NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
NOTE 1 — Description of the Business and Merger
Description of the Business
Leafly Holdings, Inc. (“Leafly” or “the Company”) is a leading online cannabis discovery marketplace and resource for cannabis consumers. Leafly provides an information resource platform with a deep library of content, including detailed information about cannabis strains, retailers and current events. Leafly was incorporated in the state of Delaware on June 20, 2019 and is headquartered in Seattle, Washington.
The Company has three wholly-owned subsidiaries, Leafly Canada Ltd., Leafly Deutschland GmbH and Leafly, LLC (“Legacy Leafly”). Legacy Leafly is the accounting predecessor of Leafly. The accompanying consolidated financial statements include the financial results of the Company and its wholly-owned subsidiaries.
Merger with Merida
On February 4, 2022, Leafly consummated the previously announced mergers and related transactions (collectively, the “Merger”) pursuant to the Agreement and Plan of Merger dated August 9, 2021 and amended on September 8, 2021 and on January 11, 2022 (as amended, the “Merger Agreement”). Legacy Leafly (formerly known as Leafly Holdings, Inc.) entered into the Merger Agreement with Merida Merger Corp. I (“Merida”), Merida Merger Sub, Inc., a Washington corporation (“Merger Sub I”) and Merida Merger Sub II, LLC, a Washington limited liability company (“Merger Sub II” and, together with Merger Sub I, the “Merger Subs”). Merger Sub I merged with and into Legacy Leafly, with Legacy Leafly surviving as a wholly-owned subsidiary of Merida, and following the initial Merger and as part of a single integrated transaction with the initial Merger, Legacy Leafly merged with and into Merger Sub II, with Merger Sub II surviving as a wholly-owned subsidiary of Merida. As a result of these Mergers, Legacy Leafly became a wholly owned subsidiary of Merida and was renamed Leafly, LLC, Merida was renamed Leafly Holdings, Inc. (“New Leafly”), and the securityholders of Legacy Leafly became security holders of New Leafly. We sometimes refer to the Mergers described above and the other transactions contemplated by the Merger Agreement and the other agreements being entered into by Merida and Legacy Leafly in connection with the Mergers as the “Business Combination” and to Merida following the Business Combination as “New Leafly.”
While the legal acquirer in the Business Combination is Merida, for financial accounting and reporting purposes under accounting principles generally accepted in the United States of America (“GAAP”), Legacy Leafly is the accounting acquirer with the Merger accounted for as a “reverse recapitalization.” A reverse recapitalization does not result in a new basis of accounting, and the financial statements of the combined entity represent the continuation of the financial statements of Legacy Leafly. Under this accounting method, Merida is treated as the “acquired” company and Legacy Leafly is the accounting acquirer, with the transaction treated as a recapitalization of Legacy Leafly. Merida’s assets, liabilities and results of operations were consolidated with Legacy Leafly’s beginning on the date of the Business Combination. Except for certain derivative liabilities, the assets and liabilities of Merida were recognized at historical cost (which is consistent with carrying value) and were not material, with no goodwill or other intangible assets recorded. The derivative liabilities, which are discussed in Notes 13 and 18, were recorded at fair value. The consolidated assets, liabilities, and results of operations of Legacy Leafly became the historical financial statements, and operations prior to the closing of the Business Combination presented for comparative purposes are those of Legacy Leafly. Pre-Merger shares of common stock and preferred stock were converted to shares of common stock of the combined company using the conversion ratio of 0.3283 and for comparative purposes, the shares and net loss per share of Legacy Leafly, prior to the Merger, have been retroactively restated using the conversion ratio.
8
NOTE 2 — Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The interim condensed consolidated financial statements have been prepared in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and should be read in conjunction with the Company's audited consolidated financial statements for the years ended December 31, 2022 and 2021, and Management’s Discussion and Analysis of Financial Condition and Results of Operations of Leafly for the year ended December 31, 2022, each of which was filed with the SEC on March 29, 2023 (the “2022 Financial Information”).
These condensed consolidated financial statements are unaudited and, in management's opinion, include all adjustments, consisting of normal recurring estimates and accruals necessary for a fair presentation of our consolidated cash flows, operating results, and balance sheets for the periods presented. Actual results may differ from these estimates and assumptions. The results of operations for any interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC for interim reporting. All intercompany balances and transactions have been eliminated upon consolidation.
Going Concern Evaluation
Under the rules of ASC Subtopic 205-40 “Presentation of Financial Statements-Going Concern” (“ASC 205-40”), reporting companies are required to evaluate whether conditions and/or events raise substantial doubt about their ability to meet their future financial obligations as they become due within one year after the date that the financial statements are issued. This evaluation takes into account a company’s current available cash and projected cash needs over the one-year evaluation period but may not consider things beyond its control. Leafly has experienced revenue declines, incurred recurring operating losses, used cash from operations, and relied on the capital raised in the business Combination to continue ongoing operations. These conditions, when considered in the aggregate, raise substantial doubt about Leafly’s ability to continue as a going concern within one year of the date these financial statements are issued. In response to these conditions, Leafly management took the following actions:
•During the fourth quarter of 2022, Leafly implemented a restructuring plan, including a reduction in force reflecting primarily one-time severance and other employee-related termination benefits incurred during the fourth quarter of 2022.
•During the three months ended March 31, 2023, Leafly announced a second restructuring plan further seeking to reduce recurring costs and identifying cost savings based on a reduction in force reflecting primarily one-time severance and other employee-related termination benefits incurred during the first quarter of 2023.
After considering all available evidence, Leafly’s management determined that, based on the cost reduction measures outlined in both actions above, Leafly’s current positive working capital will be sufficient to meet its capital requirements for a period of at least 12 months from the date that these March 31, 2023 financial statements are issued.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on the reported net loss.
Seasonality
We may experience seasonality in our business, which we believe has moderate impacts on our overall revenue. In certain years, we've seen seasonal fluctuations that coincide with either federal holidays, generally in the fourth quarter, or industry holidays and events, generally in the spring. Our industry and business history is limited and therefore we can't be certain that these are known trends or that other trends may develop.
9
Emerging Growth Company Status
Leafly is an emerging growth company (“EGC”), as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). Under the JOBS Act, EGCs can delay adopting new or revised accounting standards issued until such time as those standards apply to private companies. The Company has elected to use this extended transition period. In providing this relief, the JOBS Act does not preclude the Company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies. Leafly will continue to use this relief until the earlier of the date that it (a) is no longer an EGC or (b) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates. Such estimates include those related to the fair value of derivative liabilities; the allowance for doubtful accounts; the valuation allowance for deferred income tax assets; the fair value of the convertible promissory notes; the estimate of capitalized software costs and useful life of capitalized software; and the fair value of equity issuances. Management bases its estimates on historical experience, knowledge of current events and actions it may undertake in the future that management believes to be reasonable under the circumstances. Actual results may differ from these estimates and assumptions.
Significant Accounting Policies
The unaudited interim financial statements should be read in conjunction with the Company's 2022 Financial Information, which describes the Company's significant accounting policies. There have been no material changes to the Company's significant accounting policies during the three months ended March 31, 2023 compared to our Annual Report on Form 10-K for the year ended December 31, 2022.
Recent Accounting Pronouncements
Accounting Pronouncements Issued But Not Yet Adopted
Management does not believe that there are any recently issued, but not yet effective, accounting standards that, if currently adopted, would have a material effect on the Company’s consolidated financial statements or related disclosures.
NOTE 3 — Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash consisted of the following:
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
14,955 |
|
|
$ |
24,594 |
|
Restricted cash |
|
360 |
|
|
|
360 |
|
Restricted cash - long-term portion |
|
248 |
|
|
|
248 |
|
|
$ |
15,563 |
|
|
$ |
25,202 |
|
|
|
|
|
|
|
The March 31, 2023 and December 31, 2022 restricted cash balances include $360 of cash maintained in escrow related to Forward Share Purchase Agreements (“FPAs”). Effective August 1, 2022, the FPA holders elected to have Leafly repurchase their remaining 3,081 shares covered by the FPAs for an aggregate repurchase price of $31,663. As a result, the shares repurchased have been removed from Leafly's outstanding shares effective as of the date of purchase and placed into treasury. The FPA holders elected to have all but $360 disbursed from the escrow account and are able to claim the remainder any time until August 1, 2023. If unclaimed, the remaining funds in escrow will be distributed to the Company. Additional information regarding the FPAs is included in Notes 13 and 18.
10
NOTE 4 — Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
|
|
|
|
|
Prepaid subscriptions |
$ |
880 |
|
|
$ |
916 |
|
Prepaid insurance |
|
3,104 |
|
|
|
533 |
|
Other prepaid assets |
|
272 |
|
|
|
272 |
|
Other current assets |
|
31 |
|
|
|
71 |
|
Subtotal, current portion |
|
4,287 |
|
|
|
1,792 |
|
Prepaid expenses, long-term portion |
|
100 |
|
|
|
135 |
|
Total |
$ |
4,387 |
|
|
$ |
1,927 |
|
|
|
|
|
|
|
NOTE 5 — Accounts Receivable, Net
Accounts receivable, net of $3,638 and $3,298 as of March 31, 2023 and December 31, 2022, respectively, consists of amounts due from customers less an allowance for doubtful accounts.
