WM Technology, Inc.

Good afternoon, everyone, and welcome to WM Technology, Inc.' 's first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to turn the conference over to your host, Tim O'Shea, Director of Investor Relations.

Please go ahead.

Hi, everyone. Thanks for joining us today to discuss our fiscal 2022 first quarter results. We have our CEO, Chris Beals, and our CFO, Arden Lee, with us today. By now, everyone should have access to our earnings announcements. This announcement is also on our investor relations website along with a supporting slide deck. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, 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 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 and 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, which are not intended to be a substitute for our reported GAAP results. 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. A reconciliation of these measures to our GAAP results can be found in our earnings release. With that, I'd like to turn the call over to Chris.

Thanks, Tim, and hello to everyone on today's call. We had a really strong first quarter, and I'm pleased with our growth across a number of key areas. This quarter demonstrated that we're playing offense and creating distance from the pack as the leading technology provider and commerce-driven marketplace in cannabis. And this past 420 holiday provides clear evidence that consumer demand for cannabis remains strong despite broader macroeconomic concerns impacting other consumer discretionary sectors. We saw not only blow out crowds at 420 events across the country, but also broke our single-day record for the highest ever order volume on weed maps this 420. Let's get straight into the results. We exceeded our growth goals announced in February. For Q1, we grew revenue by 40% year over year, and we continued to grow our user and client base uninterrupted in spite of continuing turbulence in some state cannabis markets. The power of the Weedmaps marketplace and the value that we provide both users and clients is evidenced by the results we drove and continues to give us confidence in our long-term strategy. It's clear that our strategy is working with business results that reflect the user growth we are driving across the Weedmaps marketplace and and the client engagement we're driving through our WM Business software solutions. Looking at Q1, WM Tech's growth continues to be a result of three areas that I'll walk through today. First, driving deep client engagement for the cannabis retailers and brands we serve across all markets. Second, innovating and expanding our Weedmaps marketplace to continue to be the center of commerce for cannabis consumers. regardless of shopping demographic. And third, expanding the adoption of WM Business' suite of business SaaS tools to enhance the client and user experience of accessing Weedmaps. Let's start with how we drove client engagement in Q1. We focused on delivering outsized value for our clients, as I've talked about before. Our average revenue per paying client is a direct reflection of the returns that our clients are seeing from being on our marketplace, regardless of the continued choppiness in markets. We've continued to expand our reach of clients across markets with over 250 new paying clients added in the quarter. As new states come online, like Montana, which opened for recreational sales in January, and New Mexico, which started recreational sales in April, we've been active in onboarding new clients and educating them on the breadth of the WM business platform while helping these retailers reach consumers and transact with them on the marketplace. We've completed the rollout of our Admin 2.0 portal that I spoke to in February. With this update, clients now have a simple-to-use homepage user interface providing visitor, view, and engagement trends in addition to ROAS metrics. This surface also starts laying down the groundwork for self-serve with elements for how clients can upgrade the quality of their digital presence on Weedmaps, view insights like top products across their listings, and enable cross-product adoption and purchase upsell opportunities across our WM Business Suite, things like live menu integration and orders enablement, along with featured listings and deal listings. We continue to improve our deals offering with new enablement features to allow clients to publish deals at scale across their listings. We've also created a new promotions hub within Admin 2.0, allowing clients to create and manage all promotions, including online promo codes, in-store deals, and online deals from one place. We've also rolled out new promotions features within our WM Store eCom embed, allowing clients to showcase promotions more easily on their own channels powered by WM Store. Moving on to our Weedmaps marketplace, our users are the core of our value proposition with clients. And in Q1, we improved the user experience on our marketplace in several ways as we look to reinforce our positioning as the center for cannabis commerce. As our clients know better than anyone, cannabis consumers are seeking value and convenience more so than ever in this environment. Studies indicate 80% of cannabis consumers say price is the biggest factor driving their purchasing decisions. with over 60% of cannabis consumers saying they're likely to switch retailers based on better pricing. I noted