Orange County’s growing but low-key cannabis industry will get a major boost in its standing after Weedmaps parent company WM Holdings Co. goes public next year through a reverse merger that is expected to value the company around $1.5 billion.
Silver Spike Acquisition Corp. (Nasdaq: SSPK), a New York-based blank check company that raised $250 million in mid-2019, this month announced its plans to buy Irvine’s Weedmaps, which employs nearly 400 people and is based in an office in the Spectrum area of the city.
Weedmaps, which says it has been profitable for its entire 12-year history, is best-known as an online directory of cannabis dispensaries and retailers that allows consumers to make purchases, leave reviews and browse content through its site.
What’s less-known about the company is that it also provides software to cannabis businesses looking for help with everything from point-of-sale operations, to logistics, to GPS tracking of product deliveries.
“We are the 800-pound gorilla in the space with the full tech stack for cannabis,” Chief Executive Chris Beals said in a recent investor presentation.
“So, think about Weedmaps as the primary operating system that powers cannabis retailers and brands.”
The transaction is expected to provide up to $575 million of gross proceeds, including $325 million through a private investment in public equity or PIPE deal.
Current investors in Weedmaps will have a 57% stake in the public company once the deal closes. Investors in the $325 million PIPE funding will own 22% of the company, while Silver Spike’s investors and management team will own the remainder.
Weedmaps is expected to list on the Nasdaq by the second quarter of 2021. The company is expected to remain based in Irvine after the transaction with Silver Spike is completed.
40% CAGR
Weedmaps counts more than 4,000 delivery services, brands and doctors on its platform.
It estimates it has a 55% share of retail cannabis licenses in the U.S. on its platform, and businesses have the option to pay to appear more prominently or try and aggregate more demand.
Its base of 10 million active users includes monthly cannabis users (90%) and daily cannabis users (70%). About 10% of the U.S. population is estimated to use cannabis monthly.
The company has grown at a compounded annual rate of 40% over the last five years, and it said it is on track to deliver $160 million in revenue and $35 million in EBITDA in 2020.
It forecasts a jump to $205 million in revenue in 2021, with an ambitious target of reaching nearly $440 million in revenue by 2024.
Though the latest election demonstrated growing support of legalization of cannabis in numerous states, the company said it won’t count on new markets opening until 2023. It does forecast growth due an acceleration of licenses in states that have already opened up, it said.
SPAC Attack
SPACs or special purpose acquisition vehicles are blank-check companies that raise funds for the purpose of identifying and merging with another firm interested in going public. SPACs generally have a two-year period to identify a suitable candidate; and are considered a speedier and less expensive process to go public compared to traditional IPOs.
A lesser-known advantage of the SPAC process is that it provides an opportunity “to a more extended conversation with potential investors and, frankly, to curate investors who are in on the story a little more tightly,” Beals said in an interview this month, shortly after the deal with Silver Spike was announced.
Companies that go public via SPACs often boast very optimistic growth expectations—a practice that is constrained in the traditional initial public offering process, according to a recent report in the Wall Street Journal.
Hence, SPAC-backed startups can make rosy projections about future results with less risk of facing lawsuits than they would if disclosing those figures in a traditional IPO, the paper said.
SPACs have been increasingly popular in recent years; Advantage Solutions Inc. (Nasdaq: ADV) and Allied Esports Entertainment (Nasdaq: AESE), each based in Irvine, are two of the most recent OC-based firms to use this route to go public. Several other SPAC deals involving OC-based companies have been announced late this year and should close by early next year.
Acceleration of Services
Weedmaps, founded in 2008 by Doug Francis and Justin Hartfield, plans to use proceeds from the reverse merger and PIPE to aggressively invest in software development and enter new markets.
CEO Beals, a former life sciences and technology attorney, has spent much of his time working on developing the company’s ‘software-in-a-box’ product, which was built over the last three years.
Beals joined Weedmaps as general counsel in 2015, before taking the top spot last March.
The company’s software offers businesses a host of functions across point-of-sales and logistics, with an eye toward regulatory compliance every step of the way that makes the product “sticky,” Beals said.
“What we’re providing for $500 a month would cost many times that if you were to buy the pieces individually,” Beals said in an investor presentation this month. Furthermore, “connection points between those pieces of software is really where your compliance goes to die in this highly regulated space.”
Weedmaps’ software, for instance, includes a track-and-trace function so that delivery drivers maintain compliance and businesses can properly track product inventory, which must be reported in most states.
Legal Challenges
Weedmaps claims to have the “largest” and “most effective” government relations and policy team in the cannabis industry, Beals said.
Still, the company has seen its share of both regulatory challenges and business disruptions; last September it cut about 100 employees, about 25% of its workforce, citing slower-than-expected industry growth.
In its prospectus, Weedmaps disclosed a U.S. Department of Justice probe that is ongoing. The investigation is believed to revolve around cannabis dispensaries and retailers that may not have been properly licensed under state law at the time they were advertising on the company’s platform, the company said.
Weedmaps last December cut off a number of clients that were not able to verify their legal status. These accounts generated just under $30 million of revenue for the 2019 year, Chief Financial Officer Arden Lee told investors.
Since then, the company has developed an enhanced verification process for businesses that want to list on its site—a process that Beals said was “notable in the face of others like Google or Facebook.”
Such challenges are not unique to Weedmaps.
Cypress-based cannabis cartridge and container supplier KushCo Holding Inc. (OTC: KSHB) reported net revenue for its fiscal 2020 fell 24% to $113.8 million amid national issues concerning vaping and regulatory restrictions in markets the company operates due to COVID.
Terra Tech Corp., an Irvine-based cannabis-focused agriculture company that merged with Phoenix-based OneQor Technologies Inc. last September, recently said it has shifted its focus from CBD to the THC markets due to COVID disruptions.
