NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(in thousands, except per share amounts)
NOTE 1 — Description of the Business and Merger Transaction
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 two wholly-owned subsidiaries, Leafly Canada Ltd. (“Leafly Canada”) and Leafly, LLC (“Legacy Leafly”). Legacy Leafly is the accounting predecessor of Leafly. The accompanying condensed 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”), 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 Merida. 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 U.S. 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 12 and 13, 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.
The following table provides a summary of the significant sources and uses of cash related to the closing of the Business Combination on February 4, 2022 and the cash received from escrow through September 30, 2022:
| | | | | | | | |
Amount in Merida's trust account ("the Trust") at closing | | $ | 90,824 | |
Total payment to Merida public redeeming stockholders | | 49,466 | |
Amount available after paying Merida redeeming stockholders | | 41,358 | |
| Cash to escrow for Forward Share Purchase Agreements (see Note 13) | | 39,032 | |
| Remaining balance | | 2,326 | |
| Merida expenses paid from the Trust at closing | | 1,744 | |
| Net cash from the Trust to Leafly at closing | | 582 | |
| Cash received from escrow February 4, 2022 - September 30, 2022 | | 8,089 | |
| Net cash from the Trust to Leafly as of September 30, 2022 | | $ | 8,671 | |
The following table provides a reconciliation of the common shares related to the Merger transaction:
| | | | | | | | |
| Merida public stockholders | | 4,160 |
| Merida initial stockholders (including Sponsor and EarlyBirdCapital) | | 1,667 |
| Holders of 2022 Notes (see Note 11) | | 38 |
| Shares held by Sponsor in escrow that are subject to earn-out conditions (see Note 12) | | 1,625 |
| Total Merida | | 7,490 |
| Legacy Leafly existing securityholders | | 35,434 |
| Total shares outstanding as of February 4, 2022 | | 42,924 |
All shares in this table, except the shares held by Merida public stockholders and Holders of 2022 Notes, were subject to restrictions as to trading through August 3, 2022 ("Lock Up Restrictions").
NOTE 2 — Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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, 2021 and 2020, and Management’s Discussion and Analysis of Financial Condition and Results of Operations of Leafly for the year ended December 31, 2021, each of which was filed on the company’s Amendment No. 1 on Form 8-K/A filed with the SEC on March 31, 2022 (the “2021 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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on the reported net income (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.
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 emerging growth company or (b) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act.
Significant Accounting Policies
The unaudited interim financial statements should be read in conjunction with the Company's 2021 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 and nine months ended September 30, 2022 compared to our Annual Report on Form 10-K for the year ended December 31, 2021. However, certain items became material during the periods presented and therefore, we have disclosed the related accounting policies below. In addition, as a result of the Business Combination, the Company entered into certain derivative instruments that are accounted for as liabilities. These instruments and the related accounting are discussed in Notes 12, 13, and 20.
Capitalized Software
The Company capitalizes certain costs related to acquisition and development of software for internal use, including internal labor costs incurred during development. The Company begins to capitalize these costs when planning and design efforts are successfully completed and development is ready to commence. Costs incurred during planning and design, together with costs incurred for training and maintenance, are expensed as incurred and recorded in product development expense. The Company places capitalized software assets into service and commences amortization when the asset is substantially complete and ready for its intended use. Once placed into service, the Company capitalizes qualifying costs of specified upgrades or enhancements to the assets when the upgrade or enhancement will result in new or additional functionality.
The Company’s estimated useful life for capitalized software is 3 years, and amortization is calculated using the straight-line method. The Company considers the useful life of capitalized software to be a significant estimate.
Transaction Costs
The Company incurred significant costs direct and incremental to the Business Combination and therefore to the recapitalization of the Company. We deferred such costs incurred in 2021. In 2022, upon closing of the Business Combination, total direct transaction costs were allocated between equity and liability instruments measured at fair value on a recurring basis that were newly issued in the recapitalization. Amounts allocated to equity were recorded to additional paid-in capital, while amounts allocated to the specified liabilities were recorded as other expense.
Recent Accounting Pronouncements
As a result of the elected JOBS Act relief discussed above, these condensed consolidated financial statements may not be comparable to other companies that do not elect JOBS Act relief or choose to adopt certain accounting pronouncements during a different period than the Company.
Recently Adopted Accounting Standards
None.
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 condensed consolidated financial statements or related disclosures.
NOTE 3 — Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash consisted of the following:
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| Cash and cash equivalents | $ | 27,829 | | | $ | 28,565 | |
| Restricted cash | 607 | | | 130 | |
| $ | 28,436 | | | $ | 28,695 | |
The September 30, 2022 restricted cash balance includes $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 20.
