) the conversion of a $375,000 note issued and $86,000 in accrued interest and derivative value adjustment in the Bio Cup Music Festival transaction, (c) the $3,043,731 reduction in our $16,000,000 senior secured note due ExWorks as of December 31, 2018 by reason of the exercise of the ExWorks Warrants (and an additional increase in stockholders’ equity from the reversal of $12,780,882 in derivative liabilities), our consolidated pro-forma stockholders’ equity as at December 31, 2018 would still be a negative ($9,107,000). Accordingly, in order to meet the initial $4,000,000 consolidated net worth NASDAQ listing requirement, the Hightimes Group would have to either receive net proceeds of in excess of $13,000,000 from the future sale of equity in our pending Regulation A+ Offering and/or other public or private equity financings, or ExWorks would have to elect to convert into Class A Common Stock a significant portion of its now-outstanding $17,400,000 principal amount of senior secured convertible note.

 

In addition, to the extent that Hightimes Group continues to incur losses subsequent to December 31, 2018, our chances of ever being able to meet the minimum $4,000,000 consolidated net worth requirement to initially list our Class A Common Stock on NASDAQ will further decrease. Accordingly, there can be no assurance that such minimum $4,000,000 consolidated stockholders’ equity will be achieved by the High Times Group, or that we will meet other the NASDAQ initial listing requirements to qualify for listing on NASDAQ in the future.

 

 24 

 

The High Times Group has a limited operating history in the sale of products associated with the cannabis industry, which makes it difficult to accurately evaluate its business prospects.

 

The High Times Group has historically engaged in the publication of a monthly print and on-line magazine and the production and sponsorship of trade shows, festivals and events. Although the High Times Group contemplates various e-commerce initiatives and licensing its High Times brand, as well as developing an e-commerce store and licensing and branding initiatives for cannabis-based products, the High Times Group has no operating history in the commercial sale of products offered to users and producers of cannabis and cannabis-related products through wholesale or retail channels. While the High Times Group intends to pursue, acquire and integrate horizontal business lines involving the commercial sale of cannabis-related products, the High Times Group cannot guarantee that it will be successful in these prospective business initiatives and as a result its business prospects are difficult to accurately evaluate.

 

Customer complaints and negative publicity regarding the products and services of the High Times Group could hurt the business and reputation of the High Times Group.

 

From time to time, the High Times Group may receive complaints from customers regarding the quality of its media content distributed through its High Times brand and its live-events and productions. Presently as a result of its print and online publications, and in the future in the event the High Times Group furthers its business lines involved in the commercial sale of cannabis-related products, it may be subject to complaints from consumers regarding the nature and quality of goods sold by the High Times Group. Dissatisfied consumers may threaten legal action against the High Times Group if no reimbursement is made. The High Times Group may become subject to product liability lawsuits from customers alleging injury because of a purported defect in its products or services, claiming substantial damages and demanding payments from the High Times Group. The High Times Group is in the chain of ownership when it supplies or distributes products, and therefore is subject to the risk of being held legally responsible for such products. Given the nature of these products (including their relation to cannabis or for other reasons), these claims may not be covered by the High Times Group’s insurance policies. Any resulting litigation could be costly for the High Times Group, divert management attention, result in increased costs of doing business, or otherwise have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. Any negative publicity generated as a result of customer frustration or disagreement with the products or services of the High Times Group, or with its websites or trade shows, could damage its reputation and diminish the value of its brand name, which could have a material adverse effect on its business, results of operations, and financial condition.

 

The High Times Group may be required to collect sales and other taxes.

 

New excise taxes may be imposed on the sale and production of products associated with cannabis by federal and state taxing authorities, suppressing sales. New government tax regulations may require that the High Times Group be responsible to collect those excise taxes, increasing its costs and risks. The High Times Group does not expect to collect sales or other similar taxes with respect to goods sold by it via its website, except for buyers from the State of California. The High Times Group expects to file quarterly sales tax returns with the State of California. Other states may, however, seek to impose sales tax collection obligations on out-of-state companies such as the High Times Group which engage in or facilitate online commerce, and a number of proposals have been made at the state and local level that would impose additional taxes on the sale of goods and services through the Internet. Such proposals, if adopted, could substantially impair the growth of Internet commerce, and could adversely affect the opportunity of the High Times Group to derive financial benefit from such activities. Moreover, a successful assertion by one or more states or any foreign country that the High Times Group should collect sales or other taxes on the exchange of merchandise on the High Times Group’s system could have a material adverse effect on the business, results operations, and financial condition of the High Times Group. Legislation limiting the ability of the states to impose taxes on Internet-based transactions has been proposed in the U.S. Congress. The High Times Group cannot assure that this legislation will ultimately be enacted into law or that the final version of this legislation will not contain a limited time period in which such tax moratorium will apply. In the event that the tax moratorium is imposed for a limited time period, there can be no assurance that the legislation will be renewed at the end of such period. Failure to enact or renew this legislation could allow various states to impose taxes on Internet-based commerce and the imposition of such taxes could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

 25 

 

The business of the High Times Group is subject to various government regulations and its inability to comply fully with such regulations could harm its business.

 

The High Times Group is subject to various federal, state and local laws affecting the possession, consumption, production, supply and sale of cannabis. The Federal Trade Commission, the Federal Food and Drug Administration, the Federal Drug Enforcement Agency and equivalent state agencies regulate all aspects of cannabis and the advertising and representations made by businesses in the sale of cannabis or cannabis-related products. The inability of the High Times Group to fully comply with these regulations, particularly as they evolve and are subject to varying degrees of regulatory oversight and discretion, would have material adverse effects on the business, reputation, results of operations and financial condition of the High Times Group.

 

In addition, the ongoing and future business plans of the High Times Group rely on its ability to successfully establish and maintain effective controls that follow the United States Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) Guidance, “BSA Expectations Regarding Marijuana-Related Businesses,” in vetting and monitoring potential and actual customers and clients. Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statutes and the Bank Secrecy Act (“BSA”). While the High Times Group believes that it is not currently subject to the BSA or FinCEN guidelines, the High Times Group may be required institute policies and procedures that mirror the stated goals of the FinCEN guidelines and will provide a framework by which we believe we can comply with the federal government’s stated objectives with respect to the potential conflict of law.

 

The High Times Group is also subject to government laws and regulations governing health, safety, working conditions, employee relations, wrongful termination, wages, taxes and other matters applicable to businesses in general. The High Times Group is not currently subject to direct federal, state or local regulation, or laws or regulations applicable to access to or commerce on the Internet, other than regulations applicable to businesses generally. It is possible that a number of laws and regulations may be adopted with respect to the Internet or other online services covering issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. In addition, applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. The vast majority of such laws was adopted prior to the advent of the Internet and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. In addition, numerous states, including the State of California in which the headquarters of the High Times Group are located, have regulations regarding the manner in which “wholesalers/retailers” may conduct business and the liability of “wholesalers/retailers” in conducting such business. There is a risk that governmental agencies will attempt to impose additional regulations impacting the High Times Group in the future, and such imposition could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. For example, several states have also proposed legislation that would limit the uses of personal user information gathered online or require online services to establish privacy policies. Changes to existing laws or the passage of new laws intended to address these issues, as well as laws, rules and regulations related to cannabis, could create uncertainty in the marketplace that could reduce demand for the services of the High Times Group or increase the cost of doing business as a result of litigation costs or increased service delivery costs, or could in some other manner could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. In addition, because the services of the High Times Group are expected to be accessible worldwide, and the High Times Group expects to eventually facilitate sales of goods to users worldwide, other jurisdictions may claim that the High Times Group is required to qualify to do business as a foreign corporation in a particular state or foreign country. The failure of any of the companies within the High Times Group to qualify as a foreign corporation in a jurisdiction where it is required to do so could subject the High Times Group to taxes and penalties for the failure to qualify and could result in the inability of the High Times Group to enforce contracts in such jurisdictions. Any such new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to the business of the High Times Group, could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

 26 

 

The High Times Group may incur uninsured losses and insurance may be difficult to obtain or maintain.

 

Although the High Times Group maintains casualty, liability and property insurance coverage, along with workmen’s compensation and related insurance, the High Times Group cannot assure that it will not incur uninsured liabilities and losses as a result of the conduct of its current and future business operations. In particular, the High Times Group may incur liability involving the commercial sale of cannabis-related products or its live-events media business (including the Cannabis Cup) is deemed to have caused a personal injury. Uninsured losses in any significant amount could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

Moreover, because of its involvement in the cannabis industry, insurance policies that are otherwise readily available to business owners, such as workers’ compensation, general liability, and directors’ and officers’ insurance, may be more difficult for the High Times Group to find and more expensive for to obtain. There is a risk that the High Times Group may be unable to find and maintain such insurance policies, or that the cost of these policies will be unaffordable. If the High Times Group is unable to obtain or maintain such insurance policies on desirable terms, or at all, its ability to conduct business may be inhibited and it may be exposed to additional risks and financial liabilities.

 

The insurance coverage of the High Times Group may be inadequate to cover all significant risk exposures; because it is associated with the cannabis industry, it has a difficult time obtaining the various forms of insurance that are desired to operate its business, which may expose the High Times Group to additional risk and financial liabilities.

 

The High Times Group will be exposed to liabilities that are particular to the products and services we provide. While the High Times Group intends to maintain insurance for certain risks, the amount of its insurance coverage may not be adequate to cover all claims or liabilities, and it may be forced to bear substantial costs resulting from the risks and uncertainties of its business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to the High Times Group, or at all, could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. The High Times Group does not have any business interruption insurance. Any business disruption or natural disaster could result in substantial losses, costs and diversion of resources.

 

Currently, the High Times Group has very limited insurance coverage in place for its business, personal property or workers’ compensation insurance, directors’ and officers’ liability insurance, and general liability insurance.

 

Insurance that is otherwise readily available in other industries is more difficult for the High Times Group to obtain, and more expensive, because the High Times Group is involved in, and does business with, individuals or businesses engaged in, the cannabis industry. There are no guarantees that the High Times Group will be able to find such insurances in the future, or that the cost will be affordable to it. If the High Times Group is forced to go without such insurance, it may be unable to enter into certain business sectors, its growth may be inhibited and, as a result, it may be exposed to additional risks and financial liabilities.

 

If the High Times Group is unable to pay for material and services timely, the High Times Group could be subject to liens.

 

If the High Times Group fails to pay for materials and services for its business on a timely basis, its assets could be subject to material men’s and workmen’s liens. The High Times Group may also be subject to bank or secured liens in the event that it defaults on loans from banks or its secured lenders, if any.

 

The management of the High Times Group will be subject to conflicts of interest.

 

Certain members of the management of the High Times Group may in the future become associated with or employed by other companies, which are engaged, or may become engaged, in the cultivation or dispensing of cannabis and cannabis related products or services. Conflicts of interest between the affiliates and/or directors and the High Times Group may arise by reason of such relationships.

 

 27 

 

The High Times Group may not achieve its goals and objectives.

 

While the management of the High Times Group believes that its experience and relationships will moderate this risk to some degree, no representation is made that any aspect of the High Times Group’s expansion projects will be successful.

 

Targeted markets may not develop as expected.

 

If a market for the contemplated e-commerce store and contemplated licensing of the High Times brand does not develop, or if products associated with cannabis or other products and services that the High Times Group hopes to establish are not developed or commercialized as the High Times Group expects, or if the High Times Group fails to address the needs of this market, its business will be harmed. The High Times Group may not be able to successfully address these risks and difficulties or others, including those described elsewhere in these risk factors. Failure to adequately address these risks and difficulties could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

Security breaches and other disruptions could compromise the information maintained by the High Times Group and expose it to liability, which would cause its business and reputation to suffer.

 

In the ordinary course of business, the High Times Group may collect and store sensitive data, including intellectual property, its proprietary business information and that of its customers and business partners, and personally identifiable information of the High Times Group’s customers, in its data centers and on its networks. The secure processing, maintenance and transmission of this information is critical to the business strategy of the High Times Group. Despite the High Times Group’s planned security measures, its information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise the High Times Group’s network, services and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, and disruption to the High Times Group’s operations and the services it provides to customers. This often times results in a loss of confidence in a company’s products and services, which could adversely affect its ability to earn revenues and competitive position and could have a material adverse effect on the High Times Group’s business, results of operations, and financial condition.

 

The products and services that High Times Group hopes to develop will likely result in increased costs.

 

The High Times Group expects its development costs to increase in future periods as it expands into new areas, and such increased costs could negatively affect its future operating results. The High Times Group expects to continue to expend substantial financial and other resources on its current business operations, including the publication of HIGH TIMES® magazine and related content, and the creation of organized live-event experiences and licensing and branding initiatives. Furthermore, the High Times Group intends to invest in marketing, licensing and product development programs, as well as associated sales and marketing programs, and general administration. These investments may not result in increased revenue or growth in the business. The failure of the High Times Group to materially increase its revenues could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

The inability of the High Times Group to effectively control costs and still maintain its business relationships, could have a material adverse effect on its business, results of operations, and financial condition.

