Chit Chat Stocks - WM Technology (MAPS) with CFO Arden Lee

Episode Date: February 17, 2022

WM Technology provides software subscription offerings to cannabis retailers and brands. The company operates Weedmaps which is a marketplace that offers users all the information they would need to know regarding retailers, brands, strains, and even pricing. Listen as Brett and Ryan ask Arden Lee, CFO of WM Technology, questions about the company, its business model, and valuation. Enjoy the show! This episode is sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Weedmaps? Find their investor page here: https://ir.weedmaps.com/ Contact us: [e-mail]  Timestamps WM Technology | (3:47) Priorities | (29:16) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today, we have an interview with Arden Lee. He's the CFO of Weedmaps or WM Technology. It's a public company that's traded on the NASDAQ. This is a really fascinating interview. It's an industry that we aren't super familiar with, but Arden goes through it in great detail and he goes through some of the intricacies. This is one that I'm going to have to listen back to because I learned a ton and I think probably goes the same for Brett. uh before we get to the interview though there's two things i want to mention brett is officially on vacation uh an extended vacation so we're not in the same room anymore so if we end up interrupting each other at all that's why brett uh say hello for your vacation destination

yeah i am in mexico i wouldn't call it um well vacation might be a you know it sounds like a vacation but i'm working the same amount so i don't think anyone should be worried about we're going to be putting out the same amount of shows. Uh, but yeah, it's been good over zoom though. Um, hopefully it will be the same, but yeah, you know, we may have those zoom difficulties, but so far so good. Um, and yeah, it was exciting to record this interview with Arden learned a ton about cannabis and their specific business model of being the SAS solution and software solution really for retailers. And then the consumer marketplace is a fascinating pairing of a business and the industry is so complex um he knew a lot and you're gonna i

think anyone that listens even if you know cannabis well you're gonna learn a lot from this interview and before we get to that we want to talk about our sponsor quarter our friends new app date it's a blend of app plus update um if you've ever watched silicon valley you know what that reference is from but they have a new update on their app and it's a huge update actually. I don't know if Brett, you have it for Android yet, but I'm looking at it now. They've included a new explore page that has featured events, popular lists, IPOs, spinoffs, a bunch of different stuff. And it's worth just checking out because they have, I don't know, there's just so much new stuff on here. And I kind of have to go through it all. They have some famous investor

stuff. Ooh, I'm seeing a Michael Burry page. Interesting. Oh, that's, oh, it's his holdings. Okay. Sorry. I'm going through the app right now, but it's quarter. It's Q-U-A-R-T-R. They are our sponsor. You can download them on iOS or Android. It's an investor relations app for your phone. And so you can listen to conference calls, read conference call transcripts, go through presentations, all on a mobile device. And you can check them out, download them. It's quarter, Q-U-A-R-T-R. They're also on Twitter at quarter underscore app. Go ahead, check them out. Without further ado, let's get to the interview. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview

industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Okay, today we are welcomed by Arden Lee. He is the CFO of WM Technology, also known as Weedmaps. And this is the first time we've ever looked at the company, and it's also the first time we're talking to Arden. So how did you come across Weedmaps? How did you end up working

there? What was sort of the allure to go work for them? First off, thanks for having me on. I really appreciate the conversation that we're about to have. So yeah, for me, just a quick little bit, a bit of background on myself. SoCal native, went back to school, worked most of my working life on the investment banking side, covering consumer retail clients and businesses, went to go work for a consumer client that I covered and had a change in family circumstances that brought me back to LA. And as I was thinking about what's next, I had a lot of old colleagues, mentors, peers basically saying, hey, as a consumer retail guy, you should take a hard look at cannabis because there's a lot that's happening within the industry that's pretty exciting, especially for

folks that have lived within consumer retail. And at that time, I started meeting with different retailers and brands and quickly realized what I didn't know, which was a lot. Back then, a lot of retailers, and even today, had such different views around how the industry worked, what would happen with federal regulation, how the landscape would evolve. I quickly realized that these narratives were so diametrically opposed to each other that someone has to be right, and everyone else has to be wrong. And as I was going through that, that process, I got connected to Chris, our CEO. And when he articulated the vision that he had for our

business, I quickly realized, and I hate using this analogy, but we get it a lot. Wow, okay, these guys have created what's essentially the arms dealer business model for the industry to a certain extent. And so that was the attraction, I came on born in early 2019 and have been here since as you might hear from other folks within cannabis uh our end markets move very quickly they're very fluid they're very dynamic so it's a little bit i feel like it's a little bit of dog years even though i've only been here for for three years or so can you give an overview of the business sort of what the company does i know there's

there's two primary segments if i'm getting that right um and then how did it kind of evolve so from the early days to what it is now? Sure, sure. Just to start off with, we're one of the oldest and largest tech platforms exclusively servicing the cannabis industry, primarily consumers but also retailers and brands. On the consumer side, think about WeMaps as a commerce-driven marketplace. On the marketplace side, WeMaps have one of the broadest selection of cannabis retailers and brands and products for users to browse. We have over 18,000 businesses listed on WeMaps. We have over 5 million products available to browse and discover. Our site, it's built to make it easy for users to find the products that they want.