The following table presents the allowance for doubtful accounts and the changes therein:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
$ |
908 |
|
|
$ |
1,848 |
|
Add: provision for doubtful accounts, net of recoveries |
|
|
|
725 |
|
|
|
(124 |
) |
Less: write-offs |
|
|
|
(542 |
) |
|
|
(42 |
) |
Balance, end of period |
|
|
$ |
1,091 |
|
|
$ |
1,682 |
|
|
|
|
|
|
|
|
|
NOTE 6 — Property, Equipment, and Software, Net
Property, equipment, and software consisted of the following:
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
|
|
|
|
|
Furniture and equipment |
$ |
707 |
|
|
$ |
740 |
|
Capitalized internal-use software |
|
2,843 |
|
|
|
2,310 |
|
|
|
3,550 |
|
|
|
3,050 |
|
Less: accumulated depreciation and amortization |
|
(928 |
) |
|
|
(765 |
) |
|
$ |
2,622 |
|
|
$ |
2,285 |
|
|
|
|
|
|
|
The Company recognized depreciation and amortization expense as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
Depreciation expense |
|
$ |
23 |
|
|
$ |
52 |
|
Amortization of capitalized internal-use software |
|
|
172 |
|
|
|
— |
|
Total depreciation and amortization |
|
$ |
195 |
|
|
$ |
52 |
|
|
|
|
|
|
|
|
11
NOTE 7 — Accrued Expenses and Other Current Liabilities
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
|
|
|
|
|
Accrued bonuses |
$ |
466 |
|
|
$ |
1,309 |
|
Other employee-related liabilities |
|
2,295 |
|
|
|
2,403 |
|
Accrued interest |
|
400 |
|
|
|
1,000 |
|
Other accrued expenses 1 |
|
1,501 |
|
|
|
1,523 |
|
|
$ |
4,662 |
|
|
$ |
6,235 |
|
1.There are no individual items within this balance that exceed 10% of the total of the table.
NOTE 8 — Commitments and Contingencies
In the normal course of business, the Company may receive inquiries or become involved in legal disputes regarding various litigation matters. In the opinion of management, any potential liabilities resulting from such claims would not have a material adverse effect on the Company’s consolidated financial statements.
Leases
The Company does not have any leases with an original term longer than 12 months as of March 31, 2023. The Company has short-term arrangements with immaterial rental obligations for office space.
Nasdaq Notifications of Noncompliance
On October 28, 2022, the Company received a letter from the staff (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) providing notification that the Company no longer complies with the $50 million in market value of listed securities standard for continued listing on the Nasdaq Global Market under Nasdaq’s Listing Rule 5450(b)(2)(A) and that the Company also does not comply with either of the two alternative standards of Listing Rule 5450(b), the equity standard and the total assets and total revenue standard. On April 19, 2023, Nasdaq approved the Company’s application to transfer the listing of its common stock and warrants from the Nasdaq Global Market to The Nasdaq Capital Market, effective April 21, 2023. The Company complies with the net income from continuing operations listing standard of the Nasdaq Capital Market, and the transfer of the listing resolves the October 28, 2022 noncompliance notification.
On November 2, 2022, Leafly received another letter from the Staff providing notification that, for the previous 30 consecutive business days, the bid price for Leafly’s common stock had closed below the $1.00 per share minimum bid price requirement for continued listing under Nasdaq Listing Rule 5450(a)(1). The notices have no immediate effect on the listing of the Company’s common stock or warrants.
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided an initial period of 180 calendar days, or until May 1, 2023, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of the Company’s common stock must be $1.00 per share or more for a minimum of 10 consecutive business days at any time before May 1, 2023 and we must otherwise satisfy the Nasdaq Global Market’s requirements for continued listing. The Company's failure to regain compliance during this period could result in delisting.
If the Company does not regain compliance with the minimum bid price requirement by May 1, 2023, Nasdaq would notify the Company that its securities would be subject to delisting. In the event of such a notification, the Company may appeal the Staff’s determination to delist its securities, but there can be no assurance the Staff would grant the Company’s request for continued listing.
On May 2, 2023, a letter was received from the Staff (Note 19).
12
NOTE 9 — Revenue and Contract Balances
The following table presents the Company's revenue by service type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
|
Advertising 1 |
|
|
$ |
11,186 |
|
|
$ |
11,329 |
|
Other services 1 |
|
|
|
63 |
|
|
|
91 |
|
|
|
|
$ |
11,249 |
|
|
$ |
11,420 |
|
|
|
|
|
|
|
|
|
1.Amounts for the prior period have been reclassified to conform to the current period presentation.
The following table presents the Company's revenue by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
|
United States 1 |
|
|
$ |
10,805 |
|
|
$ |
10,526 |
|
All other countries 1 |
|
|
|
444 |
|
|
|
894 |
|
|
|
|
$ |
11,249 |
|
|
$ |
11,420 |
|
|
|
|
|
|
|
|
|
1.Amounts for the prior period have been reclassified to conform to the current period presentation.
The following tables presents the Company's revenue by state:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
|
Arizona |
|
|
|
20 |
% |
|
|
18 |
% |
California |
|
|
|
12 |
% |
|
|
11 |
% |
Oregon |
|
|
|
11 |
% |
|
|
11 |
% |
No other state comprised 10% or more of Leafly’s revenue during the three months ended March 31, 2023 and 2022. We have a diversified set of customers; no single customer accounted for 10% or more of our revenue for the three months ended March 31, 2023 or 2022.
The following table presents the Company's revenue by timing of recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
Over Time 1 |
|
|
|
|
|
|
|
Retail 2 |
|
|
$ |
9,470 |
|
|
$ |
9,179 |
|
Brands 3 |
|
|
|
1,362 |
|
|
|
1,564 |
|
|
|
|
|
10,832 |
|
|
|
10,743 |
|
Point in time 1 |
|
|
|
|
|
|
|
Brands 4 |
|
|
|
417 |
|
|
|
677 |
|
|
|
|
$ |
11,249 |
|
|
$ |
11,420 |
|
|
|
|
|
|
|
|
|
1.Amounts for the prior period have been reclassified to conform to the current period presentation.
2.Revenues from subscription services and display ads.
3.Revenues from brand profile subscriptions and digital media (including display ads and audience extension).
4.Revenues from channel advertising (including direct to consumer email).
13
Revenues recognized over time are associated with software subscriptions, display ads and audience extension. Revenues recognized at a point in time are associated with branded content and channel advertising. There are no material variations in delivery and revenue recognition periods within the over time category.
Contract liabilities consist of deferred revenue, which is recorded on the Consolidated Balance Sheets when the Company has received consideration, or has the right to receive consideration, in advance of transferring the performance obligations under the contract to the customer.
The following table presents the Company's deferred revenue balances and changes therein:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
$ |
1,958 |
|
|
$ |
1,975 |
|
Add: net increase in current period contract liabilities |
|
|
|
1,951 |
|
|
|
2,184 |
|
Less: revenue recognized from beginning balance |
|
|
|
(1,729 |
) |
|
|
(1,593 |
) |
Balance, end of period |
|
|
$ |
2,180 |
|
|
$ |
2,566 |
|
|
|
|
|
|
|
|
|
A majority of the deferred revenue balance as of March 31, 2023 is expected to be recognized in the subsequent 12-month period. No other contract assets or liabilities are recorded on the Company’s Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022.
NOTE 10 — Income Taxes
The Company’s effective tax rate was 0% for the three months ended March 31, 2023 and 2022. The effective tax rate was lower than the U.S. federal statutory rate of 21% due to the Company’s full valuation allowance recorded against its deferred tax assets.
The Company had net operating loss carryforwards (“NOLs”) for federal, state and foreign income tax purposes of approximately $85,430, $60,478 and $5,801, respectively, as of December 31, 2022. The Company's state NOL will begin to expire in 2039, and all of the Company's federal NOLs will last indefinitely.
The Internal Revenue Code of 1986, as amended (the “Code”), imposes restrictions on the utilization of NOLs in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use NOLs may be limited as prescribed under Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the NOLs that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Utilization of the federal and state NOLs may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 and similar state provisions.
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of March 31, 2023 and December 31, 2022. The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
14
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Management believes all the income tax returns filed since inception remain open to examination by the major domestic and foreign taxing jurisdictions to which the Company is subject due to NOLs.
NOTE 11 — Convertible Promissory Notes
2022 Notes
Merida entered into a $30,000 convertible note purchase agreement (the “Note Purchase Agreement”) in January 2022, which Legacy Leafly subsequently guaranteed and joined as a party to the agreement on February 4, 2022 in connection with the Business Combination (the “2022 Notes”). Accordingly, post-Business Combination, the 2022 Notes are presented as a liability on Leafly's balance sheet, net of debt issuance costs and debt discount. The Company recognized debt issuance costs of $714 paid in cash, and a debt discount of $924 paid in shares transferred by Merida Holdings, LLC (the “Sponsor”) to the holders of the 2022 Notes upon issuance. The 2022 Notes bear interest at 8% annually, paid in cash semi-annually in arrears on July 31 and January 31 of each year, and mature on January 31, 2025.
The 2022 Notes are unsecured convertible senior notes due 2025. They are convertible at the option of the holders at any time before maturity at an initial conversion share price of $12.50 per $1,000 principal amount of 2022 Notes and per $1,000 of accrued but unpaid interest on any converted 2022 Notes. In addition, the Company may, at its election, force the conversion of the 2022 Notes on or after January 31, 2024, if the volume-weighted average trading price of the Company’s common stock exceeds $18.00 for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days. The Company also has the option, on or after January 31, 2023 and prior to the 40th trading day immediately before the maturity date and subject to the holders’ ability to optionally convert, to redeem all or a portion of the 2022 Notes at a cash redemption price equal to 100% of the principal amount of the 2022 Notes, plus accrued and unpaid interest, if any. The holders of the 2022 Notes have the right to cause the Company to repurchase for cash all or a portion of the 2022 Notes held by such holder upon the occurrence of a “fundamental change” (as defined in the Note Purchase Agreement) or in connection with certain asset sales, in each case at a price equal to 100% of par plus accrued and unpaid interest, if any.