last quarter how we've increased the discoverability and transactability of deals and promotions for these users seeking value. Regarding convenience, we're piloting several new user enhancements, including express reorder and order again features, allowing users to easily select products they've previously purchased, along with order type preferences, which allows users to more easily filter through available delivery and pickup options in their region. We also continue to test menu personalization, leveraging our first-party user affinity data. We expect to ramp these tests across more users and regions as the results to our user engagements and conversion actions have been validating. Now let's talk through how we're expanding the adoption of our WM Business Platform. The WM Business Platform anchors our client experience in accessing the Weedmaps marketplace. The more solutions they leverage, the easier it is to drive consumer conversion. In turn, client utilization of these solutions drives a more fluid marketplace experience and a higher propensity to adopt additional WM Business Platform solutions. Why that's the case is that as clients use more solutions across the WM Business Platform, this translates to things like more up-to-date menus, more accurate product information, and more omnichannel shopping options across multiple brands and retailers on the marketplace, all to the benefit of our users. To that end, I'll highlight a few areas that showcase the progress we've made. One of our most powerful capabilities is how we use data to make the product inventory of our clients more transactable online. We employ machine learning and data augmentation to normalize and surface product-level information that is necessary to convert consumers to transact, whether it be in our marketplace or on third-party websites powered by WM Store. In Q1, we continue to expand our value-add integrations and now have menu integration with the key point-of-sale companies serving cannabis. Nearly 70% of menus on Weedmaps are now supported by our menu integrations, ensuring real-time inventory and accuracy of product information. We're also focusing on expanding our orders integration with these same point-of-sale partners as well. Given the speed at which these point-of-sale systems have been integrating with us over the last year, we've decided to prioritize our partnered approach versus our own WM retail point-of-sale solution. Our point-of-sale strategy previously had a dual owned and partnered focus. Our partner integrations have increasingly become the core of that strategy over the last year and allowed us to collaboratively service clients and ingest marketplace data more scalably with less investment. Additionally, as we start to have point-of-sale partners integrate and market parts of the WM Business Platform, navigating the inherent conflicts of being both a partner and a competitor has become increasingly challenging. Looking forward, I see an emerging opportunity to position the WM Business Platform as a SaaS vendor to cannabis point-of-sale and ERP providers. We've also continued to drive penetration across orders, our WM Store menu embed and the CRM dispatch and connector solutions that we acquired last year. And we're also expanding the breadth of solutions that we're offering to our clients. To that end, we completed the acquisition of Enlighten in the first quarter, which provides yet another offering for clients as part of the WM business platform. Enlighten operates a solution called Smart Hub, which is a subscription software offering that powers in-store digital menus and kiosks. Enlighten also operates a solution called AdSuite, which provides in-store digital ad inventory for brands to reach consumers at the physical point of purchase. I'm pleased to welcome the Enlighten team to WM Technology and look forward to scaling our solutions together. It's an incredibly synergistic acquisition. For instance, we're already pairing it with WM Store to do a jointly powered in-store experience. Moving forward, the acquisition positions us to be a tremendous partner to retailers and point-of-sale providers where we can ingest and cleanse point-of-sale data one time, enrich it, from our brand information catalogs and have that data power engaging and transactable experiences for consumers across the Weedmaps marketplace, web e-commerce, and in-store kiosk experiences. This is an example of yet another value-add solution we can provide to our software partners. Looking back over what we delivered this quarter, I think it's important to highlight a very key differentiator and competitive advantage for WM Technology. With an engineering product and design organization that numbers nearly 300, we have what I believe to be the largest software development team focusing on the cannabis space. And not only that, we've been incredibly successful at attracting marquee talent from top-tier companies across the technology space who are attracted to the size of the opportunity we have, our culture, and our commitment to supporting a just and socially conscious cannabis industry. In the first quarter alone, we grew our engineering, product, and design headcount by roughly 15% versus where we were at the end of Q4. The end result of having a technical delivery team of our size that is leaned in and passionate, is an incredible pace of software and feature delivery. And we saw that this