MAPS - NASDAQ

Good afternoon everyone and welcome to the WM Technology Inc.'s Third Quarter 2022 Earnings Conference Call. I would now like to turn the call over to your host Greg Stolowitz, Vice President of Investor Relations.

Hi everyone. Thanks for joining us today to discuss our fiscal 2022 third quarter results. We have our Executive Chair, Doug Francis; our COO, Juan Feijoo; and our CFO, Arden Lee with us today. By now everyone should have access to our earnings announcement. This announcement is also on our Investor Relations website along with the supporting slide deck. During this call, we'll make forward-looking statements including statements about our business outlook and long-term goals. These statements are not guarantees of future performance. They are subject to a variety of risks and uncertainties some of which are beyond our control. Our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC's website including our quarterly report on Form 10-Q for the quarter ended September 30th, 2022 to be filed after this call in our Investor Relations website as well as the risks and other important factors discussed in today's earnings release. Should any of these risks materialize or should our assumptions prove to be incorrect, actual financial results could differ materially from our projections or those implied by these forward-looking statements. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. While we believe these non-GAAP measures are helpful to investors in understanding our business, they are not intended to be a substitute for our GAAP results. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measure can be found in our earnings release. With that, I'd like to turn the call over to Doug.

Thanks Greg and thanks everyone for joining today. Before Arden goes into an update on the quarter and our financial results, I wanted to spend some time on the announcement we shared earlier. Today, we announced a significant change to our executive leadership team. Chris Beals, our CEO, will be leaving the company effective immediate. We've launched the search for a new CEO and have established an office of the CEO comprised of our existing executive leadership team who will be reporting directly to me in the interim. That includes our COO Juan Jose [ph] along with Arden both of whom are on the call today. On behalf of the entire Board, I want to recognize and thank Chris for navigating the company over the past three and a half years as CEO on our way to becoming a public company and before that as our General Counsel. I thought that we had announced the adjustment back in 2008 on the vision of creating a marketplace connecting consumers with the best local cannabis. We were pioneers at the center of building the early rails in the industry to engage in commerce. We were known for our C to sell knowledge of the plant, the high ROI of our marketplace, a commitment to ending the prohibition against cannabis, and most importantly, being the best place to discover and find cannabis products. During my time as CEO, we had a bootstrap culture with a track record of being profitable and cash flow positive as we scaled the business to $100 million in revenue. While the complexities of our industry have certainly increased, we need to do a better job at executing our proven strategy and leveraging all of the strengths that have made us the industry leader. As a Co-Founder and one of the largest shareholders of the company, I was asked to provide support to our management team during this time when our end markets continue to be challenged. I thought I could add value given my knowledge of the business as the former CEO and my insights and relationships around the industry. In my first 60 days as Executive Chair, I have worked with our leadership team to conduct a deep dive review of our strategy, operations, and investments to see where we can improve our performance. I'm proud of what our team has achieved in this environment, but I believe that we can do better and I commit that we will do better. When we started 2022, we said it was an investment year. But with the macro environment the way that it is, now is the time for us to execute against what we've already invested, while recalibrating our operational focus to get leaner and meaner. It's become clear to me that we can create more focus for our teams so they can move with more speed and urgency. That means more rigorous prioritization of initiatives within our existing strategy. It means more streamlined decision-making and organizational structures. It means leveraging our systems more effectively to support operations, and it means getting back to our roots of operational excellence and profitability. To that end, the Board and I have made a decision to transition leadership of the company and launch an outside search for a new CEO. We're seeking first and foremost a leader with deep hands-on operating experience with complex online marketplaces and enterprise fast models. We're looking for a leader with the flexibility and skills to adapt to a highly nuanced industry with large growth potential, but still looking forward splitting in its early days. I expect this search to be completed in 2023, and we of course, will keep you appraised of developments. In the interim, I will be working very closely with our executive leadership team. To be clear, our business model and strategy are sound. I'm highly confident of that. Our marketplace continues to provide strong ROI to businesses in the industry, as evidenced by the spend of our clients. Our platform strategy is unique versus other tech solution providers. We have the ability to continue building the future rails of the cannabis industry, while improving our cash flow as we ride out the storm of the current economic and industry headwinds. As Arden will touch on, we are already working towards plans for 2023 that drive clear line of sight to our margin and cash flow potential, which has been our historical strength as a company. We will make the adjustments needed in how we operate to deliver more significant value to our clients and users. I'm excited to work with our team and lead the company through this transition, as we will be building against the opportunities that we have. With that, I'll turn the call over to Arden.

