Leafly Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 5 speakers on the call.

Operator

Good afternoon. Thank you for attending the LeafLeak Q1 2020 4 Earnings Call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call. I would now like to pass the conference over to our host, Josh with Leafly.

Operator

Josh, please go ahead.

Speaker 1

Good afternoon, and welcome to Leafly's Q1 2024 Earnings Call. Joining me on the call today are CEO, Yoko Miyashta and CFO, Suresh Krishnaswami. Today's prepared remarks have been recorded. A copy of our press release can be found on our website at investor. Leafly.com.

Speaker 1

Today's call will contain forward looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Forward looking statements include statements regarding the services offered by Leafly, the markets in which Leafly operates, business strategies, performance metrics, industry environment, potential growth opportunities and Leafly's projected future results and financial outlook and can be identified by words such as expect, anticipate, focus, intend, plan, believe, seek or will. These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations, and we caution you not to place undue reliance on such statements. For a discussion of the material risk and other important factors that could affect our actual results, please refer to the risks discussed in today's press release, our 2023 Annual Report on Form 10 ks filed with the SEC on April 1, 2024, and our other periodic filings with the SEC.

Speaker 1

During the call, we will also discuss non GAAP financial measures, which are not prepared in accordance with generally accepted accounting site at investor. Weekly.com. We'll answer a few pre submitted questions at the end of

Speaker 2

this call. With that, let me turn

Speaker 1

the call over to Yoko.

Speaker 3

Good afternoon. Leafly remains steadfast in our commitment to enhancing operational efficiency on our path to profitability, while ensuring sustained value delivery for our customers. Our efforts have been concentrated on strengthening our resilience as a business and nurturing relationships with our customers, which we believe empowers them to leverage the full spectrum of tools offered through the weekly platform. At the same time, we're also increasing our efforts on customer acquisition designed to regrow and strengthen our network of retail customers. Our revenue in the Q1 was in line with guidance at $9,000,000 Our net loss was $2,400,000 and our adjusted EBITDA and cash finished ahead of guidance, which reflects our continued focus on building a path to profitability.

Speaker 3

As we previously mentioned, we prioritized collection we prioritized collection efforts and made the tough decision to continue removing underperforming and nonpaying retailers after reaching a peak in nonpaying customers in Q3 of last year. We believe we have a process that is effective in enforcing payment terms and are encouraged by reactivation metrics such as payment of past due amounts to come current and reactivate on our platform. As we work through what we believe is the worst of the challenges with delinquencies, we're working to turn around the decline in retail accounts by focusing on acquisition. At the end of the first quarter, Leafly had 3,840 retail accounts, marking a 5.8% reduction quarter over quarter and reflecting a moderating new market managers and 2 new acquisition managers who are intensely focused on enhancing penetration in key markets and pursuing new market opportunities. Our market managers are armed with an enhanced product portfolio that now includes a product price point for any retail customer regardless of their size or scale.

Speaker 3

This allows us to pitch the right product to the right customer at the right price, which we believe should result in the growth of ending retail accounts sequentially as we move deeper into 2024. These new markets and acquisition managers continue to ramp. We will continue to emphasize protecting and growing existing accounts and combining that with renewed investments in hunting and win back of prospective customers to increase retail penetration. Increased supply also improves the consumer shopping experience, which ultimately creates our virtuous cycle. All of these efforts require us to effectively demonstrate and communicate the power and value proposition of our platform to our retail clientele and we focused on improving how we tell that story.

Speaker 3

Part of communicating value to our retail partners is by demonstrating our ongoing commitment to reduce retailer friction and enhance the consumer experience. Over the quarter, we introduced a range of improvements across attention of price conscious shoppers. We also redesigned our information only listings to drive greater value for our paying customers and introduced live chat for our retailers, enhancing their customer support experience and reflecting our focus on customer satisfaction that we believe helps better meet our customers' needs. We also made changes to our retailer menu embeds with the goal of making them more SEO optimized. Previously, we've mentioned a revamp of our deals engine, including the introduction of new deal types, augmenting the volume and diversity of deals within our marketplace.

Speaker 3

We've now improved our deals sorting functionality to give consumers easier visibility into the deals retailers are offering. Last week, we witnessed a historic step forward in ending prohibition in the U. S. When the DEA formally agreed that cannabis should be moved from Schedule 1 to Schedule 3 under the Controlled Substances Act. While observers, advocates and commentators all speculate what this will actually mean for the industry, what we celebrate is the formal acknowledgment of the medical potential of cannabis, along with the acknowledgment that cannabis does not warrant a classification assigned to the most addictive and harmful drugs in circulation today.