last quarter as we delivered new solutions at the fastest pace I've seen during my time here at WM Technology. When I talked back in February about us playing offense with our balance sheet and cash flow, a big part of that focus was in continuing to invest in the incredible engineering product and design team we have that is such a critical piece of our success. Looking forward, I'm excited by the work our teams are doing and the opportunities that we have in front of us. We are creating the new within cannabis technology and driving innovations in ways that will be more visible over the course of this year. Let me touch on something I'm incredibly excited about. We're piloting a new in-app messaging feature, allowing our CRM clients to reach their followers on the Weedmaps marketplace with things like exclusive deals and product promotions. How this works is that clients of Sprout, the CRM solution we acquired in Q3, will be able to conduct marketing campaigns targeting their followers on Weedmaps and have these users directly receive campaigns within their inbox on the Weedmaps iOS and Android apps. This beta essentially allows our clients to reach their shoppers as they're making purchasing decisions on Weedmaps, leading to higher conversion and lower cost to the client than other channels and options. This beta also unlocks a potentially large growth flywheel for our marketplace as businesses increase their use of in-app messaging and incentivize their customers to follow them on Weedmaps, which in turn drives more user engagement across our marketplace. I'll turn now to another area that I believe is game-changing for our brands clients. We recently launched a new insight solution in the beta providing brands clients with powerful and actionable intelligence on brand and product rankings, retailer placements and performance, and product pricing insights, all of which is powered by our proprietary first-party menu data. This brands insights product meets an acute pain point for cannabis brands that we don't believe is being served anywhere today. Apart from these areas, We're also rolling out scheduled orders functionality, allowing users to receive orders at set delivery windows and continuing to work towards rolling out dynamic delivery, or what's otherwise known as ice cream truck model, capabilities for our clients with delivery operations. And we continue to unlock valuable integrations for our clients, such as menu and orders integration with LeafLogix and Biotrack that are rolling out in the near future. We've also prepared to launch a new WM business offering in Canada, centered around our WM Store, WM Dispatch, and Enlighten solutions, They'll also include new payments functionality. Our learnings on payments in Canada will inform the approach we take in the U.S. whenever regulations enable us to monetize payments. Our teams also continue to be laser-focused on what we call Winning the Big East, which is our initiative focused on owning critical new East Coast states coming online. While it's still very early days, WeedMath is resonating with clients in the tri-state area. We've already onboarded over 40% of licensees in New Jersey, for instance. We continue to be bullish about these markets, though as a reminder, the revenue contribution we expect from New Jersey this year is not material given the nascency of the market. Finally, I'd be remiss if I didn't take a moment to talk about another historic 420 holiday and what the success of that holiday means not only for WM Technology, but the broader cannabis industry itself. I've seen estimates that this year's 420 drove over $150 million in legal sales, which is an increase of over 35% from last year. In New Jersey, we saw long lines on opening day of rec sales the day after 420. On weed maps, we've had our highest volumes of orders placed this past 420, eclipsing prior all-time highs with double-digit growth in volume versus last year's 420. Heading into 420, we launched our new Tumbleweed series in April featuring Killer Mike, which is being broadcast by Vice TV. It's a multi-part docuseries that features local cannabis culture across cities like Las Vegas, San Francisco, Chicago, and New York. We coupled Tumbleweeds with the content integration within the Weedmaps app that has allowed our users to access exclusive content, merchandise, and promotions related to Tumbleweeds. Our Tumbleweeds content integration launched on 420 and contributed a 27% increase in app downloads during the 420 week versus historical weekly averages. Since the start of this year, we've seen states with a combined population of 10 million residents legalize adult recreational use, and that excludes states like New York with over 20 million residents. I think it's important to call this out and remind everyone what an exciting time we're at in this country, let alone the world, with respect to cannabis reform. And I think it serves to highlight what we've been saying all along, which is that consumer demand for cannabis remains healthy. In fact, the healthiest it's ever been. And while we at WM Technology continue to lead the push to continue to make legalized cannabis more accessible, it's up to our federal, state, and local governments to do their share to increase license density so that we drive more consumer demand away from non-licensed operators to licensed channels. With that, I'll now turn the call over to Arden, our CFO.