 

It is critical that the High Times Group appropriately align its cost structure with prevailing market conditions to minimize the effect of economic downturns on its operations and, in particular, to build and maintain its user relationships. However, the High Times Group is limited in its ability to reduce expenses due to the ongoing need to continue to invest in research and development. In circumstances of reduced overall demand for the products and services of the High Times Group, its high cost structure could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. The inability of the High Times Group to align its cost structure in response to economic downturns on a timely basis could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. Conversely, adjusting the cost structure to fit economic downturn conditions may have a negative effect on the High Times Group during an economic upturn or periods of increasing demand for products. If the High Times Group too aggressively reduces its costs, it may not have sufficient resources to capture opportunities for expansion and growth and meet customer demand. The inability of High Times Group to effectively manage resources and capacity to capitalize on periods of economic upturn could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

 28 

 

If the High Times Group is unable to accurately predict and respond to market developments or demands, its business, results of operations and financial condition will be adversely affected.

 

The cannabis industry is characterized by rapidly evolving technology, government regulations and methodologies. This makes it difficult to predict demand and market acceptance for the products and services of the High Times Group. In order to succeed, the High Times Group need to adapt the products it offers in order to keep up with technological developments and changes in consumer needs. The High Times Group cannot guarantee that it will succeed in enhancing its products, services, developing and acquiring new products, or features that adequately address changing technologies, user requirements and market preferences. The High Times Group also cannot assure you that the products and services it offers will be accepted by end users. If the products and services offered by the High Times Group are not accepted by customers, such sources will no long purchase such products and services, which could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. Changes in technologies, industry standards, the regulatory environment and customer requirements, and new product introductions by existing or future competitors, could render the existing products of the High Times Group obsolete and unmarketable, or require the High Times Group to enhance current products or develop new products. This may require it to expend significant amounts of money, time, and other resources to meet these demands. This could strain its personnel and financial resources. Furthermore, many modernization projects deal with customer mission critical applications, and therefore encapsulate risk for the customer.

 

High Times has made a number of acquisitions since February 2017 and may be unable to integrate, identify or purchase its existing acquisitions or desirable acquisition targets. Future acquisitions may not be successful, and we may not realize the anticipated cost savings, revenue enhancements or other synergies from such acquisitions.

 

Hightimes Holding acquired the business of the Trans-High Group in February 2017, in 2018 consummated the acquisitions of the businesses of CULTURE magazine, DOPE Publications and the Chalice Companies, and intends to acquire BIG Publications and Spannabis in 2019. In addition to its existing acquisitions, the High Times Group plans to investigate and acquire additional strategic businesses with the potential to be accretive to earnings, increase its market penetration, brand strength and its market position or enhancement its existing product offerings.

 

As of May 29, 2019, Hightimes Holding is currently subject to litigation surrounding the acquisition of CULTURE Magazine due to being in default on the terms of the asset purchase agreement. Furthermore, there can be no assurance that the High Times Group will be able to successfully integrate its existing acquisitions or will be able to identify or successfully complete transactions with suitable acquisition candidates in the future.

 

Additionally, if the High Times Group were to undertake a substantial acquisition, the acquisition would likely need to be financed in part through additional financing from banks, through public offerings or private placements of debt or equity securities or through other arrangements. There can be no assurance that the necessary acquisition financing would be available to the High Times Group on acceptable terms if and when required.

 

There also can be no assurance that any or all of the completed acquisitions will be successful. The High Times Group could have difficulty integrating the operations, systems, management and other personnel, technology and internal controls of the Trans-High Group or other existing or future acquired businesses. These difficulties could disrupt the ongoing business of the High Times Group, distract its management and employees, increase its expenses and could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. Matters related to integration may also delay and/or jeopardize strategic initiatives in place to enhance profitability. The High Times Group may also experience an adverse impact on its operations and revenues if acquisition or integration activities disrupt key customer and supplier relationships or if the High Times Group fails to retain, motivate and integrate key management and other employees of acquired businesses. Even if the High Times Group are able to integrate successfully, it may not be able to realize the potential cost savings, synergies and revenue enhancements that may be anticipated from any such acquisition, either in the amount or within the time frame that it expected, and the costs of achieving these benefits may be higher than, and the timing may differ from, what the High Times Group expected. Furthermore, the entities that the High Times Group acquires in the future may not maintain effective systems of internal controls, or the High Times Group may encounter difficulties integrating its system of internal controls with those of acquired entities, which could prevent the High Times Group from meeting their respective reporting obligations.

 

 29 

 

In connection with any acquisitions, the High Times Group may acquire liabilities that may not adequately be covered by insurance or an enforceable indemnity or similar agreement from a creditworthy counterparty. Additionally, fees and expenses incurred in connection with any acquisitions could be material. As a result, the High Times Group may be responsible for significant out-of-pocket expenditures and these fees and liabilities, if they materialize, could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if the High Times Group’s acquisitions do not yield expected returns, the High Times Group may be required to take charges to its operating results based on this impairment assessment process, which could adversely affect its results of operations.

 

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect the High Times Group’s operating results. The High Times Group may also unknowingly inherit liabilities from acquired businesses or assets that arise after the acquisition and that are not adequately covered by indemnities. In addition, if an acquired business fails to meet the High Times Group’s expectations, its operating results, business and financial position may suffer.

 

The High Times Group has not conducted an evaluation of the effectiveness of its internal control over financial reporting and will not be required to do so until it becomes a public reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). At such time, if the High Times Group is unable to implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of its financial reports and the market price of its common stock may be negatively affected.

 

When we become a publicly reporting company under the Exchange Act, the High Times Group will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires that the High Times Group evaluate and determine the effectiveness of its internal control over financial reporting and, beginning with its annual report on for the fiscal year ending December 31, 2019, provide a management report on the internal control over financial reporting, which must be attested to by its independent registered public accounting firm to the extent we decide not to avail ourselves of the exemption provided to an emerging growth company, as defined by The Jumpstart Our Businesses Act of 2012 (the “JOBS Act”). Since the High Times Group has not conducted an evaluation of the effectiveness of its internal control over financial reporting, the High Times Group may have undiscovered material weaknesses. If the High Times Group has a material weakness in its internal control over financial reporting, it may not detect errors on a timely basis and our financial statements may be materially misstated. The High Times Group is in the process of designing and implementing the internal control over financial reporting required to comply with this obligation, which process may be time consuming, costly, and complicated. If the High Times Group identifies material weaknesses in its internal control over financial reporting, if it is unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, if it is unable to assert that our internal control over financial reporting are effective, or if its independent registered public accounting firm is unable to express an opinion as to the effectiveness of its internal control over financial reporting, if and when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of its common stock could be negatively affected, and the High Times Group could become subject to investigations by the stock exchange on which its securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

 30 

 

We face significant competition across the media landscape, including from magazine publishers, digital publishers, social media platforms, search platforms, portals and digital marketing services, among others, which we expect will continue, and as a result we may not be able to maintain or improve our operating results.

 

We compete with other magazine publishers for market share and for the time and attention of consumers of print magazine content. The proliferation of choices available to consumers for information and entertainment has resulted in audience fragmentation and has negatively affected overall consumer demand for print magazines and intensified competition with other magazine publishers for share of print magazine readership. We also compete with digital publishers and other forms of media, including, among others, social media platforms, search platforms, portals and digital marketing services. The competition we face has intensified as a result of the growing popularity of mobile devices, such as smartphones and social-media platforms, and the shift in consumer preference from print media to digital media for the delivery and consumption of content, including video content. Social media and other platforms such as Facebook, Twitter, Snapchat, Google and Yahoo! are successful in gathering national, local and entertainment news and information from multiple sources and attracting a broad readership base. News aggregation websites and customized news feeds (often free to users) may reduce our traffic levels by minimizing the need for the audience to visit our websites or use our digital applications directly. Given the ever-growing and rapidly changing number of digital media options available on the Internet, we may not be able to increase our online traffic sufficiently and retain or grow a base of frequent visitors to our websites and applications on mobile devices. In addition, the ever-growing and rapidly changing number of digital media options available on the Internet may lead to technologies and alternatives that we are not able to offer.

 

These new platforms have reduced the cost of producing and distributing content on a wide scale, allowing new free or low-priced digital content providers to compete with us and other magazine publishers. The ability of our paid print and digital content to compete successfully with free and low-priced digital content, including video content, depends on several factors, including our ability to differentiate and distinguish our content from free or low-priced digital content, as well as our ability to increase the value of paid subscriptions to our customers by offering a different, deeper and richer digital experience. If we are unable to distinguish our content from that of our competitors or adapt to new distribution methods, our business, financial condition and results of operations may be adversely affected. We derive approximately half of our Revenues from advertising. The continuing shift in consumer preference from print media to digital media, as well as growing consumer engagement with digital media and social platforms, has introduced significant new competition for advertising. The proliferation of new platforms available to advertisers, combined with continuing strong competition from print platforms, has affected both the amount of advertising we are able to sell as well as the rates advertisers are willing to pay. Our ability to compete successfully for advertising also depends on our ability to drive scale, engage digital audiences and prove the value of our advertising and the effectiveness of our print and digital platforms, including the value of advertising adjacent to high quality content, and on our ability to use our brands to continue to offer advertisers unique, multi-platform advertising programs and franchises. If we are unable to demonstrate to advertisers the continuing value of our print and digital platforms or offer advertisers unique advertising programs tied to our brands, our business, financial condition and results of operations may be adversely affected.

 

We are exposed to risks associated with the current challenging conditions in the magazine publishing industry.

 

High Times Group (excluding the recent acquisitions of DOPE and Culture Magazine) has experienced declines in its print and other advertising revenues and circulation revenues due to challenging conditions in the magazine publishing industry. For the years ended December 31, 2018, 2017, and 2016, its print and advertising revenues declined 55.9%, declined 32.4%, and increased 13.3%, respectively, as compared to the preceding year despite it having maintained or gained market share in advertising revenues in each year, and its circulation revenues (subscription and newsstand) declined 20.4%, 17.9%, and 23.8%, respectively, as compared to the preceding year. The challenging conditions and High Times Group’s declining revenues may limit its ability to invest in our brands and pursue new business strategies, including acquisitions, and make it more difficult to attract and retain talented employees and management. Moreover, while High Times Group has reduced its costs significantly in recent years to address these challenges, it will need to reduce costs further and such reductions are subject to risks.

 

See risk factor entitled, “We may experience financial and strategic difficulties and delays or unexpected costs in completing our various restructuring plans and cost-saving initiatives, including not achieving the anticipated savings and benefits of these plans and initiatives.”

 

 31 

 

Future profits may be affected by our ability to respond to recent and future changes in technology and consumer behavior.

 

Technology used in the publishing industry continues to evolve rapidly, and advances in that technology have Jed to alternative methods for the delivery and consumption of content, including via mobile devices such as smartphones. These technological developments have driven changes in consumer behavior, especially among younger demographics. Shifts to digital platforms present several challenges to our historical business model, which is based on the production and distribution of print magazines. In order to remain successful, we must continue to attract readers and advertisers to our print products while also continuing to adapt our business model to address changing consumer demand for digital content across a wide variety of devices and platforms.

 

This adaptation poses certain risks. First, advertising models and pricing for digital platforms may not be as economically attractive to us as in print magazines, and our ability to continue to package print and digital audiences for advertisers could change in the future. Second, it is unclear whether it will be economically feasible for us to grow paid digital circulation to scale. Further, our practice of offering certain content on our websites for free may reduce demand for our paid content. In addition, the increasing adoption of ad-blocking tools could negatively impact the revenues that we generate on our digital platforms.

 

The transition from print to digital platforms may also reduce the benefit of important economies of scale we have established in our print production and distribution operations. The scale of our print operations has allowed us to support significant vertical integration in our production, consumer marketing and retail distribution operations, among others, as well as to secure attractive terms with our third-party suppliers, all of which have provided us with significant economic and competitive advantages. As the size of our print operations declines, the advantages of the economies of scale in our print operations may also decline.

 

Also, the shift to digital distribution platforms, many of which are controlled by third parties, may lead to pricing restrictions, the loss of distribution control, further loss of a direct relationship with advertisers and consumers and greater susceptibility to technological problems or failures in third-party systems as compared to our existing print distribution operations. Further, we may be required to incur significant costs as we continue to acquire new expertise and infrastructure to accommodate the shift to digital platforms, including additional consumer software and digital and mobile content development expertise, and we may not be able to economically adapt existing print production and distribution assets to support our digital operations. If we are unable to successfully manage the transition to a greater emphasis on digital platforms, continue to negotiate mutually agreeable arrangements with digital distributors or otherwise respond to changes in technology and consumer behavior, our business, financial condition and results of operations may be adversely affected.

