Hightimes’ Acquisition of California Cultivator Goes to Pot
Hightimes Holding, still laboring to complete a crowdsourced initial public offering, has quietly scrapped its deal to acquire a marijuana cultivator in California — the latest deal to hit the skids for the parent company of stoner magazine High Times.
In an SEC filing on May 15, the company said the deal for Humboldt Heritage, which was announced on March 27, had been terminated “by mutual agreement.”
It’s not the first time a deal has fallen through for Hightimes, owned by private equity owner Oreva Capital, whose founder, Adam Levin, is also executive chairman of Hightimes.
In January 2019, Hightimes said it would be bringing its Cannabis Cup show to Europe by acquiring Barcelona-based Spannabis, but by February the deal was off.
“There is no relationship or collaboration between Spannabis and Hightimes,” the Spanish company said. “We want to deny all this information.”
In December 2018, the company said it was acquiring The Big Show, a Las Vegas-based marijuana show, and that the deal would close in the first quarter of 2019. It did not.
Hightimes has for the past two years been trying to raise money through a Reg A+ crowdsourced IPO. The final deadline for the frequently delayed event is now June 30.
When High Times announced an $80 million deal April 28 to buy more than a dozen California cannabis dispensaries, the storied stoner brand called out one location in particular: the emerald jewel of the acquisition spree was to be a ritzy shop in San Francisco’s Union Square.
“We will literally be next to a Chanel store,” Hightimes Holding Corp. executive chairman Adam Levin told Bloomberg News.
Only one of the 13 statewide dispensaries in that deal is next to a Chanel — the 152 Geary Street location, formerly the John Varvatos store. That proposed dispensary still needs local and state permits before opening. But to its equity program-approved co-owner, whose two-year quest for Planning Commission approval finally found success in February, the Hightimes Holding Corp. announcement came as a complete surprise.
“The press notified me after the deal was announced,” shop co-owner Alexis Bronson tells SF Weekly. And since then, he says “I have not heard anything” — not from High Times, or their holding corporation.
When we talk about equity in cannabis, we usually mean representation for communities impacted by the war on drugs. In the age of Big Cannabis, large companies often have to partner with smaller, so-called “equity owners” in order to satisfy equity requirements in San Francisco.
But there’s another way the word equity is used in the legal marijuana industry. Private equity firms regularly put up the capital that small cannabis businesses need to operate, or even open, in the highly regulated and very costly California market.
The proposed High Times dispensary is an intersectional crash of these two types of equity — as the iconic counterculture magazine High Times moves into the world of Wall Street investment deals. The outcome of this curious conflict could prove a potent case study in what private equity and social equity look like in the new and evolving recreational marijuana era.
Smoke & Mirrors
California retail-chain dispensaries are not like supermarket chains. Each individual franchise is often legally structured as its own Limited Liability Corporation (LLC), so a given store can comply with cannabis regulations that differ between individual cities and counties.
Bronson says his LLC is being used as a pawn by large, cutthroat corporate players. Bronson’s dispensary was initially to be named Have a Heart — as it was originally part of a Seattle-based chain of 10 Have a Heart dispensaries that spanned Washington, California, and Iowa. His LLC was called HAH 2 CA, and in compliance with San Francisco Office of Cannabis equity rules, he owned a 40 percent share of that LLC and was appointed CEO.
“I met the income guidelines,” he says, noting he satisfied other social justice criteria, as well: he’d been evicted in San Francisco and has a previous cannabis arrest (although, he notes, he was not convicted).
Yet just a month after Bronson’s Have a Heart dispensary was approved by the Planning Commission, the Have a Heart brand merged with a much larger Tempe, Arizona-based chain called Harvest Health and Recreation in an $85 million deal. Harvest already had three dozen dispensaries in legal states across the country, including one in Napa.
Barely a month later came the big news of Hightimes acquiring 13 dispensaries across California for $80 million in a “mostly stock-based transaction.” Those dispensaries included the Have a Heart store in Union Square.
But it’s not really 13 open and operating dispensaries. A close review of the Securities and Exchange Commission (SEC) filings for the High Times deal reveals that only five of the 13 dispensaries listed in the transaction are currently open.
The other eight, like Bronson’s proposed Union Square dispensary, have permits still pending approval, or are applications in progress.
Bronson alleges his partners secretly flipped their ownership shares into a company called Core Competencies, LLC. And while their intent in creating this limited liability corporation may be disputed, the SEC filing for the Hightimes deal does confirm in legal language that Bronson’s partners at Have a Heart “assigned their interests to Core Competencies LLC” — a distinction that is not made for any of the other co-owned dispensaries.
“My business partners sold their shares in our entity behind my back, without my approval or consent as acting CEO,” he tells us. SF Weekly has reviewed emails and contract documents showing that Bronson then declined the offer sheet sent to him as the Harvest deal was closing, and that he was never notified of the subsequent Hightimes acquisition.
