LEAFLY HOLDINGS, INC.
The following Management's Discussion and Analysis ("MD&A") should be read in
conjunction with the condensed consolidated financial statements and related
notes. The MD&A is intended to assist in understanding our financial condition
and results of operations. This discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated due to various factors discussed under "Risk Factors" in
our Annual Report on Form 10-K and "Cautionary Note Regarding Forward-Looking
Statements" in this Quarterly Report on Form 10-Q.
Amounts in this section are presented in thousands, except for per share numbers and percentages.
Merger with Merida OnFebruary 4, 2022 ,Leafly consummated the Business Combination pursuant to the Merger Agreement and became a public company. While the legal acquirer in the Business Combination was Merida, for financial accounting and reporting purposes underU.S. GAAP,Leafly is the accounting acquirer with the Business Combination 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 ofLeafly . Under this method, Merida is treated as the "acquired" company andLeafly is the accounting acquirer with the transaction treated as a recapitalization ofLeafly . Accordingly, the consolidated assets, liabilities, and results of operations ofLeafly became the historical financial statements, with Merida's assets, liabilities and results of operations consolidated withLeafly's beginning on the Business Combination date. Except for certain derivative liabilities (which were measured at fair value), 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. Operations prior to the closing of the Business Combination presented for comparative purposes below are those ofLeafly .
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 current events. 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.Leafly was founded in 2010 and is headquartered inSeattle with 259 employees as ofSeptember 30, 2022 . 28 --------------------------------------------------------------------------------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 news, enabling consumers to useLeafly's content library to have an informed shopping experience.Leafly reduces the friction caused by fragmented regulation of cannabis acrossNorth 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 average monthly active users ("MAUs") on our platform, one of the largest cannabis-focused audiences in the world. During the second quarter and continuing into the third quarter, we began to see some macro-economic impacts on the business. Our retailer, brands, and multi state operator customers signaled that their advertising budgets are under scrutiny and, in some cases, froze their advertising spend. In addition, we saw a continuation of customer account churn in our less mature markets, which we first observed late in the first quarter. In light of the current macroeconomic environment, we are taking a more conservative view of the final quarter of the year and are taking steps to manage the business accordingly. We have implemented plans to reduce operating expenses, including an announced headcount reduction of 56 employees or approximately 21% of our workforce. We expect to incur non-recurring cash charges of approximately$500 associated with the headcount reductions during the fourth quarter of 2022. We anticipate these and other changes in our cost structure in 2022 will save approximately$16,000 in cash costs annually once 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.
Merger and Public Company Costs
As a consequence of the Business Combination,Leafly became the successor to anSEC -registered and Nasdaq-listed company which requiresLeafly to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices.Leafly has incurred, and expects to continue to incur, additional expenses as a public company for, among other things: additional directors' and officers' liability insurance; compensation for directors and additional internal and external accounting, legal, and administrative resources, including increased audit and legal fees; and costs of certain related software tools. Direct costs of the Business Combination and resulting recapitalization have been recorded to additional paid-in capital and other expense, as appropriate (see Note 2 to our condensed consolidated financial statements within this Quarterly Report), while general costs associated with becoming and operating as a public company have been expensed throughout operating expenses within our Consolidated Statements of Operations, as applicable, primarily to general and administrative. We currently anticipate we will incur approximately$8,500 to$9,500 annually in incremental cash costs of operating as a public company. This estimate does not reflect general increases in costs due to growing our business. Non-cash stock-based compensation expenses may also increase significantly as we transition to operating as a public company, leveraging our available equity, including derivatives thereof, to fund operations. These estimates and expectations may change as we begin to experience these new conditions.
Key Metrics
In addition to the measures presented in our condensed consolidated financial
statements, our management regularly monitors certain metrics in the operation
of our business:
Monthly active users
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 a customer of a dispensary or brand
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.
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Users (visitors) are considered active by initiating a session on at least one
webpage or app. Each month's MAUs is the total 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 withLeafly 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
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
The tables below presents these measures for the respective periods:
Three Months Ended September 30, 2022 2021 Change Change (%)
Average Monthly Active Users ("MAUs")
(in thousands)1 8,187 9,433 (1,246) (13) %
Ending retail accounts2 5,637 4,769 868 18 %
Retailer average revenue per account
("ARPA")3 $ 556 $ 621 $ (65) (10) %
1 Calculated as a simple average for the period presented. Using the prior
calculation that excluded native apps, Average MAUs would have been 7,510 and
8,754 for the three months ended September 30, 2022 and 2021, respectively, for
a decrease of 1,244, or 14%.