 

In addition, the advertising industry continues to experience a shift toward digital advertising. Because rates for digital advertising are generally lower than for traditional print advertising, our digital advertising revenue may not fully replace print advertising revenue lost as a result of the shift. Growing consumer reliance on mobile devices adds additional pressure, as advertising rates are generally lower on mobile devices than on personal computers. If we are unable to effectively grow digital advertising revenues through the development of advertising products that are compelling to both marketers and consumers, our business, financial condition and results of operations may be adversely affected.

 

If we fail to develop or acquire technologies that adequately serve changing consumer behaviors and support our evolving business needs, our business, financial condition and prospects may be adversely affected.

 

In order to respond to changing consumer behaviors, we need to invest in new technologies and platforms to deliver content and provide products and services where consumers demand it. If we fail to develop or acquire the necessary consumer-facing technologies or if the technologies we develop or acquire are not received favorably by consumers, our business, financial condition and prospects may be adversely affected. In addition, as our business evolves and we develop new revenue streams, we must develop or invest in new technology and infrastructure that satisfy the needs of the changing business. If we fail to do so, our business, financial condition and prospects may suffer. Further, if we fail to update our current technology and infrastructure to minimize the potential for business disruption, our business, financial condition and prospects may be adversely affected.

 

Consolidation of the competitors of the High Times Group in the markets in which it operates could place the High Times Group at a competitive disadvantage and reduce its profitability.

 

The High Times Group operates in an industry which is highly fragmented due to the regulatory environment. However, there may be a trend or competitive advantage in consolidation to acquire value-added assets or scale our operations through its brand recognition. At the same time, such consolidation of its competitors may jeopardize the strength of the position of the High Times Group in one or more of the markets in which the High Times Group operates and any operational advantages or assets that it owns. Losing some of those advantages or assets could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

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If the High Times Group is unable to continually innovate and increase efficiencies, its ability to attract new customers may be adversely affected.

 

In the area of innovation, the High Times Group must be able to develop new technologies, content and products that appeal to its customers. This depends, in part, on the technological and creative skills of its personnel and on its ability to protect its intellectual property rights. The High Times Group may not be successful in the development, introduction, marketing, and sourcing of new technologies, content or products, that satisfy customer needs, achieve market acceptance, or generate satisfactory financial returns.

 

If the High Times Group is unable to adopt or incorporate technological advances into its content and products, its business could become less competitive, uncompetitive, or obsolete and it may not be able to compete effectively with competitors’ products.

 

The High Times Group expects that technological advances in the processes and procedures for Cannabis cultivation equipment will continue to occur. As a result, there are risks that products that compete with its products could be improved or developed. If the High Times Group is unable to adopt or incorporate technological advances, its products could be less efficient or cost-effective than methods developed and sold by its competitors, which could cause its products to become less competitive, uncompetitive or obsolete, which could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group

 

Litigation may adversely affect the business, financial condition, and results of operations of the High Times Group.

 

From time to time in the normal course of its business operations, the High Times Group may become subject to litigation that may result in liability material to its financial statements as a whole or may negatively affect its operating results if changes to its business operations are required. The cost to defend such litigation may be significant and may require a diversion of resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of its business, regardless of whether the allegations are valid or whether the High Times Group is ultimately found liable. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of the insurance coverage of the High Times Group for any claims could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

If the High Times Group fails to protect or develop its intellectual property, its business, operations and financial condition could be adversely affected.

 

Any infringement or misappropriation of intellectual property of the High Times Group could damage its value and limit its ability to compete. The High Times Group may have to engage in litigation to protect the rights to its intellectual property, which could result in significant litigation costs and require a significant amount of management time and attention. In addition, the ability of the High Times Group to enforce and protect its intellectual property rights may be limited in certain countries outside the United States, which could make it easier for competitors to capture market position in such countries by utilizing technologies that are similar to those developed or licensed by the High Times Group.

 

The High Times Group may also find it necessary to bring infringement or other actions against third parties to seek to protect its intellectual property rights. Litigation of this nature, even if successful, is often expensive and time-consuming to prosecute and there can be no assurance that the High Times Group will have the financial or other resources to enforce its rights or prevent other parties from developing similar technology or designing around its intellectual property.

 

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Although the High Times Group believes that its intellectual property does not and will not infringe upon the patents or violate the proprietary rights of others, it is possible such infringement or violation has occurred or will occur in the future, which could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

The High Times Group is not aware of any infringement by it of any person’s or entity’s intellectual property rights. In the event that products or services the High Times Group offers or sells are deemed to infringe upon the patents or proprietary rights of others, the High Times Group could be required to modify its products or services or to obtain a license for the manufacture and/or sale of such products or services or cease selling such products or services. In such event, there can be no assurance that the High Times Group would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

There can be no assurance that the High Times Group will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. If products or services, or proposed products or services, are deemed to infringe or likely to infringe upon the patents or proprietary rights of others, the High Times Group could be subject to injunctive relief and, under certain circumstances, become liable for damages, which could also could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

The trade secrets of the High Times Group may be difficult to protect.

 

The success of the High Times Group depends upon the skills, knowledge, and experience of its scientific and technical personnel, its consultants and advisors, as well as its licensors and contractors. Because the High Times Group operates in several highly competitive industries, it relies in part on trade secrets to protect its proprietary technology and processes. However, trade secrets are difficult to protect. The High Times Group enters into confidentiality or non-disclosure agreements with its corporate partners, employees, consultants, outside scientific collaborators, developers, and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third parties’ confidential information developed by the receiving party or made known to the receiving party by the High Times Group during the course of the receiving party’s relationship with the High Times Group. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to the High Times Group will be the exclusive property of the High Times Group, and the High Times Group enters into assignment agreements to perfect its rights.

 

These confidentiality, inventions and assignment agreements may be breached and may not effectively assign intellectual property rights to the High Times Group. Its trade secrets also could be independently discovered by competitors, in which case the High Times Group would not be able to prevent the use of such trade secrets by its competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade secrets could be difficult, expensive and time consuming and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade secret protection could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

The High Times Group faces intense competition and many of its competitors have greater resources that may enable them to compete more effectively.

 

The cannabis information, cultivation and dispensary industry is intensely competitive and the High Times Group expect competition to intensify further in the future. The websites of the High Times Group will be subject to competition for advertisers. The High Times Group will be subject to competition from well-established commercial cannabis information providers, media companies, growers and suppliers that have all necessary government permits. Some of its competitors have greater capital resources, facilities and diversity of product lines, which may enable them to compete more effectively in this market. As a potential supplier of other Cannabis products, the High Times Group competes with several larger and better-known companies that specialize in supplying and distributing a vast array of commercial goods. These competitors may devote their resources to developing and marketing products that will directly compete with the product lines of the High Times Group. Due to this competition, there is no assurance that the High Times Group will not encounter difficulties in obtaining revenues and market share or in the positioning of its products. There are no assurances that competition in the respective industries in which the High Times Group operates will not lead to reduced prices for its products and services. The inability of the High Times Group to successfully compete with existing companies and new entrants to the market could have a material adverse effect on the business, operations and financial condition of the High Times Group.

 

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Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase such competitors’ ability to successfully market their tools and services. The High Times Group also expect that competition may increase as a result of eventual consolidation within the industry. As the High Times Group develops new products and services, it may begin to compete with companies with which it has not previously competed. The High Times Group may be unable to differentiate its products and services from those of its competitors, or successfully develop and introduce new products and services that are less costly than, or superior to, those of its competitors. This could have a material adverse effect on the business, results of operations and financial condition of the High Times Group.

 

The future success of the High Times Group will depend on its key executive officers and its ability to attract, retain, and motivate qualified personnel.

 

The future success of the High Times Group largely depends upon the continued services of its executive officers and management team. If one or more of its executive officers are unable or unwilling to continue in their present positions, the High Times Group may not be able to replace them readily, if at all. Additionally, the High Times Group may incur additional expenses to recruit and retain new executive officers. If any of its executive officers joins a competitor or forms a competing company, the High Times Group may lose some of its potential customers. Finally, the High Times Group does not maintain “key person” life insurance on any of its executive officers. Because of these factors, the loss of the services of any of these key persons could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group.

 

The continuing ability of the High Times Group to attract and retain highly qualified personnel will also be critical to its success because it will need to hire and retain additional personnel as its business grows. There can be no assurance that the High Times Group will be able to attract or retain highly qualified personnel. The High Times Group faces significant competition for skilled personnel in its industry. This competition may make it more difficult and expensive to attract, hire, and retain qualified managers and employees. Because of these factors, the High Times Group may not be able to effectively manage or grow its business, which could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. As a result, the value of your investment could be significantly reduced or completely lost.

 

The consideration being paid to certain of the management of the High Times Group was not based on arms-length negotiation.

 

The compensation and other consideration paid or being paid by the High Times Group to certain of its management team has not been determined based on arm’s length negotiations. While management believes that the consideration is fair for the work being performed, the High Times Group cannot assure that the consideration to management reflects the true market value of its services.

 

The High Times Group depends on its management but has no key man insurance.

 

The High Times Group’s business, to date, and for the foreseeable future, will be significantly dependent on its management team, directors and key consultants.

 

The loss of any one of these individuals could have a material adverse effect on the High Times Group. If the High Times Group lost the services of any one or more of its executive officers or key employees, it would need to devote substantial resources to finding replacements, and until replacements were found, the High Times Group would be operating without the skills or leadership of such personnel, any of which could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. As previously discussed, the High Times Group currently does not carry “key-man” life insurance policies covering any of these individuals.

 

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There are risks associated with the proposal expansion of the High Times business.

 

Any expansion plans undertaken by the High Times Group to increase or expand its operations entail risks, which may negatively impact the profitability of the High Times Group. Consequently, investors must assume the risk that (i) such expansion may ultimately involve expenditures of funds beyond the resources available to the High Times Group at that time, and (ii) management of such expanded operations may divert management’s attention and resources away from its existing operations, any of which factors could have a material adverse effect on the business, results of operations, and financial condition of the High Times Group. The High Times Group cannot assure investors that its products, procedures, or controls will be adequate to support the anticipated growth of its operations.

 

The High Times Group may have difficulty accessing the service of banks, including credit card processing services, which may make it difficult for us to operate.

 

Since the use of marijuana is illegal under federal law, many banks and credit card processing services will not accept for deposit funds from businesses involved with the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing to accept their business. The inability to open or maintain bank accounts may make it difficult for the High Times Group to operate our marijuana-related businesses. If any of its bank accounts are closed, the High Times Group may have difficulty processing transactions in the ordinary course of business, including paying suppliers, employees and landlords, which could have a significant negative effect on its operations and results of operations.

 

The High Times Group could become subject to Section 280E of the Code

 

Section 280E of the Code prohibits marijuana businesses from deducting their ordinary and necessary business expenses, forcing such businesses to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a marijuana business depends on how large its ratio of nondeductible expenses is to its total revenues. Although the Hightimes Group does not cultivate, dispense or sell cannabis or any derivatives of the cannabis plant, and therefore does not believe that it is subject to Section 280E of the Code, there is no assurance that the Internal Revenue Services (the “IRS”) may not take a different position, which, if sustained, could materially and adversely affect the future profitability of the High Times Group.

 

We are an emerging growth company and it cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make its Common Stock less attractive to investors.

 

For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our Common Stock less attractive because it will rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for its Common Stock and its stock price may be more volatile.

 

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of its Common Stock that is held by non-affiliates exceeds $700 million as of June 30, (ii) the end of the fiscal year in which it has total annual gross revenue of $1 billion or more during such fiscal year, (iii) the date on which it issues more than $1 billion in non-convertible debt in a three-year period or (iv) five years from the date of this proxy statement.

 

Data Privacy and Security

 

Our business activities are subject to laws and regulations governing the collection, use, sharing, protection and retention of personal data, which continue to evolve and have implications for how such data is managed. In addition, the Federal Trade Commission (the “FTC”) continues to expand its application of general consumer protection laws to commercial data practices, including to the use of personal and profiling data from online users to deliver targeted Internet advertisements. Most states have also enacted legislation regulating data privacy and security, including laws requiring businesses to provide notice to state agencies and to individuals whose personally identifiable information has been disclosed as a result of a data breach.

