MassRoots And CannaRegs: Does The $12 Million Acquisition Make Sense?
Despite being one of the most notable companies in the cannabis industry, MassRoots Inc (OTC:MSRT) has not always been great at creating value for shareholders. As Alan Brochstein, author of the 420 Investor, told Benzinga late last year, the company “endured a perfect storm of sorts … business fundamentals haven't lived up to the expectations, a convertible note added a bunch of shares to the float and the company sold 10mm shares at 50 cents.”
Things have not gone a lot better since; in fact, the stock is still trading close to all-time lows.
However, MassRoots’ latest acquisition might prove that not delivering shareholder value could become a problem of the past, as the company continues to transition from a consumer-focused business model to a business-to-business software model. The cannabis-focused tech company announced Aug. 23 it purchased CannaRegs, Inc., a provider of an extremely useful tech platform for the legal marijuana industry, for $12 million in stock.
CannaRegs tracks and aggregates all the different regulations and taxes that apply to cannabis businesses at the municipal, state, and federal levels, making it easy for users to find the ones that concern them and to get notified when anything changes. One might argue that this is the reason for a business to have lawyers and accountants. But, in a landscape as complex and rapidly evolving as that of legal cannabis, no one lawyer or accountant can stay on top of everything. This is where CannaRegs comes in.
Interested in the multi-million-dollar purchase and the future of the combined company, Benzinga reached out to CannaRegs’ co-founder and CEO Amanda Ostrowitz, J.D.
More Than Software
The CannaRegs team has “figured out a way to take the laws, which is something that is quite complex to research, and make the search of that law as simple as going online and buying a pair of shoes,” Ostrowitz told Benzinga, when asked to put what the company does in plain English. Interestingly, it’s not just law firms, but also licensed marijuana businesses, local governments, investors, consultants, real estate developers and researchers, who use this product.
Beyond the value of CannaRegs’ platform, what MassRoots has acquired is a highly trained and extensively experienced leadership team. Ostrowitz herself is a Doctor of Law, and brings to the table not only her experience as an attorney, but also the proficiency derived from her time working at the Federal Reserve Bank of Kansas City. Bryna Dahlin, J.D., the General Counsel, was a partner at the law firm of Winston & Strawn and was named as one of Chicago’s 40 attorneys under 40 by the National Law Journal in 2013.
“MassRoots is not just buying CannaRegs, the software platform. They are buying a leadership team and the reputability that they bring,” Ostrowitz said. “They definitely see us as a very important part of the leadership future of this company. But we are also working side-by-side, bringing different skills, dividing and conquering. They have a very strong sales and tech teams, and very strong marketing; things we didn’t have. What we bring is very strong operational efficiency, leadership and a legal team.”
CannaRegs makes almost $500,000 of annual recurring revenue from subscriptions.
“We’ve done all that without any money spent on marketing or a sales team,” Ostrowitz pointed out. “So, we’re very excited about the additional funding that the MassRoots deal provides; it should help us grow very quickly. We project that, within three years, we could be well over $15 million to $20 million of revenue per year.”
Reimagining A Struggling Company
In a recent article published on New Cannabis Ventures, Brochstein explained why he thinks MassRoots overpaid for CannaRegs and, more importantly, why this shows that the public company is quite “desperate” as it continues to fail to meet expectations. Among other red flags, Brochstein pointed at the strong promotion behind the stock, as well as the company’s undercapitalization and toxic debt.
While acknowledging the value of CannaRegs’ platform, Brochstein contended that the $12 million price tag, which equates to roughly 26 times current sales, wasn't justified, even in the context of the company’s transition from a consumer-oriented model to a business-to-business software model.
“While MassRoots now has a perhaps a more compelling story to tell, its challenging financial position requires it to raise capital again in the very near-term. With the stock near an all-time low and trading below prior capital raises but at a very high market cap due to all of the share issuances (134mm shares outstanding at $0.479 is $64mm), MassRoots is likely to struggle in the capital markets as it tries to raise additional capital,” he wrote.
Ostrowitz disagrees. It's not uncommon for valuations to be based on a three-year EBITDA, she told Benzinga, going back to the $10 million to $15 million within three years sales projection, while mentioning the fact that this is a cash flow positive, debt free company.
“Going after the best of the best, they wanted to make a statement of what this company will look like in the future,” she said, once again pointing to the transition and the role that the recently acquired companies (and their management teams) will play in it.
“They are also compensating us for the risk involved in the transaction,” she added.
Furthermore, the acquisition fits in the wider transition toward a business-to-business software firm, Ostrowitz argued, noting that synergies at the leadership level abounded, especially following some of the prior, smaller, acquisitions (Whaxy, an online menu-management and consumer loyalty platform, and Odava, a point-of-sale platform for cannabis-related business).
An Outside View
Is it possible that a renewed leadership could revitalize MassRoots? Could the future look brighter as new talent hops on board?
“I have to commend Amanda [Ostrowitz], as I think she handled my public criticism of the deal very well, and I appreciated her sharing her perspective,” Brochstein told Benzinga.
“I have known her since 2014 and have always had a lot of respect for her and admiration for what she has accomplished. MassRoots has definitely not fulfilled its original vision and suffers, in my view, from weak leadership, so there is a real opportunity for Ostrowitz to influence the culture positively,” he added.
“I think it's a bit early to assume this will be successful, but to the extent Amanda is able to take on leadership role, it improves the odds. The company does need to raise cash…and the departure of their recently hired CFO after the deal was announced certainly doesn't inspire confidence, especially since his hire was so heralded. This is a critical time for the company, and I wish MassRoots success,” Brochstein said.
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