2 Represents the amount outstanding in the last month of the respective period.
3 Calculated as a simple average of monthly retailer ARPA for the period presented. Using the prior calculation of retailer ARPA which included retail revenue on a product basis, retailer ARPA would have been$551 and$619 for the three months endedSeptember 30, 2022 and 2021, respectively, for a decrease of$68 or 11%. Nine Months Ended September 30, 2022 2021 Change Change (%) Average Monthly Active Users ("MAUs") (in thousands)1 7,940 10,451 (2,511) (24) % Ending retail accounts2 5,637 4,769 868 18 % Retailer average revenue per account ("ARPA")3$ 570 $ 649 $ (79) (12) % 1 Calculated as a simple average for the period presented. Using the prior calculation that excluded native apps, Average MAUs would have been 7,266 and 9,700 for the nine months endedSeptember 30, 2022 and 2021, respectively, for a decrease of 2,434, or 25%.
2 Represents the amount outstanding in the last month of the respective period.
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3 Calculated as a simple average of monthly retailer ARPA for the period
presented. Using the prior calculation of retailer ARPA which included retail
revenue on a product basis, retailer ARPA would have been $567 and $645 for the
nine months ended September 30, 2022 and 2021, respectively for a decrease of
$78 or 12%.
MAUs decreased 13% and 24% for the three and nine months ended September 30,
2022 compared to the same periods in 2021 due to people not shopping online at
the same pace as they did during the pandemic, along with a decline in organic
search traffic (in particular, our news and learn sections). The 13% decline for
the three months ended September 30, 2022 represents a slowing rate of decline
in Average MAUs and shows a sequential improvement over the decline witnessed in
the second quarter of this year. The Company continues to focus primarily on
growing the number of supply partners on the platform, leading to an 18% growth
in year over year ending retail accounts. Part of this growth in retail accounts
included expanding into lower penetration markets at a lower price point, a
strategic decision which contributed to a 10% and 12% decline in ARPA for the
three and nine months ended September 30, 2022 , respectively.
Discussion of our Results of Operations
Revenue
Three Months Ended September 30, 2022 2021 Change ($) Change (%) Retail$ 9,042 $ 8,606 $ 436 5 % Brands 2,739 2,290 449 20 % Total revenue$ 11,781 $ 10,896 $ 885 8 % Nine Months Ended September 30, 2022 2021 Change ($) Change (%) Retail$ 27,286 $ 24,572 $ 2,714 11 % Brands 7,965 6,387 1,578 25 % Total revenue$ 35,251 $ 30,959 $ 4,292 14 % Retail Retail revenue from digital media display ads from licensed dispensaries increased$424 and subscriptions revenue decreased$20 for the three months endedSeptember 30, 2022 and increased$1,873 and$757 , respectively, for the nine months endedSeptember 30, 2022 . Digital media display ads revenue growth was driven by increased volumes of display ads sold. The subscriptions revenue decline in the current quarter was driven by lower prices, reflecting turnover among accounts with higher ARPA combined with the acquisition of accounts with lower ARPA. For the nine-month period endedSeptember 30, 2022 , the increase in retail subscription revenue was driven by higher volume, reflected in an 18% increase in the number of ending retail accounts, offset in part by the price dynamics just discussed. The Company's continued focus on adding ending retail accounts, with a reduction in prices in target markets, reflects a strategic decision to attract a greater number of local retailers onto our platform. In 2022, we continued use of a regional pricing model based on traffic and orders, which had the effect of decreasing overall prices within our mix of revenue during 2022 when compared to 2021, as reflected in a 10% and 12% decrease in ARPA for the three and nine months endedSeptember 30, 2022 , respectively.
Brands
For the three months ended
•direct-to-consumer marketing revenue increase of
•digital media display ads (including audience extension services) revenue
increase of
•subscriptions revenue increase of
•revenue of
For the nine months ended
•direct-to-consumer marketing revenue increase of
•subscriptions revenue increase of
•digital media display ads (including audience extension services) revenue
increase of
•revenue of
The Company's current systems do not allow us to precisely quantify changes in Brands revenue attributable to price and volume. We continue to implement systems and processes that will allow us to do so. In the meantime, the information we
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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 grew primarily due to increased volume. We offer a
solution for brands that continue to lack access to their target audience
through certain traditional advertising channels that do not work with the
cannabis industry, and as CBD and related cannabis-adjacent brands want to
advertise to our audience.
