As the landscape of mergers and acquisitions changes in the cannabis industry, so too has the criteria used to determine a sound investment. The rapid-scale-at-all-costs and focus on topline revenue has ceded importance to profitability and sustained growth as the industry adjusts to the turbulence of figurative young adulthood.
Platinum Vape can give up-close-and-personal perspective on the attitude shift: In September, multistate operator Red White & Bloom Brands Inc. (CSE: RWB) acquired the manufacturer in a deal worth up to $60 million in cash and stock.
“Call me old-school, but I believe businesses should strive to be profitable—and that very much includes cannabis companies,” said Platinum co-founder George Sadler. Since starting out as cultivators in 2010, Sadler and his son and co-founder, Cody Sadler, have built a successful, recognizable brand by fixating on stable, prolonged growth fueled entirely by revenue from their operations in Michigan, California, and Oklahoma.
Funded initially by the sale of a pair of dirt bikes, the Sadlers began with six hardy plants in their garage. Lacking distribution opportunities, they launched a delivery service. Within six months they were completing eighty deliveries a day, according to George Sadler. A retail location soon followed, and within a year the company had added three more dispensaries in San Diego County, California.
“We’ve been measured and patient in how we’ve grown the business so far,” George Sadler said. “Our growth has been largely funded by our own success and, up to now, we haven’t taken any outside investment.”
Cody Sadler hatched the business idea at age 20. “At first it was the two of us doing everything,” he said. “Gradually, we each found our niche and focused on what each of us could bring to the table. My dad is an all-out extrovert with a knack for sales and motivating others. I love graphics, product development, and peeking around the corner for the next big thing. I also handle the finances and product procurement. We make a good team. We balance each other out very well.”
In 2016, the younger Sadler’s knack for seeing around corners led the pair to Shenzhen, China, a manufacturing hub, where they found a supplier to develop considerably better—and cheaper—vaporizer hardware than what was then available from manufacturers in the United States. The discovery added a new dimension to the business plan. On the flight home to San Diego, the Sadlers christened the venture Platinum Vape.
Fast forward to 2020, and Platinum has become a nationally recognized brand. In 2019, the company posted U.S. $70 million in revenue (25 percent to 30 percent earnings before interest, taxes, depreciation, and amortization) from three markets, with sales in George Sadler’s native Michigan representing two-thirds of the company’s revenue.
“We entered the Michigan market five years ago, long before [recreational use became legal],” he said. “We definitely benefited from that first-mover advantage, and today we’re in all but about fifteen stores in the entire state.”
Platinum’s dominance in Michigan piqued the interest of Brad Rogers, chief executive officer at newly public Red White & Bloom, a multistate operator (MSO) headquartered in Vancouver, British Columbia. Prior to the Platinum deal, Red White & Bloom commanded a 22-percent share of Michigan’s legal industry. With major cannabis and hemp holdings in Illinois, Massachusetts, and Florida, Red White & Bloom’s acquisition of Platinum Vape was a means to continue increasing market share and influence in Michigan while expanding the MSO’s influence westward.
“Platinum’s brand is larger than life and can easily find a path to a dominant position in any market,” said Rogers, who sold his previous company, Mettrum Health Corp, to Canopy Growth for more than $450 million in 2016. “If you can make it in California and transfer that same brand seamlessly to such a different market like Michigan, you have a winner.”
While Platinum’s footprint is considerably smaller in California, sales are strong. Despite being in only 15 percent of the state’s dispensaries, Platinum collected $25 million in revenue last year, which speaks to another core fundamental of the Sadlers’ business. “We would rather have strong partnerships with a smaller number of retailers than be in every store,” George said. “Our model has always been to place quality firmly at the forefront. We do that in a variety of ways relating directly to the product, like how we source raw materials or investing in our hardware, for instance. But we also bring that mentality to how we develop relationships with retailers.”
For Rogers, Platinum’s level-headed founders who had built an efficient, multistate team with strong values proved a significant asset. “[With this deal] we obviously wanted to grow the top and bottom lines, but more than anything we needed to expand the team with capable, hardworking, and innovative people to keep up with what we have going on now,” he said. “George and Cody just get it.”
Perhaps unsurprisingly, Red White & Bloom wasn’t the first suitor to knock on the Sadlers’ door. “We’ve had a number of groups approach us over the years, but none of the deals made sense to us,” George Sadler said. Intent on maintaining control of the family business they built from scratch, the pair wasn’t inclined to give up their 100-percent ownership stake.
Red White & Bloom, George Sadler explained, sought a collaborative relationship, acknowledging Platinum’s key assets (a nationally-known legacy brand, extensive history of profitability and measured growth, and a team of more than 200 employees spread across three key markets) would be best served by boosting instead of transforming. “Brad recognized the success we had enjoyed so far was on account of the strength of our team and the ethos that drives the company,” he said. “They don’t want to change any of that, and they want to give us the resources and the support to continue to scale this success.”
Cody Sadler echoed his father’s sentiment. The younger Sadler saw the opportunity for rapid national expansion as the biggest gain. “The key questions we asked of an acquisition partner were how fast could we grow? How could we take our philosophy and corporate culture that has made us successful into multiple states?” he said. “RWB met all our qualifications. They are allowing us to be who we are and grow at a more rapid pace.”
A passing glance at the numbers suggests Red White & Bloom got Platinum Vape at a good price. With a potential top-end settlement that’s the equivalent of a single year of revenue ($60 million, not including future performance-based earnouts), the terms look less eye-watering than some of the high-profile acquisitions of the past couple of years, but there’s a lot more to the deal beneath the headline.
The initial cash payment of $35 million consists of $7 million in cash payable at closing, another $13 million payable within six months, and a further $15 million as a convertible note. A potential additional $25 million earnout is based on financial milestones both parties stressed almost certainly will be achieved.
“There have been a lot of very questionable deals and funny valuations in cannabis in the past couple of years,” George Sadler said. “Based on the initial payment and the earnout potential we feel very confident meeting, we felt that these terms were fair for both parties. If you are planning to develop a long-term working relationship, that’s incredibly important.”
Rogers agreed win-win deals are far more advantageous when they represent the beginning of a mutually beneficial relationship. “Collectively, the result will bring even bigger returns for shareholders, which is what we all are now,” he said. “At the end of the day, George and Cody are very savvy businessmen who see the upside in their RWB stock—both the upswing you get from being public as well as the synergies generated. The biggest delta here is the recalibration we both get on moving from a ‘mid-sized’ firm to a ‘large-cap’ company, as the market is paying more than double for those larger, combined assets. So, we both truly win with this deal.”
Cody Sadler added, “We are now in a position to maximize all our strengths with multiple products in multiple arenas. We have two seats on the board and have the freedom to continue to manage Platinum unencumbered.” He said the company’s next steps include maintaining the existing strongholds in Michigan, California, and Oklahoma while breaking open new markets with the full support of a budding monolith behind them.
“This is going to be a fun ride,” he said.