As of March 31, 2023, the net carrying amount of the 2022 Notes was $28,999, which includes unamortized issuance costs and debt discount of $1,001, which will be amortized over the remaining 22 months. The estimated fair value of the convertible debt instruments was approximately $25,300 as of March 31, 2023. The fair value of the 2022 Notes was measured using the Bloomberg OVCV model and CNVI model which modifies the underlying OVCV program. These models incorporate inputs for volatility, Leafly’s stock price, time to maturity, the risk-free rate and Leafly’s credit spread, some of which are considered Level 3 inputs in the fair value hierarchy.
2021 Notes
Legacy Leafly issued a series of convertible promissory notes in June 2021 totaling approximately $23,970. In August 2021, Legacy Leafly issued additional convertible promissory notes totaling $7,500 to Merida Capital, an affiliate of Merida. (Both note issuances are collectively referred to below as the “2021 Notes”).
The 2021 Notes bore interest at 8% annually and were considered traditional convertible debt with the entire amount recognized as a liability (with no amount allocated to equity), reduced for direct issuance costs, with initial and subsequent recognition at amortized cost in accordance with the interest method. Unless converted, the entire balance of principal and accrued but unpaid interest was due on December 3, 2022. The 2021 Notes were contingently convertible upon the occurrence of certain events, to include a qualified financing, a non-qualified financing, or in a qualified public transaction.
On February 4, 2022, in connection with the Business Combination, the 2021 Notes were converted to approximately 4,128 shares of Leafly common stock at the conversion price of approximately $2.63, which was 80% of the implied price per share of common stock in the Business Combination. Upon closing of the Business Combination, the shares of common stock then converted to shares of common stock of the combined company using the conversion ratio of 0.3283, which was used for conversion of all Leafly securities.
15
NOTE 12 — Stockholders’ Deficit
The Consolidated Statements of Changes in Stockholders' Deficit reflect the reverse recapitalization on February 4, 2022, as discussed in Note 1. Since Legacy Leafly was determined to be the accounting acquirer in the Business Combination, all periods presented prior to consummation of the Business Combination reflect the historical activity and balances of Legacy Leafly (other than common and preferred stock and potentially issuable shares underlying stock options and convertible promissory notes, which have been retroactively restated).
Common Stock
On February 4, 2022, the Business Combination was consummated pursuant to the Merger Agreement. Prior to the Business Combination, Legacy Leafly's capital stock consisted of Series A preferred stock and common stock. Upon the consummation of the Business Combination, all issued and outstanding shares of Series A preferred stock converted to shares of nonredeemable common stock. In connection with the settlement of the FPAs (Note 13), 25 shares of the Company’s common stock held by the Sponsor were canceled, according to an agreement between the Company and the Sponsor entered into upon execution of the FPAs.
As of March 31, 2023 Leafly's authorized capital stock consisted of:
•200,000 shares of Leafly common stock, $0.0001 par value per share; and
•5,000 shares of Leafly preferred stock, $0.0001 par value per share.
Sponsor Shares Subject to Earn-Out Conditions
In accordance with the Merger Agreement, upon closing of the Business Combination, 1,625 of the shares of the Company’s common stock held by the Sponsor were placed in escrow and subjected to earn-out conditions (“Escrow Shares”). Of these Escrow Shares, 50% will be released from escrow if and when the Company's common stock trades at or above $13.50 for 20 out of 30 consecutive trading days at any time during the two-year period following closing, and the remaining 50% will be released from escrow if and when the Company's common stock trades at or above $15.50 for 20 out of 30 consecutive trading days at any time during the three-year period following closing. In addition, all 1,625 Escrow Shares will be released upon a change in control.
We account for the Escrow Shares as derivative liabilities, remeasured to fair value on a recurring basis, with changes in fair value recorded to earnings. See Note 18 for additional information.
Treasury Stock
Effective August 1, 2022, the Company repurchased 3,081 shares of its common stock at a weighted-average price of $10.28 per share for a total of $31,663, with $31,303 paid with restricted cash held in escrow at the time and $360 remaining in accrued expenses and other current liabilities on our consolidated balance sheets at March 31, 2023 and December 31, 2022. These repurchases were in settlement of the FPAs. See Notes 3 and 13 for additional information.
Stockholder Earn-Out Rights
Leafly stockholders, as of immediately prior to the closing of the Business Combination, were granted upon closing of the Business Combination, contingent rights to receive up to 5,429 shares of common stock (the “Rights”) if the Company achieves certain earn-out conditions prior to the third anniversary of the Business Combination. We will account for the Rights as derivative liabilities, which we will remeasure to their current fair value as of the end of each reporting period, with changes in the fair value recorded to earnings. See Note 18 for additional information.
The Rights will be earned and shares of common stock will be issued as follows:
First Tranche
Up to 2,715 shares will be issued if and when:
16
•revenue for the year ended December 31, 2022 equaled or exceeded $65,000 (“first revenue target”), or
•the date on which the volume-weighted average price of common stock for a period of at least 20 days out of 30 consecutive trading days ending on the trading day immediately prior to the date of determination is greater than or equal to $13.50 (“first target price”) during the two-year period beginning on the trading day after the closing date of the Merger (as adjusted for stock splits, reverse stock splits, stock dividends, reorganizations, recapitalizations, reclassifications, combinations, exchanges of shares or other like changes or transactions with respect to shares of common stock occurring at or after the closing of the Business Combination) (the “first target period”), or
•a change of control occurs within the two years after the closing date of the Business Combination at the first target price or higher, or
•a pro rata portion of 2,715 shares (50%) if the revenue during the target period meets or exceeds 90% of the first revenue target.
Second Tranche
Up to 2,715 shares will be issued if and when:
•revenue for the year ending December 31, 2023 equals or exceeds $101,000 (“second revenue target”), or
•the date on which the volume-weighted average price of common stock for a period of at least 20 days out of 30 consecutive trading days ending on the trading day immediately prior to the date of determination is greater than or equal to $15.50 (“second target price”) during the three-year period beginning on the trading day after the closing date of the Merger (as adjusted for stock splits, reverse stock splits, stock dividends, reorganizations, recapitalizations, reclassifications, combinations, exchanges of shares or other like changes or transactions with respect to shares of common stock occurring at or after the closing of the Business Combination) (the “second target period”), or
•a change of control occurs within the three years after the closing date of the Business Combination at the second target price or higher, or
•a pro rata portion of 2,715 (50%) if the revenue during the second target period meets or exceeds 90% of the second revenue target.
If the second revenue target or second target price is met in full, the respective first revenue target or first target price, as applicable, will be deemed to have been met as well if it had not been met during the first target period.
Preferred Stock
The Leafly board of directors is authorized, subject to limitations prescribed by the law of the State of Delaware, to issue Leafly preferred stock from time to time in one or more series. The Leafly board of directors is authorized to establish the number of shares to be included in each such series and to fix the voting rights, if any, designations, powers, preferences and relative, participating, optional, special and other rights, if any, and any qualifications, limitations and restrictions thereof, applicable to the shares of each series. The Leafly board of directors is able, without stockholder approval, to issue Leafly preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the Leafly common stock and could have anti-takeover effects. The ability of the Leafly board of directors to issue Leafly preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change of control of Leafly or the removal of existing management. Leafly did not have any issued and outstanding shares of preferred stock as of March 31, 2023 or December 31, 2022.
17
NOTE 13 — Warrants and Forward Share Purchase Agreements
Public Warrants
As of both March 31, 2023 and December 31, 2022, there were 6,501 warrants outstanding that had been included in the units issued in Merida’s initial public offering (the “Public Warrants”). Each Public Warrant entitles the holder to purchase one share of common stock at an exercise price of $11.50. Public Warrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the Public Warrants. The Public Warrants became exercisable 30 days after the completion of the Business Combination. No warrants will be exercisable for cash unless the Company has an effective and current registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to such shares of common stock.
Notwithstanding the foregoing, if a registration statement covering the shares of common stock issuable upon exercise of the Public Warrants is not effective within a specified period following the consummation of a merger, warrant holders may, until such time as there is an effective registration statement and during any period when the Company shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to the exemption provided by Section 3(a)(9) of the Securities Act, provided that such exemption is available. If that exemption, or another exemption, is not available, holders will not be able to exercise their warrants on a cashless basis. The Public Warrants will expire five years after the completion of a merger or earlier upon redemption or liquidation.
Once the warrants become exercisable, the Company may redeem the Public Warrants:
•in whole and not in part;
•at a price of $0.01 per warrant;
•upon not less than 30 days’ prior written notice of redemption;
•if, and only if, the reported last sale price of the Company’s common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period commencing after the warrants become exercisable and ending on the third business day prior to the notice of redemption to the warrant holders; and
•if, and only if, there is a current registration statement in effect with respect to the shares of common stock underlying the warrants.
If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement.
Private Warrants
As of both March 31, 2023 and December 31, 2022, there were 3,950 warrants outstanding that Merida had sold to the Sponsor and EarlyBirdCapital in a private placement that took place simultaneously with Merida’s initial public offering (“the Private Warrants”). The Private Warrants are identical to the Public Warrants, except that the Private Warrants and the shares of common stock issuable upon the exercise of the Private Warrants were not transferable, assignable or salable until after the completion of the Business Combination, subject to certain limited exceptions. Additionally, the Private Warrants will be exercisable for cash or on a cashless basis, at the holder’s option, and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. The exercise price and number of shares of common stock issuable upon exercise of the Private Warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the Private Warrants will not be adjusted for issuance of common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the Private Warrants.