Cost of revenue
Three Months Ended September 30, 2022 2021 Change ($) Change (%)
Retail $ 1,063 $ 862 $ 201 23 %
Brands 452 399 53 13 %
Total cost of revenue $ 1,515 $ 1,261 $ 254 20 %
Nine Months Ended September 30, 2022 2021 Change ($) Change (%)
Retail $ 3,093 $ 2,233 $ 860 39 %
Brands 1,318 1,331 (13) (1) %
Total cost of revenue $ 4,411 $ 3,564 $ 847 24 %
Retail
Retail cost of revenue increased due primarily to a $74 and $479 increase in
business platform costs, primarily data licensing fees, for the three and nine
months ended September 30, 2022 , respectively, and due to $47 and $170 higher
website infrastructure costs, primarily hosting fees, respectively. Retail cost
of revenue also increased $79 and $200 for the three and nine months ended
September 30, 2022 , respectively, due to increased headcount costs, generally.
Brands
Brands cost of revenue increased across nearly all components when comparing the
three months ended September 30, 2022 to the prior year. Partially offsetting
these increases was a decrease of $55 in costs of audience extension services,
corresponding to decreased associated revenue.
Brands cost of revenue decreased for the nine months ended September 30, 2022 ,
primarily reflecting a decrease of $346 in costs of audience extension,
corresponding to decreased associated revenue. Partially offsetting this
decrease were $147 higher business platform costs and $68 higher 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
increased $86 for the nine months ended September 30, 2022 , due to increased
headcount costs, generally.
Operating expenses
Three Months Ended September 30, 2022 2021 Change ($) Change (%)
Sales and marketing $ 6,403 $ 4,999 $ 1,404 28 %
Product development 3,406 3,522 (116) (3) %
General and administrative 6,489 4,949 1,540 31 %
Total operating expenses $ 16,298 $ 13,470 $ 2,828 21 %
Nine Months Ended September 30, 2022 2021 Change ($) Change (%)
Sales and marketing $ 21,529 $ 13,148 $ 8,381 64 %
Product development 10,927 9,905 1,022 10 %
General and administrative 20,730 10,485 10,245 98 %
Total operating expenses $ 53,186 $ 33,538 $ 19,648 59 %
Sales and marketing expenses grew as we made additional investments in this area
of our business following increased funding through the issuance of the 2022
Notes, with cost temperament beginning in the third quarter as we began to
implement the cost reduction activities described under "- Business Overview"
above. We (decreased) increased advertising and marketing spending by $(508) and
$1,848 and employee compensation costs by $1,734 and $5,652 , when comparing
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the three and nine months ended
Product development expenses behaved similarly to sales and marketing expenses, growing with additional funding and beginning to slow as we implemented cost reduction activities. Professional services fees included within product development grew$258 and$1,064 for the three and nine months endedSeptember 30, 2022 , respectively, largely related to the use of outsourced providers for staff augmentation. Also within product development are increases in headcount costs generally offset by capitalized product development costs in 2022. Headcount costs prior to capitalization increased approximately$311 and$1,825 for the three and nine months endedSeptember 30, 2022 , respectively. Product development expenses are reported net of$755 and$2,081 of costs capitalized to internal-use software for the three and nine months endedSeptember 30, 2022 , respectively. No amounts were capitalized in 2021. See Note 6 to our condensed consolidated financial statements within this Quarterly Report for more information.
General and administrative expenses increased for the three and nine months
ended
•a
•a$275 and$3,079 increase in compensation, including$426 and$2,359 of stock-based compensation expenses, primarily associated with the modification of certain options held by our CEO, the hiring of several senior-level employees during the fourth quarter of 2021, and higher rates of salaries, stock-based compensation, and related benefits and bonuses in general; and •a$(536) decrease and a$1,751 increase in professional services fees, largely related to the Business Combination and becoming a public company, offset by decreased recruiting fees as we generally moved these activities in-house and reduced our hiring during the third quarter of 2022; and
•a
Other income and expense
Three Months Ended September 30, 2022 2021 Change ($) Change (%) 1 Interest expense, net$ (705) $ (590) $ (115) 19 % Change in fair value of derivatives 22,264 - 22,264 nm Other expense, net (73) (29) (44) nm Total other income (expense)$ 21,486 $ (619) $ 22,105 nm