For example, they can search by retailer, they can search by brand, they can, if they've heard about a specific product, they can go straight into product discovery. If they heard about a strain, they can learn and discover about that strain and then drill into products that are showcasing that strain. So we support all those different product journeys or discovery journeys. And when these users find the product that they're specifically looking for, we hit them with all the information that's required to get them to convert, which in cannabis is pretty complex. Keep in mind that cannabis itself, it's not like any other consumer good, even though we often talk about cannabis as a consumer good. It's in some ways a lot more like

fresh produce or very heavily regulated material. And what I mean by that is cannabis, the good itself, has a wide range of clinical effects. So unlike alcohol, which has one clinical effect, cannabis can impact you in a number of different ways based on product quality and freshness. It has a wide range of form factors and skews across flowers, pre-rolls, edibles, concentrates, topicals. It's also highly regulated, to my point earlier. The regulations are a lot more like hazardous waste in certain respects than a pharmaceutical good, which is what cannabis is to a certain extent. Our users are the most valuable within all of cannabis based on their user frequency. A lot of people don't appreciate this, but active cannabis users, and I'm using

air quotes, not those that eat an edible around Thanksgiving, but users that are consuming at least once per month or more. They're today only a fraction of the population. There's different third-party studies out there that suggest that they're about 13% of the population in any given regulated state. And for our users on the marketplace, they tend to be one of the most valuable subsegments of what's already a small portion of the population, just given their usage and consumption frequency, which leads to higher purchase frequency, which also leads to relatively higher average order volumes. So our retailer and brand clients, they know that dynamic and they want access to the marketplace. So that brings me to the other side of our business, which is what

we call WM Business. And that works hand in glove with the WeMaps marketplace in and of itself. What WM Business is, it's a monthly subscription offering that's geared towards cannabis retailers and brands. It includes a full suite of software solutions, including access to the WeMaps marketplace through a business listing. That business listing in and of itself has the ability for retailers to showcase the product menus that they're carrying in store. Those product menus can be quite robust. So a lot of folks like to think about our product menus similar to what you would find on a meal delivery platform. And listen, while the average restaurant might stock only 30 to 40 menu items, the average cannabis dispensary is stocking, let's call it 300 to 400 menu items.

And so there's a lot of complexity that goes into that menu setup process. Also, what's included within WM Business is a set of e-com enablement power tools that basically help our retailer and brand clients get the best of their remaps experience and also create labor efficiencies in the process of doing that while they're managing compliance with their businesses. That includes value-added software integrations to get their menus up and running, to facilitate order capabilities. It includes functionality to receive and fulfill online orders.

It includes the ability to create their own e-com channels off of our marketplace using the setup process for their own remaps, listing presence, and menus, as well as user retargeting tools and the like. Okay, so I'm picturing kind of the dashboard, if you will, of these retail centers, sort of the point-of-sales system. What are the differences? Why can't just a traditional point-of-sale system work for a cannabis retail shop? Are there more complexities or does it need a specific solution? yeah you know what's interesting about point of sale within cannabis is that it works very differently and it has a very different intended use case than point of sale in that in any other

consumer category you know when i think about point of sale i immediately start thinking about payment gateways right and so that's the first fundamental difference is that payments through credit cards aren't possible today in cannabis given the lack of federal regulation so a lot of the actual fulfillment or the point of sale, it's cash transactions, it's ACH or closed loop, like digital wallets that some of the kind of financial providers that are specific to cannabis have developed and provided. But the point of sale serves a very different function. Point of sale primarily, as I think about it within cannabis, is more of a compliance reporting tool as well as an inventory management tool. And so most states have what's called track and

compliance reporting where the point of sale needs to accurately comply with those track and trace compliance regulations. And those regulations can be as detailed and specific as not only tracking the inventory in the store, in the dispensary, but also tracking how that inventory flows throughout the store. And so some states require, for example, tracking of inventory that's in the front of the house where users can access that versus the back of the house, right? And so So hopefully you get a sense for point of sale. While it is obviously a key part of software in a lot of these dispensaries and delivery services, it serves a completely different function than what you would think about.

Now, that's a perfect example of why the industry is so unique compared to even just food, which has a bit of a complication itself. But we're going to get into some of the more nitty-gritty of the actual WM technology business. But I want to ask, since I think this is the first time we've ever had a CFO on the show, And I think a lot of people that are listening who are investors are interested in what a CFO actually does because they're kind of crucial. You know, they're talking with investors a lot of the time. So as a CFO, what exactly is your role at Weedmaps? Sure. Great question.

