Leafly(LFLY) - 2022 Q1 - Quarterly Report

Part I - Financial Information This section presents the unaudited condensed consolidated financial statements and management's analysis of Leafly Holdings, Inc Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents Leafly Holdings, Inc.'s unaudited condensed consolidated financial statements for the three months ended March 31, 2022 and 2021, including balance sheets, statements of operations, changes in stockholders' equity (deficit), and cash flows. It also includes detailed notes explaining the company's business, merger transaction, accounting policies, and specific financial line items Condensed Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and stockholders' deficit, at specific dates Condensed Consolidated Balance Sheets (in thousands) | Item | March 31, 2022 (unaudited) | December 31, 2021 (audited) | | :---------------------------------------------------------------- | :-------------------------- | :-------------------------- | | ASSETS | | | | Cash and cash equivalents | $35,389 | $28,565 | | Restricted cash | $37,224 | $130 | | Total current assets | $83,211 | $35,840 | | Total assets | $84,246 | $36,153 | | LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | Total current liabilities | $16,791 | $44,725 | | Total non-current liabilities | $82,491 | $— | | Total stockholders' deficit | $(15,036) | $(8,572) | | Total liabilities and stockholders' deficit | $84,246 | $36,153 | - Total assets significantly increased from $36.15 million at December 31, 2021, to $84.25 million at March 31, 2022, primarily driven by a substantial increase in restricted cash and cash and cash equivalents[16] - Total current liabilities decreased from $44.73 million to $16.79 million, while non-current liabilities increased from $0 to $82.49 million, reflecting the reclassification and recognition of derivative liabilities and convertible promissory notes post-merger[16] - Stockholders' deficit widened from $(8.57) million to $(15.04) million, indicating increased accumulated losses[16] Condensed Consolidated Statements of Operations This section presents the company's revenues, expenses, and net loss for the three-month periods ended March 31, 2022 and 2021 Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $11,420 | $9,475 | | Cost of revenue | $1,455 | $1,090 | | Gross profit | $9,965 | $8,385 | | Total operating expenses | $17,410 | $9,479 | | Loss from operations | $(7,445) | $(1,094) | | Change in fair value of derivatives | $(10,397) | $— | | Net loss | $(19,376) | $(1,109) | | Basic and diluted loss per share | $(0.52) | $(0.04) | - Revenue increased by 20.5% to $11.42 million for the three months ended March 31, 2022, compared to $9.48 million in the prior year period[18] - Net loss significantly widened to $(19.38) million from $(1.11) million year-over-year, primarily due to a $(10.40) million change in fair value of derivatives and increased operating expenses[18] - Loss per share increased to $(0.52) from $(0.04) in the comparable period[18] Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) This section outlines changes in stockholders' equity, including net loss and merger-related transactions, for the three months ended March 31, 2022 Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) (in thousands) | Item | Balance at Dec 31, 2021 | Net Loss | Stock-based Compensation | Conversion of 2021 Notes | Conversion of Preferred Stock | Merger & Recapitalization | Stockholder Contribution | Escrow Shares Derivative | Private Warrants Derivative | Forward Share Purchase Agreement Derivative | Shareholder Earnout Rights Derivative | Balance at Mar 31, 2022 | | :-------------------------------- | :---------------------- | :------- | :----------------------- | :----------------------- | :-------------------------- | :------------------------ | :------------------------ | :------------------------ | :-------------------------- | :------------------------------------------ | :---------------------------------- | :---------------------- | | Preferred Stock (Amount) | $1 | $— | $— | $— | $(1) | $— | $— | $— | $— | $— | $— | $— | | Common Stock (Amount) | $3 | $— | $— | $— | $1 | $— | $— | $— | $— | $— | $— | $4 | | Additional Paid-In Capital | $61,194 | $— | $1,924 | $33,024 | $— | $27,997 | $924 | $(6,867) | $(3,916) | $(14,170) | $(26,131) | $74,106 | | Accumulated Deficit | $(69,770) | $(19,376) | $— | $— | $— | $— | $— | $— | $— | $— | $— | $(89,146) | | Total | $(8,572) | $(19,376) | $1,924 | $33,024 | $— | $27,997 | $924 | $(6,867) | $(3,916) | $(14,170) | $(26,131) | $(15,036) | - The total stockholders' deficit increased from $(8.57) million at December 31, 2021, to $(15.04) million at March 31, 2022, primarily due to the net loss of $(19.38) million, partially offset by significant increases in additional paid-in capital from the conversion of 2021 Notes and merger-related transactions[21] - Additional paid-in capital saw substantial increases from the