18
We account for the Private Warrants as derivative liabilities, remeasured to fair value on a recurring basis, with changes in the fair value recorded to earnings. See Note 18 for additional information.
Forward Share Purchase Agreements
In December 2021 and January 2022, the Company entered into four separate FPAs with certain investors. The FPAs allowed the investors to sell and transfer common stock held by the investors, not to exceed a total of 4,000 shares in aggregate, to the Company in exchange for cash. The price to be paid by the Company was initially $10.16 per share for up to 2,600 shares and $10.01 per share for up to 1,400 shares. As required by the FPAs, $39,032 of cash was placed into escrow upon closing of the Business Combination, to be used for the share purchases. If the FPAs were not exercised by the holders within their terms of three months post-Business Combination closing, the associated funds were to be released from escrow to the Company. We account for the FPAs as derivative liabilities, remeasured to fair value on a recurring basis, with changes in the fair value recorded to earnings.
On May 3, 2022, Leafly and the holders entered into amendments to the FPAs (the “Amended FPAs”). The Amended FPAs modified the price at which the applicable holder has the right, but not the obligation, to have Leafly repurchase certain shares held by the applicable holder as of the closing of the Business Combination and not later sold into the market to a price of $10.16 per share (with respect to 686 of the shares subject to the Amended FPAs) and $10.31 per share (with respect to 2,404 of the shares subject to the Amended FPAs). The Amended FPAs also modified the date by which such holders may elect to have Leafly repurchase their shares to August 1, 2022. In connection with the Amended FPAs, certain amendments were also made to the escrow agreements in respect of the escrow accounts.
During the year ended December 31, 2022, a total of $8,089 was released from the escrow accounts due to the FPA holders selling shares in the open market, which was accordingly reclassified on the Company's balance sheet from restricted cash to cash.
Effective August 1, 2022, the FPA holders elected to have Leafly repurchase their remaining 3,081 shares covered by the FPAs for an aggregate repurchase price of $31,663. As a result, the shares repurchased have been removed from Leafly's outstanding shares effective as of the date of purchase and placed into treasury. The FPA holders elected to have all but $360 disbursed from the escrow account and are able to claim the remainder any time until August 1, 2023. If unclaimed, the remaining funds in escrow will be distributed to the Company. Also, in connection with the settlement, 25 shares of the Company’s common stock held by the Sponsor were canceled, according to an agreement between the Company and the Sponsor entered into upon execution of the FPAs.
19
NOTE 14 — Equity Incentive and Other Plans
The Company currently has four equity plans: the New Leafly 2021 Equity Incentive Plan (the “2021 Plan”), the Legacy Leafly 2018 Equity Incentive Plan (the “2018 Plan”), the New Leafy Earn-Out Plan (the “Earn-Out Plan”), and the New Leafly 2021 Employee Stock Purchase Plan (the “ESPP”). Awards under the 2021 Plan are detailed below. There were no options or other equity awards granted under the 2018 Plan or the Earn-Out Plan during the three months ended March 31, 2023.
Stock-Based Compensation
2021 Plan
The 2021 Plan became effective immediately upon closing of the Business Combination. Pursuant to the 2021 Plan, 4,502 shares of common stock were initially reserved for issuance. During the term of the 2021 Plan, the number of shares of common stock thereunder automatically increases on each January 1, commencing on January 1, 2023, and ending on (and including) January 1, 2031, by the lesser of (i) 10% of the fully diluted shares of common stock as of the last day of the preceding fiscal year and (ii) 4,502 shares (adjusted pursuant to the terms of the 2021 Plan). Effective January 1, 2023, 4,416 shares of common stock were available for issuance under the 2021 Plan.
2022 Awards
In August 2022 and October 2022, the Company’s compensation committee of the board of directors and an authorized executive of the Company, as applicable, granted stock options to purchase an aggregate of approximately 102 shares of common stock at a weighted-average exercise price of $1.98 per share and granted an aggregate of 2,560 restricted stock units (”RSUs”) and performance stock units (”PSUs”). Of the PSUs granted, 683 were market-based awards made to executives with a grant date fair value of $0.04 per share with vesting based on achievement of a $1.0 billion market cap by February 4, 2026, and 137 were performance awards made to executives with a grant date fair value of $0.81 per share with vesting based in part on achievement of a fiscal year 2022 Adjusted EBITDA target, which was achieved. Prior to such grants, no grants had been made under the 2021 Plan. Leafly’s compensation committee approved the vesting of 137 PSUs awarded in 2022, which vested based on the achievement of the Company’s 2022 Adjusted EBITDA target, on March 13, 2023.
2023 Awards
Leafly’s compensation committee approved the grant of 631 annual incentive plan RSUs on March 14, 2023, which vest over four months.
Stock Options
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. No options were granted under the 2021 Plan during the three months ended March 31, 2023 or 2022.
20
Stock option activity under the 2021 Plan for the three months ended March 31, 2023 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares |
|
|
Weighted Average
Exercise Price |
|
|
Aggregate
Intrinsic Value |
|
|
Weighted Average
Remaining Contractual
Term (in years) |
|
Outstanding at January 1, 2023 |
|
|
101 |
|
|
$ |
1.98 |
|
|
$ |
— |
|
|
|
9.61 |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
Forfeited or expired |
|
|
— |
|
|
|
1.60 |
|
|
|
|
|
|
|
Outstanding at March 31, 2023 |
|
|
101 |
|
|
$ |
1.98 |
|
|
$ |
— |
|
|
|
9.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable |
|
|
27 |
|
|
$ |
1.98 |
|
|
$ |
— |
|
|
|
9.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2023, there was $83 of total unrecognized compensation cost related to stock options granted under the 2021 Plan. That cost is expected to be recognized over a weighted-average period of 2.86 years.
Restricted Stock Units and Performance Stock Units
RSU and PSU activity under the 2021 Plan for the three months ended March 31, 2023 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares |
|
|
Weighted Average
Grant Date
Fair Value |
|
|
Total Fair Value |
|
Unvested at January 1, 2023 |
|
|
2,058 |
|
|
$ |
1.30 |
|
|
|
|
Granted |
|
|
631 |
|
|
|
0.48 |
|
|
$ |
305 |
|
Vested |
|
|
(359 |
) |
|
|
0.94 |
|
|
$ |
188 |
|
Forfeited |
|
|
(485 |
) |
|
|
1.00 |
|
|
|
|
Unvested at March 31, 2023 |
|
|
1,845 |
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2023, there was $1,437 total unrecognized compensation cost related to unvested RSUs and $24 total unrecognized compensation cost related to market-based PSUs granted under the 2021 Plan. The total cost is expected to be recognized over a weighted-average period of 2.57 years.
2018 Plan
The 2018 Plan became effective on April 17, 2018. The 2018 Plan terminated upon closing of the Business Combination in 2022, but then-outstanding options under the 2018 Plan remain outstanding pursuant to their terms, with adjustments to the number of shares and exercise prices to reflect the terms of the Business Combination.
The fair value of each stock option award to employees is estimated on the date of grant using the Black-Scholes option pricing model. There were no grants made in 2023 or 2022 under the 2018 Plan.
21
Stock option activity under the 2018 Plan for the periods presented was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares |
|
|
Weighted Average
Exercise Price |
|
|
Aggregate
Intrinsic Value |
|
|
Weighted Average
Remaining Contractual
Term (in years) |
|
Outstanding at January 1, 2023 |
|
|
3,431 |
|
|
$ |
1.60 |
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
0.40 |
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(446 |
) |
|
|
1.40 |
|
|
|
|
|
|
|
Outstanding at March 31, 2023 1 |
|
|
2,985 |
|
|
$ |
1.63 |
|
|
$ |
15 |
|
|
|
4.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable |
|
|
1,777 |
|
|
$ |
1.25 |
|
|
$ |
15 |
|
|
|
4.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.Includes 1,929 and 1,056 awards accounted for as service-based and market-based options, respectively, that are vested, that the Company currently deems probable of vesting, or in the case of market-based options, that the Company is expensing so long as the respective service conditions are met. The market-based options will vest only if the price of the Company's common stock reaches a $1 billion market capitalization target for any 20 days during a 30-day period on or before February 4, 2026.
As of March 31, 2023, there was: (i) $611 of unrecognized compensation cost related to service-based 2018 Plan option awards, which is expected to be recognized over a remaining weighted-average service period of approximately 1.96 years; and (ii) $1,136 of unrecognized compensation cost related to market-based 2018 Plan option awards, which is expected to be recognized over a remaining weighted-average service period of approximately 1.05 years.
Stock-Based Compensation Expense
The following table presents the classification of stock-based compensation expense under the 2018 Plan and the 2021 Plan:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
76 |
|
|
$ |
34 |
|
Product development |
|
|
109 |
|
|
|
18 |
|
General and administrative |
|
|
473 |
|
|
|
1,872 |
|
|
|
$ |
658 |
|
|
$ |
1,924 |
|
|
|
|
|
|
|
|
2022 Option Modification
Concurrent with the closing of the Business Combination, the vesting provisions of certain stock options previously granted in 2021 under the 2018 Plan to our Chief Executive Officer to purchase 2,917 shares of common stock were modified, and a corresponding charge of $1,366 was recorded during the three months ended March 31, 2022 to general and administrative expenses and additional paid-in capital.
Earn-Out Plan
The Earn-Out Plan became effective immediately upon closing of the Business Combination. Pursuant to the Earn-Out Plan, approximately 571 shares of common stock have been reserved for issuance to employees and certain other eligible parties in the form of RSUs. These RSUs will vest if the Company achieves certain thresholds prior to the third anniversary of the Merger. No RSUs have been awarded under the Earn-Out Plan as of March 31, 2023.