 

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Similar laws and regulations have been implemented in many of the other jurisdictions in which the Company operates, including the European Union. Recently, the European Union adopted the General Data Protection Regulation (“GDPR”), which is intended to provide a uniform set of rules for personal data processing throughout the European Union and to replace the existing Data Protection Directive (Directive 95/46/EC). Fully enforceable as of May 25, 2018, the GDPR expands the regulation of the collection, processing, use and security of personal data, contains stringent conditions for consent from data subjects, strengthens the rights of individuals, including the right to have personal data deleted upon request, continues to restrict the trans-border flow of such data, requires mandatory data breach reporting and notification, increases penalties for non-compliance and increases the enforcement powers of the data protection authorities. Also, in 2015, the European Court of Justice invalidated the U.S.-E.U. Safe Harbor framework, one of the legal mechanisms through which personal data could be transferred from the European Union to the United States, and the mechanism relied upon by the Company with respect to certain personal data transfers among the Company’s businesses, and between the Company and some of its third-party service providers. The Company has been putting into place, and working with its third-party service providers to implement, alternative legal mechanisms for cross-border personal data transfers.

 

In response to such developments, industry participants in the U.S., and Europe have taken steps to increase compliance with relevant industry-level standards and practices, including the implementation of self-regulatory regimes for online behavioral advertising that impose obligations on participating companies, such as the Company, to give consumers a better understanding of advertisements that are customized based on their online behavior. The Company continues to monitor pending legislation and regulatory initiatives to ascertain relevance, analyze impact and develop strategic direction surrounding regulatory trends and developments, including any changes required in the Company’s data privacy and security compliance programs.

 

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Common Stock less attractive to investors.

 

For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our Common Stock less attractive because we will rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock price may be more volatile.

 

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of June 30, (ii) the end of the fiscal year in which we have total annual gross revenue of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (iv) five years from the July 26, 2018 effectiveness date of the Company’s Regulation A+ Offering Circular.

 

ADDITIONAL RISKS RELATED TO THE CANNABIS INDUSTRY

 

Cannabis is illegal under Federal Law. As Federal Law Prohibits the Use of Cannabis and our Business is Dependent on the Growth of the Cannabis Industry, our Business is at Risk in the Event of Federal Enforcement – Even When our Operations are Legal Under State Law.

 

Under the federal Controlled Substances Act (“CSA”), Cannabis is deemed to be a Schedule 1 narcotic that has no medical benefit. Therefore, a range of activities including cultivation and the personal use of Cannabis (including Cannabis infused products) is prohibited and is a criminal offense. Unless and until Congress amends the CSA with respect to medical Cannabis, as to the timing or scope of any which amendments there can be no assurance, there is a risk that federal authorities may enforce current federal law. The risk of strict enforcement of the CSA in light of political philosophy, Congressional activity, judicial the Company, and stated federal policy remains uncertain. Although the Company does not cultivate, sell or distribute Cannabis or marijuana infused products, and has no present intention to do so, our business and business prospects depends, in large measure, on the anticipated growth of the Cannabis industry.

 

If the Trump administration and federal agencies adopt a policy of stricter enforcement of the CSA, it could likely have a material and adverse effect on our planned business growth and prospects.

 

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The Cannabis industry is extremely speculative, and its legality is uncertain.

 

The possession, consumption, production and sale of cannabis has historically been, and continues to be, illegal under federal law and in virtually all state and local jurisdictions that have not passed legislation to the contrary. A number of states have decriminalized cannabis to varying degrees and other states have created exemptions specifically for medical cannabis. Seven states, including California, Delaware, Oregon, Alaska, Washington, Nevada and Massachusetts, have legalized the recreational use of cannabis. Many of these states have adopted or are in the process of adopted regulations which could delay, impede or have a material adverse effect on cannabis revenues to be derived from business engaged in the growing, dispensing or processing cannabis within such states, and indirectly impact the business of the Hightimes Group. Variations exist among states that have legalized, decriminalized, or created medical cannabis exemptions.

 

In most states, the cultivation of cannabis for personal use continues to be prohibited except for those states that allow small-scale cultivation by the individual in possession of medical cannabis needing care or that person’s caregiver. Active enforcement of state laws that prohibit personal cultivation of cannabis may indirectly and adversely affect our business and our revenue and profits.

 

While management believes that legalization trends are favorable and create a compelling business opportunity for early movers, there is no assurance that those trends will continue and be realized, that existing limited markets will continue to be available or that any new markets for cannabis and related products will emerge for the Company. Our business plan is based on the premise that cannabis legalization will expand, that consumer demand for cannabis will continue to exceed supply for the foreseeable future, and that consumer demand for cannabis for medical and recreational uses will grow as it becomes legal to possess and consume it. There is no assurance that this premise will prove to be correct or that we will be profitable in the future. Moreover, if cannabis legalization is scaled back or reversed at the state level, or if the federal government increases regulation and prosecution of cannabis-related activities, the ability of the High Times Group to generate revenue and profit could be materially and adversely impacted. In addition, with the rescission of the Ogden and Cole Memorandums (as defined below) by former Attorney General Jeffrey Sessions on January 4, 2018, the risk of potential federal prosecution arising out of the states’ legalization of certain cannabis products has been made even more uncertain, which could also materially and adversely impact the Company’s revenue and profit.

 

Enforcement of federal law under the CSA by the Department of Justice and the Trump administration may negatively impact the ability of the High Times Group to pursue its prospective business operations and/or generate revenues.

 

Under the federal Controlled Substance Act (“CSA”), the policies and regulations of the federal government and its agencies are that cannabis (marijuana) is a Schedule 1 Controlled Substance that is addictive and has no medical benefit. Enforcement of the CSA, including as it relates to cannabis, is subject to prosecutorial discretion and available resources. In the case of cannabis, and particularly in light of the growing legalization of cannabis at the state level, enforcement of the CSA is uncertain and could change rapidly, leaving businesses such as the High Times Group hard pressed to react and operate their businesses.

 

In an effort to provide guidance to federal law enforcement, under the Obama Administration, the Department of Justice (“DOJ”) issued Guidance Regarding Cannabis Enforcement to all United States attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009 (the “Ogden Memorandum”), in a memorandum from Deputy Attorney General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013 (the “Cole Memorandum”). Each memorandum provided that the DOJ was, at the time, committed to the enforcement of the CSA, but the DOJ was also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent and rational way.

 

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Under the Trump administration, however, there is a risk that the enforcement of Federal laws under CSA may be “stepped up”, and that the guidance in the Ogden Memorandum and the Cole Memorandum may be overruled, thereby reversing course on the former Obama administration policies towards the Federal regulation of cannabis. On January 4, 2018, former Attorney General Jeffrey Sessions rescinded the Ogden Memorandum and the Cole Memorandum, with the result being that any previous DPJ guidance under such memoranda was withdrawn, thus creating an environment where increases in cannabis-related prosecutions could be subject to increase. In addition, pursuant to a Presidential Executive Order signed in February 2017, Mr. Sessions created a Task Force on Crime Reduction and Public Safety to review, and provide recommendations with respect to, strategies to reduce crime, including, in particular, illegal immigration, drug trafficking, and violent crime. According to the Attorney General, one of the mandates of the Task Force is to undertake a review of existing policies in the areas of charging, sentencing, and marijuana to ensure consistency with the Department’s overall strategy on reducing violent crime and with Administration goals and priorities. The Task Force was reviewing policies regarding the CSA and accepting recommendations regarding possible amendments through the end of July 2017. However, to date, the Task Force has yet to release those comments or make formal recommendations to change the laws. Should Congress enact legislation to enhance or expand the enforcement of the CSA provisions relating to marijuana, or if the Trump administration, or any future administration, seeks to enforce Federal laws regulating the production, possession, distribution, dispensation, administration, testing, or delivery of cannabis to the detriment of states that have enacted medical or recreational marijuana laws, the future and potential business prospects of the High Times Group would become more challenging, perhaps significantly so. Any such legislation or enforcement policies could adversely affect the business, results of operations, and financial condition of the High Times Group.

 

Moreover, Congress enacted an omnibus spending bill for fiscal year 2017 including a provision prohibiting the U.S. Department of Justice (which includes the Drug Enforcement Administration) from using funds appropriated by that bill to prevent states from implementing their cannabis laws. This provision, however, is effective only until December 31, 2017 and must be renewed by Congress in subsequent years. In order to extend the prohibition, it must be specifically included in the fiscal year 2018 Commerce, Justice, and Science (CJS) Appropriations bill. Currently, only the Senate version of the fiscal 2017 CJS Appropriations bill includes the prohibition and the House version does not. In USA vs. McIntosh, the United States Court of Appeals for the Ninth Circuit held that this provision prohibits the U.S. Department of Justice from spending funds from relevant appropriations acts to prosecute individuals who engage in conduct permitted by state cannabis laws and who strictly comply with such laws. However, the Ninth Circuit’s opinion, which only applies to the states of Alaska, Arizona, California, Hawaii, and Idaho, also held that persons who do not strictly comply with all state laws and regulations regarding the distribution, possession and cultivation of cannabis have engaged in conduct that is unauthorized, and in such instances the U.S. Department of Justice may prosecute those individuals. As a result, if Congress fails to include the provision prohibiting the U.S. Department of Justice from using funds appropriated by that bill to prevent states from implementing their cannabis laws, and the federal government decides to strictly enforce federal law with respect to cannabis operations, the High Times Group may have difficulty or may be unable to operate all or aspects of its business.

 

We may become subject to adverse findings by federal or state agencies.

 

The High Times Group does not cultivate, dispense or sell cannabis or any derivatives of the cannabis plant, such as oils or edible products that have been used and sold at our Cannabis Cup Events since 2010. Notwithstanding our efforts to ensure compliance with all applicable laws, rules and regulations at these events, it is possible that we may be accused by federal or state agencies of violating certain laws or regulations that involve the use of cannabis. An adverse finding could have a material adverse impact on our business and future prospects.

 

Cannabis is not legal to produce or distribute in the U.S. under federal law and is subject to a “zero tolerance” policy as a controlled substance under the U.S. Controlled Substances Act.

 

In certain states, the growth and cultivation of cannabis is legal (California, Colorado, Hawaii, Maine, Maryland, Michigan, Montana, New Mexico, Oregon, Rhode Island, Vermont and Washington), although states are resistant to allow the cultivation of Cannabis due to resistance from the U.S. Department of Drug Enforcement Agency and prohibitions of federal law.

 

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While the High Times Group does not engage in the production or distribution of Cannabis or any such other controlled substances governed under the U.S. Controlled Substances Act, the High Times Group has previously been and may continue to be the subject of a federal government investigation or department “matter” into the business and affairs of the High Times Group’s business segments.

 

For example, on February 16, 2017 the United States Attorney’s Office for the District of Nevada issued a letter to the Moapa Indian Reservation, a third-party venue operator for our March 2017 Las Vegas Cannabis Cup and owner of the land of the Moapa Band of Paiutes (the “2017 DA Letter”). The 2017 DA Letter issued, in part, a warning to the Moapa Indian Reservation that it’s leasing of the venue property for purposes of hosting the High Times Group’s March 2017 Cannabis Cup may be a violation of federal law under Controlled Substances Act. The U.S. Attorney’s office took the position that any reliance on the Cole Offering Circular or such factor test under the Cole Offering Circular does not preclude the U.S. Attorney’s office from conducting a federal investigation of a matter or further prosecution of such a matter pursuant to a violation of federal law. Following the issuance of the 2017 DA Letter, the High Times Group and the venue operator decided to proceed with the production and presentation of the Cannabis Cup event in Nevada on March 4-5, 2017. Further, the High Times Group issued an explicit instruction to all vendors, guests, performers and attendees of the March 2017 Las Vegas Cannabis Cup that the High Times Group does not condone the illegal sale of drugs covered under the Controlled Substance Act and that all parties are required to comply with applicable law concerning the distribution of cannabis in any amount at such an event. These explicit instructions continue to be a basis of our internal policies and rules and continues to be issued to all parties and participants of our Cannabis Cup Events.

 

We believe that regardless of our Company’s internal policies, rules and enforcement thereof to maintain compliance with federal laws, our Live Production and Events segment may be exposed, from time to time, to the illegal sale of narcotics (including Cannabis) covered under the Controlled Substance Act. We believe that there can be no guarantee that our customers will follow state and/or federal laws as well as the regulations or the internal policies of our business. As a result, violations of our internal policies or applicable laws and regulations of the state and federal governments may occur, from time to time, and may stem from violations committed by our trade vendors and/or audience members attending our Cannabis Cup Events.

 

Variations in state and local regulation and enforcement in states that have legalized medical Cannabis that may restrict Cannabis-related activities, including activities related to medical Cannabis may negatively impact our revenues and profits.