conversion of 2021 Notes ($33.02 million) and merger and recapitalization activities ($28.00 million), but was significantly reduced by derivative liabilities related to escrow shares, private warrants, forward share purchase agreements, and shareholder earn-out rights[21] Condensed Consolidated Statements of Cash Flows This section reports cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2022 and 2021 Condensed Consolidated Statements of Cash Flows (in thousands) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(14,005) | $(368) | | Net cash used in investing activities | $(788) | $— | | Net cash provided by (used in) financing activities | $58,711 | $(25) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $43,918 | $(393) | | Cash, cash equivalents, and restricted cash, end of period | $72,613 | $4,541 | - Net cash used in operating activities increased significantly to $(14.01) million in Q1 2022 from $(0.37) million in Q1 2021, primarily due to a larger net loss[23] - Net cash provided by financing activities was $58.71 million in Q1 2022, a substantial increase from $(0.03) million in Q1 2021, driven by proceeds from convertible promissory notes and restricted cash related to Forward Share Purchase Agreements[23] - The company's cash, cash equivalents, and restricted cash balance at the end of the period increased to $72.61 million from $4.54 million year-over-year[23] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies and specific financial statement line items NOTE 1 — Description of the Business and Merger Transaction Leafly Holdings, Inc. operates as a leading online cannabis discovery marketplace. The company completed a merger with Merida Merger Corp. I on February 4, 2022, which was accounted for as a reverse recapitalization, with Legacy Leafly as the accounting acquirer. The merger resulted in significant cash movements and changes in share structure - Leafly Holdings, Inc. is a leading online cannabis discovery marketplace and resource for cannabis consumers, providing an information platform with content on strains, retailers, and events[25] - On February 4, 2022, Leafly consummated a merger with Merida Merger Corp. I, which was accounted for as a reverse recapitalization, with Legacy Leafly as the accounting acquirer[27] Summary of Cash Sources and Uses from Business Combination (February 4, 2022) (in thousands) | Item | Amount | | :------------------------------------------ | :------- | | Amount in Merida's trust account at closing | $90,824 | | Total payment to Merida public redeeming stockholders | $49,466 | | Amount available after paying redeeming stockholders | $41,358 | | Cash to escrow for Forward Share Purchase Agreements | $39,032 | | Net cash from the Trust to Leafly at closing | $582 | Common Shares Related to Merger Transaction (as of February 4, 2022) | Shareholder Group | Shares | | :------------------------------------------------ | :----- | | Merida public stockholders | 4,160 | | Legacy Leafly existing securityholders | 35,434 | | Total shares outstanding as of February 4, 2022 | 42,924 | NOTE 2 — Basis of Presentation and Significant Accounting Policies The interim financial statements are prepared in accordance with GAAP and SEC rules for interim reporting, with certain disclosures omitted. The company is an Emerging Growth Company (EGC) and has elected to use the extended transition period for new accounting standards. Key policies include capitalization of internal-use software and allocation of transaction costs - The interim condensed consolidated financial statements are unaudited and prepared in accordance with GAAP and SEC rules for interim financial reporting[30][31] - Leafly is an Emerging Growth Company (EGC) and has elected to use the extended transition period for complying with new or revised financial accounting standards[34] - The company capitalizes certain costs related to the acquisition and development of internal-use software, amortizing them over an estimated useful life of 3 years[36][37] - Direct and incremental costs of the Business Combination were allocated between equity and liability instruments, with amounts allocated to equity recorded to additional paid-in capital and amounts allocated to specified liabilities recorded as other expense[38] NOTE 3 — Cash, Cash Equivalents, and Restricted Cash Cash, cash equivalents, and restricted cash significantly increased, with a substantial portion of restricted cash held in escrow for Forward Share Purchase Agreements Cash, Cash Equivalents, and Restricted Cash (in thousands) | Item | March 31, 2022 | December 31, 2021 | | :------------------------ | :------------- | :---------------- | | Cash and cash equivalents | $35,389 | $28,565 | | Restricted cash | $37,224 | $130 | | Total | $72,613 | $28,695 | - The March 31, 2022 restricted cash balance includes $37.07 million maintained in escrow related to Forward Share Purchase Agreements (FPAs)[42] NOTE 4 — Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets increased substantially, primarily due to a significant rise in prepaid insurance Prepaid Expenses and Other Current Assets (in thousands) | Item | March 31, 2022 | December 31, 2021 | | :------------------------ | :------------- | :---------------- | | Prepaid insurance | $5,059 | $57 | | Other prepaid expenses | $2,159 | $1,134 | | Other current assets | $100 | $156 | | Total | $7,318 | $1,347 | - Prepaid insurance increased significantly from $57 thousand at December 31, 2021, to $5.06 million at March 31, 2022[44] NOTE 5 — Accounts Receivable, Net The allowance for doubtful accounts decreased slightly for the three months ended March 31, 2022, compared to the prior year, reflecting a net recovery rather than a provision for doubtful accounts Allowance for Doubtful Accounts (in thousands) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Balance, beginning of period | $1,848 | $1,131 | | Add: provision for doubtful accounts, net of recoveries | $(124) | $82 | | Less: write-offs | $(42) | $(272) | | Balance, end of period | $1,682 | $941 | - The company recorded a net recovery of $(124) thousand for doubtful accounts in Q1 2022, compared to a provision of $82 thousand in Q1 2021[45] NOTE 6 — Property, Equipment, and Software, Net Property, equipment, and software, net, increased significantly, primarily due to the capitalization of internal-use software, while depreciation expense decreased Property, Equipment, and Software, Net (in thousands) | Item | March 31, 2022 | December 31, 2021 | | :------------------------------------------ | :------------- | :---------------- | | Furniture and equipment | $866 | $1,049 | | Internal-use software | $758 | $— | | Total | $1,626 | $1,051 | | Less: accumulated depreciation and amortization | $(591) | $(738) | | Net | $1,035 | $313 | - Internal-use software was capitalized at $758 thousand as of March 31, 2022, compared to $0 at December 31, 2021[46] - Depreciation expense decreased to $52 thousand for the three months ended March 31, 2022, from $80 thousand in the prior year period[46] NOTE 7 — Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities decreased, mainly due to a significant reduction in accrued bonuses and other employee-related liabilities Accrued Expenses and Other Current Liabilities (in thousands) | Item | March 31, 2022 | December 31, 2021 | | :------------------------------------------ | :------------- | :---------------- | | Accrued bonuses | $776 | $3,668 | | Other employee-related liabilities | $1,573 | $2,131 | | Accrued interest | $360 | $1,313 | | Other accrued expenses | $1,189 | $1,213 | | Total | $3,898 | $8,325 | - Accrued bonuses decreased from $3.67 million at December 31, 2021, to $0.78 million at March 31, 2022[48] NOTE 8 — Commitments and Contingencies Management believes that any potential liabilities from legal disputes arising in the normal course of business would not have a material adverse effect on the company's financial statements - The company is involved in legal disputes in the normal course of business, but management believes potential liabilities would not materially affect financial statements[49] NOTE 9 — Revenue and Contract Balances Total revenue increased by 20.5% year-over-year, primarily driven by advertising services in the United States. The majority of revenue is recognized over time, and deferred revenue increased, with most expected to be recognized within 12 months Revenue by Service Type (in thousands) | Service Type | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------- | :-------------------------------- | :-------------------------------- | | Advertising | $11,329 | $9,411 | | Other services | $91 | $64 | | Total | $11,420 | $9,475 | Revenue by Geographic Region (in thousands) | Geographic Region | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------ | :-------------------------------- | :-------------------------------- | | United States | $10,735 | $8,655 | | All other countries | $685 | $820 | | Total | $11,420 | $9,475 | Revenue by Timing of Recognition (in thousands) | Timing of Recognition | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Over time | $10,596 | $8,901 | | Point in time | $824 | $574 | | Total | $11,420 | $9,475 | - Deferred revenue increased from $1.98 million at the beginning of the period to $2.57 million at the end of March 2022, with a majority expected to be recognized in the subsequent 12-month period[52] NOTE 10 — Income Taxes The company's effective tax rate was 0% due to a full valuation allowance against deferred tax assets. The Business Combination resulted in substantial net operating loss carryforwards, which may be subject to limitations - The effective tax rate was 0% for the three months ended March 31, 2022 and 2021, due to a full valuation allowance against deferred tax assets[54] - As of December 31, 2021, the company had federal, state, and foreign net operating loss carryforwards of $53.90 million, $35.98 million, and $4.30 million, respectively, which may be subject to Section 382 limitations[55] NOTE 11 — Convertible Promissory Notes Leafly issued $30 million in 2022 convertible notes with an 8% annual interest rate, maturing in 2025, and convertible at $12.50 per share. The 2021 notes, totaling $31.47 million, were converted into common stock upon the Business Combination - Merida entered into a $30 million convertible note purchase agreement in January 2022 (2022 Notes), bearing 8% annual interest, maturing January 31, 2025, and convertible at $12.50 per share[56][57] - As of March 31, 2022, the net carrying amount of the 2022 Notes was $28.46 million, with an estimated fair value of approximately $31.90 million[58] - Legacy Leafly issued $31.47 million in 2021 convertible promissory notes, which were converted into approximately 4,128 shares of Leafly common stock at $2.63 per share upon the Business Combination on February 4, 2022[59][61] NOTE 12 — Stockholders' Equity Following the reverse recapitalization, all Series A preferred stock converted to common stock. The company's capital structure now includes common stock with specific voting, dividend, and liquidation rights. Additionally, 1,625 Sponsor Escrow Shares and up to 5,429 Stockholder Earn-Out Rights were established as derivative liabilities, contingent on stock price or revenue targets - Upon the Business Combination, all issued and outstanding Series A preferred stock converted to nonredeemable common stock[63] - Leafly's authorized capital stock as of March 31, 2022, consists of 200,000 shares of common stock and 5,000 shares of preferred stock, both with $0.0001 par value[70] - 1,625 Sponsor shares were placed in escrow, subject to earn-out conditions (stock price targets of $13.50 and $15.50) and accounted for as derivative liabilities[69][70] - Leafly stockholders were granted contingent rights to receive up to 5,429 shares of common stock (Earn-Out Rights) if the company achieves specific revenue targets ($65 million for 2022, $101 million for 2023) or stock price targets ($13.50, $15.50) within three years, also accounted for as derivative liabilities[73][74] NOTE 13 — Warrants and Forward Share Purchase Agreements The company has Public Warrants and Private Warrants outstanding, both exercisable at $11.50 per share, with Private Warrants accounted for as derivative liabilities. Additionally, Forward Share Purchase Agreements (FPAs) were entered into, allowing investors to sell up to 4,000 shares to the company for cash, with $39.03 million placed in escrow, and these are also treated as derivative liabilities - As of March 31, 2022, there were 6,501 Public Warrants and 3,950 Private Warrants outstanding, each entitling the holder to purchase one share of common stock at an exercise price of $11.50[77][80] - Private Warrants are accounted for as derivative liabilities, remeasured to fair value on a recurring basis, with changes recorded to earnings[81] - Forward Share Purchase Agreements (FPAs) allow investors to sell up to 4,000 shares to the company for cash at prices of $10.16 or $10.01 per share, with $39.03 million placed in escrow for these purchases[82] - FPAs are accounted for as derivative liabilities, remeasured to fair value on a recurring basis, with changes recorded to earnings[82] NOTE 14 — Equity Incentive Plans Leafly operates four equity plans: the 2021 Plan, 2018 Plan, Earn Out Plan, and ESPP. The 2018 Plan options remain outstanding post-merger, with significant unrecognized compensation costs. A modification to the CEO's stock options resulted in a $1.37 million charge - The 2021 Equity Incentive Plan reserved 4,502 shares of common stock for issuance, with automatic annual increases[85] Stock Option Activity (2018 Plan) for Three Months Ended March 31, 2022 (in thousands, except per share amounts) | Item | Number of Shares | Weighted Average Exercise Price | | :-------------------------- | :--------------- | :------------------------------ | | Outstanding at January 1, 2022 | 3,851 | $1.77 | | Exercised | (114) | $1.12 | | Forfeited or expired | (56) | $1.08 | | Outstanding at March 31, 2022 | 3,681 | $1.78 | | Vested and exercisable | 1,339 | $0.98 | - As of March 31, 2022, unrecognized compensation costs totaled $1.80 million for service-based, $0.58 million for performance-based, and $0.68 million for market-based awards[88] - A modification to the CEO's stock options resulted in a $1.37 million charge to general and administrative expenses and additional paid-in capital for the three months ended March 31, 2022[91] NOTE 15 — Employee Stock Purchase Plan The 2021 Employee Stock Purchase Plan (ESPP) became effective upon the merger, reserving 1,126 shares of common stock for issuance, with automatic annual increases. No employees currently participate - The 2021 Employee Stock Purchase Plan (ESPP) reserved 1,126 shares of common stock for issuance, with automatic annual increases[93] - No employees participated in the ESPP as of