NOTE 4 — Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| Prepaid insurance | $ | 2,065 | | | $ | 57 | |
| Other prepaid expenses | 1,441 | | | 1,134 | |
| Other current assets | 63 | | | 156 | |
| $ | 3,569 | | | $ | 1,347 | |
NOTE 5 — Accounts Receivable, Net
Accounts receivable, net 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
September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Balance, beginning of period | $ | 1,469 | | | $ | 1,142 | | | $ | 1,848 | | | $ | 1,131 | |
| Add: provision for doubtful accounts, net of recoveries | 383 | | | 529 | | | 1,023 | | | 841 | |
| Less: write-offs | (894) | | | (93) | | | (1,913) | | | (394) | |
| Balance, end of period | $ | 958 | | | $ | 1,578 | | | $ | 958 | | | $ | 1,578 | |
NOTE 6 — Property, Equipment, and Software, Net
Property, equipment, and software consisted of the following:
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| Furniture and equipment | $ | 902 | | | $ | 1,049 | |
| Leasehold improvements | — | | | 2 | |
| Internal-use software | 2,081 | | | — | |
| 2,983 | | | 1,051 | |
| Less: accumulated depreciation and amortization | (770) | | | (738) | |
| $ | 2,213 | | | $ | 313 | |
The Company recognized depreciation expense of $38 and $57 for the three months ended September 30, 2022 and 2021, respectively, and $135 and $195 for the nine months ended September 30, 2022 and 2021, respectively. Amortization of internal-use software was $90 and $0 for the three months ended September 30, 2022 and 2021, respectively, and $141 and $0 for the nine months ended September 30, 2022 and 2021, respectively.
Leases
The Company does not have any leases with an original term longer than twelve months as of September 30, 2022. The Company does rent office space under short-term arrangements, which are not material.
NOTE 7 — Accrued Expenses and Other Current Liabilities
Accrued expenses consist of the following:
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| Accrued bonuses | $ | 537 | | | $ | 3,668 | |
| Other employee-related liabilities | 2,547 | | | 2,131 | |
| Accrued interest | 400 | | | 1,313 | |
Other accrued expenses 1 | 1,592 | | | 1,213 | |
| $ | 5,076 | | | $ | 8,325 | |
1 There are no individual items within this balance that exceed 10% of the total of the table.
Accrued bonuses include those for executive officers of the Company. Historically, bonuses have been provided to executives on a discretionary basis. Bonus compensation is designed to hold executives accountable and reward them for individual and business performance. The Company offers an annual incentive program for its executive officers whereby they are eligible to receive target bonus payouts, of up to 50% for the CEO and 40% for other executive officers, of their base salary, with the actual bonus awarded based on a number of factors, including each executive’s individual performance, Leafly’s performance, current market and business climate, and Leafly’s financial circumstances, as determined by the Leafly board of directors.
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 condensed consolidated financial statements.
NOTE 9 — Revenue and Contract Balances
The following table presents the Company's revenue by service type:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Advertising | $ | 11,731 | | | $ | 10,840 | | | $ | 34,959 | | | $ | 30,813 | |
| Other services | 50 | | | 56 | | | 292 | | | 146 | |
| $ | 11,781 | | | $ | 10,896 | | | $ | 35,251 | | | $ | 30,959 | |
The following table presents the Company's revenue by geographic region:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
United States1 | $ | 11,140 | | | $ | 9,757 | | | $ | 32,787 | | | $ | 27,644 | |
All other countries1 | 641 | | | 1,139 | | | 2,464 | | | 3,315 | |
| $ | 11,781 | | | $ | 10,896 | | | $ | 35,251 | | | $ | 30,959 | |
1 Calculated based on customer sold to address for the periods presented. Using the prior calculation based on billing entity address, revenue for the United States and All other countries would have been $11,335 and $446 for the three months ended September 30, 2022, $10,041 and $855 for the three months ended September 30, 2021, $33,491 and $1,760 for the nine months ended September 30, 2022, and $28,204 and $2,755 for the nine months ended September 30, 2021, respectively.
The following tables presents the Company's revenue by state:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Arizona | 19 | % | | 16 | % | | 18 | % | | 16 | % |
| California | 13 | % | | 11 | % | | 11 | % | | 10 | % |
| Oregon | 10 | % | | 11 | % | | 10 | % | | 12 | % |
No other state comprised 10% or more of Leafly’s revenue during the three and nine months ended September 30, 2022 and 2021. We have a diversified set of customers; no single customer accounted for 10% or more of our revenue for the three and nine months ended September 30, 2022 and 2021.