Employee Stock Purchase Plan
The ESPP became effective immediately upon closing of the Business Combination. Pursuant to the ESPP, 1,126 shares of common stock are initially reserved for issuance. During the term of the ESPP, the number of shares of common stock
22
thereunder automatically increases on each January 1, commencing on January 1, 2023 and ending on (and including) January 1, 2031, by the lesser of (i) 2.5% of the fully diluted shares of common stock as of the last day of the preceding fiscal year and (ii) 1,126 shares (as adjusted pursuant to the terms of the ESPP). Effective January 1, 2023, 1,104 shares of common stock were available for issuance under the ESPP. On March 15, 2023, Leafly’s employees purchased 289 shares for a total purchase price of $120. The Company's current offering period runs from March 16, 2023 through September 15, 2023.
Defined Contribution Plan
The Company recognized expense from matching contributions to the Company-sponsored defined contribution retirement (401k) plan as follows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
401(k) matching contributions |
|
$ |
233 |
|
|
$ |
244 |
|
|
|
|
|
|
|
|
NOTE 15 — Related Party Transactions
In June 2021 Merida Capital, an affiliate of Merida, purchased a convertible promissory note totaling $1,000. The note was issued as part of the existing series of 2021 Notes (see Note 11) and was subject to the same interest rate, maturity, and conversion terms. This note converted to shares of Leafly common stock upon closing of the Business Combination in February 2022, along with the other 2021 Notes.
At December 31, 2022, the Company owed $10 to two members of its board of directors, which is included in accrued expenses and other current liabilities on Leafly's consolidated balance sheet and was repaid prior to March 31, 2023.
NOTE 16 — Net Loss Per Share
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. Under the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Shares repurchased and held in treasury by the Company are removed from the weighted-average number of shares of common stock outstanding as of the date of repurchase.
The Company considers its preferred stock to be participating securities. As of March 31, 2023 and March 31, 2022, the Company had 1,625 outstanding shares of common stock that are in escrow and subject to earn-out conditions and thus forfeiture, which do not meet the criteria for participating securities (see Note 12 for additional information). Net loss is attributed to common stockholders and participating securities based on their participation rights. Net loss is not attributed to the preferred stock as the holders of the preferred stock do not have a contractual obligation to share in any losses.
23
Diluted earnings per share attributable to common stockholders adjusts basic earnings per share for the potentially dilutive impact of non-participating shares of common stock that are subject to forfeiture, stock options, preferred stock, convertible notes, and other securities outstanding. Certain securities are antidilutive and as such, are excluded from the calculation of diluted earnings per share and disclosed separately. Because of the nature of the calculation, particular securities may be dilutive in some periods and anti-dilutive in other periods. The Class 1, 2, and 3 common shares presented below have been retroactively restated for all periods using the conversion ratio in connection with the Business Combination.
The following table presents the computation of basic and diluted net loss per share attributable to common stockholders, as a group, for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,397 |
) |
|
$ |
(19,376 |
) |
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
38,705 |
|
|
|
37,525 |
|
|
|
|
|
|
|
|
Basic net loss per share |
|
$ |
(0.14 |
) |
|
$ |
(0.52 |
) |
Diluted net loss per share |
|
$ |
(0.14 |
) |
|
$ |
(0.52 |
) |
|
|
|
|
|
|
|
During 2022, the Class 1, 2, and 3 shares were outstanding from January 1, 2022 through February 3, 2022, while only one class of common stock was outstanding beginning February 4, 2022. Following are the calculations of basic and diluted net loss per share for each class of common stock (refer to the tables above for the impact of common stock equivalents on common shares for the periods presented):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2022 |
|
|
Common |
|
|
Class 1 |
|
|
Class 2 |
|
|
Class 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
$ |
(12,013 |
) |
|
$ |
(2,748 |
) |
|
$ |
(4,030 |
) |
|
$ |
(585 |
) |
Weighted average shares outstanding |
|
35,206 |
|
|
|
3,543 |
|
|
|
5,196 |
|
|
|
754 |
|
Common stock and common stock equivalents |
|
35,206 |
|
|
|
3,543 |
|
|
|
5,196 |
|
|
|
754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share |
$ |
(0.34 |
) |
|
$ |
(0.78 |
) |
|
$ |
(0.78 |
) |
|
$ |
(0.78 |
) |
Diluted net loss per share |
$ |
(0.34 |
) |
|
$ |
(0.78 |
) |
|
$ |
(0.78 |
) |
|
$ |
(0.78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
The following shares of common stock subject to certain instruments were excluded from the computation of diluted net income per share attributable to common stockholders for the periods presented as their effect would have been antidilutive (with figures recast using the conversion ratio for the Business Combination, as applicable):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
Shares subject to warrants |
|
|
10,451 |
|
|
|
10,451 |
|
Shares subject to convertible promissory notes |
|
|
2,480 |
|
|
|
2,400 |
|
Shares subject to forward purchase agreements |
|
|
— |
|
|
|
3,861 |
|
Escrow Shares |
|
|
1,625 |
|
|
|
1,625 |
|
Shares subject to outstanding common stock options, RSUs and PSUs |
|
|
4,853 |
|
|
|
3,681 |
|
Shares subject to stockholder earn-out rights |
|
|
5,429 |
|
|
|
5,429 |
|
|
|
|
24,838 |
|
|
|
27,447 |
|
|
|
|
|
|
|
|
24
See Note 11 for additional information regarding convertible promissory notes, Note 12 for additional information regarding stockholder earn-out rights, preferred stock, and Escrow Shares, Note 13 for additional information regarding warrants, and Note 14 for additional information regarding stock options, RSUs and PSUs.
NOTE 17 — Segment Reporting
Segment revenue and gross profit were as follows during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
Revenue: |
|
|
|
|
|
|
|
Retail |
|
|
$ |
9,470 |
|
|
$ |
9,179 |
|
Brands |
|
|
|
1,779 |
|
|
|
2,241 |
|
Total revenue |
|
|
$ |
11,249 |
|
|
$ |
11,420 |
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
Retail |
|
|
$ |
8,390 |
|
|
$ |
8,139 |
|
Brands |
|
|
|
1,513 |
|
|
|
1,826 |
|
Total gross profit |
|
|
$ |
9,903 |
|
|
$ |
9,965 |
|
|
|
|
|
|
|
|
|
Assets are not allocated to segments for internal reporting presentations, nor are depreciation and amortization.
Geographic Areas
The Company’s operations are primarily in the U.S. and to a lesser extent, in Canada. Refer to Note 9 for revenue classified by major geographic area.
NOTE 18 — Fair Value Measurements
The Company follows the guidance in ASC 820, “Fair Value Measurement,” for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period. The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities).
The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
Level 1: Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3: Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.
25
The Company’s financial instruments include cash equivalents, restricted cash, accounts receivable from customers, accounts payable and accrued liabilities, all of which are typically short-term in nature. The Company believes that the carrying amounts of these financial instruments reasonably approximate their fair values due to their short-term nature.
The following table presents information about the Company’s derivative liabilities that are measured at fair value on a recurring basis beginning February 4, 2022 (the date of closing of the Business Combination) when the derivative liabilities were assumed, and discloses the fair value hierarchy level of the valuation inputs the Company utilized to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at |
|
|
Change in Fair
Value of Derivatives |
|
Description |
|
Level |
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|
February 4, 2022 |
|
|
Three Months Ended
March 31, 2023 |
|
|
Three Months Ended March 31, 2022 |
|
Private Warrants derivative liability |
|
|
3 |
|
|
$ |
130 |
|
|
$ |
182 |
|
|
$ |
7,989 |
|
|
$ |
3,916 |
|
|
$ |
52 |
|
|
$ |
(4,073 |
) |
Forward share purchase agreements derivative liability 1 |
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
7,452 |
|
|
|
14,170 |
|
|
|
— |
|
|
|
6,718 |
|
Escrow Shares derivative liability |
|
|
3 |
|
|
|
7 |
|
|
|
52 |
|
|
|
10,129 |
|
|
|
6,868 |
|
|
|
45 |
|
|
|
(3,261 |
) |
Stockholder earn-out rights derivative liability |
|
|
3 |
|
|
|
34 |
|
|
|
204 |
|
|
|
35,912 |
|
|
|
26,131 |
|
|
|
170 |
|
|
|
(9,781 |
) |
Total |
|
|
|
|
$ |
171 |
|
|
$ |
438 |
|
|
$ |
61,482 |
|
|
$ |
51,085 |
|
|
$ |
267 |
|
|
$ |
(10,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.The forward share purchase agreements were settled effective August 1, 2022, at which time the fair value was $13,824 based on cash settlement.
Assumptions used to determine the fair values are presented in the following sections:
Private Warrants Derivative Liability
The Private Warrants were valued using a Black-Scholes model and the following Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|
February 4, 2022 |
|
Exercise price |
|
$ |
11.50 |
|
|
$ |
11.50 |
|
|
$ |
11.50 |
|
|
$ |
11.50 |
|
Stock price |
|
$ |
0.40 |
|
|
$ |
0.65 |
|
|
$ |
8.28 |
|
|
$ |
6.53 |
|
Volatility |
|
|
88.8 |
% |
|
|
75.0 |
% |
|
|
36.7 |
% |
|
|
34.3 |
% |
Term (in years) |
|
|
3.84 |
|
|
|
4.09 |
|
|
|
4.85 |
|
|
|
5.00 |
|
Risk-free rate |
|
|
3.7 |
% |
|
|
4.1 |
% |
|
|
2.4 |
% |
|
|
1.8 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The volatility input was calculated using a weighted average of historical volatilities from select benchmark companies and the volatility of the Public Warrants. The term input represents the maximum contractual term, though the Private Warrants may be exercised earlier. The interest rate input is the U.S. Treasury constant maturity rate for the instrument that most closely matches the term input.