So like any CFO, I manage the financial direction of the company is how I kind of think about my scope in one quick sentence. like any other public company, our finance function has the typical roles and responsibilities that you would expect. So we carry out our mandate as finance through different teams within accounting and controlling, within our planning, within our strategic finance area, within our corp dev, IR, and treasury zones. But putting that aside, when I think about what my job is as a CFO, and I think most CFOs would take a similar view, I think about it as the following, which is A, driving and delivering shareholder value through how we manage our financial performance and results, shaping our P&L and cash flow to deliver what I like to call profitable

and sustainable growth, creating the capacity for us to invest and making sure that we are very tight around how we're prioritizing investments, making sure that we're raising and deploying capital effectively and efficiently. I also think it's about building advocacy as a public company CFO with the market and the investment community. I think it's also thinking about what's around the corner, optimizing against risk with the enterprise through very strong internal controls and processes. And lastly, although this is not in any particular order, I'd say it's partnering with our business teams and stakeholders to make sure that we're building and executing very strategic and operating a tight operating plans that are in line with where we want to go from a financial perspective. Okay. Can you go through the unit economics of the business?

One thing that popped out to me was the high gross margins. So what enables you guys to have such strong gross margins? And then what are you spending now on operating expenditures? kind of what are your main focuses to grow the business, you know, over the next five, three to five years? Sure. So let me start briefly by explaining how we make money, because I think that will help level set around the balance of the P&L. And I'll circle back on your gross margin question. So we've monetized today by selling monthly software subscriptions, the WM business subscription that I mentioned earlier, and other advertising solutions to

retailers and brands. So as of our last publicly reported quarter, Q3 of fiscal 2021, we had about 4,400, give or take, paying clients spending on average about $3,800 per month on our solutions. You're right. We have very high gross margins. I think that's reflective of our business model. Our gross margins have historically been 90% plus. The core of our business is an internet marketplace and related software. So our costs to sales are pretty straightforward. It's primarily server costs and merchant processing fees. Most of our investments these days, in terms of where we're fueling gross initiatives, they fall into a couple of buckets that we've talked about publicly before. One is investing behind our regional go-to-market teams. We have just over

half of US licensees across regulated states. As clients on the platform today, and as new markets open and as existing market season with continued license issuance, we're seeing a lot of opportunity to drive share against that other approximately half of the licensing universe that aren't on the platform as paying clients today. The other thing we're investing pretty heavily behind is our engineering and product design teams. We're constantly looking for ways to improve our user and client experience on WeMaps as well as all the software solutions that support the marketplace. And across our software, we get constant client feedback on ways to introduce new features and functionality

that we're always looking to improve on. We also have a number of investments we're making as we look ahead towards new markets and opening and as we look to integrate some of our recent acquisitions. And so you kind of just led into my next question, which is the acquisitions. I think it was in the third quarter that you guys closed on two new acquisitions.

what are the goal with those and can you maybe describe what those businesses kind of bring to wm technologies sure you're right so last year we bought a couple businesses that filled product gaps in our wm business subscription offering one acquisition was a crm solution the other was for a couple solutions focused on what i call premium delivery logistics and compliance software. So think about it as software that helps retail operators that want to facilitate delivery orders, run that delivery operation in a compliant way that's responsive to user needs. And there's a lot of compliance that comes with delivery that I can get into in a bit. And then the other solution that came on board as part of that acquisition is an integrators

and connectors tool. And what you'll find within cannabis today is while we ourselves are a true tech platform, a lot of operators there are stitching together different single point solutions. And this capability that we acquired essentially allows these operators to take different software solutions that don't talk to each other. And depending on that operator's workflows, stitch it together such that they do. So for us, both of these businesses were small bolt-ons that filled capability gaps when you think about it and you take a step back. And the reason why we like these deals is because they were all solutions that, in our mind, had established proof points around product market fit in most of the regions where we do business, but hadn't yet scaled and didn't come with a lot of overhead. And that's the synergy that we bring to the table. Like I mentioned before, we have 4,400-plus clients to cross-sell to, and we have a large engineering product design org to leverage in terms of taking these solutions to the next level, integrating them within our own technology ecosystem, and really delivering outsized value to our clients.

For us, when I think about M&A, we've typically been focused on deals that fit the profile of what we did last year. And by the way, these can be either within cannabis, they can also be outside of cannabis in terms of capabilities that can port into cannabis if they're interesting solutions. That tends to mean acquiring capabilities that allow us to pull forward growth. Those are in areas on our product roadmap that have multi-year development cycles, where if we can acquire something that's compelling today and pull forward that development cycle, then that could be accreted to our growth.

