LEAFLY HOLDINGS, INC. 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 "Item 8.
Financial Statements and Supplementary Data" of this Annual Report on Form 10-
Amounts in this section are presented in thousands, except for per share numbers and percentages.
Business Overview
During the second quarter and continuing into the third quarter of 2022, we
began to see some macro-economic impacts on the business. Our retailer, brand,
and multi-state operator customers signaled that their advertising budgets were
under scrutiny and, in some cases, froze their advertising spend. In addition,
we saw heightened customer account churn in our less mature markets, which we
first observed late in the first quarter of 2022. These conditions continued for
the remainder of the fiscal year. In light of the current macroeconomic
environment, we have taken steps to manage the business accordingly. We
implemented plans to reduce operating expenses, including an announced headcount
reduction during the fourth quarter of 2022 of 56 employees or approximately 21%
of our workforce at the time. We incurred non-recurring cash charges of
approximately
Merger and Public Company Costs
As a consequence of the Business Combination,
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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 1 to our consolidated financial statements within this Annual
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
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
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
Due to third-party technological limitations, user software settings, or user
behavior,
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.
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Ending retail accounts is the number of paying retailer accounts with
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
Results of OperationsKey Metrics
The table below presents these measures for the respective periods:
Year Ended December 31,
2022 2021 Change Change (%)
Key Operating Metrics:
Average MAUs (in thousands)1 7,962 10,005 (2,043 ) -20 %
Ending retail accounts2 5,806 5,265 541 10 %
Retailer ARPA3 $ 566 $ 636 $ (70 ) -11 %
1.Calculated as a simple average for the period presented.
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.
MAUs decreased 20% for the year ended
Revenue
We generate our revenue through the sale of online advertising and online order
reservation enablement on the
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extension.
Year Ended December 31,
2022 2021 Change ($) Change (%)
Revenue:
Retail $ 36,742 $ 33,628 $ 3,114 9 %
Brands 10,621 9,408 1,213 13 %
Total revenue $ 47,363 $ 43,036 $ 4,327 10 %
Retail
Retail revenue from digital media display ads and subscriptions revenue
increased
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 an 11% decrease in ARPA for the year ended
Brands
For the year ended
•
direct-to-consumer marketing revenue increase of
•
subscriptions 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 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
Year Ended December 31,
2022 2021 Change ($) Change (%)
Cost of sales:
Retail $ 4,141 $ 3,193 $ 948 30 %
Brands 1,719 1,790 (71 ) -4 %
Total cost of sales $ 5,860 $ 4,983 $ 877 18 %
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Retail cost of revenue increased due primarily to
Brands
Brands cost of revenue decreased for the year ended
Operating Expenses
Year Ended December 31,
2022 2021 Change ($) Change (%)
Operating expenses:
Sales and marketing $ 27,080 $ 19,640 $ 7,440 38 %
Product development 14,988 13,896 1,092 8 %
General and administrative 27,440 15,142 12,298 81 %
Total operating expenses $ 69,508 $ 48,678 $ 20,830 43 %
Sales and marketing expenses grew as we made additional investments in this area
of our business following increased funding through the issuance of
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
General and administrative expenses increased for the year ended
•
a
•
a
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a
•
a
Other Income and Expense
Year Ended December 31,
2022 2021 Change ($) Change (%) 1
Other income (expense):
Interest expense, net $ (2,811 ) $ (1,349 ) $ (1,462 ) 108 %
Change in fair value of derivatives 36,823 - 36,823 nm
Other expense, net (937 ) (50 ) (887 ) nm
Total other income (expense) $ 33,075 $ (1,399 ) $ 34,474 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 year ended
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 18 to our consolidated financial statements within this Annual Report for details on the valuations and the fair value changes in the periods presented.