26
Forward Share Purchase Agreements Derivative Liability
The FPAs were valued using a Black-Scholes model and the following Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
February 4, 2022 |
|
Exercise price - one agreement |
|
|
|
|
|
$ |
10.16 |
|
|
$ |
10.16 |
|
Exercise price - three agreements |
|
|
|
|
|
$ |
10.01 |
|
|
$ |
10.01 |
|
Stock price |
|
|
|
|
|
$ |
8.28 |
|
|
$ |
6.53 |
|
Volatility |
|
|
|
|
|
|
72.6 |
% |
|
|
63.9 |
% |
Term (in years) |
|
|
|
|
|
|
0.09 |
|
|
|
0.24 |
|
Risk-free rate |
|
|
|
|
|
|
0.2 |
% |
|
|
0.2 |
% |
Dividend yield |
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
The volatility input was calculated using a weighted average of historical volatilities from select benchmark companies. The term input represents the maximum contractual term, though the shares underlying the FPAs were in some cases sold by the holders into the open market earlier (see Note 13). The interest rate input is the U.S. Treasury constant maturity rate for the instrument that most closely matches the term input.
Escrow Shares Derivative Liability
The Escrow Shares derivative liability was calculated using a Monte Carlo simulation and the following Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|
February 4, 2022 |
|
First stock price trigger |
|
$ |
13.50 |
|
|
$ |
13.50 |
|
|
$ |
13.50 |
|
|
$ |
13.50 |
|
Second stock price trigger |
|
$ |
15.50 |
|
|
$ |
15.50 |
|
|
$ |
15.50 |
|
|
$ |
15.50 |
|
Stock price |
|
$ |
0.40 |
|
|
$ |
0.65 |
|
|
$ |
8.28 |
|
|
$ |
6.53 |
|
Volatility |
|
|
87.5 |
% |
|
|
86.0 |
% |
|
|
63.0 |
% |
|
|
64.0 |
% |
Term (in years) |
|
|
1.84 |
|
|
|
2.09 |
|
|
|
2.85 |
|
|
|
3.00 |
|
Risk-free rate |
|
|
4.1 |
% |
|
|
4.4 |
% |
|
|
2.4 |
% |
|
|
1.6 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The volatility input was calculated using a weighted average of historical volatilities from select benchmark companies. The term input represents the maximum contractual term, though the shares may be released from escrow earlier. The interest rate input is the U.S. Treasury constant maturity rate for the instrument that most closely matches the term input.
27
Stockholder Earn-Out Rights Derivative Liability
The stockholder earn-out rights were valued using a Monte Carlo simulation and the following Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|
February 4, 2022 |
|
First stock price trigger |
|
$ |
13.50 |
|
|
$ |
13.50 |
|
|
$ |
13.50 |
|
|
$ |
13.50 |
|
Second stock price trigger |
|
$ |
15.50 |
|
|
$ |
15.50 |
|
|
$ |
15.50 |
|
|
$ |
15.50 |
|
First revenue trigger |
|
$ |
65,000 |
|
|
$ |
65,000 |
|
|
$ |
65,000 |
|
|
$ |
65,000 |
|
Second revenue trigger |
|
$ |
101,000 |
|
|
$ |
101,000 |
|
|
$ |
101,000 |
|
|
$ |
101,000 |
|
Stock price |
|
$ |
0.40 |
|
|
$ |
0.65 |
|
|
$ |
8.28 |
|
|
$ |
6.53 |
|
Base year revenue assumption |
|
$ |
44,000 |
|
|
$ |
48,000 |
|
|
$ |
55,500 |
|
|
$ |
55,500 |
|
Volatility |
|
|
87.5 |
% |
|
|
86.0 |
% |
|
|
63.0 |
% |
|
|
64.0 |
% |
Term (in years) |
|
|
1.84 |
|
|
|
2.09 |
|
|
|
2.85 |
|
|
|
3.00 |
|
Risk-free rate |
|
|
4.1 |
% |
|
|
4.4 |
% |
|
|
2.4 |
% |
|
|
1.6 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The revenue assumption input relates to projected revenue for fiscal year 2022 (for the periods ended March 31, 2022 and February 4, 2022) and fiscal year 2023 (for the periods ended December 31, 2022 and March 31, 2023) and represents the midpoint of revenue guidance the Company had provided in the respective period. The volatility input was calculated using a weighted average of historical volatilities from select benchmark companies. The term input represents the maximum contractual term, though the stockholder earn-out rights may vest earlier. The interest rate input is the U.S. Treasury constant maturity rate for the instrument that most closely matches the term input.
NOTE 19 — Subsequent Event
Nasdaq Notification of Noncompliance
On May 2, 2023, the Company received a letter from Nasdaq notifying it that Leafly’s common stock would be subject to delisting from Nasdaq unless the Company timely requested a hearing before a Nasdaq Hearings Panel (the “Panel”). The Panel has the discretion to grant up to an additional 180 calendar days from May 2, 2023, to give the Company time to regain compliance with the $1.00 per share minimum bid price requirement for continued listing under Nasdaq Listing Rule 5450(a)(1) (the “Bid Price Rule”) (Note 8). On May 8, 2023, the Company timely requested a hearing before the Panel. The Request stayed any further action by Nasdaq, and while the hearings process is pending, it is expected that the Common Stock will continue to be listed and traded on Nasdaq.
28
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related thereto which are included in “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q. Certain information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”).
Amounts in this section are presented in thousands, except for per share numbers and percentages.
Business Overview
Leafly is a leading online cannabis discovery marketplace and resource for cannabis consumers. Leafly provides an information resource platform with a deep library of content, including detailed information about cannabis strains, retailers and cannabis products. We are a trusted destination to discover legal cannabis products and order them from licensed retailers with offerings that include subscription-based products and digital advertising. Legacy Leafly was founded in 2010 and is headquartered in Seattle with 194 total employees with 184 in the U.S. and 10 in Canada as of March 31, 2023. The number of employees at March 31, 2023 does not reflect the impact of the reduction in force that was announced on March 16, 2023 discussed below.
Leafly is one of the cannabis industry’s leading marketplaces for brands and retailers to reach one of the largest audiences of consumers interested in cannabis. Our platform includes educational information, strains data, and lifestyle content, enabling consumers to use Leafly’s content library to have an informed shopping experience. Leafly reduces the friction caused by fragmented regulation of cannabis across North America and offers a compliant digital marketplace that connects cannabis consumers with legal and licensed retailers and brands nearest them.
Leafly allows each shopper to tailor their journey, selecting the store, brand, and cannabis form-factor that appeals to them. Once that shopper builds a basket and is ready to order, our non-plant-touching business model sends that order reservation to the store for payment and fulfillment. By matching stores and shoppers, we deliver value to all constituencies. We monetize our platform primarily through the sale of subscription packages, bundling e-commerce software and advertising solutions, as well as non-subscription-based advertising to retailers and brands. Through the participation on our platform, retailers and brands can reach and engage the millions of monthly average users (“MAUs”) on our platform, one of the largest cannabis-focused audiences in the world.
Significant Events
Reductions in Force
In light of the current macroeconomic environment, we have taken steps to manage the business accordingly. We implemented plans to reduce operating expenses, including announced headcount reductions:
•on October 18, 2022 of 56 employees, or approximately 21% of our workforce at the time. We incurred cash charges of $492 associated with the headcount reductions during the fourth quarter of 2022.
•on March 16, 2023 of approximately 40 employees, or approximately 21% of our workforce at the time. We incurred cash charges of $754 associated with the headcount reductions during the first quarter of 2023.
We anticipate these and other changes we made to our cost structure in 2022 and 2023 will save a total of approximately $24,000 in cash costs annually (beginning in the second quarter of 2023), now that all of the restructuring and other cost savings initiatives are fully implemented. These cost reductions are not expected to have a significant impact on the scope of our business. We will focus on maximizing efficiencies across all areas, investing in projects and products that we expect will result in the highest returns.
29
Key Metrics
In addition to the measures presented in our consolidated financial statements, our management regularly monitors certain metrics in the operation of our business:
Monthly Active Users
MAUs represents the total unique visitors to Leafly websites and native apps each month, which in turn represents the maximum potential unique visitors that could become customers of dispensaries or brands listed on Leafly’s platform, within a given month. Leafly’s revenue model for dispensaries and brands is based, in part, on the number of visitors it can drive to dispensary or brand listings on the platform. Providing more visitors, as represented by MAUs, may lead to increased advertising rates for both dispensaries and brands.
Users (visitors) are considered active by initiating a session on at least one webpage or app. Each month’s MAU tally represents the total number of unique visitors to Leafly during the specified month and includes both new visitors as well as those returning from the previous month. We count a unique user the first time an individual accesses one of our websites or native apps during a calendar month. If an individual accesses our websites using different web browsers within a given month, the first access by each such web browser is counted as a separate unique user. If an individual accesses more than one of our websites or native apps in a single month, the first access to each website or app is counted as a separate unique user since unique users are tracked separately for each domain and native app. The unique visitors are measured using Google Analytics for our web applications and Firebase for our native applications.
Due to third-party technological limitations, user software settings, or user behavior, Google Analytics may assign a unique cookie to different instances of access by the same individual to our websites. In such instances, Google Analytics would count different instances of access by the same individual as separate unique users. Accordingly, reliance on the number of unique users counted by Google Analytics may overstate the actual number of unique users who access our websites during the period. Additionally, we cannot differentiate between a user who accesses Leafly across both the web and a native app, which could overstate the number of unique users.