Thanks, Chris, and hello to everyone on today's call. Today's environment continues to be incredibly dynamic. The human tragedy overseas and inflation fears at home are driving concerns on the health of the consumer and discretionary spending. And while these dynamics are weighing on the business outlook for many companies, the same does not hold true for WM Tech. Consumer demand for cannabis remains strong, access to licensed cannabis products continues to improve, and the visibility of our opportunities is only getting clearer with each quarter that goes by. These dynamics were borne out in our Q1 results. We delivered $57 million in revenue, which is 40% growth versus last year, and approximately $1.5 million higher than the top end of our guidance. While we completed the enlightened acquisition in Q1, we recognized less than $1 million of incremental revenue from that transaction during the quarter. We now have over 5,000 average monthly paying clients with over 250 new paying clients added this quarter, or 28% growth versus last year. Our average monthly revenue per paying client of approximately 3,800 is 9% higher versus last year. And we continue to grow our user base with over 50% growth in monthly active users versus last year. Our Q1 performance is proof of the value that we continue to deliver to both our users and clients, and the scale advantages we have versus other technology solutions providers in cannabis. Moving down to P&L, our Q1 gross margin rate of 93% reflects the investments that we're making as we expand our new client solutions, such as our new multi-channel WeMaps ad network offering, along with several of our data initiatives. Our reported operating expenses after cost of revenues and before DNA expense came in at $64 million for the quarter. Our reported OPEX includes $7.5 million in stock-based compensation, along with $2.3 million in other non-recurring charges related to our recent transactions. 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 $54 million, or a 78% increase versus last year. Our Q1 adjusted OpEx increase was driven by continued investments in our go-to-market teams, our engineering product and design orgs, as well as incremental expense that we incurred from the acquisition of Enlighten. We also continued to see elevated levels of bad debt expense due to clients who continued to struggle in the current environment, which impacted our adjusted EBITDA by $3 million for the quarter. Our Q1 adjusted EBITDA, given the above factors, was a loss of $1 million. As a reminder, we anticipated our first half adjusted EBITDA margins would be breakeven to slightly positive, reflecting the strategic investments for 2023 and beyond that we discussed back in February. With the opportunities we are seeing beyond this year, we believe the pull forward of these investments accelerates our dominance in key areas. Our reported net loss was $31 million, which includes an $18 million change in in the fair value of our warrant liability resulting from the change in our accounting following the SEC statement earlier last year on accounting for these types of warrants. Our fully diluted share count across just our Class A and B share classes was $144 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 and quarterly results presentation that are posted to our investor relations site. We ended the quarter with $56 million in cash and zero debt. We continue to believe that our highest returns on capital will come from investing in opportunities to drive growth, whether organically or via investments like the Enlightened Transaction. We also continue to be on the receiving end of more partnership and acquisition proposals and have the ability to be very selective and disciplined in how we think about strategic investments. As we look ahead to Q2, our outlook on 2022 remains unchanged. We continue to expect 2022 revenue to grow to $255 to $265 million, which represents 32% to 37% growth over our fiscal 2021 actual results. While we see the potential for upside from increasing visibility on new state openings, traction against our innovation pipeline, and our recent acquisition of Enlighten, We are also mindful of the broader macro volatility that is weighing on the health of the consumer along with the continued business challenges facing our clients across a number of end markets. We expect to drive consistent revenue growth across our subscription-like products in line with our prior guidance. As a reminder, over 90% of our revenue continues to be recurring in nature. We continue to drive higher levels of spend across clients where we see return dynamics supportive of net dollar expansion growth. We are also expanding our client base, as evidenced by our growth in paying clients this past quarter. And we continue to see progress against the opportunities we have with under-penetrated clients and across new solutions. And while our guidance for the year did not assume material growth from new East Coast markets or Canada monetization, we're making progress on building our relevance in New Jersey and are rolling out a new product-driven strategy in Canada, as Chris spoke to earlier. We also are evaluating a freemium strategy to scale adoption of our recent Enlighten acquisition with a focus on installs versus revenue. So do not expect that transaction to materially change our outlook for the year. On February's call, I noted that we expect our growth to be more consistent throughout this year versus what we saw in fiscal 2021, given the absence of planned shifts in the business. To that end, our outlook for Q2 revenue is in the range of 60 to 63 million. Moving on to margin, again, our outlook remains unchanged. We continue to expect fiscal 2022 adjusted EBITDA in the range of 15 to 20 million, which includes our investments in support of fiscal 2023 priorities. We also continue to expect our adjusted EBITDA margins for the first half will be breakeven to slightly positive as we front load investments against growth opportunities for the back half of this year, as well as the fiscal 2023 strategic opportunities we spoke to in February. Adjusted EBITDA profitability is core to our DNA as a company. We have always maintained positive adjusted EBITDA annually throughout our 10-plus year history and will continue to maintain rigorous cost discipline in areas that are not points of strategic differentiation for us as a company. In closing, our strategy is working, our teams are executing, and the cannabis end markets continue to strengthen. As we play offense, our scale advantages within the cannabis tech ecosystem are creating a gravitational pull that is benefiting WeMaps in our WM business platform. And against that backdrop, WM Tech represents a differentiated and insulated story versus the broader technology space in today's macro environment. With that, let's open it up for questions.