Other expense, net increased for the year ended
Note 1 to our consolidated financial statements within this Annual 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 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
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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:
Year Ended December 31,
2022 2021
Net income (loss) $ 5,070 $ (12,024 )
Interest expense, net 2,811 1,349
Depreciation and amortization expense 449 253
EBITDA 8,330 (10,422 )
Stock-based compensation 3,917 1,022
Transaction expenses allocated
to derivatives 874 - Severance costs 492 - Change in fair value of derivatives (36,823 ) - Adjusted EBITDA$ (23,210 ) $ (9,400 )
The increase in EBITDA is due to the change in fair value of the derivatives for
the year ended
Financial Condition
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash totaled
Cash Flows
As compared to the year ended
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 consolidated financial statements within this Annual Report.
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Deferred revenue is primarily related to software subscriptions and display ads.
The revenue deferred at
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 operation as a public company. As we continue to grow, we expect the aggregate amount of these expenses will also continue to grow.
Liquidity and Capital Resources
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 incurred recurring operating losses, used cash from
operations, and relied on the capital raised in our merger transaction 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
Upon the closing of the Business Combination,
We believe that our capital resources are sufficient to fund our operations for at least the following 12 months.
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Nasdaq Notifications of Noncompliance
On
On
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
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.
Related Party Relationships
See Note 15 to our consolidated financial statements within this Annual Report for information on the Company's related party relationships and transactions.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in
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We believe that of our significant accounting policies described in Note 2 , "Basis of Presentation and Significant Accounting Policies", in the Notes to Consolidated Financial Statements included in Part II, Item 8 - "Financial Statements and Supplementary Data" , the critical accounting estimates, assumptions, and judgments that have the most significant impact on our consolidated financial statements are described below (references to Notes refer to the aforementioned notes to the Consolidated Financial Statements).
Valuations Derivative Liabilities
As of
2022 Notes
As of
Income Taxes
We record deferred tax assets and liabilities based on the net tax effects of
tax credits, operating loss carryforwards, and temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
compared to the amounts used for income tax purposes. We regularly review our
deferred tax assets for recoverability with consideration for such factors as
historical losses, projected future taxable income, and the expected timing of
the reversals of existing temporary differences. A valuation allowance is
recorded when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management believes the
Stock-Based Compensation
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Stock-based compensation expense represents the cost of the grant date fair
value of stock option, restricted stock unit or performance stock unit grants,
estimated in accordance with the applicable accounting guidance, recognized on a
straight-line basis over the vesting period. The fair value of stock options
with service or performance conditions is estimated on the date of grant using
the Black-Scholes option pricing model, inclusive of assumptions for risk-free
interest rates, expected dividends, expected terms, expected volatility, and the
fair value of the underlying stock. The fair value of restricted stock awards
with service or performance conditions is estimated on the date of grant based
on the market value of the Company's common stock. The fair value of stock
options and restricted stock units with market-based conditions is estimated on
the date of grant using a Monte Carlo simulation model, inclusive of assumptions
for risk-free interest rates, expected terms, expected volatility, and the
market target. Significant changes to the key assumptions underlying the factors
used could result in different fair values of stock options at each valuation
date, which could result in different stock-based compensation expense.
Stock-based compensation expense for the year ended
Allowance for Credit Losses
Allowance for credit risk for accounts receivables and contract assets is
established based upon historical experience and loss patterns, the number of
days that billings are past due, an evaluation of the potential risk of loss
associated with delinquent accounts and known delinquent accounts. The allowance
reflects our best estimate of probable losses associated with the accounts
receivable balance. It is based upon historical experience and loss patterns,
the number of days that billings are past due, an evaluation of the potential
risk of loss associated with delinquent accounts, and known delinquent accounts.
When new information becomes available that allows us to estimate the allowance
more accurately, we makes an adjustment, which is considered a change in
accounting estimate. If our estimate of uncollectible accounts is too low,
credit loss expense may increase in future periods, and if it is too high,
credit loss expense may decrease in future periods. At
Capitalized Software
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