A growing number of MAUs is indicative of our overall product health as it is the result of metrics reflecting both retention and acquisition of customers of our suppliers. While we consider MAUs to be a leading indicator of general product health representing the blend of new customer acquisition and the retention of returning customers, we also acknowledge that this must be paired with a deeper analysis of MAU behavioral metrics. We measure the quality of experience by looking at MAU cohorts engagement behaviors as measured by time-on-site, interaction with personalization features such as favoriting and following, and orders placed.
Ending Retail Accounts
Ending retail accounts is the number of paying retailer accounts with Leafly as of the last month of the respective period. Retail accounts can include more than one retailer. This metric is helpful because it represents a portion of the volume element of our revenue and provides an indication of our market share.
Retailer Average Revenue Per Account (“ARPA”)
Retailer ARPA is calculated as monthly retail revenue, on an account basis, divided by the number of retail accounts that were active during that same month. An active account is one that had an active paying subscription with Leafly in the month. Leafly does not provide retailers with an ongoing free subscription offering but may offer a free introductory period with certain subscriptions. This metric is helpful because it represents the price element of our revenue.
30
Results of Operations
Key Metrics
The table below presents these measures for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change (%) |
|
Key Operating Metrics: |
|
|
|
|
|
|
|
|
|
|
|
Average MAUs (in thousands)1 |
|
8,085 |
|
|
|
7,749 |
|
|
|
336 |
|
|
|
4 |
% |
Ending retail accounts2 |
|
5,702 |
|
|
|
5,422 |
|
|
|
280 |
|
|
|
5 |
% |
Retailer ARPA3 |
$ |
553 |
|
|
$ |
576 |
|
|
$ |
(23 |
) |
|
|
-4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
1.Calculated as a simple average for the period presented.
2.Represents the amount outstanding on the last day of the month of the respective period.
3.Calculated as a simple average of monthly retailer ARPA for the period presented.
MAUs increased 4% for the three months ended March 31, 2023 compared to 2022, due to an increase in news and learn traffic. We continued to focus primarily on growing the number of retail partners on our platform, leading to 5% growth in year-over-year ending retail accounts. Declining pricing across some of Leafly’s advertising products in major markets contributed to a 4% decline in ARPA for the three months ended March 31, 2023 when compared to the same period in 2022.
Revenue
We generate our revenue through the sale of online advertising and online order reservation enablement on the Leafly platform for suppliers in our Retail and Brands segments. Within our Retail segment, we monetize our multi-sided retail marketplace through monthly subscriptions that enable retailers to advertise to and acquire potential shoppers. Our solutions allow retailers, where legally permissible, to accept online orders from shoppers, who visit Leafly.com or use a Leafly-powered online order reservation solution, including our iOS app. Within our Brands segment, our revenue is derived by creating custom advertising campaigns for both small and large brands that target Leafly’s broad and diverse audience and offering brands profile listings on our platform, which are sold on a monthly recurring subscription or annual basis. Advertising opportunities include on-site digital display, native placements, email, branded content, and off-site audience extension. Leafly’s advertising partners span a variety of verticals including hardware and accessories, THC-infused products, hemp, CBD, and seed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2023 |
|
|
2022 |
|
|
Change ($) |
|
|
Change (%) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Retail |
$ |
9,470 |
|
|
$ |
9,179 |
|
|
$ |
291 |
|
|
|
3 |
% |
Brands |
|
1,779 |
|
|
|
2,241 |
|
|
|
(462 |
) |
|
|
-21 |
% |
Total revenue |
$ |
11,249 |
|
|
$ |
11,420 |
|
|
$ |
(171 |
) |
|
|
-1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Retail revenue from digital media display ads and subscriptions revenue increased $491 and decreased $208, respectively, contributing to the overall increase in retail revenue for the three months ended March 31, 2023. Digital media display ads revenue growth was driven by increased volumes of display ads sold. For the three months ended March 31, 2023, the decrease in retail subscription revenue was primarily driven by customer churn. Our overall growth strategy contributed to a 5% increase in the number of ending retail accounts.
31
Ending retail account growth in 2023 reflects favorable impacts from several developing market states (typically at a lower ARPA) as well as a strategic pricing decision to attract a greater number of local retailers onto our platform. Both of these drivers contributed to a 4% decrease in ARPA for the three months ended March 31, 2023.
Brands
Macro challenges have put overall pressure on the cannabis industry, particularly in our brand advertising business. For the three months ended March 31, 2023, Brands revenue decreased $462, mostly in Canada, due primarily to:
•direct-to-consumer marketing revenue decrease of $233;
•reduction in display ads of $163; and
•branded content decrease of $80.
The Company’s current systems do not allow us to precisely quantify changes in Brands revenue attributable to price and volume. The information we have from our existing systems, combined with our knowledge of changes in list prices, informs the discussion of Brands volume and pricing that follows. We believe Brands revenue declined due to decreased volume and reduced advertising spend per ad from our clients.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2023 |
|
|
2022 |
|
|
Change ($) |
|
|
Change (%) |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
Retail |
$ |
1,080 |
|
|
$ |
1,040 |
|
|
$ |
40 |
|
|
|
4 |
% |
Brands |
|
266 |
|
|
|
415 |
|
|
|
(149 |
) |
|
|
-36 |
% |
Total cost of sales |
$ |
1,346 |
|
|
$ |
1,455 |
|
|
$ |
(109 |
) |
|
|
-7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
32
Retail
Retail cost of revenue increased due primarily to $107 increase in business platform and merchant processing costs, for the period ended March 31, 2023, partially offset by reductions in website infrastructure costs of $37 and headcount costs of $30.
Brands
Brands cost of revenue decreased for the three months ended March 31, 2023, primarily reflecting a decrease of $100 in costs of display advertising, corresponding to decreased associated revenue, and $22 lower website infrastructure costs, as described under Retail cost of revenue above, as these costs are shared across both of our segments. Brands cost of revenue also decreased $25 for the three months ended March 31, 2023, due to reduced headcount costs.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2023 |
|
|
2022 |
|
|
Change ($) |
|
|
Change (%) |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
$ |
4,911 |
|
|
$ |
7,014 |
|
|
$ |
(2,103 |
) |
|
|
-30 |
% |
Product development |
|
3,280 |
|
|
|
3,465 |
|
|
|
(185 |
) |
|
|
-5 |
% |
General and administrative |
|
6,660 |
|
|
|
6,931 |
|
|
|
(271 |
) |
|
|
-4 |
% |
Total operating expenses |
$ |
14,851 |
|
|
$ |
17,410 |
|
|
$ |
(2,559 |
) |
|
|
-15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses declined beginning in the third quarter of 2022 as we began to implement the cost reduction activities described under “Significant Events” above. We reduced advertising and marketing spending by $1,051 and employee compensation costs by $751, when comparing the three months ended March 31, 2023 to the same period in 2022. The Company reduced its sales and marketing spend in response to slowing conditions, but believes it is still positioned to respond efficiently to growth opportunities.
Product development expenses also began to slow as we implemented cost reduction activities and reprioritized our development efforts. Professional services fees included within product development declined $359 for the three months ended March 31, 2023 largely related to the reduction in use of outsourced providers, partially offset by an increase in depreciation and amortization of $163. Also within product development are headcount costs generally offset by capitalized product development costs in 2022. Headcount costs prior to capitalization decreased approximately $237 for the three months ended March 31, 2023 when compared to the same period in 2022. Product development expenses are reported net of $535 and $758 of costs capitalized to internal-use software for the three months ended March 31, 2023 and 2022, respectively. See Note 6 to our consolidated financial statements within this Quarterly Report for more information.
General and administrative expenses decreased $271 for the three months ended March 31, 2023 due primarily to:
•a $1,640 decrease in compensation costs, including a $1,398 decrease in stock-based compensation expense, which was attributable to the modification of awards in the first quarter of 2022 (Note 14);
•a $154 reduction in other costs including lower facilities and insurance costs; partially offset by:
•an $849 increase in bad debts expense due to net recoveries in the prior year period; and
•a $674 increase in professional services primarily related to audit and consulting fees.
33
Other Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2023 |
|
|
2022 |
|
|
Change ($) |
|
|
Change (%) 1 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
$ |
(713 |
) |
|
$ |
(697 |
) |
|
$ |
(16 |
) |
|
|
2 |
% |
Change in fair value of derivatives |
|
267 |
|
|
|
(10,397 |
) |
|
|
10,664 |
|
|
nm |
|
Other expense, net |
|
(3 |
) |
|
|
(837 |
) |
|
|
834 |
|
|
nm |
|
Total other income (expense) |
$ |
(449 |
) |
|
$ |
(11,931 |
) |
|
$ |
11,482 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
1.An “nm” reference means the percentage is not meaningful.
Interest expense for the three months ended March 31, 2023 was similar to that of the same period in 2022.
The change in fair value of derivatives is due to the recognition of derivatives in connection with the Business Combination and changes in their valuations, which were primarily driven by the decline in Leafly’s stock price between the two periods. See Note 18 to our consolidated financial statements within this Quarterly Report for details on the valuations and the fair value changes in the periods presented.
Other expense, net decreased for the three months ended March 31, 2023 due primarily to $874 of costs incurred in connection with the Business Combination during 2022, which were allocated upon closing of the Business Combination to newly issued derivative liabilities that are recorded at fair value on a recurring basis. See Note 1 to our consolidated financial statements within this Quarterly Report for information on allocation of these costs.