Thank you, sir. As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. I show our first question. It comes from the line of Tom Champion from Piper Sandler. Please go ahead.

Thank you. Good afternoon, guys, and congrats on the strong results. Can you just provide a little more context and detail on what you're seeing in the end markets? I think at the macro level, investors are debating inflation and other cost increases. And I'm just curious what you're seeing out there, both with the consumer and your licensed clients. Overall, it just seems like a lot of uncertainty, and I'm wondering if that plays into your 2Q guide after a very strong start to the year in 1Q. And then one more, if I can, please. Chris, it seems like there's a long list of product improvements that you discussed in the script. Maybe if you could isolate one or two that you think will really drive the results most. What moves the needle here? Thanks, guys.

Yeah, great, great. So I think, first of all, the thing to highlight is cannabis demand in the aggregate level continues up and to the right. we're seeing sort of the number of people who are reporting consuming monthly in the U.S. continuing to increase after states legalize. It's materially higher in Canada, you know, in some cases roughly 10% higher than it is here. So it's not just people, new people consuming cannabis, it's the increase in the frequency in which people are consuming cannabis. Separately, we had several states come online. As states come online, the speed with which they open varies, and so that's been an incredibly strong trend. One thing that's interesting in the data that we're seeing is we are seeing an increase in consumers choosing to shop through a centralized, specialized marketplace, namely us. And so our growth rates, our return user rates, and sort of our performance, if you look at something like 420, had increasingly outpaced what we're seeing for in-cannabis retailers. So we're seeing a differentiated story. And part of that is that we're seeing a reduction in people's aversion to to ordering cannabis online and having it delivered to their house. And we are the best way to browse, shop, look for cannabis, and then easily compare deals and pricing. We mentioned the price sensitivity and have it come to your house. And so we're seeing that come to bear. I think one thing that's interesting is also is we're seeing the number of retailers increase in states. We're seeing in some cases same-store sales in those states decrease significantly. not because of what's often talked about, which is the move to illicit market, which is there are more options for consumers, and consumers are increasingly getting choosier about what store they frequent, and the sort of friction in terms of them wanting to look at a new store has been greatly lowered. So I would say overall, while there are the bumps, and undoubtedly, I think as long as tax rates remain high and you have areas in legalized states where you have to drive a long distance to get to a legal store, you're going to see outsized illicit market rates. That still continues to be the case. The good news is that decreasing is a factor of time, and separately, the dominance of our marketplace is increasing as a factor of time, which is the key piece. In terms of the things we're working on, you know, I think a couple things. We are We are doing a bunch of work that much more tightly integrates these acquisitions we completed, and we're sort of taking the time to digest them and bundle them together, but bundling them together to make the WM platform. So making it easy to do single sign-on across them, making it easy for something like the inbox MVP, where from your CRM you can directly run targeted campaigns to users in the marketplace. These are incredibly powerful things. And we're already seeing really great validation from clients when we present these solutions. So along the lines of, wow, where have these been my entire time? Our work on brands, the brand segment, and I highlighted this last quarter, continue to be really underserved. And so we're rolling out into beta brand analytics that help the brands understand trends, set wholesale pricing, identify gaps in sort of their coverage and availability to consumers, and But then separately, and the enlightened acquisition really augments this beautifully, the ability of a brand to say, I want to promote my products with a retailer or a subset of retailers and have that appear within the largest marketplace for Canvas Online, Weedmaps, to have it appear, if they're using WM Store, within that retailer's website and their e-com presence on their own website, and then having it appear on the website In-store, for stores that are using the Enlightened Kiosk, where you can go in and the menuing and what's being promoted in the stores, it's just this really incredible scalability where increasingly as we see these businesses look to do more with tighter margins as competition increases, it really highlights that strength we have in terms of unlocking solutions where they can do something once. control their menu or inventory data once and have it appear in multiple places. A brand can promote in one place, have it appear in multiple places. And then that's a natural segue to the third thing, which is this admin 2.0 and the analytics we mentioned. For larger, more scaled clients, MSOs and MLOs, being able to more easily centrally manage their stores and have good data on how those stores are performing. So that was a lot, but thematically, they're really centered on a very limited number of key themes. We're keeping the team very focused. Thanks, Chris.

Thank you. I show our next question comes from the line of Andrew Carter from CFO. Please go ahead.

Hey, thanks. Can you all hear me okay?

Yes.

Okay, good. First question I wanted to ask about kind of backing up on that in-markets question. You're up 40% in the quarter. We had some of your key markets up barely flat. Are you seeing any major differences because, I mean, you're in Colorado, you're in Oklahoma, you're in California, the three of those, I think Oklahoma is under the most pressure. Are you seeing any major differences where you're seeing the kind of in-market declines really kind of reduce the investment by retailers or impact your businesses?

I think to some degree. I'd say it's a bit more generalized within the states, so sort of generalizing that to an entire state is a bit difficult. I would say this. I would say there's more normalization to the behavior across a bunch of different states than I think is being given credit in a lot of the trade coverage. I think these factors have a bit more commonality than is being talked about. I think You know, that being said, I think that, you know, tax season hit especially hard in California this April where a lot of businesses sort of had a very large sort of state tax bill come due, and that sort of caught a few people flat-footed where maybe it was a newer cycle for them or that sort of thing. That being said, there's some really good news on the horizon there, which is California looks likely poised to implement pretty material tax reduction and tax reform in cannabis. And if that stays in the governor's trailer bill, that would take effect in July, which would, you know, frankly, free up more capital for them to use on other things like SaaS solutions with us, like augmenting their presence and visibility within the marketplace and that sort of thing. But, yeah, to sum it up, I think more commonality than people give credit for, but I think on the flip side, I think we're seeing – we're seeing reduction and maybe a bit of a bottoming in this sort of volatility.

Yeah, the only thing I'd add, Andrew, on top of what Chris said is, listen, in some of those markets that you noted, yeah, operators are struggling to a certain extent, but we think this is actually playing to our advantage in some ways because we do get the sense that some of these operators are shifting the mix of their spend and we're the net beneficiary of that, right? So perfect case in point, you take California, our home state, That's a market where our revenue per client trends continue to show growth versus last quarter, and that's one area of upside surprise that we had in Q1.