Thanks, Doug, and hello to everyone on today's call. Our Q3 performance comes in the face of continued challenges across our end markets. The risks we anticipated last quarter played out as expected throughout this quarter. Our Q3 revenue of $51 million declined 1% versus last year, and our reported net income and adjusted EBITDA were both a loss of $10 million. Our adjusted EBITDA was heavily impacted by reserves we took against our most aged client balances. We saw 25% plus growth in paying clients during the third quarter, though this growth was fully offset by a decline in our revenue per paying client. We expected these pressures given the continued liquidity challenges that our clients are facing. Moving down the P&L. Our Q3 gross margin rate of 92% is consistent with the prior quarter. Our reported operating expenses after cost of revenues and before D&A expense came in at $63 million for the quarter, and includes $2 million in stock-based compensation along with $6 million in other non-recurring charges, which include severance payments associated with the headcount reduction we executed in August. More information on these charges is available in our earnings release and earnings slide deck and will be in our Form 10-Q. Excluding these items our non-GAAP adjusted OpEx for the quarter came in at $56 million, or a 46% increase versus last year resulting in our adjusted EBITDA loss. The largest driver of adjusted OpEx growth came from the bad debt expense we incurred, which I'll touch on now. Excluding bad debt from both this quarter and the prior year period, our adjusted OpEx grew by 27% year-over-year and adjusted EBITDA was $1 million. Over the past year, we selectively worked with certain clients who are facing difficulties to help them navigate through the challenging environment. We've talked previously about how we believe that supporting our clients during trying times like these will pay dividends when conditions improve. This quarter what became clear to us however is the prolonged time required for a return to growth across cannabis end markets. For example, the California market which contributed 53% of our total Q3 revenue saw year-over-year declines in statewide sales of minus 10% based on third-party data during the quarter. Given these dynamics, we made the decision to accelerate the reserves we're taking against a handful of clients some of whom remain on the platform at significantly downgraded levels of spend, others of whom have been unpublished as a result of their liquidity challenges. Our bad debt expense was a significant drag on our Q3 adjusted EBITDA, which was positive before this charge. Our bad debt is also limited to a handful of accounts that saw challenges earlier this year versus a wider spread issue. Approximately 90% of the bad debt we incurred in Q3 relates to 15 clients where we are now fully reserved against the majority of these accounts. What's encouraging is the decline we saw this quarter in our gross receivables balances. The third quarter is the first, since end market challenges began where the change in our receivables was a source of cash. We are very focused on where we're investing and firmly believe that we can find further opportunities to rationalize our spend, as we get back on the path towards cash flow generation. As Doug stated, we know we must do better in this environment on controlling our spend, and we'll continue to take action on productivity opportunities. Our reported net income loss of $10 million, includes $7 million gain in the fair value of our warrant liability. Our fully diluted share count across our Class A and B share classes was 146 million at the end of the quarter. A reconciliation of adjusted EBITDA to net income as well as the details of our share classes and share count calculation are provided in our earnings release posted to our Investor Relations site. We ended the quarter with $34 million in cash and no long-term debt. We continue to be comfortable with our liquidity position given the productivity initiatives that we've already taken and are continuing to take action against. Before I speak to our outlook for the fourth quarter, I also wanted to address our thinking on additional metrics for disclosure. I mentioned in our August earnings call that we've been evaluating additional metrics for investors to gauge the health of our business and progress in executing against our platform strategy. We've decided to sunset our prior MAU metric as, it's a very broad top of funnel metric that has become more correlated to our marketing investments and less correlated to our revenue growth. We expect to provide our additional metrics disclosure on our Q4 call in concert with our 2023 plan and guidance. More details on these changes can be found in our Form 10-Q filing. Now, I'll turn to our financial outlook for the fourth quarter and provide some commentary on how we're planning for fiscal year 2023. I noted on our August earnings call that, we were baking in risks in our scenario planning for the second half, including continued end market declines in Q3, bottoming out in Q4 along with continued liquidity challenges for our clients. Based on where we are today, we lack clear signs that end market challenges and client liquidity concerns have fully bottomed out. As such, we expect our second half revenue will decline closer to the wide end of our guidance range for the second half, or down in the mid-single-digit percentage area. We're continuing to execute against productivity actions, as I noted, but expect Q4 adjusted EBITDA will be further impacted by bad debt expense, which will remain elevated in Q4 though significantly lower than Q3. As Doug stated, we're currently working through our annual operating plans for next year and we'll provide more detailed guidance for 2023 at a later stage. With that said, I'd like to share some initial thoughts on where we're focusing our plans. As a backdrop to our planning, we expect visibility on a return to growth across licensed cannabis end markets will remain low. Against this backdrop, we're working towards creating more focus across our teams, more streamlined operations, and clear line of sight to positive cash flow. While the environment may remain uncertain our objective is to achieve profitability and positive cash flow in 2023. Our strategy remains unchanged. What has changed though is the focus we have on executing operationally, rightsizing our investments with rigorous prioritization, and delivering against our margin and cash flow potential regardless of the macro environment. In closing, Juan, myself and our entire leadership team are looking forward to partnering more closely with Doug and bringing WM Tech to its next phase of growth. His intimate knowledge of our company and end markets will serve us well as we get after the opportunities this year and complete our planning for 2023. With that, let's open up the call for questions.