And of course, when we think about doing deals, they need to be financially accreted. That means being very disciplined in terms of the multiple that we're paying and also being very clear around validating the synergies and growth that we can achieve with these businesses under the kind of WeMaps umbrella, if that makes sense. In general, do you think that, okay, so I'm seeing a lot of these descriptions of the businesses that you've acquired or business segments that you're operating.

And it seems like there's a lot of comparisons you can make to, say, a general one like CRM, Salesforce, maybe Square, DoorDash. It goes down the line. Do you think in general with cannabis, given the uniqueness of the industry, there almost needs to be these specialized solutions for cannabis operators or for cannabis consumers because you can't just slap on just a basic solution that's supposed to be for any business? That's exactly right, Brett. The way we think about it is that, at least on the software side, if you do not have solutions that are custom-built for cannabis, they just will not work in cannabis.

And that's partly they won't work to remove friction points in terms of workflows or capabilities that these retail or brand operators need, but they also won't work from a compliance perspective. So we talked about POS and the uniqueness of POS in cannabis. Each state has its own track and trace compliance reporting. We talked about how that track and trace compliance reporting can have detailed nuances like front of the house versus back of the house inventory tracking. We didn't mention this before, but the industry continues to be largely flour in terms of demand for different types of SKUs. Flour loses water weight over time. There's true strength in the inventory, right? You have to record that strength for track and trace compliance reporting processes.

And so a lot of what I just went through just on POS is not enabled by the Shopify's and Square's and what have you's of the world. You mentioned DoorDash, for example. So meal delivery, a lot of folks think about meal delivery as, well, you know, there's a logical extension that some of these operators could make within cannabis. Well, I think that fundamentally ignores some of the compliance complexities around doing delivery. So if I am one of the meal delivery platforms that operate today, I largely have a driver fleet that's independent contractors. In this contactless delivery world, if I drop off a pizza with the end user, I can just leave it on the doorstep, take a photo, and get back on with my business. None of that works within cannabis. Most states that enable delivery require delivery operators to have their drivers be full-time employees.

They need to be W-9 employees, not independent contractors. Most states require very nuanced, detailed regulations. So, for example, in the state of California, there are GPS log requirements, there are fleet tracking requirements, there are trunk limit requirements, requirements meaning I cannot carry more than X thousand dollars worth of product in the trunk of my car on any given delivery route. in addition to age-gating restrictions. Oftentimes, these state-level regs don't mirror other states. The trunk limit for California is different than Oregon versus Nevada and so on and so forth. Often, local cities and counties within a single state can have their own set of rules where they have, for example, in LA, a different trunk limit than the state of California sets. The compliance can quickly be a massive headache for a lot of

these operators. You also think about what I just went through in terms of that meal delivery driver dropping off the pizza. Well, in cannabis today, because payments aren't a thing, you have to ensure that the end user is there when you're delivering the product and that you fulfill the sale in terms of perceived payment, i.e. cash or some of these closed-loop digital wallets. That doesn't happen today. If the end user is not there, then the driver needs to have a way to get back to the depot or dispensary and check back in the product from a track and trace compliance reporting perspective. So hopefully that gives you a sense for all the reasons why on the software side, a lot of the non-Canada specific technology platforms just

wouldn't work. Now, when you look at the marketplace side, there's similar challenges, but it's less about compliance functionality. It's more about user efficiency. So for example, I think a lot of folks don't fully appreciate that there are a number of retailers and brands that actively try to acquire users or promote their businesses on online platforms like Yelp or Google or what have you, right? The challenge, though, is if I'm on Google paying however much in cost per click with a low conversion rate or click-through rate, well, if I'm trying to reach, let's call it 13% of the population, you're essentially throwing a lot of spend out the door against

the general audience, right? And let's say I actually reach that user. Listen, the location-based search is of limited value to Canvas users that want to purchase product. At the end of the day, what they're looking for specifically is all the information that I mentioned at the front end of this call. What is the specifics around the product? What is the THC CBD content?

what is the price per weight? What are the reported clinical effects? What are the strain flavors? How can I price compare for this retailer versus other retailers? A lot of that information that's critical and necessary to drive user conversion into Transat isn't necessarily available on some of these non-cannabis internet marketplaces or platforms, if that makes sense. So that's the role that we play on the marketplace side. It's fascinating all the industry-specific kind of intricacies that there are and sort of the, like you said, the compliance sort of complications. And even on the maps example or on the marketplace side, I have a hard enough time looking for

a restaurant on Google Maps and finding the right one. I can't imagine looking for a cannabis retail shop. I have one more question before we get to the ad break. and it's sort of on the monetization side for WM business. So when you add new solutions like Sprout, let's say, does that just get filled right into the subscription or do customers kind of add that on top of it? Do they pay for that as well? Yeah. So Sprout is an interesting one in that the CRM solution, most of our software solutions are sold on a more of a monthly recurring revenue model. So it's more of a monthly subscription,