Okay, thanks. Building on that question about the kind of struggles of retailers, I know that you noted the bad debt expense. I think you gave it three. I think the cash flow statement was 275. So as a percentage of revenue, that's gone up three-quarters in a row, and the second side of it is that your AR has consistently gone up. I think it's 28 days, trailing 12, 37 in the quarter. Can you give us any comfort around the aging and, you know, has this peaked or just anything that you might just be, you know, clients can't pay, you could be losing a lot of gains? Anything you can give us to make remote cover as this is being the peak here?

Yeah, yeah, sure, I'll take that. So, listen, as I mentioned before, specifically in California, listen, there are operators that are struggling, and I don't think it's any secret that a lot of the operators are internally telling their folks that, If it's not rent, taxes, or utilities, then just pay whoever is screaming the loudest, right? And so, listen, over the course of the quarter, we unfortunately had to turn some clients off. We also had to put a number of clients onto payment plans. We do think the worst is behind us. That's evidenced by the dialogue that we're having with these clients that have seen some operating challenges. It's also informed by some of the third-party data that's out there as well as the data that we're tracking on our marketplace. A lot of that data showed that there was some strengthening of trends exiting Q1 and heading into Q2. And at the end of the day, we want to be there for our clients. Our platform is uniquely positioned to help our clients, specifically the ones that are struggling, to weather the storm and make it to the other side. And so we do think that the work that we're doing to get these clients on the payment plans will pay off. Like I said, we do think that the worst is behind us. We do think that we'll see some reversal of trend in Q2.

Consider the fact that we have the ability for, you know, post-order chat. When you consider the fact that we have logistics software and the ability to sort of better manage those orders. When sort of your menuing is rendered easy to manage. It's real time based on what you have in stock. Generally, I think what we're seeing is it's cheaper and easier to fulfill orders coming from our digital marketplace. When you're going after sort of yield when margins are tightening, we're providing software that helps you do mission critical things for servicing customers, getting them service more quickly, or dealing with compliance more cost effectively. And then when you look at things like our CRM, when you look at the things like being able to promote yourself within the marketplace, the fastest area of growth for Amazon, for instance, It's cheaper and easier to reacquire or to put people back into the marketplace to purchase more from you. And so that's a really kind of compelling triple play when it comes to businesses in good times, but doubly so when it's businesses in times of uncertainty.

Appreciate the clarification. Thanks, guys.

Thank you. Hashan, next question comes from the line of Pablo Zlanek from Cantor Fitzgerald. Please go ahead.

Hello, everyone. Look, I got disconnected, so I'm sorry if my question was asked already. One very simple one. If we try to think in terms of the concept of same-store sales, but for your own average monthly spend per client, how would you think about that? And the reason I ask that, in year-on-year terms, you added about 800 retailers, and the average spend per month increased, right, from about $100, $3,700 to $3,800. But I'm assuming that all those new clients that came in, whether in New Mexico, Oklahoma, or wherever, are starting at a much lower rate. So you probably have a very good, you have probably a decent lift on average spend on your existing client base. And any quick thoughts on that?

Yeah, I can take that, Pablo. So, yeah, you're right. Most of our new client growth is coming in what we call our emerging regions. These are markets where either they're newer states that have opened up like in New Mexico or Montana, or they're states that have been up and running for a while where we're just under-penetrated, where we're working our way up the share penetration curve. You're also right that in some of these emerging regions, they tend to be lower revenue per client states versus kind of some of our more mature regions. Now, with that being said, I'd highlight some of what we've talked about in the past as a company around some of our cohort curves. So, for example, when you look at the different classes of clients across all regions, our clients generally within their regions are coming onto the platform at higher levels of spend over time. And what we've also seen across, and this is pretty consistent across regions within cohorts, is that that spend curve is steepening in terms of how they increase their spend over time the longer they're with us on the platform. What does that mean in terms of a kind of comparable sales growth type metric? It's really region specific. It's a function of the dynamics of that market. It's a function of the type of cohort trends that we're seeing. It's a function of whether that market is a new market that's just opening up or it's an existing market and whether we're fully penetrated or whether we're somewhat under penetrated. What I will say, though, is, again, pretty consistently with newer vintages of clients coming onto the platform, they're just spending more month one and spending more at a greater rate of acceleration over time than prior cohorts.

And just a quick follow-up, Arden. I know you said in the call that 90% of your revenue is recurring, but I saw your subscription number was a lot less than that. And ads are still a big part of the revenue base, and ads are not so recurring necessarily, right? People are bidding against each other. They may drop out the next month if they want to. And can you expand or give more column than 90%?