The following table presents the Company's revenue by timing of recognition:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | Nine Months Ended
September 30, |
| 2022 | | 2021 | 2022 | | 2021 |
| Over time | | | | | | |
Retail1 | $ | 9,042 | | | $ | 8,606 | | $ | 27,286 | | | $ | 24,572 | |
Brands2 | 1,759 | | | 1,581 | | 5,067 | | | 4,591 | |
| $ | 10,801 | | | $ | 10,187 | | $ | 32,353 | | | $ | 29,163 | |
| Point in time | | | | | | |
Brands3 | 980 | | | 709 | | 2,898 | | | 1,796 | |
| $ | 11,781 | | | $ | 10,896 | | $ | 35,251 | | | $ | 30,959 | |
1 Revenues from subscription services and display ads.
2 Revenues from brand profile subscriptions and digital media (including display ads and audience extension).
3 Revenues from branded content and channel advertising (including direct to consumer email).
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 accounts and changes in the deferred revenue accounts
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | Nine Months Ended
September 30, |
| 2022 | | 2021 | 2022 | | 2021 |
| Balance, beginning of period | $ | 2,467 | | | $ | 2,079 | | $ | 1,975 | | | $ | 1,585 | |
| Add: net increase in current period contract liabilities | 1,630 | | | 1,947 | | 1,976 | | | 2,112 | |
| Less: revenue recognized from beginning balance | (2,045) | | | (1,847) | | (1,899) | | | (1,518) | |
| Balance, end of period | $ | 2,052 | | | $ | 2,179 | | $ | 2,052 | | | $ | 2,179 | |
A majority of the deferred revenue balance as of September 30, 2022 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 September 30, 2022 or December 31, 2021.
NOTE 10 — Income Taxes
The Company’s effective tax rate was 0% for the three and nine months ended September 30, 2022 and 2021. 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.
There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of September 30, 2022 and December 31, 2021. 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 has been subject to income tax examinations by major taxing authorities since inception.
As a result of the Business Combination, the Company’s federal, state, and foreign net operating loss carryforwards were $53,904, $35,976 and $4,303, respectively, as of December 31, 2021. Federal and state tax laws impose substantial restrictions on the utilization of net operating loss carryforwards in the event of an "ownership change" as defined in Section 382 of the Internal Revenue code. Such a limitation could result in limitation in the use of the net operating losses in future years and possibly a reduction of the net operating losses available.
NOTE 11 — Convertible Promissory Notes
2022 Notes
Merida entered into a $30,000 convertible 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 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. 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) 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 September 30, 2022, the net carrying amount of the 2022 Notes was $28,726, which includes unamortized issuance costs and debt discount of $1,274. The estimated fair value of the convertible debt instruments was approximately $23,000 as of September 30, 2022. The fair value was measured using a combination of an income approach and Black-Scholes model, both 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 Leafy securities.
NOTE 12 — Stockholders’ Equity
The Consolidated Statements of Changes in Stockholders' Equity (Deficit) reflect the reverse recapitalization on February 4, 2022, as discussed in Note 1. Since the Company was determined to be the accounting acquirer in the transaction, all periods presented prior to consummation of the transaction reflect the historical activity and balances of Leafly, Inc. (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.
As of September 30, 2022 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.
Voting Rights
The holders of Leafly common stock exclusively possess all stockholder voting power with respect to Leafly, except as otherwise required by law or the Company's charter. Holders of Leafly common stock are entitled to one vote per share on each matter properly submitted to a vote of stockholders. The holders of Leafly common stock will at all times vote together as one class on all matters submitted to a vote of stockholders, unless otherwise required by Delaware law or the charter. If Leafly has multiple classes of common stock in the future, then Delaware law could require holders of shares of a class of capital stock to vote separately as a single class in the following circumstances:
•if we were to seek to amend the charter to increase or decrease the par value of a class of the capital stock, then that class would be required to vote separately to approve the proposed amendment; and
•if we were to seek to amend the charter in a manner that alters or changes the powers, preferences, or special rights of a class of capital stock in a manner that affected its holders adversely, then that class would be required to vote separately to approve the proposed amendment.
Election of Directors
The charter provides for a classified board of directors that is divided into three classes with staggered three-year terms. Only the directors in one class are subject to election by a plurality of the votes cast at each annual meeting of stockholders, with the directors in the other classes continuing for the remainder of their respective three-year terms. The charter does not provide for cumulative voting for the election of directors.