whereas CRM is more of a kind of annual recurring revenue or ARR driven model. And so for Sprout, listen, it's still relatively early days in that acquisition. We intend to sell that as an add-on module to WM Business. Now, in certain instances, we may lead with just that Sprout solution because there are certain clients that may just want a CRM offering, right? And so we're thinking through that. But the way you should think about a lot of the solutions that we bring in-house is that these become add-on modules or upsell pricing tiers against our base kind of WM business subscription offering tier. When we first transitioned all of our clients, and this goes a little bit into the evolution that we've been on, and I forgot to address this

in front of the call, how have you evolved as a business? Keep in mind that when we were founded back in 2008, we were founded as WeMaps the Marketplace. WM Business, which is all the e-com enablement software that allows the marketplace to be a better experience for users and clients, that's a relatively newer part of our business that we've been developing over the last several years. And we used to essentially sell listing subscriptions to our marketplace and bundle that up with free software to encourage a little bit of this kind of viral usage and adoption approach. We, at the start of last year, migrated all of our clients onto this WM Business software subscription, which of course still includes the listing on the marketplace, but

also includes access to all of this stuff that i referenced earlier we don't mandate that our retailers need to or brands need to adopt every single solution within within wm business there are some folks that just want the listing there are some folks that want the listing with the menu integration with the words functionality but don't but they already have their own menu econ embed there are some folks that want the whole thing because they're starting from scratch and they just want to deal with everything at once that talks to each other instead of trying to to figure out different vendors and different solutions. And they quickly realized that if they had to stitch together some of what's already included within WM Business, that

becomes pretty costly quite quickly. And so hopefully that gives you a sense for how we think about it. Yeah, it does. I have another question that's on the top of my mind, but I'm going to hit the ad break first and then we can get to it on the back half. this episode is brought to you by kpmg as a business leader how can you innovate build trust and move forward in a digital era kpmg can help by bringing together the right talent and technologies generating insights that spark opportunities to explore their thinking visit read.kpmg.us opportunities this episode is brought to you by lakinta by windham Here you are, miles from home and ready to start your vacation.

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Welcome back, Ian. uh the question on the top of my mind was so you talked a lot about um kind of evolving from the marketplace to incorporating the businesses as well have you found that is is there one thing that's like highest on the priority list for the businesses is it that compliance part or is there is it kind of like all your solutions i guess or is there is there really one thing that they're looking for? Yeah. I'd say it used to be primarily one thing that they were looking for, but I think that was more a function of we were predominantly a marketplace without some of the other software tools that I mentioned earlier. I'd say even today, compliance, listen, compliance

is table stakes for a lot of these businesses. They cannot afford to have a footfall around compliance because there's so much at stake if you lose your license, right? There's so much investment that they've made. And so they just need to ensure that if they're operating a certain way that they're doing so, if they're not operating compliantly, they're doing so at the risk of losing their license. So let me just put it that way. But I'd say the pain points when it comes to our clients, and they're a bit different for the retail clients versus our brand clients, is at the end of the day, it's really hard for cannabis businesses to find cannabis users. That's the fundamental pain point when you think about it at the end of the day. Why is it hard?

It's because cannabis users are still only a small portion of the population. Traditional channels of accessing users aren't necessarily available, or if they are available, they're incredibly inefficient for all the reasons that we talked about earlier. And so a lot of these businesses are struggling with how do I actually reach that consumer? How do I reach that consumer, tell my story in terms of what I'm stocking within my store, or what products we showcase as a brand and why we're so differentiated versus the other guy down the street or the other guy down the aisle. And we facilitate a lot of that user discovery by essentially aggregating in a true marketplace

fashion all of those retailers, brands, products, and allowing these retailers and brands to tell their stories in a certain way. So, for example, I mentioned brands have slightly different challenges than retailers, right? And, you know, in most consumer discretionary categories, and you see this everywhere, brands are going direct, right? They're trying to bypass distribution, right? They're trying to bypass third-party resale and their wholesale partners. And in most categories, brands have very robust information and data. Most consumer brands know exactly, you know, this third-party wholesale provider is seeing this type of sell-through on my product versus this other third-party wholesale partner is seeing higher or lower sell-through.