Non-GAAP Financial Measures
Earnings Before Interest, Taxes and Depreciation and Amortization (EBITDA) and Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed EBITDA and Adjusted EBITDA, both of which are non-GAAP financial measures that we calculate as net loss before interest, taxes and depreciation and amortization expense in the case of EBITDA and further adjusted to exclude non-cash, unusual and/or infrequent costs in the case of Adjusted EBITDA. Below we have provided a reconciliation of net loss (the most directly comparable GAAP financial measure) to EBITDA and from EBITDA to Adjusted EBITDA.
We present EBITDA and Adjusted EBITDA because these metrics are a key measure used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of investment capacity. Accordingly, we believe that EBITDA and Adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management.
EBITDA and Adjusted EBITDA have limitations as an analytical tool, and you should not consider these in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and both EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; and
•EBITDA and Adjusted EBITDA do not reflect interest or tax payments that may represent a reduction in cash available to us.
Because of these limitations, you should consider EBITDA and Adjusted EBITDA alongside other financial performance measures, including net loss and our other GAAP results.
34
A reconciliation of net loss to non-GAAP EBITDA and Adjusted EBITDA follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
Net loss |
|
|
$ |
(5,397 |
) |
|
$ |
(19,376 |
) |
Interest expense, net |
|
|
|
713 |
|
|
|
697 |
|
Depreciation and amortization expense |
|
|
|
195 |
|
|
|
52 |
|
EBITDA |
|
|
|
(4,489 |
) |
|
|
(18,627 |
) |
Stock-based compensation |
|
|
|
658 |
|
|
|
1,924 |
|
Transaction expenses allocated
to derivatives |
|
|
|
— |
|
|
|
874 |
|
Severance costs |
|
|
|
754 |
|
|
|
— |
|
Change in fair value of derivatives |
|
|
|
(267 |
) |
|
|
10,397 |
|
Adjusted EBITDA |
|
|
$ |
(3,344 |
) |
|
$ |
(5,432 |
) |
|
|
|
|
|
|
|
|
The decrease in EBITDA loss is primarily due to the change in fair value of the derivatives for the three months ended March 31, 2023 versus the same period in 2022 as well as the result of the cost saving measures described above. See Note 18 to our consolidated financial statements within this Quarterly Report for more information regarding the fair value of derivatives. The decrease in our loss on an Adjusted EBITDA basis is primarily due to decreased operating expenses as a result of the cost saving measures discussed above.
Financial Condition
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash totaled $15,563 and $25,202 as of March 31, 2023 and December 31, 2022, respectively. Explanations of our cash flows for the periods presented follow.
Cash Flows
First Quarter 2023
During the first quarter of 2023, the Company utilized a total of $9,639 of cash, primarily to fund cash operating losses of approximately $3,947, to fund changes in current assets and liabilities of $5,269 and for capitalized software costs of $535. The changes in current assets and liabilities during the three months ended March 31, 2023 included primarily reductions in accrued expenses of $1,565 primarily related to the payment 2022 bonuses and accrued interest as well as increases in prepaid expenses and other current assets of $2,460 related to the payment of directors and officers insurance.
First Quarter 2023 Compared to First Quarter 2022
As compared to the three months ended March 31, 2022, cash used in operations decreased by $4,789 to $9,216 for the three months ended March 31, 2023, mainly due to decreased net loss from operations. See discussion under “— Results of Operations” above for more information. Cash used in investing activities decreased $253 to a use of $535 primarily due to lower software capitalization in the current year. Cash and restricted cash provided by financing decreased $58,599 over this same period to $112 for the three months ended March 31, 2023, mainly due to proceeds from the convertible promissory notes and the Merger in 2022. See Notes 1, 12, and 13 to our consolidated financial statements within this Quarterly Report for more information.
Deferred Revenue
Deferred revenue is primarily related to software subscriptions and display ads. The revenue deferred at March 31, 2023 is expected to be recognized in the subsequent 12-month period. See Note 9 to our consolidated financial statements within this Quarterly Report for further discussion.
35
Contractual Obligations and Other Planned Uses of Capital
We are obligated to repay any convertible notes that do not ultimately convert to equity, as well as the other operating liabilities on our Consolidated Balance Sheets, such as accrued liabilities.
Liquidity and Capital Resources
Leafly has incurred operating losses since its inception and had an accumulated deficit of $70,097 and $64,700 at March 31, 2023 and December 31, 2022, respectively.
Under the rules of ASC Subtopic 205-40 “Presentation of Financial Statements — Going Concern” (“ASC 205-40”), reporting companies are required to evaluate whether conditions and/or events raise substantial doubt about their ability to meet their future financial obligations as they become due within one year after the date that the financial statements are issued. This evaluation takes into account a company’s current available cash and projected cash needs over the one-year evaluation period but may not consider things beyond its control. As noted above, we have experienced revenue declines, incurred recurring operating losses, used cash from operations, and relied on the capital raised in the Business Combination to continue ongoing operations. These conditions, when considered in the aggregate, raise substantial doubt about our ability to continue as a going concern within one year of the date these financial statements are issued.
•During the fourth quarter of the year ended December 31, 2022, we implemented a restructuring plan, including a reduction in force of approximately 56 persons and other cost cutting measures, with an estimated expected annual cash savings of approximately $16,000 beginning in 2023. These cost-cutting measures are expected to allow the Company to prioritize growth opportunities, realign its expense structure, and preserve capital while strengthening its financial position. The cash cost for this initiative was $492 reflecting primarily one-time severance and other employee-related termination benefits incurred during the fourth quarter of 2022.
•On March 16, 2023, we announced a second restructuring plan further reducing recurring costs and identifying cost savings that we expect to result in an estimated annual cash savings of an additional $8,000 based on an estimated reduction of an additional 40 personnel at a cash cost of $754 recognized in the first quarter of 2023.
After considering all available evidence, we determined that, based on both of our cost reduction measures, our current positive working capital will be sufficient to meet our capital requirements for a period of at least twelve months from the date that our March 31, 2023 financial statements are issued. We believe our restructuring plans alleviate the substantial doubt about our ability to continue as a going concern within one year of the date these financial statements are issued. Management will continue to evaluate our liquidity and capital resources.
Upon the closing of the Business Combination, Leafly issued the 2022 Notes, which provided incremental funding for our operations. Note 11 to our consolidated financial statements within this Quarterly Report provides additional information regarding the 2022 Notes.
We believe that our capital resources are sufficient to fund our operations for at least the following 12 months.
Nasdaq Notifications of Noncompliance
On October 28, 2022, we received a notice from the Nasdaq staff informing us that Leafly was not in compliance with the $50 million minimum market value requirement for continued listing on the Nasdaq Global Market (“Global Market”) and that we had until April 26, 2023 to regain compliance. On April 19, 2023, Nasdaq approved the Company’s application to transfer the listing of its common stock and warrants from the Global Market to The Nasdaq Capital Market (“Capital Market”), effective April 21, 2023. The Company complies with the net income from continuing operations listing standard of the Capital Market, and the transfer of the listing resolves the October 28, 2022 noncompliance notification.
On November 2, 2022, we received another letter from the Nasdaq staff informing us that Leafly was not in compliance with the Nasdaq’s $1.00 minimum bid price requirement (“Bid Price Rule”) and that we had until May 1, 2023 to regain compliance. To regain compliance, the closing bid price of Leafly’s common stock must have been $1.00 or more per share for a minimum of ten consecutive business days at any time before May 1, 2023. We were unable to regain compliance with
36
the Bid Price Rule by May 1, 2023, and on May 2, 2023, we received a letter from Nasdaq notifying us that our common stock would be subject to delisting from Nasdaq unless we timely requested a hearing before a Nasdaq Hearings Panel (the "Panel"). The Panel has the discretion to grant up to an additional 180 calendar days from May 2, 2023, to give us time to regain compliance with the Bid Price Rule. On May 8, 2023, we timely requested a hearing before the Panel and will present a detailed action plan to comply with the Bid Price Rule by effecting a reverse stock split, if necessary, and request a further extension of time (the “Request”). We understand that the Panel routinely grants additional time for a company to cure a bid price deficiency when the compliance plan demonstrates, like we expect our plan will, that the company will cure a bid price issue through a reverse stock split within 180-days of a delisting notice. The Request stayed any further action by Nasdaq, and while the hearings process is pending, it is expected that the Common Stock will continue to be listed and traded on Nasdaq.
As part of the Company’s plan to regain compliance with the Bid Price Rule within 180 days of May 2, 2023, the Company intends to seek stockholder approval of an amendment to the Company’s Second Amended and Restated Certificate of Incorporation to effect a reverse stock split (the “Reverse Split Proposal”) at the upcoming Annual Meeting of stockholders. The Company expects to file preliminary proxy materials on May 15, 2023, with respect to the Annual Meeting of stockholders, including the approval of the Reverse Split Proposal.
The Company believes it is taking prudent steps to be successful in the Panel hearing and with its Reverse Split Proposal and that it will ultimately be successful in regaining compliance with the Bid Price Rule. However, there can be no assurances that any of these efforts will be successful, and if the Company is unable to regain compliance with the Bid Price Rule, the Common Stock would be subject to delisting from Nasdaq. See “Risk Factors — Our shares of common stock are listed on Nasdaq, but we cannot guarantee that we will be able to satisfy the applicable listing standards going forward.”
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2023.
Contractual Obligations
Other than our 2022 Notes (see Note 11 to our consolidated financial statements), we do not have any long-term debt, lease obligations or other long-term liabilities. We have entered into several multi-year licensing and administration agreements in the ordinary course of business, the cost of which are reflected within general and administrative expense within our statements of operations as costs are incurred.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates.
We believe there have been no material changes to the items that we disclosed as our critical accounting estimates under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2022 Annual Report.
Recently Issued and Adopted Accounting Pronouncements
Reference is made to Note 2 for information about recently issued accounting pronouncements.
37
38