Dividend Rights
Subject to the rights, if any, of the holders of any outstanding series of the Leafly preferred stock, the holders of Leafly common stock are entitled to receive dividends and other distributions (payable in cash, property or capital stock of Leafly) when, as and if declared by the Leafly board of directors out of any assets or funds legally available and will share equally on a per share basis in such dividends and distributions.
No Preemptive or Similar Rights
Leafly common stock is not entitled to preemptive rights, and is not subject to conversion, redemption or sinking fund provisions.
Liquidation, Dissolution and Winding Up
In the event of any voluntary or involuntary liquidation, dissolution or winding-up, after payment or provision for payment of the debts and other liabilities of Leafly, the holders of Leafly common stock will be entitled to receive all the remaining
assets of Leafly available for distribution to its stockholders, ratably in proportion to the number of shares of the Leafly common stock held by them, subject to the rights, if any, of the holders of any outstanding shares of Leafly preferred stock.
Sponsor Shares Subject to Earn-Out Conditions
In accordance with the Merger Agreement, upon closing of the Business Combination, 1,625 of the shares 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 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 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 20 for additional information.
Lock Up Restrictions
In accordance with various legal documents, the majority of our Common Stock was subject to restrictions on trading through August 3, 2022. See Note 1 for detail on Common Stock previously subject to Lock Up Restrictions.
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 and $360 remaining in accrued expenses and other current liabilities on our consolidated balance sheet at September 30, 2022. These repurchases were in settlement of the Forward Purchase Agreements. 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 20 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:
•revenue for the year ending December 31, 2022 equals or exceeds $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 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), 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 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), 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 or price target is met in full, the respective first target will be deemed to have been met as well if it had not been met during the first 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 September 30, 2022.
NOTE 13 — Warrants and Forward Share Purchase Agreements
Public Warrants
As of both September 30, 2022 and December 31, 2021, 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 will become exercisable on the later of (a) 30 days after the completion of a merger or (b) 12 months from the closing of the IPO. 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 September 30, 2022 and December 31, 2021, 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 warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the 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 warrants.
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 20 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 to the escrow accounts.
During the three and nine months ended September 30, 2022, $720 and $8,089, respectively, 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 held by Merida Holdings, LLC were canceled, according to an agreement between the Company and Merida Holdings, LLC entered into upon execution of the FPAs.
NOTE 14 — Equity Incentive 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 (“Earn Out Plan”), and the New Leafly 2021 Employee Stock Purchase Plan (the “ESPP”), which are discussed in this Note 14 and in Note 15. Awards under the
2021 Plan are detailed below. There were no options or other equity awards granted under the 2018 Plan during the three and nine months ended September 30, 2022.
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).
In August 2022, the Company’s compensation committee of the board of directors or an authorized executive of the Company granted stock options to purchase an aggregate of approximately 101 shares of common stock at an exercise price of $1.98 per share and granted 1,228 restricted stock units. Prior to such grants, no grants had been made under the 2021 Plan. See Note 21 for awards subsequent to September 30, 2022.
The fair value of each stock option award to employees is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used as inputs to the pricing model for options granted during the three and nine months ended September 30, 2022:
| | | | | |
| Risk-free interest rate | 4.1 | % |
| Expected term in years | 4.06 |
| Expected volatility | 74.6 | % |
| Expected dividend yield | 0.0 | % |
Stock option activity under the 2021 Plan for the three months ended September 30, 2022 (there were no stock options granted previously under this plan) was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Shares | | Weighted Average
Exercise Price | | Aggregate
Intrinsic Value | | Weighted Average Remaining Contractual Term (in years) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Outstanding at June 30, 2022 | | — | | | $ | — | | | $ | — | | | — | |
| Granted | | 101 | | | 1.98 | | | | | |
| Exercised | | — | | | — | | | | | |
| Forfeited or expired | | — | | | — | | | | | |
Outstanding at September 30, 2022 | | 101 | | | $ | 1.98 | | | $ | — | | | 9.89 |
| | | | | | | | |
Vested and exercisable | | — | | | $ | — | | | $ | — | | | — | |
As of September 30, 2022, there was $114 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 3.36 years. The weighted-average grant date fair value of options granted under the 2021 Plan for the three and nine months ended September 30, 2022 was $1.16 per share.
Restricted stock unit activity under the 2021 Plan for the three months ended September 30, 2022 (there were no restricted stock units granted previously under this plan) was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Shares | | Weighted Average
Grant Date
Fair Value | | Total Fair Value | |
Unvested at June 30, 2022 | | — | | | $ | — | | | | |
| Granted | | 1,228 | | | 1.98 | | | $ | 2,432 | | |
| Vested | | (173) | | | 1.98 | | | $ | 325 | | |
| Forfeited | | (65) | | | 1.98 | | | | |
Unvested at September 30, 2022 | | 990 | | | $ | 1.98 | | | | |
| | | | | | | |
As of September 30, 2022, there was $1,825 of total unrecognized compensation cost related to unvested restricted stock units granted under the 2021 Plan. That cost is expected to be recognized over a weighted-average period of 3.34 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.