And the currency of the industry today is brands are flying blind. They, just given compliance, do not have the ability to go direct to consumers. they just given the lack of data and the kind of nascency of data within cannabis cannabis don't have visibility and insight into uh sell through velocity at certain retailers versus others and so there's a lot that uh we can help uh in in terms of alleviating those pain points for brands and for retailers it's everything that we talked about in terms of reaching users in an efficient way and really showcasing the breadth of their product selection and the attractiveness of the value that they're serving in terms of prices or deal promotions. We facilitate a lot of that

through our marketplace. Okay. You talked about how or why anyone would want to advertise with you guys, but can you go through the ROIs advertisers get with you? Because I know you've gone through examples. I forget where you may have mentioned it or it could have been someone else at the company mentioned it, but the ROI for an advertiser is even much higher than I believe on, say, an Amazon, which is kind of a similar promotional marketplace. Could you go through one of those examples, if you can, and speak to why you can get that good return on marketing spend? Yeah. Part of it, well, I'd say a large part of it has to do with how we actually monetize our current more advertising related solution. So whether it's our featured listings product,

whether it's our deal listings, a large portion of our listings are sold on what we call a real estate pricing model. It's a bid auction based on what inventory is available within that sales region and is completely independent of clicks, eyeballs, et cetera, that we're sending to the client. So for example, when you go to our homepage on WeMaps, what you'll see is what we call the different carousels of brands, deliveries, dispensary businesses that users can click on and browse and start looking for product against, right? And each of those card slots within the carousel are sold through a bid auction where clients within that sales region are actively bidding for those slots. That's why we call it the real estate model.

It's real estate on the homepage. What we don't do for the vast majority of our listing solutions is sell it more on a performance basis, meaning cost per impression or cost per click. And so one of the things that we've talked about publicly in the past is that our cost per click is very low relative to what you would expect for a very specialized marketplace that has a very down-selected audience. Our eyeballs are as specialized as it can be. We are active cannabis users. We are catching active cannabis users when they're looking specifically for product to purchase. That's a pretty down-selected audience. Yet, our implied CPCs, as of our last quarter, continue to be cost per click against our featured listings inventory and

our inventory full stop on the listing side continues to be under a buck. That compares to Google at, let's call it three bucks, yet our conversion rate is materially higher, right? And so part of that is a function of, A, we have a pricing model that doesn't necessarily correlate to the performance that we're delivering to our clients in terms of clicks, impressions, eyeballs that we're sending to their businesses. B, that also has to do a little bit with the nascency of the industry, right? We still are at a point where there are a lot of structural limitations on retailers that limit their ability to spend. So for example, not to go down a rabbit hole on regulations, you may, if you talk with different cannabis operators, hear about this

concept of 280E. And what that means is if you're a plant touching business, like a number of the MSOs or dispensaries or delivery services, you cannot deduct your OPEX for federal income tax purposes. And so that in and of itself limits their ability to spend on things like marketing or tech solutioning tools, right? There's also the reality that today, cannabis retailer density on the licensed side is very, very low. I think the stat is essentially one licensed retailer for every, let's call it 25,000 residents across all regulated US states. Now, of course, that ratio has been improving over time, but it's still very low. You look at alcohol retail, where I want to say the different data that I've seen suggests that alcohol retail is more like one per four

or 5,000 residents when alcohol retailer per four or 5,000 residents. Pharma retail, we get, you know, cannabis gets compared to pharma a lot. That density is even tighter at one per two to 4K, right? And so we're still miles away from achieving appropriate retail density. That means in certain markets, you have situations where folks don't necessarily need to spend as much against services like what we provide versus what you would expect any kind of small, medium-sized business to do. And so that's a long-winded way of saying that we do think there is a lot of return that we're generating for our clients, to address your initial question. we do believe that we are arguably one of the higher if not highest return on ad spend channels

that our clients have access to we do think that there is probably more of a happy medium where we can continue delivering high levels of return on ad spend but also start taking a bit more of price because we do think that there is quite a large gap between the ROAS that we're delivering versus the monetization that we could achieve. One of the strategies that we're looking at and we've been continuing to implement on a very gradual basis is trying to unlock some of that pricing gap through what we call cost per click or performance pricing in certain regions. We have different tests underway. It's only a handful of our sales regions where Our listings are sold not on that real estate bid auction basis where you have clients bidding on slots against each other, but more on a cost per click basis where the client knows, okay, I'm paying for exactly this type of performance, if that makes sense.

Yeah, it does. How many, I'm blanking on it, how many users do you guys have on the marketplace now? So as of the last quarter, we had just over about 14 million monthly active users. We don't provide disclosure apart from that in terms of, as you might imagine, our teams are constantly not only optimizing for top of the funnel, but also bottom of the funnel, if that makes sense. Okay. Obviously, we've alluded to it throughout this interview, but legalization is kind of the hot topic within cannabis. So can you kind of quantify what effects legalization would have on your guys' business? How does it impact you?