 

Individual state laws do not always conform to the federal standard or to other states laws. A number of states have decriminalized Cannabis to varying degrees, other states have created exemptions specifically for medical Cannabis, and several have both decriminalization and medical laws. Six states, Delaware, Oregon, Alaska, Washington, Nevada and Massachusetts have legalized the recreational use of Cannabis and California will permit the recreational use of Cannabis in January 2018. Variations exist among states that have legalized, decriminalized, or created medical Cannabis exemptions. For example, Delaware has limits on the number of Cannabis plants that can be homegrown. In most states, the cultivation of Cannabis for personal use continues to be prohibited except for those states that allow small-scale cultivation by the individual in possession of medical Cannabis needing care or that person’s caregiver. Active enforcement of state laws that prohibit personal cultivation of Cannabis may indirectly and adversely affect our business and our revenue and profits.

 

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RISKS RELATED TO THE OFFERING

 

The Determination of the Offering Price of the Class A Common Stock May Not Reflect the Value of the Company.

 

The $225,000,000 valuation of our currently outstanding shares of Class A Common Stock and the $11.00 per share Offering Price of the Class A Common Stock has been arbitrarily determined by the Company and is not based on book value, assets, earnings or any other recognizable standard of value. No assurance can be given that our Class A Common Stock, or any portion thereof, could be sold for the Offering Price or for any amount. If profitable results are not achieved from the Company’s operations, of which there can be no assurance, the value of the Class A Common Stock sold pursuant to this Offering could fall below the Offering Price and the Class A Common Stock could become worthless.

 

This Offering has not been reviewed by independent professionals.

 

We have not retained any independent professionals to review or comment on this Offering or otherwise protect the interest of the investors hereunder. Although we have retained our own counsel, neither such counsel nor any other counsel has made, on behalf of the investors, any independent examination of any factual matters represented by management herein. Therefore, for purposes of deciding to purchase our Offered Shares, you should not rely on our counsel with respect to any matters herein described. Prospective investors are strongly urged to rely on the advice of their own legal counsel and advisors in deciding to purchase our Offered Shares.

 

There is no minimum capitalization required in this Offering in excess of $5,000,000.

 

We cannot assure that all or a significant number of shares of our Class A Common Stock will be sold in this Offering. Once we have realized gross proceeds of $5,000,000 from the sale of 454,545 shares of Class A Common Stock, Investors’ subscription funds will be used by us as soon as they are received, and no refunds will be given if an inadequate amount of money is raised from this Offering to enable us to conduct our business. Management has no obligation to purchase shares of our Class A Common Stock. If we raise less than the entire amount that we are seeking in this Offering, then we may not have sufficient capital to meet our operating requirements or to list our shares of Class A Common Stock on NASDAQ. We cannot assure that we could obtain additional financing or capital from any source, or that such financing or capital would be available to us on terms acceptable to us. Under such circumstances, investors in our Class A Common Stock could lose their investment in our Company. Furthermore, investors who subscribe for shares in the earlier stages of this Offering will assume a greater risk than investors who subscribe for shares later in this Offering as subscriptions approach the $50,000,000 of Offered Shares.

 

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We may not be able to satisfy listing requirements of a Qualified Stock Exchange to maintain a listing of our Common Stock.

 

If our Class A Common Stock is listed on NASDAQ, the OTC Market or the Canadian Securities Exchange, we must meet certain financial and liquidity criteria to maintain such listing. If we violate the maintenance requirements for continued listing of our Class A Common Stock on such exchanges, our Class A Common Stock may be delisted. In addition, our board may determine that the cost of maintaining our listing on a national securities exchange outweighs the benefits of such listing. A delisting of our Class A Common Stock from NASDAQ, the OTC Market or the Canadian Securities Exchange may materially impair our stockholders’ ability to buy and sell our Class A Common Stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our Class A Common Stock. In addition, in order to list, we will be required to, among other things, file with the SEC a post-qualification amendment to the Offering Circular, and then file a Form 8-A in order to register our shares of Class A Common Stock under the Securities Exchange Act of 1934, as amended. In the event we are required to file a post-qualification amendment to this Offering Circular, such post-qualification amendment will be subject to review by the SEC, and there is no guarantee that such amendment will be qualified promptly after filing. In such event, any delay in the qualification of the post-qualification amendment may cause a delay in the initial trading of our Class A Common Stock on NASDAQ, the NYSE American, the OTC Market or the Canadian Securities Exchange. For all of the foregoing reasons, you may experience a delay between the closing of your purchase of shares of our Class A Common Stock and the commencement of exchange trading of our Class A Common Stock. In addition, the delisting of our Class A Common Stock could significantly impair our ability to raise capital.

 

If we fail to meet the minimum requirements for listing on NASDAQ, we intend to seek to have our Class A Common Stock quoted on the OTC Market or the Canadian Securities Exchange. The OTC Market is not a stock exchange, and if our Class A Common Stock trades on the OTC Market there may be significantly less trading volume and analyst coverage of, and significantly less investor interest in, our Class A Common Stock, which may lead to lower trading prices for our Class A Common Stock. In addition, if our shares do not trade on either NASDAQ, the NYSE American, the OTC Market or the Canadian Securities Exchange (each of which is a Qualified Stock Exchange) our outstanding Purchase Notes and the ExWorks Warrants may not be converted or exercised.

 

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RISKS RELATED TO OUR CLASS A COMMON STOCK

 

There is no Assurance that dividends will be paid by the Company and the Company currently has no plans to pay dividends in the future.

 

Payment of cash distributions on the Class A Common Stock is within the discretion of the Company’s Board of Directors and management and will depend upon the Company’s future earnings, its capital requirements and financial condition, and other relevant factors. At the present time, the Company’s management intends to reinvest earnings in the Company, the purpose of which is to increase the potential for long-term profitability and enterprise value of the Company and increase cash reserves where possible. The Company does not intend to declare any dividends in the foreseeable future and will not declare or pay any dividends unless funds are legally available and the Company’s management has determined, in its sole discretion, that dividends should be paid. There can be no guarantees that dividends will ever be paid by the Company.

 

Our principal shareholders own voting control of the Company and, indirectly, the THC Group.

 

After giving effect to our recent stock split, our current officers, directors, founders and principal shareholders currently own a total of 14,583,372 shares of our Class A Common Stock or approximately 59.49% of the total issued and outstanding capital stock of Hightimes Holders. Our principal shareholders will continue to own a majority (52.56%) of our outstanding voting shares even if a maximum of 4,545,455 shares of Class A Common Stock are issued pursuant to this Offering for a total of $50,000,000. These shareholders are able to exercise significant control over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our Common Stock. This concentration of ownership may not be in the best interests of all of our shareholders.

 

Our failure to maintain effective internal controls over financial reporting could have an adverse impact on us.

 

We anticipate that commencing with our annual report for the year ending December 31, 2019, we will be required to establish and maintain appropriate internal controls over financial reporting. Our failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our Class A Common Stock.

 

Our Class A Common Stock could be subject to the “Penny Stock” rules of the Securities and Exchange Commission if it were publicly traded and may be difficult to sell.

 

Our shares of Class A Common Stock are considered to be “penny stocks” because they are not registered on a national securities exchange or listed on an automated quotation system sponsored by a registered national securities association, pursuant to Rule 3a51-1(a) under the Exchange Act. For any transaction involving a penny stock, unless exempt, the rules require that a broker or dealer approve a person’s account for transactions in penny stocks and that the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market, which sets forth the basis on which the broker or dealer made the suitability determination and that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

 

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The market for penny stocks has suffered in recent years from patterns of fraud and abuse.

 

Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:

 

  control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
     
  manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
     
  boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced salespersons;
     
  excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and
     
  the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequential investor losses.

 

Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our shares of common stock. The occurrence of these patterns or practices could increase the volatility of our share price.

 

External Economic Factors May have a Material Adverse Impact on the Company’s Business Prospects.

 

Success can also be affected significantly by changes in local, regional and national economic conditions. Factors such as inflation, labor, energy, real estate costs, the availability and cost of suitable employees, fluctuating interest rates, state and local laws and regulations and licensing requirements and increased competition can also adversely affect the Company.

 

The foregoing risk factors are not to be considered a definitive list of all the risks associated with an investment in our Offered Shares. This Offering Circular contains forward-looking statements that are based on our current expectations, assumptions, estimates, and projections about our business, our industry, and the industry of our clients. When used in this Offering Circular, the words “expects,” anticipates,” “estimates,” “intends,” “believes” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. The cautionary statements made in this Offering Circular should be read as being applicable to all related forward-looking statements wherever they appear in this Offering Circular.

 

USE OF PROCEEDS

 

Assuming the sale by us of $50,000,000 and estimated selling agent’s fees and offering expenses, including selling agent fees of up to $1,500,000 and other expenses of up to $3,000,000, including marketing expenses (including without limitation, media expenses, and internal website posting costs we will incur) and professional fees, the total net proceeds to us would be approximately $45,600,000. We intend to use these net proceeds to (i)  finance the acquisitions of BIG Publications and Feria Del Canamo S.L., (ii) repay the remaining indebtedness of $2,903,000 that we owe to the former holders of our of Purchase Notes, (iii) retire other indebtedness and reduce or retire the $17,400,000 of our outstanding senior secured debt, (iv) fund our brand development, including expansion of our Cannabis Cup events, marketing and other operating expenses, and (v) provide working capital to the High Times Group for acquisitions, joint ventures and other general corporate purposes. However approximately 32.3% of the net proceeds we received to date from the sale of 1,382,458 shares of Class A Common Stock were used to defray marketing expenses and costs of the Offering. As of the date of this Offering Circular, we cannot specify with certainty all of the particular uses for the net proceeds to us from the sale of Class A Common Stock. The following table represents management’s best estimate of the uses of the net proceeds received from the sale of our shares of Class A Common Stock in this Offering, assuming the sale of, respectively, 100%, 75%, 50% and 25% of the Common Stock shares offered for sale in this Offering.

 

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Percentage of Offering Sold

 

    10%   25%    50%    75%    100% 
Estimated Offering Expense (1)  $1,500,000   $3,500,000   $4,000,000   $5,000,000   $6,000,000 
Payment of Purchase Notes (2)   1,500,000    1,500,000    4,500,000    4,500,000    4,500,000 
Reduction of Debt (3)   500,000    1,500,000    2,500,000    7,000,000    9,000,000 
Expanding our Cannabis Cup events   500,000    1,000,000    3,000,000    5,000,000    7,500,000 
Marketing and licensing our brand   250,000    1,000,000    3,500,000    5,000,000    7,500,000 
Potential acquisitions and joint ventures (4)   250,000    1,000,000    3,500,000    5,000,000    7,500,000 
Working Capital (5)   500,000    3,000,000    4,000,000    6,000,000    8,000,000 
                          
Total Net Proceeds (1)  $5,000,000   $12,500,000   $25,000,000   $37,500,000   $50,000,000 

 

(1) Assumes that all shares of Class A Common Stock are sold by management and that no commissions or other fees are payable to broker/dealers, other than the 3% Selling Agent’s fee. In the event that our estimated offering expenses are greater or less than the amounts indicated above, any such increased offering expenses will reduce our working capital and any excess funds we may retain shall be applied toward our working capital and other corporate purposes
   
(2) Prior to December 31, 2018, we paid $1,500,000 of principal on the original $30,000,000 of Purchase Notes, an aggregate of $16,875,000 of such Purchase Notes (representing a 25% discount to $22,500,000 in Purchase Notes) were converted into 1,534,091 shares of our Class A Common Stock, we issued a $2,903,000 one year non-convertible notes to such former Purchase Note holders, and the remaining $3.046,000 principal amount of such Purchase Notes will be converted into an aggregate of 276,909 additional shares of our Class A Common Stock at such time as our Class A Common Stock is quoted for trading or listed on the OTCQX Market or other securities exchange.
   
(3) Represents net proceeds we intend to apply to prepay a portion of the outstanding principal amount due to ExWorks under its $17,400,000 convertible note due February 28, 2020 and $2,900,000 in fees owed to ExWorks, as adjusted by the application of the anticipated weighted average exercise price of the ExWorks Warrants to reduce such note by approximately $3,046,000. To the extent that ExWorks elects to convert all or part of their note in Class A Common stock or we are successful in refinancing the ExWorks debt on more favorable terms, we may utilize such finds to financing marketing our brand to in connection with potential acquisitions or joint ventures. At this time, we have no commitment either ExWorks to convert any portion of such indebtedness or any commitment from a third-party investor or lender to refinance such ExWorks loan. Accordingly, there can be no assurance that the High Times Group will be able to raise any meaningful net proceeds from the Offering or from other sources in amounts needed to significantly reduce or retire its indebtedness to ExWorks and provide necessary expansion and working capital. See “Risk Factors” on page 22 of this Offering Circular.