March 31, 2022[93] NOTE 16 — Related Party Transactions A significant investor, Brendan Kennedy, purchased a $1 million convertible promissory note in June 2021, which converted to Leafly common stock upon the Business Combination - Brendan Kennedy, a significant investor, purchased a $1 million convertible promissory note in June 2021, which converted to Leafly common stock upon the Business Combination[94] NOTE 17 – Defined Contribution Plan The company's matching contributions to its defined contribution retirement plan increased year-over-year Defined Contribution Plan Expense (in thousands) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Matching contributions expense | $244 | $151 | NOTE 18 — Net Loss Per Share Basic and diluted net loss per share increased significantly due to a higher net loss. All potentially dilutive securities were antidilutive for the periods presented Basic and Diluted Net Loss Per Share (in thousands, except per share amounts) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss | $(19,376) | $(1,109) | | Weighted average shares outstanding | 37,525 | 30,904 | | Basic and diluted net loss per share | $(0.52) | $(0.04) | - All potentially dilutive securities, including stock options, convertible promissory notes, shareholder earn-out rights, and warrants, were excluded from diluted EPS computation as their effect would have been antidilutive due to net losses[98][99] Antidilutive Securities Excluded from Diluted EPS (in thousands) | Item | March 31, 2022 | March 31, 2021 | | :------------------------------------------ | :------------- | :------------- | | Shares subject to outstanding common stock options | 3,681 | 1,827 | | Shares subject to convertible promissory notes | 2,400 | — | | Shares subject to shareholder earn-out rights | 5,429 | — | | Shares subject to Public Warrants | 6,501 | — | | Shares subject to Private Warrants | 3,950 | — | | Escrow Shares | 1,625 | — | | Series A preferred stock | — | 6,140 | | Total | 23,586 | 7,967 | NOTE 19 — Segment Reporting Leafly reports revenue and gross profit across two segments: Retail and Brands. Both segments showed year-over-year growth in revenue and gross profit Segment Revenue and Gross Profit (in thousands) | Segment | Three Months Ended March 31, 2022 (Revenue) | Three Months Ended March 31, 2021 (Revenue) | Three Months Ended March 31, 2022 (Gross Profit) | Three Months Ended March 31, 2021 (Gross Profit) | | :------ | :------------------------------------------ | :------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Retail | $9,179 | $7,821 | $8,139 | $7,091 | | Brands | $2,241 | $1,654 | $1,826 | $1,294 | | Total | $11,420 | $9,475 | $9,965 | $8,385 | - Retail revenue increased by 17.3% and Brands revenue increased by 35.5% year-over-year[101] - Retail gross profit increased by 14.8% and Brands gross profit increased by 41.1% year-over-year[101] NOTE 20 — Fair Value Measurements The company measures certain financial liabilities at fair value on a recurring basis, primarily derivative liabilities related to Private Warrants, Forward Share Purchase Agreements, Escrow Shares, and Shareholder Earn-Out Rights. These are classified as Level 3 in the fair value hierarchy and valued using Black-Scholes or binomial lattice models with unobservable inputs - The company's financial instruments measured at fair value on a recurring basis are classified as Level 3, indicating the use of unobservable inputs[104][105] Fair Value of Derivative Liabilities (in thousands) | Description | Level | March 31, 2022 | Gain (Loss) | February 4, 2022 | | :------------------------------------------ | :---- | :------------- | :---------- | :--------------- | | Private Warrants derivative liability | 3 | $7,989 | $(4,073) | $3,916 | | Forward share purchase agreements derivative liability | 3 | $7,452 | $6,718 | $14,170 | | Escrow Shares derivative liability | 3 | $10,129 | $(3,261) | $6,868 | | Shareholder earn-out rights derivative liability | 3 | $35,912 | $(9,781) | $26,131 | | Total | | $61,482 | $(10,397) | $51,085 | - The change in fair value of derivatives resulted in a $(10.40) million loss for the period, primarily driven by the shareholder earn-out rights and private warrants[105] - Valuation models for these derivatives include Black-Scholes (Private Warrants, FPAs) and binomial lattice models (Escrow Shares, Shareholder Earn-Out Rights), utilizing inputs such as stock price, volatility, term, risk-free rate, and revenue assumptions[106][107][110][111] NOTE 21 - Subsequent Event Subsequent to quarter-end, Forward Share Purchase Agreements (FPAs) were amended, modifying repurchase prices and extending the exercise date to August 1, 2022. Cash totaling $7.28 million was released from escrow related to FPA holders selling shares in the open market - On May 3, 2022, the Forward Share Purchase Agreements (FPAs) were amended, adjusting repurchase prices to $10.16 or $10.31 per share and extending the exercise date to August 1, 