Yeah, so I'll circle back to what we talked about in February. So when we talk about recurring revenue streams, we're, of course, including WM business subscription fees, which for Q1 came in at about 20% of our revenue net. What we're also including though is our featured listing solution as well as our promoted deals listing solution. And while those are somewhat advertising in nature in terms of generating awareness on behalf of our clients, the way that clients purchase those solutions, they're essentially purchasing them over a subscription-like period. They're not necessarily paying based on impressions or clicks or on a performance basis. And so when you think about the contribution of revenue across featured listings, across our deal listings, as well as our WM Business subscription products, that's about 90% of our revenue in Q1, and those are all recurring in nature.

Thank you. And one last one, if I may. You know, from what Chris said, it seems that, you know, you're having second thoughts in terms of some of the funnels that you were thinking of entering or the new verticals you are entering. that maybe it's better to partner with some of those potential competitors and necessarily create a new vertical? Can you give more color on that? I don't know if there's a change, if there's a bit of a pivot there in the way you're thinking about it, or that was always a plan to partner with someone in those other verticals. Thank you.

I think a better way of thinking of it is we've always had a partner strategy. One of my strategic goals since I came in as CEO is to build SaaS and marketplace solutions that are not just leveraged by end licensees, but that are leveraged by software providers and other sort of ancillary providers to the cannabis space. And I think it's been an area that we've invested heavily in over the last couple of years with the acquisitions we've done. They were intentionally structured in a way that the WM platform fits seamlessly and sort of wraps things like ERPs and POSs and other sort of mission critical systems to the cannabis sector. And so for that regard, I think it's frankly, what you're seeing is a culmination or a sort of, I think, blossoming of that strategy and the fact that we have a number of sort of partner software companies that basically want to augment their solution and resell parts of the WM platform onto their clients. Or we're seeing this manifest with sort of the menu and online ordering integrations having evolutionary pathways where we're talking about deeper integrations around our deal engine, things like that.

Chris, I'm going to add one more, if I may. And I'm sorry if maybe there's other people waiting on the line. But I keep thinking of the loyalty providers. I think what's interesting about this industry is that if I go and buy milk at Walmart and pay cash, nobody knows I was there. Here in the dispensary, you have to key in on the point of sale terminal, your ID, pretty much everything. They have all the information. But when I think about that, it seems to me that the payment, the POS providers, and the loyalty guys have a lot more data than you necessarily, right? And I wonder if that puts you at a disadvantage in a certain way. Do you follow what I mean?

Yeah. No, yeah, I would say actually the opposite in that we get a broader set of data and that we see people who are transacting, who are not transacting. Also, for orders to compliantly come in from our system, we too collect IDs. And one of the things we're talking about with POSs and our partner POSs is actually potentially powering that check-in step in doing the ID verification and authentication. It's also worth noting that with the Enlighten acquisition that we did, one of the things that we're very focused on is starting to take our personalization engine and looking at what consumers purchase and turn it into information that guides bud tenders on what to recommend to people in stores. Two things. One is we generally have a much broader set of data than they do. And two, I think we're about to start injecting that data more into sort of the physical presence at stores. Thank you.

Thank you. I see our next question comes from the line of David Hines from Canaccord. Please go ahead.

Hey, guys. This is Luke on for DJ. Thanks for taking the question. Arden, you mentioned your growth in ARPU was an area of upside surprise in the quarter. Could you just expand or contextualize other areas where you were maybe surprised to the upside or alternatively didn't see things materialize quite how you had hoped?

Yeah, sure. So just to go in no particular order on areas of upside in Q1, So we mentioned that our revenue per client, specifically in California and some of our other kind of more mature markets, showed upside relative to what we were planning for that informed our original guide for Q1. I'd say also that we saw on the margin some incremental positive new client growth in our emerging regions versus what we were banking on. And then lastly, I'd say new solutions scaling quicker than we expected. So whether it's kind of our multi-channel media offering, which we're calling our WM Ad Network, some of the assumptions that we made in our forecast and our outlook around the SaaS solutions, specifically Sprout and Canvea, there was incremental upside. So long story short, taking a step back, what I'd say is there was pretty kind of balanced growth across regions. In emerging regions, more new client acquisition. In our kind of mature regions, specifically California, a bit more on revenue per client. And then on the margin, a little bit more on some of these newer solutions that we talked about last quarter.

Excellent. That's helpful. And then can you guys just expand on sort of the freemium offering you mentioned you're considering and maybe just the opportunities that might create for you?

Sorry, can you repeat that again? The premium offering?

Freemium. Oh, the freemium.