 

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(4) As indicated above, we have entered into agreements to acquire BIG Publications and the assets of Feria Del Canamo, S.L., dba “Spannabis.” To the extent that we raise an additional $5,400,000 of available funds from sales of our Class A Common Stock in this Offering, we intend to use such proceeds to make cash payments required under such agreements, of which $2,420,000 is owed to the owner of BIG Publications and $3,000,000 is owed to Feria Del Canamo, S.L., Although we have held preliminary discussions with other media and publication companies, as of the date of this offering circular we have no other definitive or binding agreements in place to consummate any additional acquisitions or joint ventures, or agreements as to the terms of any such transactions.
   
(5)

In the event we are unable to refinance the outstanding balance of the ExWorks loan and ExWorks elects not to convert any meaningful portion of the ExWorks loan, depending on the total amount of net proceeds we are able to receive from this Offering, we intend to utilize available working capital to reduce the ExWorks loan.

 

The amounts set forth above are estimates, and we cannot be certain that actual costs will not vary from these estimates. Our management has significant flexibility and broad discretion in applying the net proceeds received in this Offering. We cannot assure you that our assumptions, expected costs and expenses and estimates will prove to be accurate or that unforeseen events, problems or delays will not occur that would require us to seek additional debt and/or equity funding, which may not be available on favorable terms, or at all. See “Risk Factors.”

 

This expected use of the net proceeds from this Offering represents our intentions based upon our current financial condition, results of operations, business plans and conditions. As of the date of this Offering Circular, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the closing of this Offering or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors. As a result, our management will retain broad discretion over the allocation of the net proceeds from this Offering.

 

We may Pending our use of the net proceeds from this Offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities.

 

DILUTION

 

As of April 30, 2019, when we paused the Public Offering, there were an aggregate of 24,582,774 shares of Hightimes Holding Class a Common stock issued and outstanding.

 

If you purchase shares in this Public Offering, your ownership interest in our Class A Common Stock will be diluted immediately, to the extent of the difference between the price to the public charged for each share in this Public Offering and the net tangible book value per share of our Common Stock (including the Class B Common Stock) after this Public Offering of Class A Common Stock.

 

Our net book value as December 31, 2018, was a negative ($39,134,906) or ($1.6868) based on current outstanding shares of our Class A Common Stock of 23,200,316 shares after giving effect to the 1.9308657 forward split as of January 15, 2018 and excluding 1,382,458 of shares sold through April 30, 2019 in the offering.

 

Assuming the sale of all 4,545,454 shares of Class A Common Stock in this Offering at the initial public offering price of $11.00 per share, after giving effect to the conversion, as of April 30, 2019, of the following convertible notes, 276,909 shares to be issued to the Seller Purchase Note holders upon conversion of $3,046,000 of the original note, the conversion of the Bio Cup Note into 36,745 shares of Class A Common Stock, the conversion of the Broader Holdings Note into 949,293 shares of Class A Common Stock, the conversion of the Gemini Note into 62,395 shares of Class A Common Stock, and after deducting approximately $4,000,000 in maximum sales commissions and an additional $3,000,000 in estimated maximum marketing and other offering expenses payable by us, our pro forma as adjusted net tangible book value of our Common Stock would have been approximately $18,443,850 or $0.6344 per share as of December 31, 2018. This amount represents an immediate increase in pro forma net tangible book value of $2.3212 per share to our existing stockholders at the date of this Offering Circular, and an immediate dilution in pro forma net tangible book value of approximately ($8.6788) or (78.90%) per share to new investors purchasing shares of Class A Common Stock in this Offering at $11.00 per share.

 

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The following tables illustrate the per share dilution to new investors discussed above, assuming the sale of, respectively, 100%, 75%, 50% and 25% of the shares offered for sale in this Offering (after our estimated maximum offering expenses of up to $7,000,000):

 

Funding Level  $50,000,000   $37,500,000   $25,000,000   $12,500,000 
Offering Price  $11.00   $11.00   $11.00   $11.00 
Pro forma net tangle book value per Common Stock share before the Offering  $(1.6868)  $(1.6868)  $(1.6868)  $(1.6868)
Increase in per common share attributable to investors in this Offering  $2.3212   $2.5724   $2.1762   $1.7449 
Pro forma net tangle book value per Common Stock share after the Offering  $0.6344   $0.8856   $0.4898  $0.0587 
Dilution to investors  $(8.6788)  $(8.4276)  $(8.8238)  $(9.2551)
Dilution as a percent of Offering Price   78.90%   76.61%   80.22%   84.14%

 

The following tables set forth, assuming the sale of, respectively, 100%, 75%, 50%, 25% and 10% of the shares offered for sale in this Offering, the total number of shares previously sold to existing stockholders, the total consideration paid for the foregoing and the respective percentages applicable to such purchased shares and consideration paid, based on an average price of $0.4999 per share paid by existing stockholders and $11.00 per share paid by investors in this Offering.

 

   Shares Purchased   Total Cash Consideration 
   Number   Percentage   Amount   Percentage 
Assuming 100% of Shares Sold:                
Existing stockholders (1)   23,200,316    83.62%  $11,598,948    18.83%
New Investors   4,545,454    16.38%  $50,000,000    81.17%
Total   27,745,770    100.00%  $61,598,948    100.00%

 

   Shares Purchased   Total Cash Consideration 
   Number   Percentage   Amount   Percentage 
Assuming 75% of Shares Sold:                    
Existing Stockholders (1)   23,200,316    87.19%  $11,598,948    23.62%
New Investors   3,409,091    12.81%  $37,500,000    76.38%
Total   26,609,407    100.00%  $49,098,948    100.00%

 

   Shares Purchased   Total Consideration 
   Number   Percentage   Amount   Percentage 
Assuming 50% of Shares Sold:                    
Existing Stockholders (1)   23,200,316    91.08%  $11,598,948    31.69%
New Investors   2,272,727    8.92%  $25.000,000    68.31%
Total   25,473,043    100.00%  $36,598,948    100.00%

 

   Shares Purchased   Total Consideration 
   Number   Percentage   Amount   Percentage 
Assuming 25% of Shares Sold:                    
Existing Stockholders (1)   23,200,316    95.33%  $11,598,948    48.13%
New Investors   1,136,364    4.67%  $12,500,000    51.87%
Total   24,336,680    100.00%  $24,098,948    100.00%

 

   Shares Purchased   Total Consideration 
   Number   Percentage   Amount   Percentage 
Assuming 10% of Shares Sold:                    
Existing Stockholders (1)   23,200,316    98.08%  $11,598,948    69.88%
New Investors   454,545    1.92%  $5,000,000    30.12%
Total   23,654,861    100.00%  $16,598,948    100.00%

 

(1) Does not include up to 1,289,789 shares issuable at an average price of approximately $2.359 per share, to ExWorks Capital upon exercise of warrants, up to 1,304,217 shares issuable to ExWorks upon full conversion of a $17,400,000 convertible note ($14,357,388 net of the $3,042,612 application of the exercise price of the ExWorks Warrants to reduce the outstanding principal amount of the note), 264,945 shares issuable upon conversion of Warrants held by the Purchase Note Holders, and up to 3,780,122 shares issuable upon exercise of outstanding stock options and RSUs. Also excluded is the 1,382,458 shares sold in the Public Offering as of April 30, 2019.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS OF HIGH TIMES GROUP

 

The following discussion of Hightimes Holding’s financial condition and results of operations should be read in conjunction with Hightimes Holding’s consolidated financial statements and notes to those statements included in this Offering Circular. This discussion contains forward-looking statements that involve risks and uncertainties. Please see the sections entitled, “Forward-Looking Statements” and “Risk Factors” in this Offering Circular. References in this section to the “Company,” “we,” “us” and “our” are to Hightimes Holding, and unless the context otherwise requires, together with its consolidated subsidiaries.

 

Unless otherwise expressly indicated otherwise, all numbers referenced in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are expressed in thousands (000’s).)

 

Overview

 

Hightimes Holding Corp. was formed as a Delaware corporation in December 2016. The Company was formed to acquire 100% of the common stock of Trans-High Corporation.

 

On March 1, 2017, the Company acquired 100% of the issued and outstanding common stock of Trans-High Corporation (“THC”) and its wholly owned subsidiaries High Times Production Inc., Cannabis Business Digital, LLC, The Hemp Company of America, Inc., Hemp Times, Inc., High Times, Inc., New Morning Productions, Inc. and Planet Hemp, Inc. (collectively “High Times Group”).

 

THC was Originally founded in 1974 as a print magazine publication, Trans-High Corporation, a New York Corporation, doing business as “HIGH TIMES”®. High Times® has since evolved from a print magazine into a diversified media, information services and live entertainment company focused on creating and distributing authoritative and engaging content related to “all things Cannabis” to consumers and businesses throughout the world. Over its 43-year history, the HIGH TIMES® magazine has been providing consumers and businesses with information on cultivation, legal issues, entertainment, culture and hard-hitting news surrounding the Cannabis industry. Its core properties, including its High Times and Cannabis Cup brands, are delivered to an audience within markets of the Cannabis industry.

 

The High Times Group delivers its content to consumers across a variety of distribution platforms consisting not only of traditional print, but also through an array of digital platforms including websites, applications for mobile devices and tablets, social media and live entertainment events. The High Times Group is focused on pursuing integrated strategies across its business divisions to continue to capitalize on the growth in digital consumption and the development of continuing state legalization of both medical and recreational Cannabis consumption and production. The High Times Group believes that the increasing number of media choices and formats will allow us to continue to deliver its content in a more engaging, timely and personalized manner, provide opportunities to more effectively monetize its content via strong customer relationships and more compelling and engaging advertising solutions and reduce the production and distribution costs of print publication and continue to focus on digital platforms and live entertainment events.

 

The High Times Group’s operations are organized into four reporting segments: (i) festivals events and competitions, including live events and productions, including its Cannabis Cup®; (ii) publishing and print advertising, including the publication of our monthly High Times Magazine®; (iii) e-Commerce; and (iv) licensing and branding, including co-sponsorship and strategic partnership arrangements.

 

Financial Statement Presentation

 

The accompanying audited financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. The balance sheet as of December 31, 2018 and 2017 have been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the High Times Group’s consolidated financial statements and notes thereto. The notes to the unaudited condensed consolidated financial statements are presented on a continuing basis unless otherwise noted.

 

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Principles of consolidation

 

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary Trans-High Corporation, its wholly owned subsidiaries High Times Production Inc., Cannabis Business Digital, LLC, The Hemp Company of America, Inc., Hemp Times, Inc., High Times, Inc., New Morning Productions, Inc., Planet Hemp, Inc., Chalice Holdings, Inc., Wilshire & Veteran Media Corp and Culture Pub, Inc. All the subsidiaries are inactive except for Trans-High Corporation and High Times Production, Inc. All intercompany transactions have been eliminated.

 

Business Combinations

 

Business combinations are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations (“ASC 805”). Under the acquisition method the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceeds the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the consolidated statement of income (loss) from the date of acquisition. Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred.

 

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RESULTS OF OPERATIONS: (all figures in thousands)

 

For the Year Ending December 31, 2018 Compared with the Year Ending December 31, 2017

 

Revenues:

 

(in thousands 000’s)  For The Year
Ended
December 31,
2018
   For The Year Ended
December 31,
2017
   Net
Change $
   Net
Change %
 
Revenue by Type                    
Festivals, events, competitions  $10,184   $11,037   $(853)   -7.7%
Publishing and advertising  $4,180   $3,192   $988    31.0%
Merchandising and branding  $370   $252   $118    46.8%
Total Revenue  $14,734   $14,481   $253    1.7%
                     
Revenue by Geographical Location                    
US Domestic Revenue  $14,465   $13,973   $492    3.5%
International Revenue  $269   $508   $(239)   -47.0%
Total Revenue  $14,734   $14,481   $253    1.7%

 

Total Revenue

 

Total revenues increased by $253, or 1.7%, to $14,734 for the year ended December 31, 2018 from $14,481 for the year ended December 31, 2017. U.S. and international revenues comprised 98% and 2%, respectively, of total revenues for the year ended December 31, 2018, as compared to 96% and 4%, respectively, for the year ended December 31, 2017. Overall results for revenue reported for the year ended December 31, 2018 was affected from lower attendance and booth sales due to not obtaining a recreational permit for the April 2018 San Bernardino Cup event, thus affecting the following Cup Events that lead to lower festivals and event revenue. The increase in adverting, merchandising and ecommerce revenue offset the decrease in revenue from events.

 

Total festival, events and competition revenues decreased by $853, or 7.7%, to $10,184 for the year ended December 31, 2018 from $11,037 for the year ended December 31, 2017. Total festival revenue represented 69.1% and 76.2% of total revenues for the year ended December 31, 2018 and 2017, respectively. Total festival revenues for the year ended December 31, 2018 were comprised of 98% U.S. revenues and 2% international revenues with just one international event staged during the year ended December 31, 2018, as compared to the year ended December 31, 2017 that had 96% US revenues and 4% international revenues from two staged international event. The one international cup staged for the 2018 fiscal year was held in Amsterdam in July 2018, compared to the two international Cup Events held in 2017 that were also staged in the second half of the fiscal year (Vancouver in August 2017, and Amsterdam in November 2017).