Yeah, sure. That's a great topic. So first off, it goes without saying that with every new state that legalizes, that's an opportunity for us to win new clients and drive spend by these clients on WPAPs, MWM business. and that also allows us to further divide diversify our revenue base because each state has its own dynamics on supply demand uh and they're all regulated as closed border economies cannabis in the u.s i forgot if i mentioned this it's a lot more like selling goods across the eu

california might as well be spain michigan might as well be germany each state has its own regulatory framework that governs license issuance but also track and trace compliance reporting on inventory, delivery compliance, advertising restrictions, and so on and so forth. So, for us, when we think about new states coming online, we typically try to get there early through our public affairs team. So, we spend a lot of time on on-the-ground policy efforts. We have a very experienced team that works with local policymakers. They share our collective experience with what's worked in other states versus not. We try to influence policy behind the scenes to truly create a functioning market framework that creates an optimal supply and

demand mix. Let me leave it at that. That means creating retail density by liberalizing license issuance and supporting social equity operators who, let's face it, are the ones that should be benefiting from the legalization of cannabis. Once legalization happens in a state, there's still a fair ways to go before sales of cannabis can actually begin. I think that's the other dynamic around cannabis that's not fully appreciated. Legalization does not equal licensing. Once regulation happens, policy frameworks need to be developed. Cannabis commissions need to get set up, then licenses need to be awarded. And the timeline for how all that goes down, it can vary pretty dramatically. So for example, in California,

They passed adult use laws in 2016, but sales didn't start until 2018. And today, there's still only about 1,000 licenses in all of California, which is like one license per 35,000 residents, versus a market like Oklahoma. So when Oklahoma first opened up for med use, all that happened, Oklahoma opened and issued licenses all within the same year. And that state, just given their licensing framework, already has twice the level of licenses that the entire state of California has. And so that's all to say that we start investing early on with our policy efforts so that we can influence the shape of how these markets are

developed. And then when we have visibility into licenses starting to get issued or about to get issued, that we start what you would expect us to do in terms of brand awareness, on the ground efforts to reach out to potential licensees, to build front of mind awareness around who we are as a platform and the capabilities that we can help them with. Once we get clients onto the platform, the goal is to get them to use as many of our solutions as possible, get them up and running with their listing, have user menu integrations with whatever POS you're on, get them to use our menu e-com embed, turn on orders, and so on and so forth. And so that's essentially kind of how we think about with legalization in every new state.

Now, you raise another point, which is, well, what about federal regulation, right? And so federal regulation for us, listen, I think everyone in the industry would say it can't happen soon enough. We all wish it to happen yesterday. The unfortunate reality is that it's still probably years away. And why we're so anxious for federal regulation to happen is there's a number of reasons. A, it removes some of the structural barriers that we talked about earlier. Ideally, things like 280E go away where you then have businesses that can invest in growing their businesses versus not. Ideally, with federal regulation, license retail density increases and you have, from a user perspective, consumer perspective, more standard options in

terms of shopping and browsing and purchasing product. For us specifically, we don't engage in any consumer-related monetization. We don't take rates against GMV that flows through our marketplace. We don't engage in any payment monetization, just in that it's not federally regulated today and we're NASDAQ listed. When federal regulation happens and we can debate which form of federal regulation, then it opens up some of the traditional monetization streams that you would expect of a marketplace business model. We get that question a lot, which is, you guys are a marketplace with an e-com enablement set of software solutions that's specific to cannabis end markets. So your business model is marketplace meets vertical

SaaS. And that usually results in this kind of layer cake monetization strategy where you have software subscription fees, ad monetization, GMV take rates, payments, maybe even user subscription fees and whatnot. And we don't have a lot of those layers in the cake today because federal regulation is not yet here. But once federal regulation rolls around, that represents an opportunity for us. And as we think about our own business, we are actively obviously trying to get after the marketplace opportunity today in terms of licensees within our existing states, new states coming on board, and that kind of thing. But we are also building for that future when we can start more actively monetizing against

some of these consumer transaction-related revenue streams. And then I think – sorry, go ahead. I was just going to say, when there is the state legalizations, is there a point in time when you guys feel comfortable putting a regional sales team in there, or is it like, do you wait for, how far do the regional sales teams go? When is it the right time to add one into a certain area? Yeah, that's a great question. And I might digress a little bit because we've been on a bit an evolution on that specific topic. What I mean by that is prior to Q4 of 2020, so at this point, a little under a year and a half ago, our go-to-market teams were not regionally aligned.

We had our go-to-market teams aligned against client types. We're no different than other internet software businesses. We have account execs. We have client success folks. We call them hunters and growers. And our hunters and growers, our client-facing folks, were all aligned against large clients that spend above a certain threshold and small, medium-sized businesses that spend below a certain threshold. But they were not aligned against different regions. And that's why you have situations where we have dominant share in certain states and under penetration in other states, but there's not a regional rhyme or reason to that. There are some East Coast states where we have 100% share of licensees. There are some

West Coast states where we have barely 10% penetration of existing licensees. And that's more a reflection of how we were organized historically versus the actual market opportunity for us as a business. In Q4 2020, we implemented a new regional flying formation for these client facing teams. And so to your question, it's never too soon to add headcount against new states that are going to be opening. Because what we found in more of these recent states is that certain states may take a bit of time between legalization passing, licensing starting to happen. Other states are moving on more of a quicker cadence, and you have to be ready to engage with clients. And historically, while we've enjoyed a lot of brand awareness in new states, so I remember when Oklahoma opened up, our reps were getting calls from potential licensees even before they had their stores up and running.