In May 2021, the Company’s board of directors granted stock options under the 2018 Plan to purchase an aggregate of approximately 2,191 shares of common stock at an exercise price of $1.10 per share.
The fair value of each stock option award to employees is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used as inputs to the pricing model for options granted during the nine months ended September 30, 2021 (there were no grants made in 2022):
| | | | | |
| Risk-free interest rate | 1.0 | % |
| Expected term in years | 5.90 |
| Expected volatility | 61.2 | % |
| Expected dividend yield | 0.0 | % |
Stock option activity under the 2018 Plan for the quarterly periods ended September 30, 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Shares | | Weighted Average
Exercise Price | | Aggregate
Intrinsic Value | | Weighted Average Remaining Contractual Term (in years) | |
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 | | | $ | 23,918 | | | 8.62 | |
| Exercised | | (29) | | $ | 1.05 | | | | | | |
| Forfeited or expired | | (3) | | $ | 2.30 | | | | | | |
Outstanding at June 30, 2022 | | 3,649 | | $ | 1.78 | | | $ | 11,307 | | | 8.35 | |
| Exercised | | (5) | | 0.79 | | | | | | |
| Forfeited or expired | | (110) | | 7.75 | | | | | | |
Outstanding at September 30, 2022 1 | | 3,534 | | $ | 1.60 | | | $ | 84 | | | 8.29 | |
| | | | | | | | | |
Vested and exercisable | | 1,849 | | $ | 1.18 | | | $ | 82 | | | 7.80 | |
1 Includes 2,478, 0, and 1,056 of awards accounted for as service-based, performance-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 performance options vest only if gross revenue equals or exceeds certain thresholds for the years ending December 31, 2022 and 2023, while the market-based options will vest only if the price of the Company's common stock reaches a $1,000,000 market capitalization target for any 20 days during a 30-day period on or before the fourth anniversary of the closing of the Merger.
As of September 30, 2022, there was: (i) $1,219 of unrecognized compensation cost related to service-based awards, which is expected to be recognized over a weighted-average service period of approximately 2.13 years; and (ii) $1,687 of unrecognized compensation cost related to market-based awards, which is expected to be recognized over a weighted-average service period of approximately 1.55 years.
The following tables presents the classification of stock-based compensation expense under the 2018 Plan and the 2021 Plan:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Sales and marketing | $ | 77 | | | $ | 15 | | | $ | 137 | | | $ | 65 | |
| Product development | 86 | | | 14 | | | 123 | | | 126 | |
| General and administrative | 608 | | | 179 | | | 2,899 | | | 538 | |
| $ | 771 | | | $ | 208 | | | $ | 3,159 | | | $ | 729 | |
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 restricted stock units (“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 September 30, 2022.
Option Modification
Concurrent with the closing of the Business Combination, the vesting provisions of certain stock options previously granted in 2021 to our Chief Executive Officer to purchase 2,917 shares of common stock were modified, and a corresponding charge of $1,366 was recorded for the three months ended March 31, 2022 to general and administrative expenses and additional paid-in capital. The original award included the following vesting provisions:
•Liquidity Event Option: A stock option to purchase 1,458 shares of common stock will vest upon the earlier of (a) the closing of the Initial Public Offering of the Company's common stock or (b) a change in control, provided the recipient remains in continuous service.
•Milestone Option: A stock option to purchase 1,458 shares of common stock will vest one-third each upon the achievement of the three annual revenue targets of $75,000, $150,000 and $300,000, provided the recipient remains in continuous service.
The modified vesting provisions are as follows:
•Liquidity Event Option: A stock option to purchase 1,458 shares of common stock will vest as follows, provided the recipient remains in continuous service: 50% upon the closing of the Business Combination and 50% upon the earlier of (i) the Company's achievement of a $1,000,000 market capitalization for any 20 during a 30-day period on or before the fourth anniversary of the closing of the Business Combination (the "Market Cap Milestone") or (ii) a change in control.
•Milestone Option: A stock option to purchase 1,458 shares of common stock will vest upon the achievement of the following milestones, provided that the recipient remains in continuous service:
◦First Milestone: 50% of the total number of shares subject to the stock option will vest if the Company's gross revenue for the year ending December 31, 2022 equals or exceeds $65,000. A pro rata amount vests in the event that the Company's gross revenue equals or exceeds 90% of the revenue target.