Speaker 3

We celebrate the potential for more research to drive informed policy and a pathway for cannabis operators to free up cash and invest in their businesses, including making necessary investments in marketing to educate and attract the many consumers looking for relief from this plant. Along with the DEA's actions and the ensuing rule making process to formalize the rescheduling, Florida voters will decide this November whether to legalize recreational adult use. And in New York, we have renewed hope for the rollout of legal cannabis following the recent positive court ruling in legally favor that will allow us to offer our full scope of services to new licensees. Paired with the steady issuance of new retail licenses in the state, we believe we can now maximize our value proposition to retailers and consumers in a market we all believe should have meaningful upside. On an international scale, Germany celebrated 4.20 for the first time with fewer restrictions on cannabis with legalization that went into effect in April.

Speaker 3

Germany is an economic powerhouse in Europe and we believe Germany's actions will be a potential trigger across the European Union. They have a strong base of advocates pushing for change, and Leafly plays a role by providing content on our platform accessible globally that solves an education gap that currently exists. It is the collection of these pivotal moments that propel industry momentum and also contribute to the normalization of cannabis consumption worldwide. As the industry continues its upward trajectory, we remain steadfast in our commitment to leveraging our robust platform to cater to discerning high value consumers, providing them with trusted premium content, while facilitating connections with local retailers and brands. I'll now turn it over to Suresh.

Speaker 2

Thank you, Yoko, and welcome, everyone. In the Q1, we reported revenue of $9,000,000 down 19.6% year over year and down 7.2% sequentially. Retail revenue in Q1 was $7,900,000 and brand revenue was 1,200,000 dollars The year over year decline in total revenue was primarily driven by the continued removal of non paying retail accounts from the platform. At the end of Q1, our ending retail accounts totaled 3,840, which was a sequential decline of 235 accounts compared to the end of the 4th quarter. This decline was anticipated again as we continue to remove non paying accounts from pace of these removals is moderating.

Speaker 2

At the same time, there remains some level of account churn due to out of business and budget reasons. As Yoko spoke to earlier, our new sales heads that we added are focused on adding accounts, which reinforces our commitment to stabilizing ending retail accounts. Our ARPA for the Q1 was $6.77 up 22% year over year and up about 1% sequentially. As expected, our retail ARPA is leveling out following the removal of small and non paying accounts. Brand revenue in the Q1 was $1,200,000 down 34% year over year.

Speaker 2

Brand revenue declines are slowly stabilizing and we expect year over year declines from Q3 onward to flatten. As part of our effort to stem these declines, we have revamped our brand subscription offering, including a new lower priced basic tier. The goal of this offering is to introduce brands to the Leafly platform and the value proposition we provide. Longer term, we seek to deepen our relationship with brands, extend their spend into more digital advertising and we're working hard to return this part of the business back to growth. Gross margin in the Q1 improved year over year to 89.2% compared to 88% in Q1 of 2023.

Speaker 2

We continue to operate an asset light model and anticipate maintaining these attractive margin levels. Moving to operating expenses. In Q1, OpEx totaled $9,800,000 down 34% year over year. We continue to look for ways to reduce our costs and be mindful of spend. Looking to Q2, we expect our OpEx excluding stock based comp to be at similar levels to Q1.

Speaker 2

Our net loss in Q1 was $2,400,000 an improvement from the $5,400,000 net loss reported in Q1 2023. Our adjusted EBITDA in Q1 was negative $900,000 an improvement from the negative $3,300,000 reported in Q1 2023. We continue to work towards long term operating profitability. Before turning to the balance sheet, I'd like to provide an update on our collections and bad debt. In Q1, our bad debt as a percentage of revenue was 5.5%, an improvement over the 6.5% average for the full year 2023.

Speaker 2

Looking ahead, we're committed to maintaining the tighter processes we implemented last year and managing this proactively and are focused on further improvements. Now to the balance sheet. We ended the quarter with $14,100,000 in cash excluding restricted cash. We're expecting our cash burn in Q2 to be around $1,500,000 As we discussed last quarter, our $29,700,000 convertible notes are due in January of 2025 and have now become a current liability. Given our position today, we will not have the funds available to repay these notes when due.