2022[112][113] - Since the merger closing, $7.28 million has been released from escrow accounts related to FPA holders selling shares in the open market, with $1.97 million recognized during Q1 2022 and the remainder thereafter[114][155] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Leafly's financial condition and results of operations for the three months ended March 31, 2022. It covers the impact of the reverse recapitalization merger, business overview, public company costs, key operational metrics, detailed analysis of revenue and expenses, non-GAAP financial measures, and liquidity Merger with Merida The Business Combination with Merida Merger Corp. I on February 4, 2022, was accounted for as a reverse recapitalization, with Leafly as the accounting acquirer - The Business Combination with Merida Merger Corp. I on February 4, 2022, was accounted for as a reverse recapitalization, with Leafly as the accounting acquirer[117] - Merida's assets and liabilities were consolidated at historical cost, with no goodwill recorded, except for certain derivative liabilities measured at fair value[118] Business Overview Leafly is a leading online cannabis discovery marketplace and resource, connecting consumers with legal and licensed retailers and brands - Leafly is a leading online cannabis discovery marketplace and resource, connecting consumers with legal and licensed retailers and brands[119][120] - The company monetizes its platform primarily through subscription packages bundling e-commerce software and advertising solutions, as well as non-subscription-based advertising[121] Merger and Public Company Costs Leafly expects to incur approximately $8.5 million to $9.5 million annually in incremental cash costs for operating as a public company, alongside increased non-cash stock-based compensation expenses - Leafly expects to incur approximately $8.5 million to $9.5 million annually in incremental cash costs for operating as a public company[124] - Non-cash stock-based compensation expenses are also expected to increase significantly as the company leverages equity to fund operations[124] Key Metrics Key operational metrics show a decrease in monthly active users but an increase in retail accounts, alongside a strategic reduction in retailer average revenue per account Key Metrics | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | Change (%) | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | :--------- | | Average Monthly Active Users ("MAUs") (in thousands) | 7,749 | 10,973 | (3,224) | (29)% | | Ending retail accounts | 5,422 | 3,965 | 1,457 | 37% | | Retailer average revenue per account ("ARPA") | $576 | $685 | $(109) | (16)% | - Average Monthly Active Users (MAUs) decreased by 29% year-over-year, attributed to reduced online shopping post-pandemic and a decline in organic search traffic[131] - Ending retail accounts increased by 37% year-over-year, reflecting the company's focus on growing supply partners[131] - Retailer ARPA decreased by 16% year-over-year, a strategic decision to expand into lower population/demand markets at lower price points[131] Discussion of our Results of Operations This section provides a detailed analysis of Leafly's revenue, cost of revenue, operating expenses, and other expenses for the three months ended March 31, 2022 and 2021 Revenue Total revenue increased by 21%, driven by growth in both Retail and Brands segments, primarily from digital media display ads, subscription sales, and increased volume Revenue (in thousands) | Segment | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Retail | $9,179 | $7,821 | $1,358 | 17% | | Brands | $2,241 | $1,654 | $587 | 35% | | Total revenue | $11,420 | $9,475 | $1,945 | 21% | - Retail revenue growth was driven by increased volumes of digital media display ads and subscription sales, despite an overall reduction in prices in target markets[132] - Brands revenue grew primarily due to increased volume, as the company offers a solution for brands lacking access to traditional advertising channels in the cannabis industry[133] Cost of revenue Total cost of revenue increased by 33%, primarily due to higher business platform costs and website infrastructure costs in the Retail segment Cost of Revenue (in thousands) | Segment | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Retail | $1,040 | $730 | $310 | 42% | | Brands | $415 | $360 | $55 | 15% | | Total cost of revenue | $1,455 | $1,090 | $365 | 33% | - Retail cost of revenue increased primarily due to a $214 thousand increase in business platform costs (data licensing fees) and $94 thousand higher website infrastructure costs (hosting fees)[134] - Brands cost of revenue also increased due to shared business platform and website infrastructure costs, partially offset by a $57 thousand decrease in audience extension costs[135] Operating expenses Total operating expenses surged by 84%, driven by significant increases in sales and marketing, and general and administrative