Yeah, so with that, what we're doing is looking to, and it's a strategy we've employed and we're sort of expanding, but basically looking, given that clients are really hungry for sort of value and that there's basically this sort of blossoming platform effect we see where businesses using one piece of the platform are more likely to use other pieces, are likely to be stickier, effectively employing a strategy where they're able to sort of use it on an initial period for free and a longer term contract is one strategy this and then they sort of pay in the out period or increasingly kind of change the costing structure where sort of the base usage of the software is free and then there's sort of incremental upsells or tolling based upsells for using other things. I think one natural example of this is if you look at the CRM space you know, rethinking about what the recurring SAS fee is versus the incremental campaign-based fees. And I think this sort of reflects, you know, a strong desire by us in increasing penetration, but also a high ROI for growing that penetration.

Great. Thank you. Thank you. Yeah. I show the last question comes from Scott Fortune from Rudd Capital Partners. Please go ahead.

Hey, you've got Nick on for Scott. And I apologize if this question has been asked. I got cut off, I think, a little earlier than others. But you mentioned an upside surprise in California. Could you just unpack what you saw in California specifically and what it contributed to the quarter in terms of mix and just your overall growth outlook in that market specifically? Thank you.

Yeah, so in California, it was, as I mentioned before, relative to our own outlook and assumptions for Q1, we saw a bit more growth on spend per client. And so what drove that? It's everything that we were mentioning before. On the margin, I think, as I mentioned before, we're the net beneficiary of clients revisiting their mix of spend, reallocating to channels that are working. And in that instance, we win that conversation all day long. When there's an acute focus on returns from our clients, we can showcase the ROAS that we're delivering for them, the solutions that we have across our platform, and it's a straightforward conversation to get greater share of wallet in certain respects. Listen, California continues to be a gross market. expect to continue growing within California. There continues to be modest license issuance, not at the pace that I think everyone is expecting or hoping for, but we continue to get our fair share of new licenses that are coming out in the market. We continue to really beat the drum around the value that we're delivering for our clients as they look to kind of revisit their mix of spend across vendors. We have more solutions that we're bringing to market, as Chris spoke to. We have some exciting new features specifically for delivery clients. And as folks know, California is a very heavy delivery market. And so it's still a very much growth market. And as the industry turns the corner, we expect a lot of the work that we've done with clients in terms of getting them through this rough spot will pay dividends.

I think structurally it's worth noting that California, I think is really going to be in, in terms of how cannabis retailers do business. It traditionally has been a bellwether state and it will be for others. And I think some of the trends that we're seeing in California, which are fitting really well in our solution set are what we'll see in other places, a movement towards smaller, more nimble footprints, a much stronger, uh, and towards that end, we're piloting within Lighten and WM store, our in-store kiosk ordering solution. improving the ability of people in the store to recommend products. That's something we're attacking with our recommendation engine and looking to find ways where we can start putting recommendations in front of bud tender eyes. Not adopting delivery is a failing strategy. And so we're seeing California retailers who in cases have not done delivery realizing they need to embrace delivery. We're attacking that with Canvea, with the direct orders integrations with POS. We're seeing an increase in sort of The competition on pricing, we're attacking that with the deals engine with a better price compare features in the marketplace as well as in the e-com embeds. A ability to more nimbly sort of switch out brands and SKUs and products and educate people with that. We're attacking that with our brand solutions. And we're starting to see those same trends appear in other states. And so I think the interesting thing is from a the solutions we provide the benefit and sort of the profitability we drive for these retailers. I think that we're seeing some interesting trends emerge in California in terms of how retailers and brands operate. And we're seeing that increasingly, um, sort of, uh, move over to other states.

Got it. I appreciate that color. And then one follow up, if I may, uh, just around the East, uh, with New Jersey rec sales kind of underway here, you mentioned onboarding about 40% of clients there with other States potentially follow. Are you looking to accelerate your investment cadence there, or are you still comfortable with your timelines you have in place? Thank you.

So we generally have front-loaded a lot of our investments for this year, as evidenced by us reaffirming our positive EBITDA guidance. And so I think the pacing for there, a lot of the sort of in terms of headcount and sort of the relationship building, that's frankly been in the works for some time now. So I would say we're on track and on schedule there. We're working closely with a number of the groups out there. I think the interesting thing to watch in New Jersey is, well, there's currently about 12 retailers conducting recreational sales. That number should greatly increase. But the other thing is there's a fair amount of supply constraint because those retailers are required to make sure they have sufficient supply for the medical side. And so I'd say right now it's sort of from a supply and sort of how that recreational market is actually functioning. It's very nascent.

Got it. I appreciate the call.

Thank you. That concludes the Q&A session and today's conference call. Thank you all for participating. You may all disconnect.