[Operator Instructions] Our first question comes from the line of DJ Hynes from Canaccord. Your line is open.

Hey, guys. Thanks for taking questions. Doug, I wanted to ask you so in the press release I think you were quoted saying something along the lines of like we need to be more focused and more streamlined. What does that mean to you? Is it narrower product focused? Is it about getting costs realigned? Like what's contemplated in that when you talk about focus and streamlining the business?

Yeah. It's all basic textbook like operational things. It starts with that prioritization that we mentioned and putting a clear focus on what we're trying to accomplish here. We're trying to outline clear objectives internally, decentralize decision-making, and restructuring our internal orgs, to allow us to move faster. And then, we need discipline on spend and make better trade-offs to deal with these headwinds. So that's really where the focus is going to be. Our strategy is largely intact. I spent a lot of time with Chris working through that over the years. It mainly comes down to execution. And the simple fact is, we had all of our company dials turned up to a 10. And with the market pressure and the economic headwinds, we definitely turned down some of those dials. So it's just about the logic in which we do that.

Yeah. Yeah. Okay. And then switching gears a bit maybe more to kind of macro regulatory line of questioning. Just curious with the midterms tomorrow – like what are the key things that you're watching for that we can maybe draw signals from for the end market, Doug?

Well, again, every year that we go through this we have positive news. So we expect nothing different this year. And one of the things, I want to try and bring to the company is more of a ground game getting back to the culture. And so we're looking forward to executing getting go-to-market strategies going in these states. But again, as far as policy goes, it's typically always positive and we'll be ready to execute when the news comes up.

By the way, DJ we also have Juanjo, our COO on the call and I know, he has some incremental thoughts as well. So...

Hey, DJ. This is this is Juanjo as Arden said. The only thing I wanted to add to what Doug had said is the news has always been positive. Obviously, the polling seems generally positive as well in most of these states. But I think part of what we're particularly excited about is a number of medical states that are looking to turn rec are very positive states for us, right, when you think of the likes of Maryland, Arkansas, Missouri. And so while the time line of how these states turn from med to rec is always hard to predict, right? There's a lot of regulatory nuance. I think there's plenty of reason to be bullish if some of these ballot initiatives go the way we expect them to.

Okay. Sounds good guys. I appreciate the color. Thank you.

Thanks, DJ.

One moment for next question. [Operator Instructions] Our next question comes from line of Tom Champion from Piper Sandler. Your line is open.

Hi. Good afternoon. Doug, I'm wondering if you could talk a little bit about what you're seeing in the end markets. You've been involved with the company and the industry for a long time. And in what ways is this current market environment familiar? And in what ways is it new? How tied is kind of the current challenge to the dynamics that's going on specific to California? If you could touch on that a little bit. And then just any update on kind of the Big East rollout what you're seeing in the New York, New Jersey area would be helpful?

Yes. So California, obviously, is feeling the commoditization of the plant and a very much robust black market that is definitely putting price pressure on everything and making operations hard for everyone. It is happening a little bit in other states like Colorado and Oklahoma, but we expect that force to show itself in all the other states in time. But for most of the operators in California it's definitely, a lot of headwinds, a lot of cost cutting a lot of preparing for what's going to come next year. Even in the East Coast states that are coming online, they have a lot of black market problems as well that will put downward pressure on prices out there. And obviously the licenses in New York for example have taken a little bit longer than expected. And obviously that doesn't help with the forces that I just mentioned. So just like everything in cannabis, we've been in this game a long time. Even though it says, it's going to open things tend to take a lot longer and it's a lot more nuanced as governments work with local governments to kind of roll out their policy and then have to again deal with a robust black market. So again for us we just have to build the tools to help you guys survive and then we have to have the ground game because one thing that I can help bring to the table a little bit is a broader understanding of the plant. And when you get into a world where margin and everything gets crushed it really comes down to your ability to understand how to deliver quality to price which is something that I can help some of our clients do.

Got it. Thank you.

Thank you. [Operator Instructions] Now I'm not showing any further questions in the queue. I'd like to turn the call back over to our speakers for any closing remarks.

Right. Well, thanks operator. We appreciate everyone for joining today. And with that we'll wrap up today's call.