1 An "nm" reference means the percentage is not meaningful.
Nine Months Ended September 30, 2022 2021 Change ($) Change (%) 1 Interest expense, net$ (2,119) $ (698) $ (1,421) 204 % Change in fair value of derivatives 36,264 - 36,264 nm Other expense, net (962) (39) (923) nm Total other income (expense)$ 33,183 $ (737) $ 33,920 nm
1 An "nm" reference means the percentage is not meaningful.
Interest expense, net increased due to higher principal balances of convertible promissory notes outstanding, on average, for the three and nine months endedSeptember 30, 2022 , respectively, when compared to the same periods in 2021. The change in fair value of derivatives is due to the recording of derivatives in connection with the Business Combination and changes in their valuations. See Note 20 to our condensed consolidated financial statements within this Quarterly Report for details on the valuations and the fair value changes in the periods presented. Other expense, net increased for the nine months endedSeptember 30, 2022 due primarily to$874 of costs incurred in connection with the Business Combination, 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 2 to our condensed consolidated financial statements within this Quarterly Report for information on allocation of these costs. 33 --------------------------------------------------------------------------------
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 income (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 income (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 income (loss) and
our other GAAP results.
A reconciliation of net income (loss) to non-GAAP EBITDA and Adjusted EBITDA
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income (loss) $ 15,454 $ (4,454) $ 10,837 $ (6,880)
Interest expense, net 705 590 2,119 698
Depreciation and amortization expense 127 57 276 195
EBITDA 16,286 (3,807) 13,232 (5,987)
Stock-based compensation 771 208 3,159 729
Transaction expenses allocated to
derivatives - - 874 -
Change in fair value of derivatives (22,264) - (36,264) -
Adjusted EBITDA $ (5,207) $ (3,599) $ (18,999) $ (5,258)
The increase in EBITDA is due to the change in fair value of the derivatives for
the three and nine months ended September 30, 2022 . See Note 20 to our condensed
consolidated financial statements within this Quarterly Report for more
information regarding the fair value of derivatives. The increase in our loss on
an Adjusted EBITDA basis is due to increased operating expenses offset in part
by increased revenue. See discussion of these changes under the respective
headings above.
Financial Condition
Cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash totaled$28,436 and$28,695 as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. Explanations of our cash flows for the periods presented follow. 34 --------------------------------------------------------------------------------
Cash flows
As compared to the nine months endedSeptember 30, 2021 , cash used in operations increased by$22,029 to$25,130 for the nine-month period endedSeptember 30, 2022 , mainly due to increased net loss from operations. See discussion under "- Discussion of our Results of Operations" above for more information. Cash used in investing activities increased$2,156 to a use of$2,194 due to additional investments in property and equipment in the current year. Cash and restricted cash provided by financing decreased$4,386 over this same period to$27,065 for the nine months endedSeptember 30, 2022 , mainly due to the use of financing proceeds received earlier in the year to repurchase common stock in settlement of FPAs in the third quarter of 2022. See Notes 3, 11, and 13 to our condensed consolidated financial statements within this Quarterly Report for more information.
Stock and convertible promissory note issuances
Since our capital restructuring in 2019, we have financed a sizable portion of our operations from issuances of stock and convertible promissory notes. The proceeds of these issuances have been used to fund, among other things, working capital and capital expenditures. See more information about our stock in Note 12 and our convertible notes in Note 11 to our condensed consolidated financial statements within this Quarterly Report.
Deferred revenue
Deferred revenue is primarily related to software subscriptions and display ads. The revenue deferred atSeptember 30, 2022 is expected to be recognized in the subsequent 12-month period. See Note 9 to our condensed consolidated financial statements within this Quarterly Report for further discussion.
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. We intend to continue to invest in product and feature development, expanding our marketing and sales operations, improving and expanding our technology and finance infrastructure, hiring additional and retaining existing employees, pursuing strategic opportunities, and meeting the increased compliance requirements associated with our transition to and operation as a public company. In addition, we intend to add back in-person working space over time. As we continue to grow, we expect the aggregate amount of these expenses will also continue to grow.
Liquidity
Upon the closing of the Business Combination,Leafly issued the 2022 Notes, which provided incremental funding for our operations. Note 11 to our condensed consolidated financial statements within this Quarterly Report provides additional information regarding the 2022 Notes. As discussed in Note 21 and under "- Business Overview" above, the Company announced a restructuring plan onOctober 18, 2022 , which along with other cost cutting measures, the Company estimates will reduce annual operating costs by approximately$16,000 .
We believe that our capital resources are sufficient to fund our operations for at least the following 12 months.
Related Party Relationships
See Note 16 to our condensed consolidated financial statements within this Quarterly Report for information on the Company's related party relationships and transactions.
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