◦Second Milestone: 50% of the total number of shares subject to the stock option will vest if the Company's gross revenue for the year ending December 31, 2023 equals or exceeds $101,000. A pro rata amount vests in the event that the Company's gross revenue equals or exceeds 90% of the revenue target.
◦In the event the Second Milestone is achieved, any unvested portion of the stock option subject to the First Milestone will fully vest.
◦In the event the Market Cap Milestone is achieved, any unvested portion of the Milestone Option will fully vest.
◦The date of vesting for the Milestone Option will be the earlier of (i) the date following the Company's filing with the SEC of its Form 10-K for the applicable fiscal year in which the applicable revenue target was attained or, (ii) the date of the Market Cap Milestone is achieved.
◦All shares subject to the Milestone Option will vest immediately upon a change in control.
◦The Milestone Option will remain outstanding unless and until the last possible time that the Second Milestone can be achieved, the Market Cap Milestone can be achieved, or a change in control may occur during the term of the Milestone Option award, subject to the recipient's continued service.
NOTE 15 — Employee Stock Purchase Plan
The 2021 Employee Stock Purchase Plan (the “ESPP”) became effective immediately upon closing of the Merger. 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 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). The Company's current offering period runs from September 16, 2022 through March 15, 2023. Certain employees have enrolled but no purchases had been made as of September 30, 2022.
NOTE 16 — Related Party Transactions
One of Leafly's significant investors, Brendan Kennedy, is a member of the board of directors of Tilray, Inc., which is the parent company of High Park Holdings Ltd., a customer of Leafly, and has therefore been identified as a related party. During the three months ended September 30, 2022 and 2021, the Company recorded approximately $— and $11, respectively, of revenue earned from contracts with this customer, and during the nine months ended September 30, 2022 and 2021, the Company recorded approximately $— and $125, respectively, of revenue earned from contracts with this customer.
In June 2021, Mr. Kennedy, 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.
NOTE 17 – Defined Contribution Plan
The Company recognized expense from matching contributions to the Company-sponsored defined contribution retirement (401k) plan of $225 and $159 for the three months ended September 30, 2022 and 2021, respectively, and $684 and $528 for the nine months ended September 30, 2022 and 2021, respectively.
NOTE 18 — Net Income (Loss) Per Share
Basic and diluted net income (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 income (loss) per share attributable to common stockholders is computed by dividing the net income (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 September 30, 2022, the Company had 5,429 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 — Stockholders' Equity for additional information). Net income (loss) is attributed to common stockholders and participating securities based on their participation rights. Net income (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.
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 income (loss) per share attributable to common stockholders, as a group, for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income (loss) (A) | $ | 15,454 | | | $ | (4,454) | | | $ | 10,837 | | | $ | (6,880) | |
| Income impact of FPAs | (3,939) | | | — | | | (346) | | | — | |
| Income impact of convertible promissory notes | 600 | | | — | | | — | | | — | |
| Total undistributed income (loss) (B) | 12,115 | | | (4,454) | | | 10,491 | | | (6,880) | |
| | | | | | | |
Weighted average shares outstanding (C) | 35,580 | | 24,923 | | 35,260 | | 24,832 |
| Dilutive effect of FPAs | 3,547 | | — | | | 1,140 | | — | |
| Dilutive effect of convertible promissory notes | 2,477 | | — | | | — | | | — | |
| Dilutive effect of stock-based awards | 1,611 | | — | | | 2,304 | | — | |
| Common stock and common stock equivalents (D) | 43,215 | | 24,923 | | 38,704 | | 24,832 |
| | | | | | | |
| Net income (loss) per share: | | | | | | | |
| Basic (A/C) | $ | 0.43 | | | $ | (0.18) | | | $ | 0.31 | | | $ | (0.28) | |
