Weedmaps has fought hard to keep unlicensed retailers on their website for as long as possible, now we know why

Weedmaps fought hard to keep the unlicensed traders on their website for as long as possible, now we know why.

Weedmaps, or now known on Wall Street as WM Technology, has had a terrible string of bad news and grim financial reports in the past few weeks. Their stock price has fallen nearly 58% since the end of June, and they gave a poor forecast for the next quarter. Chris Beals, a former SPAC attorney who is now the CEO of Weedmaps, stated that it is the illegal cannabis market that is only ruining their financial metrics. On his Q3 conference call, Beals said:

While licenses continue to be issued in our end markets, license density is not what it should be as licensing has remained sluggish, which contributes to a flourishing illegal market. Additionally, much has been written in the press about how manufacturers are dealing with the current glut of supply, in some cases redirecting products at significant discounts to unlicensed market channels, only fueling the shift in consumer demand.

WM Technology CFO Arden Lee said:

California, our largest market in just over 60% of sales have lower end-market retail sales in the third quarter than in the second quarter of this year. we believe that The slowdown was a result of the shift in consumer demand from licensed to unlicensed channels as producers, dumped excess inventory to cope with the glut of supply, resulting in significant price differences between licensed and unlicensed channels.

So, Weedmaps says that California’s illegal cannabis market, which as a state accounts for 60% of its revenue, is destroying their revenues and margins. For example, it was mentioned that their software business and SaaS models that they offer legal pharmacies for menu management, order fulfillment and compliance have a gross margin of 96%. The problem is that the illegal market in California is no longer using WM technology.

What else do you mean

Rewind the movie a few years ago and Weedmaps was a thriving privately held company, actually the most successful cannabis company in the world, with sales of over $ 480 million while claiming never directly selling cannabis or touching the plant. They made their huge war chests by selling entries on their grass card. They generated huge amounts of traffic and at that point were the “only game in town” that a pharmacy found (no offense, Leafly). . Rumor has it that the top spot for Los Angeles was around $ 25,000 per month, # 2 at $ 22,000, # 3 at 20,000 and on across the board. If someone fell out of line, the Weedmaps sales team would pick up the phone and sell the nearest pharmacy in line to move on.

But wait, 4 or 5 years ago there couldn’t have been so many legal pharmacies to make that much money?

Exactly, so weedmaps would pretty much list anyone willing to pay their dues and sell weed. It didn’t matter if they were California state licensed or not, as long as you could pay they were listed and mapped for consumers. That way, those sums on the map could get so high that illegal operators who don’t pay taxes or royalties can instead spend all that money on their weedmaps list.

Troubleshooting

The good times couldn’t last forever for Weedmaps, especially when they wanted to go public, which they did in a SPAC transaction. The state of California has ordered Weedmaps to remove all unlicensed companies from its website. Weedmaps refused, citing the now famous Section 230 of the Communications Decency Act, the same protection that Facebook and other social media platforms use to defend free speech and moderate the information appearing on their website. The problem was that Weedmaps wasn’t a social media platform and they weren’t free, independent users creating their own content, but rather paid advertisers.

The state of California wasn’t a fan of Weedmaps’ refusal to take out unlicensed growers and sellers, and threatened to fines the California company then known as the Ghost Group. The kicker was that the fines could be retroactive, so Weedmaps was theoretically looking at fines of $ 6.2 billion and possible US drug trafficking violations and RICO ACT.

More storm clouds began to gather as weedmaps was investigated by federal agencies and federal subpoenas were issued regarding their business practices and some of the companies listed on their website. All of this was very worrying for a company trying to go public and raise funds. Full disclosure, Weedmaps announced on the previous conference call that the federal subpoenas have been dropped and there are currently no further federal investigations into their business.

Weedmaps eventually had to submit to the state of California, possibly with some pressure from the federal government, and remove all unlicensed operators from their platform. At the time, the industry wondered why they hadn’t simply agreed to delete illegal listings as it was inevitable, especially if they wanted to go public and be listed on a public exchange. The obvious answer was money. They made millions from these illegal entries. Weedmaps stopped and fought as long as they could to try to keep unlicensed entries on the map and pay for the map’s placement and rank for as long as possible

Jump back to the present

Based on the latest earnings call, it emerged that the group of unlicensed growers and sellers listed on Weedmaps that helped them make so much money was now missing from WM Technologies’ earnings. Weedmaps also had to remove illegal listings in Canada and agreed to the new Canadian government’s rules on legal marijuana shops and advertising.

Chris Beals, CEO of Weedmaps, confirmed what the industry thought that the enormous amount of money weedmaps made in the past with illegal growers and sellers is now killing them in the present as if they didn’t have it on their card and for it pay listings. California was cited by Beals as one of the main reasons behind the drop in numbers. It is no longer surprising to anyone why Weedmaps fought the Feds and the State of California to keep these unlicensed entries on the map for as long as possible because they made a ton of money from them. The other piece of news that led to a dramatic drop in prices was the curious case that Weedmaps was in a “negative equity position” because of the recent SPAC business combinations. WM had to issue more shares in a secondary offering that the market did not price into their current float. The shares lost 20% on the day of the announcement as the secondary offering would dilute current shareholders.

The karmic fate of illegal entries from weedmaps cannot be underestimated, especially when it comes to their earnings. Live by the sword, die by the sword, as they say. These unlicensed listings grossed them hundreds of millions of dollars as a private company, but now that they are public and can no longer list unlicensed cannabis companies in the US or Canada, there is a huge gap in their financial numbers.

Their latest announcement that they are starting a social marijuana network with rapper and cookies founder Berner has not stopped the current slide in prices. The marijuana industry road is littered with attempted cannabis social networks that now no longer exist, such as Massroots, Social High, and a variety of apps called Weed.

It will be interesting to see if Weedmaps stock continues to slide in the near future, as there simply aren’t enough legal pharmacies online to get their estimates up, and with their first lock-up period lifted in December, many insiders are choosing theirs Sell ​​paper options in the company and make real profits.

While it’s a monster in the industry, there is growing pressure on weedmaps from Google, which are now listing legal pharmacies on their map, and from delivery services like EAZE, which allow consumers to bypass the Weedmaps experience. Weedmaps may have to recreate themselves to justify their still high price. Buying pharmacies or an MSO may be the best move, as EAZE has done, but then they would have their own businesses in direct competition with their customers who pay their monthly software fees. Beals set a record and said he was not interested in it, but time and revenue pressures could force him to rethink this strategy.

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