expenses, including substantial stock-based compensation and public company costs Operating Expenses (in thousands) | Expense Category | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :----------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Sales and marketing | $7,014 | $3,803 | $3,211 | 84% | | Product development | $3,465 | $3,170 | $295 | 9% | | General and administrative | $6,931 | $2,506 | $4,425 | 177% | | Total operating expenses | $17,410 | $9,479 | $7,931 | 84% | - Sales and marketing expenses increased by 84%, driven by an $858 thousand increase in advertising and marketing spending and a $2.03 million increase in employee compensation costs[136] - General and administrative expenses surged by 177%, primarily due to a $2.36 million increase in compensation (including $1.37 million in stock-based compensation for CEO options), a $1.06 million increase in insurance costs, and a $0.63 million increase in professional services fees related to the Business Combination[137][138] Other expense Total other expense significantly increased due to a substantial change in the fair value of derivatives and higher interest expense from new convertible notes Other Expense (in thousands) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :-------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Interest (expense) income, net | $(697) | $1 | $(698) | nm | | Change in fair value of derivatives | $(10,397) | $— | $(10,397) | nm | | Other expense, net | $(837) | $(16) | $(821) | nm | | Total other expense | $(11,931) | $(15) | $(11,916) | nm | - Interest expense increased significantly due to the issuance of the 2022 Notes[137] - A $10.40 million change in fair value of derivatives was recorded, stemming from the Business Combination and subsequent valuations[138] - Other expense, net, increased due to $874 thousand in costs allocated to newly issued derivative liabilities in connection with the Business Combination[139] Non-GAAP Financial Measures Leafly presents EBITDA and Adjusted EBITDA as non-GAAP measures to evaluate operating performance, excluding interest, taxes, depreciation, amortization, stock-based compensation, transaction expenses, and changes in fair value of derivatives. Both metrics show an increased loss year-over-year - EBITDA and Adjusted EBITDA are non-GAAP financial measures used by management to evaluate operating performance and make strategic decisions[140][141] Reconciliation of Net Loss to Non-GAAP EBITDA and Adjusted EBITDA (in thousands) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss | $(19,376) | $(1,109) | | Interest expense, net | $697 | $(1) | | Depreciation and amortization expense | $52 | $80 | | EBITDA | $(18,627) | $(1,030) | | Stock-based compensation | $1,924 | $181 | | Transaction expenses | $874 | $— | | Change in fair value of derivatives | $10,397 | $— | | Adjusted EBITDA | $(5,432) | $(849) | - The increase in loss on both an EBITDA and Adjusted EBITDA basis is due to increased operating expenses, partially offset by increased revenue[142] Financial Condition Leafly's financial condition saw a significant increase in cash, cash equivalents, and restricted cash due to proceeds from convertible notes and the Business Combination. Operating cash flow worsened, but financing activities provided substantial cash. The company has an accumulated deficit but anticipates sufficient liquidity for the next 12 months Cash, cash equivalents, and restricted cash Cash, cash equivalents, and restricted cash significantly increased due to proceeds from convertible notes and restricted cash from the Business Combination - Cash, cash equivalents, and restricted cash increased from $28.70 million at December 31, 2021, to $72.61 million at March 31, 2022[143] - The increase was primarily due to proceeds from the issuance of the 2022 Notes and restricted cash received through the Business Combination[143] Cash flows Cash used in operations increased significantly due to a larger net loss, while financing activities provided substantial cash from convertible notes and restricted cash - Cash used in operations increased by $13.64 million to $14.01 million for the three months ended March 31, 2022, mainly due to increased net loss[144] - Cash and restricted cash provided by financing activities increased by $58.74 million to $58.71 million, primarily from 2022 Notes proceeds and restricted cash from Forward Share Purchase Agreements[144] Stock and convertible promissory note issuances Leafly has historically financed a significant portion of its operations through the issuance of stock and convertible promissory notes - Leafly has financed a sizable portion of its operations since 2019 through issuances of stock and convertible promissory notes, used for working capital and capital expenditures[145] Deferred revenue Deferred revenue, primarily from software subscriptions and display ads, is expected to be recognized within the next 12 months - Deferred revenue primarily relates