| Diluted (B/D) | $ | 0.28 | | | $ | (0.18) | | | $ | 0.27 | | | $ | (0.28) | |
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. During 2021, only the Class 1, 2, and 3 shares were outstanding. Following are the calculations of basic and diluted net income (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 three and nine months ended September 30, 2022):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, 2022 | | Three Months Ended
September 30, 2021 |
| Common | | Class 1 | | Class 2 | | Class 3 |
| Net income (loss) | $ | 15,454 | | | $ | (1,676) | | | $ | (2,458) | | | $ | (320) | |
| Weighted average shares outstanding | 35,580 | | | 9,379 | | 13,755 | | 1,789 |
| Common stock and common stock equivalents | 43,215 | | 9,379 | | 13,755 | | 1,789 |
| | | | | | | |
| Basic net income (loss) per share | $ | 0.43 | | | $ | (0.18) | | | $ | (0.18) | | | $ | (0.18) | |
| Diluted net income (loss) per share | $ | 0.28 | | | $ | (0.18) | | | $ | (0.18) | | | $ | (0.18) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
| Common | | Class 1 | | Class 2 | | Class 3 |
| Net loss | $ | 10,837 | | | $ | (2,598) | | | $ | (3,811) | | | $ | (471) | |
| Weighted average shares outstanding | 35,260 | | 9,379 | | 13,755 | | 1,698 |
| Common stock and common stock equivalents | 38,704 | | 9,379 | | 13,755 | | 1,698 |
| | | | | | | |
| Basic net income (loss) per share | $ | 0.31 | | | $ | (0.28) | | | $ | (0.28) | | | $ | (0.28) | |
| Diluted net income (loss) per share | $ | 0.27 | | | $ | (0.28) | | | $ | (0.28) | | | $ | (0.28) | |
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
September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Shares subject to warrants | 10,451 | | — | | 10,451 | | — |
| Shares subject to convertible promissory notes | — | | 12,240 | | 2,428 | | 12,240 |
| Preferred stock | — | | 6,141 | | — | | 6,141 |
| Escrow Shares | 1,625 | | — | | 1,625 | | — |
| Shares subject to outstanding common stock options and RSUs | 1,056 | | 3,785 | | 1,056 | | 3,785 |
| Shares subject to stockholder earn-out rights | 5,429 | | — | | 5,429 | | — |
| $ | 18,561 | | | $ | 22,166 | | | $ | 20,989 | | | $ | 22,166 | |
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 and RSUs.
NOTE 19 — Segment Reporting
Segment revenue and gross profit were as follows during the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenue: | | | | | | | |
| Retail | $ | 9,042 | | | $ | 8,606 | | | $ | 27,286 | | | $ | 24,572 | |
| Brands | 2,739 | | | 2,290 | | | 7,965 | | | 6,387 | |
| Total revenue | $ | 11,781 | | | $ | 10,896 | | | $ | 35,251 | | | $ | 30,959 | |
| Gross profit: | | | | | | | |
| Retail | 7,979 | | | 7,744 | | | 24,193 | | | 22,339 | |
| Brands | 2,287 | | | 1,891 | | | 6,647 | | | 5,056 | |
| Total gross profit | $ | 10,266 | | | $ | 9,635 | | | $ | 30,840 | | | $ | 27,395 | |
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 certain other countries. Refer to Note 9 for revenue classified by major geographic area.
NOTE 20 — 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.
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 of the valuation inputs the Company utilized to determine such fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Level | | Fair Value at September 30, 2022 | | Fair Value at June 30, 2022 | Fair Value at February 4, 2022 | Gain (Loss) Three Months Ended September 30, 20221 | Gain (Loss) Nine Months Ended September 30, 20221 |
| Private Warrants derivative liability | | 3 | | $ | 662 | | | $ | 3,693 | | $ | 3,916 | | $ | 3,031 | | $ | 3,254 | |
Forward share purchase agreements derivative liability 2 | | 3 | | — | | | 17,763 | | 14,170 | | 3,939 | | 346 | |
| Escrow Shares derivative liability | | 3 | | 47 | | | 3,481 | | 6,868 | | 3,434 | | 6,821 | |
| Stockholder earn-out rights derivative liability | | 3 | | 288 | | | 12,147 | | 26,131 | | 11,859 | | 25,843 | |
| Total | | | | $ | 997 | | | $ | 37,084 | | $ | 51,085 | | 22,264 | | $ | 36,264 | |
1 Totals may not foot due to rounding.
2 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:
| | | | | | | | | | | | | | |
| | September 30, 2022 | June 30, 2022 | February 4, 2022 |
Exercise price | | $ | 11.50 | $ | 11.50 | $ | 11.50 |
Stock price | | $ | 0.68 | $ | 4.50 | $ | 6.53 |
Volatility | | 98.0% | 51.6% | 34.3% |
Term (in years) | | 4.34 | 4.59 | 5.00 |
Risk-free rate | | 4.1% | 3.0% | 1.8% |
Dividend yield | | 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.