 

The net decrease in festival revenues was due to the city of San Bernardino not approving the issuance of a recreational permit for the first Cup Event held during 2018 right before the event was held. Our failure to obtain a recreational permit caused several vendors to cancel or ask for credit for a future cannabis Cup Event, thus resulting in an overall reduction in booth and sponsorship Cup Event revenue overall. Nonetheless, the Cup Events held in the second half of fiscal 2018 were stronger in attendance and revenue and thus were able to partially offset the lower than expected revenue from our first Cup Event. In addition to stronger Cup Events after the San Bernardino Cup, the increased number of our smaller sponsored events served to also partially offset the loss in revenue from the San Bernardino Cup Event for the year. In the fiscal year ended December 31, 2018 there was an increase in smaller sponsored events as compared to the prior year.

 

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For the year ended December 31, 2017, we held ten Cup Events (San Bernardino (2), Las Vegas, Michigan (2), Vancouver, Rhode Island, Amsterdam, Vancouver, and San Francisco) and five one-off sponsored events as compared to eight Cup Events (San Bernardino, Sacramento, Sonoma, Amsterdam, Alaska, Reggae on the River, and Michigan (2)) and six one-off sponsored events for the current year ended December 31, 2018

 

Publishing and advertising revenues showed an increase of $988, or 31.0%, to $4,180 for the year ended December 31, 2018, as compared to $3,192 for the year ended December 31, 2017. This increase was primarily the result of additional revenue from the DOPE and Culture Magazine advertising sales of $750. We also experienced an increase in publishing and advertising revenue derived from High Times digital advertising and social media service revenue that increased over the prior year and offset the decline in print, newsstand and subscription revenues. Our acquisition of the DOPE and Culture Magazine websites in the fourth quarter of 2018 is projected to increase the amount of ad inventory space that can be monetized by the sales staff and, thus, is expected to continue the growth in total digital advertising and social media service revenue in 2019, as compared to the current fiscal year.

 

Merchandising and branding revenue showed an increase of $118, or 46.8%, to $370 for the year ended December 31, 2018, from $252 in revenue recorded during the year ended December 31, 2017. The increase in merchandising and branding revenue resulted from higher on-line store revenues, which was a direct result of moving the operations in-house in late 2017. The move has allowed us to provide a wider selection of products that better fits the High Times customer while also allowing for more in-house promotion of our products and store on our website. We have also experienced an increase in branding royalty revenue as deals that were signed late in 2017 have come on-line and into production during 2018.

 

Revenue by Geographical Location

 

U.S. revenues increased by $492, or 3.5%, to $14,465 for the year ended December 31, 2018 from $13,973 for the year ended December 31, 2017. This increase was due to an increase in digital advertising revenue, social media services revenue, and higher merchandising and branding revenue from an increase in the Company’s online store that offset lower print magazine (newsstand, subscription and print advertising) revenues and lower event revenue.

 

International revenues decreased by $239, or 47.0%, to $269 for the year ended December 31, 2018 from $508 for the year ended December 31, 2017. This decrease was due to our holding one less event in fiscal 2018 as compared to the prior year. We held only one international event for the 2018 fiscal year, which was held in July 2018 in Amsterdam, as compared to two international events held in Vancouver (Summer 2017) and Amsterdam (November 2017) in the prior year.

 

Cost of revenues:

 

Our costs of revenues were composed of the following amounts:

 

(in thousands 000’s)  For The Year Ended
December 31,
2018
  

For The Year Ended

December 31,
2017

   Net
Change $
   Net
Change%
 
                 
Festivals, events, competitions  $12,186   $10,360   $(1,826)   -17.6%
Publishing and advertising  $1,508   $950   $(558)   -58.7%
Total Cost of Revenue  $13,694   $11,310   $(2,384)   -21.1%

 

The cost of revenues increased by $2,384, or 21.1%, to $13,694 for the year ended December 31, 2018 from $11,310 for the year ended December 31, 2017. Expressed as a percentage of revenues, cost of revenues was 92.9% and 78.1% for the year ended December 31, 2018 and 2017, respectively. The total cost of revenues increased by 21.1% at the same time as overall revenues increased by only 1.7% during the year ended December 31, 2018 as compared to the year ended December 31, 2017, during which time we experienced an increase in the cost of revenue as a percent of revenue and decreased the gross profit margin for the period from 21.9% to 7.1%.

 

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The costs of festival, events and competitions as a percentage of related revenues were a 119.7% and 93.9% for the year ended December 31, 2018 and 2017, respectively. The increase in actual festival costs of $1,826, or 17.6%, to $12,186 from $10,360 for the year ended December 31, 2018 and 2017, respectively, was driven by an increase in talent costs (an increase of $434) and related required additional staging costs at each Cup Event (a $489 increase in production costs) along with other increase in temporary staffing (s $411 increase) and ticket processing costs (a $343 increase). The smaller sponsored events cost significantly less to stage and have a higher gross profit as a percentage than the Cup Events and act to partially offset the lower gross profit from the Cup Events held in the year ended December 31, 2018. The actual gross profit for the segment decreased 395.7% from $677 to ($2,002) for the year ended December 31, 2018 and 2017, respectively, due to an increase in talent and production costs in staging the Cup Events produced during the year combined with lower revenue earned compared to the prior year. The gross profit margin on events decreased from 6.1% to (19.7%) for the year ended December 31, 2018 and 2017, respectively.

 

The combined publishing and advertising as well as merchandising and branding costs as a percentage of related revenues were 33.1% and 27.6% for the year ended December 31, 2018 and 2017, respectively. Overall the actual costs of publishing and merchandising increased $558, or 58.7%, due to higher ecommerce costs from moving the store operation in-house, and higher costs from the printing of DOPE and Culture magazines. The proposed consolidation and integration of operations for the three magazines is one cost savings strategy that is projected to bring costs as a percent of print activity down the historic lower percent as in the year ended December 31, 2018. The gross profit for the segment increased 19.1% from $2,242 to $2,672 for the year ended December 31, 2017 and 2018, respectively, due to higher overall revenues. The gross margin decreased from 72.4% to 66.9% for the year ended December 31, 2017 and 2018, respectively, due to the higher increase in print cost as a percentage then the increase in revenue as a percentage.

 

Operating expenses:

 

Our Operating expenses are composed of the following marketing and advertising expenses, professional fees, and general and administrative expenses, as detailed below.

 

(in thousands 000’s)  For The Year Ended
December 31,
2018
   For The Year Ended
December 31,
2017
   Net
Change $
   Net
Change %
 
Marketing and advertising  $7,062   $397   $(6,665)   -1678.8%
Professional fees  $2,698   $8,933   $6,235    69.8%
General and administrative  $10,515   $7,219   $(3,296)   -45.7%
Depreciation, amortization, and impairment  $8,263   $232   $(8,031)   -3461.6%
Total Operating Costs  $28,538   $16,781   $(11,757)   -70.1%

 

Totals for depreciation and amortization expense include impairment on intangibles of $7,685 and $0 for the year ended December 31, 2018 and 2017, respectively.

 

Operating expense increased by $11,757, or 70.1%, to $28,538 for the year ended December 31, 2018 from $16,782 for the year ended December 31, 2017. Expressed as a percent of revenues, operating expenses increased to 193.7% for the year ended December 31, 2018 from 115.9% for the year ended December 31, 2017. The major variance in the net increase in total operating costs was a result of an increase in advertising expenses of $6,637 that was related to promoting the company brand during the company’s ongoing Regulation A+ public offering, as well as a one-time booking of impairment on intangibles of $7,685. Additional increases in payroll and rent were related to the additional staff and offices resulting from the DOPE and Culture acquisitions. Partially offsetting these higher costs was lower non-cash equity compensation expense that was booked in 2018. The equity compensation expense booked was $2,963 and $9,330 for the year ended December 31, 2018 and 2017, respectively. Adjusting for these non-cash equity compensation costs, impairment, and the one time increase in advertising expenditure, total operating costs would have been $11,253 for the year ended December 31, 2018, which would have been a $3,802, or 51.0%, increase from the $7,451 adjusted total for the year ended December 31, 2017. The net increase in the adjusted cost totals is mostly due to booking executive deferred compensation that was not booked during the same period for the prior year, as well as additional payroll from staffing increases to expand business and an increase in professional fees to cover the additional legal and audit work for the Company’s ongoing Regulation A+ public offering and costs associated with applying for the Company’s public listing.

 

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Marketing and advertising expense for non-event company branding increased by $6.665, or 1,678.8%, to $7,062 for the year ended December 31, 2018 from $397 for the year ended December 31, 2017. The large increase is mostly due to the $6,637 spend from the use of iHeart Media advertising credits and other costs related to the Company’s promotion of the Company’s brand during our Regulation A+ public offering. Adjusting for this one-time advertising expense for the year ended December 31, 2018 would have been $425, representing an increase of $28 or a 7.1%, as compared to the prior year. The ratio of the adjusted advertising costs as compared to revenues was flat. Expressed as a percentage of revenues, the adjusted marketing and advertising expense showed an increase to 2.88% of revenue for the year ended December 31, 2018 as compared to 2.74% of revenue for the year ended December 31, 2017.

 

Professional fees decreased by $6,235, or 69.8%, to $2,698 for the year ended December 31, 2018 from $8,933 for the year ended December 31, 2017. The overall decrease in professional fees is due to the change in the amount of non-cash stock and option grant compensation booked in each year. Adjusting professional fees for the non-cash equity compensation costs for consultants of $386 and $6,689 for the years ended December 31, 2018 and 2017, respectively, resulted in an increase of $68, or 3.0%, from $2,244 for the year ended December 31, 2017 to $2,312 for the year ended December 31, 2018. The overall increase in professional fees is due to the costs for the various filings related to the Company’s ongoing Regulation A+ public offering and the related public listing process.

 

General and administrative expenses increased by $3,296, or 45.7%, to $10,515 for the year ended December 31, 2018 from $7,219 for the year ended December 31, 2017. One major contributor to the increase in general and administrative expense resulted from recording employee stock option compensation costs of $2,597 for the year ended December 31, 2018 compared to $1,741 recorded in the year ended December 31, 2017. Adjusting for the non-cash equity compensation costs, the total general and administrative expense for the year ended December 31, 2018 would be $7,918 compared to an adjusted year end December 31, 2018 total of $5,478. The adjusted total variance of $2,440 is from the increase of $1,203 in payroll and benefit costs from High Times and the Dope and Culture acquisitions. Rent also increased by $228 due to the added offices and due to the New York City office lease assumed by the Company from Planetout Inc., which lease expense is offset by the subleasing income that is recorded as other income. The other increase in costs are related to the increase in staff from the prior year with increases in travel costs, office supplies, and initial integration costs from the acquisitions made during the year. Expressed as a percentage of revenues, general and administrative expense increased to 71.4% (53.7% if adjusted for the stock option compensation expense) for the year ended December 31, 2018 from 49.9% (37.8% if adjusted for the stock option compensation expense) for the year ended December 31, 2017. The increase is due to a higher increase in general and administrative costs compared to a lower increase in revenue.

 

Depreciation, amortization, and impairment expense

 

As of August 31, 2017, Trans-High entered into an online sales representative agreement with Green Rush Daily Inc. (“Green Rush”), a daily on-line publication providing news and information relating to cannabis, including guides and strain reviews, products and health news. On March 28, 2018, the parties terminated the online sales representative agreement and pursuant to an asset purchase agreement, dated March 28, 2018, Trans-High acquired certain of Green Rush’s assets consisting solely of its websites, intellectual property, advertiser agreements and future revenues from such agreements. No employees or liabilities of Green Rush were acquired or assumed by Trans-High. As consideration for the purchased assets, Green Rush received 577,651 shares of the Company’s Class A Common Stock and Hightimes Holding agreed to pay Green Rush an additional $500 in cash on or before September 30, 2018. Under the terms of the asset purchase agreement, if by September 30, 2018 either (a) Green Rush did not receive the $500 cash payment or (b) the Company’s Class A Common Stock does not trade on NASDAQ, another national securities exchange or is not quoted for trading on the OTCQX, the OTCQB or the Canadian Stock Exchange (the “Trading Deadline”), Green Rush would have the right to rescind the asset purchase agreement and repurchase the assets in consideration for returning to the Company the 577,651 shares of Class A Common Stock. As the Company has not made the $500 cash payment, Green Rush does have the right to rescind.