to software subscriptions and display ads, with the balance at March 31, 2022, expected to be recognized within the subsequent 12-month period[146] Contractual obligations and other planned uses of capital The company plans to invest in product development, marketing, technology, and strategic opportunities, while also meeting public company compliance requirements - The company plans to invest in product and feature development, expand marketing and sales, improve technology and finance infrastructure, hire and retain employees, pursue strategic opportunities, and meet public company compliance requirements[147] Liquidity Leafly has an accumulated deficit but anticipates sufficient capital resources, including funding from the 2022 Notes, to fund operations for at least the next 12 months - Leafly has incurred losses since inception, with an accumulated deficit of $89.15 million at March 31, 2022[148] - The company anticipates that its capital resources, including funding from the 2022 Notes, are sufficient to fund operations for at least the next 12 months[149] Forward Share Purchase Agreements and Restricted Cash Forward Share Purchase Agreements (FPAs) allowed holders to sell shares to Leafly at specified prices, with $39.03 million deposited into escrow upon the merger closing - Forward Share Purchase Agreements (FPAs) allowed holders to sell up to 4,000 shares to Leafly at specified prices, with $39.03 million deposited into escrow accounts upon the merger closing[150][151][152] - Leafly was informed that certain holders sold 196 shares covered by the FPAs following the merger and before the end of Q1 2022[152] FPA Amendments subsequent to quarter-end Subsequent to quarter-end, FPAs were amended to adjust repurchase prices and extend the election date, resulting in the release of $7.28 million from escrow - On May 3, 2022, FPAs were amended to modify repurchase prices to $10.16 or $10.31 per share and extend the repurchase election date to August 1, 2022[154] - $7.28 million has been released from escrow accounts since the merger closing due to FPA holders selling shares in the open market[155] Related Party Relationships Information regarding related party relationships and transactions is detailed in Note 16 to the condensed consolidated financial statements - Information on related party relationships and transactions is detailed in Note 16 to the condensed consolidated financial statements[156] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Leafly is not required to provide quantitative and qualitative disclosures about market risk - Leafly is a smaller reporting company and is not required to provide information on market risk[157] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures, concluding they were effective as of March 31, 2022. There were no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2022[160] - There were no material changes in internal control over financial reporting during the three months ended March 31, 2022[161] Part II - Other Information This section provides additional information not included in the financial statements, covering legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings The company is involved in routine legal and administrative proceedings, but management believes any potential liabilities will not materially affect its financial position, cash flows, or results of operations. No material developments occurred since the last annual report - Management believes potential liabilities from legal proceedings will not have a material adverse effect on the company's financial position, cash flows, or results of operations[162] - There have been no material developments to the legal proceedings reported in the Annual Report on Form 10-K for the year ended December 31, 2021[162] Item 1A. Risk Factors There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes to the Risk Factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021, occurred during the three months ended March 31, 2022[163] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities and use of proceeds to report[164] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[164] Item 5. Other Information There is no other information to report for the period - No other information to report[165] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including merger agreements, corporate governance documents, note purchase agreements, and certifications - The report includes exhibits such as the Agreement and Plan of Merger, Second Amended and Restated Certificate of Incorporation, Amended and Restated By-Laws, Note Purchase Agreement, and certifications from the CEO and CFO[167] Signatures This section confirms the official signing of the report by the Chief Executive Officer and Chief Financial Officer of Leafly Holdings, Inc - The report was signed on May 16, 2022, by Yoko Miyashita, Chief Executive Officer, and Suresh Krishnaswamy, Chief Financial Officer, of Leafly Holdings, Inc[170][171]