So, if he refused to sign onto the terms of the first acquisition, does Bronson lose his stake now that the whole thing has been sold to Hightimes?
We asked a prominent marijuana lawyer.
“In a typical organization, the majority shareholder has control over the entity,” says cannabis attorney Omar Figueroa. (Bronson is only the 40 percent shareholder and does not hold a majority for that dispensary.) “He wouldn’t lose his shares, it just means that he doesn’t have control, because he doesn’t have the voting shares to have that control.”
We should note that other Have a Heart dispensary owners see the Hightimes deal as making sense for their equity business.
“Due to the level of business capacity that retail cannabis businesses in California are in, and due to the gravity of how large these companies need to be, this type of situation does not surprise me,” Have a Heart Downtown Oakland owner Josh Chase tells us.
In San Francisco, any change in ownership must be approved by the SF Office of Cannabis. That office would not comment for this article, citing a policy on refraining from commenting on all permits that are still pending state and local review. Whether this dispensary is called Have a Heart of High Times, it’s still a pending permit.
Not Your Father’s High Times
The old-school pot magazine you remember as High Times looked to be blooming into a marijuana empire in 2017. That year, The New York Times initially reported that a group of wealthy Los Angeles-based investors, including Bob Marley’s son, Damian, acquired the magazine for $70 million, establishing a new parent company called Hightimes Holding Co.
However, the Times quickly issued a correction to that report, clarifying that “the group acquired a controlling stake that valued the magazine at $70 million; it did not pay $70 million.” The initial hype was an omen of things to come.
Hightimes pivoted its core business to producing Cannabis Cup events, and they went on a spending spree to acquire and put their name on many of the world’s biggest marijuana festivals.
But closer to home, just one year after acquiring Humboldt County’s popular Reggae on the River music festival, the event was cancelled — and some of their other California Cannabis Cup events failed to get permits or were cancelled last-minute.
Hightimes carried on with a grand plan for an IPO, hoping to list their shares on the NASDAQ exchange and ride the green rush to riches. But the company couldn’t secure much interest from the traditional investor community, so instead they turned to a much smaller, cannabis-specific penny stock exchange called the OTCQX, and started a crowdfunding campaign aimed at their longtime readers and fans to launch a new mini-IPO. Months later, they are still trying to raise money.
“What better way to enter the public markets than crowdsourcing our ticker? This was truly a community decision,” Hightimes (now ousted) CEO Stormy Simon said on March 11. “We wanted to open this up to our shareholders as this will be a symbol that defines us all for years to come.”
Simon resigned as Hightimes CEO on Monday, May 5, after less than four months on the job. The company is now on its third CEO in less than a year, a dubious sign for investors and the dispensaries involved, considering this supposedly $80 million transaction is an almost all-stock deal.
“All-stock deals are like paying an IOU,” says Jacqueline McGowan, founder of the cannabis consulting firm G Street Consulting. “I like to call them ‘funny money deals.’”
The Hightimes stock offering is particularly surreal, because Hightimes stock still technically does not even exist. Hightimes sends potential investors three or four emails every day with messages like “Time is ticking, don’t miss out!,” often resending the same email five minutes later. The company has now extended its investor deadline at least seven times in the last 18 months.
“It is nothing more than a Hail Mary,” McGowan tells SF Weekly. “Hightimes failed to secure the amount needed in their most recent attempt, and that means that they now need a hyped up story to tell their next round of investors. Harvest [the dispensary chain] isn’t selling Hightimes anything in the event the raise fails and Hightimes isn’t buying anything if they don’t magically make a bankroll appear.
“This isn’t anything more than a fluff piece and a ploy to lure more of the public into buying Hightimes’ non-existent stock.”
But why would a reputable cannabis retail chain sell their real-life, revenue-generating, brick-and-mortar stores for a non-existent stock?
“California’s overly complicated, complex regulatory structure makes it uniquely challenging to thrive in,” says McGowan. “That, coupled with some of the highest taxes in the country, means that our state has become a hot potato that most multi-state operators are thrilled to unload, Harvest Health being the most recent.”
And so, what may have been the first Union Square recreational cannabis dispensary — flanked by luxury brand names and peppered by curious tourists from states without legal pot — may ultimately be the victim of big cannabis vulture capitalists. The entire deal may simply go up in a cloud of legalese.
The dirty little secret of the cannabis industry is that everyone’s suing each other all the time, over unpaid bills, deals gone bad, and promised permits that didn’t come through. Have a Heart founder and CEO Ryan Kunkel is currently engaged in a legal battle with Harvest, and Harvest is currently suing another company to get out of a previous $240 million merger deal.
It seems that this deal could go the same way. For his part, Alexis Bronson vows he’s pulling his Union Square dispensary out.
“The license is now 100 percent mine,” he tells us. “I don’t want my reputation spoiled by corporate canna-greed.”