Speaker 2

Resolving this is a key priority for the company and we are in ongoing dialogue with our lender. Earlier this week, we announced that we worked with our lender and converted an additional portion of the outstanding related to our debt as we move through the year and we look forward to providing additional updates on this matter when appropriate. Another item I want to provide an update on is our NASDAQ listing. We received notification from NASDAQ in early April as expected but we do not currently meet the requirements for continued listing on the NASDAQ Capital Market. We plan to submit a compliance plan and request a 180 day extension to give us time to regain compliance with the applicable listing requirements, which is due by May 24.

Speaker 2

At this time, our stock continues to be listed and traded on the capital market and we'll provide updates on this when we have more information to share. Now to our guidance. For Q2 2024, we expect revenue of around $8,600,000 and an adjusted EBITDA loss of approximately negative $1,100,000 The entire team at Leafly is focused on running a lean business and investing in product enhancements and in our sales team with the aim of returning the business to top line growth. We're also focused on improving our balance sheet, optimizing cash and setting the company up for long term success. I'll now turn the call back to Yoko.

Speaker 3

Thanks, Suresh. Before addressing questions that have been submitted, I'd like to formally introduce everyone to Peter Lee, who joined Leafly this week as our President and Chief Operating Officer. We're excited about welcoming Peter to Leafly in a full time capacity, where he'll lead new monetization efforts, operations and corporate development, while also focusing on deepening relationships with our customers. We're excited to have Peter here with us for Q and A, and we're looking forward to introducing him to investors as he takes a more active role in future calls. Welcome, Peter.

Speaker 3

Josh will now move to the questions that we received prior to the call.

Speaker 1

Thanks, Yoko. First, we received this question. How does the rescheduling of cannabis impact the business and the industry?

Speaker 3

Thanks for the question. So we talked about our excitement around rescheduling in my earlier comments, but I want to go a little deeper here of why this is so exciting for the industry and for Leafly. The last few years have been an incredibly difficult operating environment for the retailers and brands we serve. That's because the industry has been so capital constrained. And the cash benefits for operators from the 2.80 E tax savings that they'll benefit from as a result of rescheduling, Those have been estimated to range from $1,000,000,000 to $2,000,000,000 Those are tax savings that can be reinvested in the growth of their businesses and that includes making necessary investments in consumer marketing and engagement.

Speaker 3

And we see as the preeminent source of educational information content for consumers, we couldn't be more excited about the increase in opportunity for research that we expect to result from rescheduling from Schedule 1 to Schedule 3.

Speaker 1

Thanks, Yoko. The second question we received is, can you provide an update on the convertible note?

Speaker 3

Thanks for the question. I'd love to hand this one over to Peter.

Speaker 4

Thank you, Yoko. Solving for lease lease capital needs is an important part of my role with the organization. I originally worked with a lender to put the convertible note in place more than 2 years ago. As Suresh noted, we took an opportunity to work with the lender and deleverage at this moment with 2 separate transactions to convert a small part of the debt to equity, resolving the outstanding debt as well as working with our advisors to explore a full range of opportunities that have the potential to maximize shareholder value remains a priority for us. I look forward to working with the management team to tackle this and many other opportunities and challenges ahead.

Speaker 4

Given the potential tailwinds from anticipated rescheduling, we believe it is a good time to look at all of our options now.

Speaker 2

And then our last question is about our retail accounts, which Suresh can answer. Can you talk about account churn and new customer acquisition? Sure, Josh. We believe we've reached a stable pace of accounts coming off our platform due to non payment for the peak levels of both delinquent accounts and related bad debt expense in the second half of last year. In the normal course of business, we also see accounts turn due to budget reasons or going out of business.

Speaker 2

We broadened our product suite to now include lower entry price points. And with this broader portfolio, we believe that our sales teams can work to retain customers that may need to trim their budgets, as well as introduce new customers to the platform at prices that align with their ability to pay. We're also starting to see early results for new customer acquisition after adding the 8 new sales heads in January. For example, in Q1, we added around 20% more accounts than we added in Q4 of 2023. Now on a net basis, we're still reporting declines in ending retail accounts, but we're focused on both mitigating churn and winning new business with the goal of reversing the downtrend in the second half of the year.

Speaker 3

That's it for the questions. I want to thank all of you for your continued interest and support of Leafly. We appreciate your time today and are looking forward to keeping you updated on our operations and progress.

Operator

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
Leafly Q1 2024
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