 

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However, following the acquisition of the Green Rush assets, the revenues from the former Green Rush business materially deteriorated. At such time, Trans-High also learned that certain of the assets it had believed it had purchased had previously been sold by Green Rush in breach of the asset purchase agreement. Accordingly, the Company has written off the value of the Green Rush assets of $6,750 on its financial statements for the year ended December 31, 2018.

 

Impairment on intangibles booked for the year ending December 31, 2018 was $7,685 compared to $0 booked for the year ending December 31, 2017. For the year ended December 31, 2018, impairment was recorded for the assets for the Green Rush Daily website (as set forth above) of $6,750, the Legend Valley Music Festival (purchase by the Bio Cup Music Note) of $375, and the Chalice Cup Event assets (purchased by the Gemini Finance Corp note) of $560.

 

Adjusting out impairment costs depreciation and amortization expense increased by $346, or 149.3% to $578 for the year ended December 31, 2018 from $232 for the year ended December 31, 2017. The increase was due to the amortization of intangibles that were part of the purchase price allocation in the Dope and Culture Magazine asset acquisitions. The amortization related to the acquisitions was $330 for the year ended December 31, 2018, The balance of the increase of $16 was due to an increase in deprecation from additional asset expenditures put into service including assets from the asset acquisitions.

 

Operating loss from continuing operations

 

Our net operating loss increased by $13,888, or 102.0%, to $27,498 for the year ended December 31, 2018 as compared to a $13,610 loss for the year ended December 31, 2017. Operating net loss margin increased to 186.6% for the year ended December 31, 2018, from 94.0% for the year ended December 31, 2017. The increase in net operating loss as a percent of revenue on higher revenues was primarily due to the iHeart advertising costs and credits of $6,604 that were expensed promoting the Company’s Regulation A+ public Offering, the increase in equity compensation charge of $1,222 ($2,963 in the current year compared to $1,741 in the prior years), and the one time impairment on intangibles of $7,685. Adjusting for these charges the net operating loss would be $10,246 for the year ending December 31, 2018, a decrease of $1,623 or 13.7% in the adjusted loss reported for the year ended December 31, 2017 of $11,869.

 

Interest expense, net

 

Net interest expense decreased $1,585, or 34.8%, to $2,973 for the year ended December 31, 2018 as compared to $4,558 for the year ended December 31, 2017. Gross interest accrued increased for the year ended December 31, 2018 by $1,329 but this was offset by a decrease of $2,914 due to Purchase Note holders forgiving a portion of their interest that was accrued that resulted in the overall decrease in interest expense of $1,585.

 

Change in fair value in derivative

 

The Company issued a warrant to our senior loan holder for a line of credit that was used to finance the acquisition of Trans-High Corporation. The warrant is deemed a derivative due to the terms that it exercises into 2.75% of our Class A Common Stock based on the number of deemed issued shares at the time the warrant is exercised. The initial fair value of the warrant was $570. The fair value of the warrant was $3,950 for the year ending December 31, 2017. The change in the fair value of the derivative of $3,380 in expense was recorded as Other Expense. In the year ended December 31, 2018, the Company issued an additional warrant to our senior loan holder under the same terms as the first warrant issued and exercises into 2.25% of Class A Common Stock based on the number of deemed issued shares at the time of its exercise. The combined change in fair value of the two senior loan holder warrants resulted in an expense of $8,815. In addition to loan holder warrants, an additional $1,195 expense was related to warrants issued to the Purchase Note Holders in exchange for forgiveness of interest, and net income of $66 was recorded on a junior note for event lease rights.

 

Change in fair value of investment securities

 

The Company received common shares from Cannabis Sativa Inc. in lieu of cash payment for a lock-up event service agreement valued at $1,000. The investment was classified as a Level 1 financial instrument at December 31, 2017. The Company recorded a $1,134 change in fair value of investment securities for the year ended December 31, 2017. For the year ended December 31, 2018, the same shares as mentioned before were returned as part of terminating agreements between the companies resulting in recording a net loss of $1,405 in the change in fair value of investment securities.

 

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Change in fair value of convertible notes

 

The modified terms under the Second Amendment to the Company’s senior secured note were considered substantially different as compared to the terms of the Loan Agreement immediately prior to the Second Amendment, pursuant to ASC 470-50, Modification and Extinguishment. Based on the modification the new note was recorded using the fair value method. The net change in the fair value of the notes resulted in a loss of $1,117, which is included in other non-operating expense for the year ended December 31, 2018. For the current year ended December 31, 2018, the net change in the fair value of the notes resulted in a net gain of $1,826.

 

(Gain)/loss from settlement of debt

 

The modified terms under the Second Amendment for the Company’s senior secured note were considered substantially different as compared to the terms of the Loan Agreement immediately prior to the Second Amendment, pursuant to ASC 470-50, Modification and Extinguishment. As such, the Second Amendment was accounted for as a debt extinguishment, resulting in a loss on debt extinguishment of $1,231, which is included in other non-operating expenses for the year ended December 31, 2017. For the year ended December 31, 2018 there was a settlement of a loan that was paid off that resulted in a net gain of $53.

 

Finance charges

 

Finance charges of $1,533 were $386, or 20.1%, lower in the year ended December 31, 2018 as compared to the $1,919 recorded for the year ended December 31, 2017. The lower charges were from lower success fees and other costs charged by our senior note holder for the 2018 amendments as compared to the fees and other costs charged in the prior year.

 

Other net Income and Expenses

 

Other net income and expenses resulted in a net income of $207 for the year ended December 31, 2018, as compared to a net loss of $13 for the year ended December 31, 2017. The increase in net income was due to rental income earned from the sublease of the New York office to Pride Media in the New York office after the lease had been assumed by Trans-High Corporation from Planetout Inc. in November 2017. Other income derived from a vendor review of accounts payment for invoices that were no longer due form prior years, which was offset by the closing of customer sales invoices from prior years that were deemed uncollectable or were still open due to prior mismatched payments.

 

Net loss

 

Our net loss increased by $16,573, or 67.1%, to a net loss of $41,267 for the year ended December 31, 2018, as compared to a net loss of $24,694 for the year ended December 31, 2017. The increase in net loss was primarily the result of the factors noted above with respect to our loss from continuing operations and increase in non-operating expenses.

 

Going Concern

 

The High Times Group financial statements appearing elsewhere in this Offering Circular have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the period from January 1, 2015 through December 31, 2018, the company has incurred net losses of $69,175.

 

High Times Group is currently generating operating losses and requires the continued infusion of new capital to continue and grow its business operations. Since February 2017, the High Times Group has obtained working capital primarily through short-term loans obtained from its executive officers and directors. See “Certain Relationships and Related Party Transactions” on page 81 of this Offering Circular.

 

The net operating loss for the first three months of the current fiscal year is due to a number of non-cash expenses (equity compensation charges, unrealized loss on securities, and change in derivative liability) which, if eliminated, would result in High Times Group being closer to a net cash flow break-even.

 

For operations to grow it requires prepaying for Cannabis Cup event costs several months in advance. In order to increase 2019 revenues by increasing the number of Cannabis Cup events, High Times Group increased the amount of its senior credit facilities owed to ExWorks Capital Fund I, L.P. from $13,500 to $17,400 (as of May 22, 2019), and is planning to use a portion of the Offering proceeds to fund operations and repay its debt.

 

At December 31, 2018, our cash and cash equivalents were approximately $1,178 and our accounts payable and accrued liabilities, including accrued and unpaid executive compensation and professional fees was approximately $9,605.

 

Unaudited Pro Forma Balance Sheet Information

 

The unaudited pro forma balance sheet data as of December 31, 2018 gives effect to a pro-forma estimated $30,028 increase in our consolidated stockholders’ equity, which was a negative ($39,135) at December 31, 2018 resulting from increases in stockholders’ equity primarily resulting from (a) the conversion into Class A Common Stock of approximately $3,046 remaining balance of an aggregate of $22,500 principal amount of convertible notes issued to the former stockholders of THC previously converted into such Class A Common Stock, (b) consummation of the purchase of assets and businesses of Culture Magazine, DOPE and Chalice Festivals, (c) the exercise by ExWorks’ of their two warrants resulting in the elimination of $12,780 of prior expenses derivative liability and a reduction of $3,043 to the senior note equal to the combined exercise price; which transaction is scheduled to take place simultaneous with a “Liquidity Event,” and (e) the sale through December 31, 2018 of 1,223,855 shares of the Class A Common stock at $11.00 per share in the Hightimes Holding Regulation A+ Public Offering . The unaudited pro forma stockholders’ equity for the fiscal year ended December 31, 2018 gives effect to such transactions as if they had occurred as of the end of the period.

 

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The unaudited pro forma balance sheet data does not include the prospective acquisition of BIG Publications or Spannabis which will require (in addition of issuance of Common Stock and notes) cash payments aggregating approximately $5,420.

 

(000 omitted)

 

   December 31, 2018   Pro Forma Adjustments        Pro-Forma assets, liabilities, and stockholder’s equity 
   (Unaudited)            (unaudited) 
Assets                    
Current assets                    
Cash and cash equivalents  $1,178            $1,178 
Accounts receivable, net   3,741              3,741 
Income tax receivable   25              25 
Employee advances   10              10 
Deferred costs and prepaid expense   4,469              4,469 
Total current assets  $9,423             $9,423 
                     
Other Assets                    
Fixed assets and technology, net  $689              689 
Intangible assets   6,457              6,457 
Goodwill   6,895              6,895 
Investment in Spectrum King LED   1,500              1,500 
Other assets   48              48 
Total assets  $25,012             $25,012 
                     
Liabilities and Stockholders’ Deficit                    
Current liabilities:                    
Accounts payable and accrued liabilities  $9,605    (21)   2    9,403 
         (176)   5      
         (5)   6      
Notes payable - non-related party, short term   1,840              1,840 
Deferred revenue   4,450              4,450 
Deferred tax liability   426              426 
Capital lease obligation   8              8 
Convertible notes payable   955              955 
Convertible share purchase note – related party, short term   5,949    (3,046)   1    2,903 
Convertible notes, fair value   25,754    (7,689)   3    9,929 
         (8,136)   4      
Derivative and warrant liability   13,996    (395)   2    3,041 
         (10,000)   5      
         (560)   6      
Notes payable - related party   45              45 
Total current liabilities  $63,028   $(30,028)        33,000 
                     
Capital lease obligation – long term   32              32 
Notes payable - non-related party, long-term   1,087              1,087 
Total liabilities  $64,147    (30,028)       $34,119 
                     
Stockholders’ deficit:                    
Class A common stock, par value $0.0001; 100,000,000 shares authorized; 24,444,277 and 29,415,844 shares issued and outstanding as of December 31, 2018 and Pro Forma December 31, 2018, respectively   2              2 
                     
Additional paid in capital   54,976    3,046    1    85,004 
         416    2      
         7,689    3      
         8,136    4      
         10,176    5      
         560    6      
Stock subscription receivable   (904)             (904)
Accumulated deficit   (93,209)             (93,209)
Total stockholders’ (deficit) equity   (39,135)   30,028         (9,107)
Total liabilities and stockholders’ (deficit) equity  $25,012   $-        $25,012 

 

The accompanying notes are an integral part of these consolidated pro forma financial statements.

 

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Footnotes to the December 31, 2018 Pro-Forma Balance Sheet:

 

The pro forma adjustments to stockholders’ equity and increase in the outstanding shares of Class A Common Stock:

 

(1) Gives pro-forma effect to (a) a $3,046 increase in stockholders’ equity resulting from the conversion in November 2018 of $3,046 of principal and accrued interest in the remaining balance of the Purchase Notes that were issued in 2017 to the former THC stockholders and outstanding at September 30, 2018 which were subsequently converted into Class A Common Stock prior to December 31, 2018, (b) the payment in cash of $1,500 to such purchase noteholders, and (c) the reclassification of $2,903 of principal and accrued interest on such purchase notes into a $2,903 principal amount non-convertible note due October 31, 2019 and subject to prepayment at the rate of 20% of all net proceeds received from any financings proceeds received by the Company between November 1, 2018 and October 31, 2019. On November 13, 2018 of the remaining balance of the purchase notes ($22,500 discounted by 25% to $16,875) were converted into 1,534,000 additional shares of Company Class A Common Stock at a price of $11.00 per share.

 

(2) Gives pro-forma effect to an increase in stockholders’ equity resulting from the automatic conversion into Class A Common Stock upon consummation of the Regulation A+ Public Offering of a $375 principal amount convertible note, plus accrued interest of $21, issued in August 2017 to Bio Cup Music Festival Ltd. in connection with the acquisition of the right to conduct Cannabis Cup Events at a designated venue in Vancouver, British Columbia. Such note plus any accrued and unpaid interest will convert into 3