And so our reps would Google Earth the specific location of the licensee that called and still see a going out of business sign for a vitamin world or GNC or what have you. And so in past instances, we've been pretty fortunate to see a lot of this inbound given our brand awareness, but we don't take that for granted, especially with some of these new states opening up. And so we try to get there early. The reason why we try to get there early is because so much of what we do is blocking and tackling on the ground. And so we try to get the early seeding social equity workshops and raising awareness with social equity licensees that here's who we are as a business and how we can help with e-com enablement solutions. Because when you think about it from a dispensary perspective, especially if you're one of these smaller operators, you need a store lease, you need labor, and you need a license. But outside of that, essentially, you could run a lot of your platform on leveraging all the technology that we're bringing to bear in terms of generating user awareness, servicing that user, fulfilling that user demand, analyzing that user demand, and then retargeting those users. And for a lot of these businesses, they realize that being up and running on web apps, it's not a day one type thing.

It's a day zero. It's like T minus X number of days ahead of the business being operational because so much is at stake, so much capital is invested. A lot of these folks that have been applying for licenses have been sitting on dark store where they've been paying rent while they wait for their applications to go through. And so they need to get out of the blocks at a sprinting pace versus gradually building up their operations. And that's where we come into play. Is it just like word of mouth? Why do you guys have such good brand awareness with those potential licensed stores? I think it's several things.

I think it's, A, we've been around for a while. So we were founded back in 2008. We built a lot of brand awareness within cannabis circles. Our marketing folks like to say that WeMaps is synonymous with cannabis culture, and I believe that. um you guys may not have seen this but we just released a a catchy ad uh uh uh just the other day i'd encourage you guys to take a look at it but we we tend to pride ourselves as being very much for in the forefront of everything around cannabis really driving the dialogue around

cannabis and i think that translates to a high level of user awareness about webapps right um Today, within cannabis, brands aren't yet a thing. I think in a world where brands continue to come in and out, and there are so many different new concepts, so many concepts that might be hot at one moment and then fade to the background at another moment, we've had staying power because we've been at this for over a decade. As it relates to the business's awareness of us, I'd say what we're finding, at least in newer markets that we're opening uh and we're branching into is that the level of

sophistication amongst the operators has grown pretty significantly over the last several years i think a lot of folks realize that there's a lot of at stake to my earlier point about making sure that they're uh getting out of the blocks at a sprinting pace and what we're finding these days is that a lot of these operators they're pairing they're paired with local cannabis business consultants and a lot of these consultants know, hey, well, we got to get onto Weedmaps. We need to make sure that we have a listing of these regions. And there's a whole game theory in terms of how you leverage our platform to essentially provide visibility to users or to try to kind of position yourself against a competitor down the street or a competitor down

the aisle and whatnot. And so we're seeing growing levels of awareness and sophistication amongst businesses. And I think with users, it's just a matter of what we've been doing for the last 10 plus years in terms of really driving forefront, uh, that whole dialogue around cannabis and the legalization of cannabis. All right. Last, uh, last question here, unless Ryan has one more, and this is kind of the one, this might be more of a CEO question, but I think you're probably in those discussions as well. Uh, what are the long-term goals for WM technology and how do you guys envision the business three to five years from now? Sure. So I'll try to channel our CEO the best I can, but I'll start first by pointing out our corporate mission. And this goes a little

bit to what I just mentioned earlier. And our corporate mission is to power a transparent and inclusive global cannabis economy by building the best technology solutions in the industry and driving safe and convenient access for consumers by driving cannabis legalization forward. And I think that's a very articulate explanation for how we think about driving strategy forward. What that means for us is that we're super focused on building our platform to the earlier conversation for that day when federal regulation happens, where we can start monetizing like any other consumer-driven marketplace where you see take rates against GMB, revenue against payments, in addition to the software subscription fees and ad monetization

that we're currently driving within our business. I can't say enough that it's a – and I think most folks today would agree it's a when, not if question, and I'm hopeful that within the next several years, we'll get there, but we'll need to see. Okay. I think that's all the questions we have. um arden thank you for joining us for any listeners that want to keep up with keep up more with weed maps is there a place they should do that or keep up with you

yeah so uh there is definitely you should check out our uh we maps site as well as our investor relations uh uh site within our corporate site and so uh that's probably the best information to around Weedmaps in and of itself. And our investor relations site is ir.weedmaps.com. Perfect. All right, Arden, thank you for your time. I guess we should probably give the disclosure before we sign out.

We want to remind our listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions in the securities discussed in this podcast. Thanks again to Arden, and thank you all for listening.