Forward Share Purchase Agreements Derivative Liability
The FPAs were valued using a Black-Scholes model and the following Level 3 inputs:
| | | | | | | | | | | | | | |
| | September 30, 2022 | June 30, 2022 | February 4, 2022 |
Exercise price - one agreement | | N/A | $ | 10.31 | $ | 10.16 |
| Exercise price - three agreements | | N/A | $ | 10.16 | $ | 10.01 |
Stock price | | N/A | $ | 4.50 | $ | 6.53 |
Volatility | | N/A | 70.4% | 63.9% |
Term (in years) | | N/A | 0.09 | 0.24 |
Risk-free rate | | N/A | 1.3% | 0.2% |
Dividend yield | | N/A | 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 may be sold by the holders into the open market earlier, which in some cases they have been (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 binomial lattice model and the following Level 3 inputs:
| | | | | | | | | | | | | | |
| | September 30, 2022 | June 30, 2022 | February 4, 2022 |
First stock price trigger | | $ | 13.50 | $ | 13.50 | $ | 13.50 |
| Second stock price trigger | | $ | 15.50 | $ | 15.50 | $ | 15.50 |
Stock price | | $ | 0.68 | $ | 4.50 | $ | 6.53 |
Volatility | | 79.0% | 68.0% | 64.0% |
Term (in years) | | 2.34 | 2.59 | 3.00 |
Risk-free rate | | 4.2% | 3.0% | 1.6% |
Dividend yield | | 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.
Stockholder Earn-Out Rights Derivative Liability
The stockholder earn-out rights were valued using a binomial lattice model and the following Level 3 inputs:
| | | | | | | | | | | | | | |
| | September 30, 2022 | June 30, 2022 | February 4, 2022 |
First stock price trigger | | $ | 13.50 | $ | 13.50 | $ | 13.50 |
| Second stock price trigger | | $ | 15.50 | $ | 15.50 | $ | 15.50 |
| First revenue trigger | | $ | 65,000 | $ | 65,000 | $ | 65,000 |
| Second revenue trigger | | $ | 101,000 | $ | 101,000 | $ | 101,000 |
Stock price | | $ | 0.68 | $ | 4.50 | $ | 6.53 |
| 2022 Revenue assumption | | $ | 47,500 | $ | 49,500 | | $ | 55,500 | |
Volatility | | 79.0% | 68.0% | 64.0% |
Term (in years) | | 2.34 | 2.59 | 3.00 |
Risk-free rate | | 4.2% | 3.0% | 1.6% |
Dividend yield | | 0.0% | 0.0% | 0.0% |
The revenue assumption input 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 21 - Subsequent Events
Issuance of Restricted Stock Units
On October 6, 2022, the Company awarded 512,203 restricted stock units to employees and members of its board of directors, and 819,721 performance stock units to employees.
Restructuring Plan
On October 18, 2022, the Company committed to a restructuring plan (the “Restructuring Plan”), which is intended to support its strategic plan in an effort to improve operating performance and ensure that the Company is appropriately structured and resourced to deliver sustainable value to its customers and shareholders. Key activities under the Restructuring Plan include a focus on efficiency and cost-saving efforts, which includes decreasing, through attrition and layoffs, total headcount by approximately 56 employees upon the completion of the Restructuring Plan. These activities are expected to be substantially completed by the end of 2022.
The Company currently estimates it will incur cash pre-tax restructuring charges of approximately $500, primarily in the fourth quarter of 2022, as a result of the Restructuring Plan, comprised primarily of one-time severance and other employee-related termination benefits. Estimated amounts are subject to change until finalized.
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 November 2, 2022, Leafly received another letter from the Nasdaq 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, and its common stock and warrants will continue to trade on The Nasdaq Global Market under the symbol “LFLY” and “LFLYW,” respectively.
The notification of noncompliance has no immediate effect on the listing or trading of the Company’s common stock on the Nasdaq Global Market. In accordance with Nasdaq Listing Rule 5810(c)(3)(C), the Company has been provided an
initial period of 180 calendar days, or until April 26, 2023, to regain compliance with the minimum bid price requirement. To regain compliance, the market value of the Company’s common stock must be $50 million or more for a minimum of 10 consecutive business days at any time before April 26, 2023 and we must otherwise satisfy the Nasdaq Global Market’s requirements for continued listing. 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 is not able to achieve compliance with an applicable listing standard under Listing Rule 5450(b) prior to April 26, 2023, the Company may be eligible to transfer the listing for its common stock to the Nasdaq Capital Market. To qualify, the Company would be required to meet the continued listing requirements for the Nasdaq Capital Market.
If the Company does not regain compliance with the minimum bid price requirement by May 1, 2023, the Company may be eligible for an additional 180 calendar day compliance period. To qualify, the Company would need to transfer the listing of its common stock to the Nasdaq Capital Market, provided that it meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price requirement, and would need to provide written notice of its intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Staff that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, 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.