Leafly (LFLY) 10-Q 2023 Q2 Quarterly report

ROC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39119

Leafly Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	84-2266022
( State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
113 Cherry Street, PMB 88154 Seattle, Washington	98104-2205
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (206) 455-9504

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 Par Value	LFLY	The Nasdaq Stock Market LLC
Warrants, exercisable for shares of common stock at an exercise price of $11.50 per share	LFLYW	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 7, 2023, the registrant had 44,494,659 shares of common stock, $0.0001 par value per share, outstanding.

INDEX

		Page
	Cautionary Note Regarding Forward-Looking Statements	2
Part I	Financial Information
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (Audited)	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022	4
	Condensed Consolidated Statements of Changes in Stockholders Deficit for the Three and Six Months Ended June 30, 2023 and 2022	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42
Part II	Other Information
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 6.	Exhibits	45

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of present or historical fact included in or incorporated by reference in this Quarterly Report regarding Leafly Holdings, Inc.’s (the “Company’s”) future financial performance, as well as the Company’s strategy, future operations, future operating results, financial position, estimated revenues, and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intend,” “project,” “budget,” “forecast,” “plan,” “will,” “could,” “should,” “predict,” “potential,” and “continue” or similar words. These forward-looking statements include all matters that are not historical facts. Forward-looking statements are predictions, projections and other statements about future events that are based on current expectations and assumptions and, as a result, are subject to risks and uncertainties. You should read statements that contain these words carefully because they:

•

discuss future expectations;

•

contain projections of future results of operations or financial condition; or

•

state other “forward-looking” information.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report.

All forward-looking statements included herein attributable to the Company or any person acting on the Company’s behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. These cautionary statements are being made pursuant to federal securities laws with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. Except to the extent required by applicable laws and regulations, the Company undertakes no obligations to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events.

There may be events in the future that the Company is not able to predict accurately or over which it has no control. The section in the Company’s Annual Report on Form 10-K for the year ended 2022 (“2022 Annual Report”) and in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 ( “1Q 2023 10-Q”) and in this Quarterly Report entitled “Risk Factors,” and the section of this Quarterly Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other cautionary language discussed in this report provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by the Company in such forward-looking statements. These examples include:

•

the Company’s inability to raise sufficient capital or financing in the future to execute its business plan;

•

the size, demands and growth potential of the markets for the Company’s products and services and the Company’s ability to serve those markets;

•

the impact of worldwide economic conditions, including the resulting effect on consumer spending at local businesses and the level of advertising spending by local businesses;

•

the degree of market acceptance and adoption of the Company’s products, services and pricing changes;

•

the Company’s ability to attract and retain customers;

•

the Company’s success in retaining or recruiting officers, key employees or directors;

•

the impact of the regulatory environment and complexities with compliance related to such environment, including compliance with restrictions imposed by federal law; and

•

factors relating to the business, operations and financial performance of the Company and its subsidiaries.

2

Part I - Financial Information


Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LEAFLY HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

	June 30, 2023			December 31, 2022
ASSETS
Current assets
Cash and cash equivalents	$	14,118		$	24,594
Accounts receivable, net of allowance for doubtful accounts of $1,404 and $908, respectively		3,589			3,298
Prepaid expenses and other current assets		3,186			1,792
Restricted cash		360			360
Total current assets		21,253			30,044
Property, equipment, and software, net		2,649			2,285
Restricted cash - long-term portion		251			248
Other assets		75			135
Total assets	$	24,228		$	32,712
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable	$	962		$	1,625
Accrued expenses and other current liabilities		3,838			6,235
Deferred revenue		2,017			1,958
Total current liabilities		6,817			9,818
Non-current liabilities
Non-current portion of convertible promissory notes, net		29,136			28,863
Private warrants derivative liability		121			182
Escrow shares derivative liability		6			52
Stockholder earn-out rights derivative liability		30			204
Total non-current liabilities		29,293			29,301
Total liabilities		36,110			39,119
Commitments and contingencies (Note 8)
Stockholders' deficit
Preferred stock: $0.0001 par value; 5,000 and 5,000 authorized; 0 and 0 issued and outstanding; aggregate liquidation preference of $0 and $0 at June 30, 2023 and December 31, 2022, respectively		—			—
Common stock: $0.0001 par value; 200,000 and 200,000 authorized; 44,456 and 43,275 issued at June 30, 2023 and December 31, 2022, respectively		4			4
Treasury stock: 3,081 and 3,081 shares held at June 30, 2023 and December 31, 2022, respectively		(31,663	)		(31,663	)
Additional paid-in capital		91,310			89,952
Accumulated deficit		(71,533	)		(64,700	)
Total stockholders' deficit		(11,882	)		(6,407	)
Total liabilities and stockholders' deficit	$	24,228		$	32,712

See Notes to Condensed Consolidated Financial Statements.

3

LEAFLY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Revenue	$	10,675		$	12,050		$	21,924		$	23,470
Cost of revenue		1,238			1,441			2,584			2,896
Gross profit		9,437			10,609			19,340			20,574
Operating expenses
Sales and marketing		2,852			8,112			7,763			15,126
Product development		2,320			4,056			5,600			7,521
General and administrative		5,016			7,310			11,676			14,241
Total operating expenses		10,188			19,478			25,039			36,888
Loss from operations		(751	)		(8,869	)		(5,699	)		(16,314	)
Interest expense, net		(724	)		(717	)		(1,437	)		(1,414	)
Change in fair value of derivatives		14			24,397			281			14,000
Other income (expense), net		25			(52	)		22			(889	)
Net (loss) income	$	(1,436	)	$	14,759		$	(6,833	)	$	(4,617	)
Net (loss) income per share:
Basic	$	(0.04	)	$	0.39		$	(0.17	)	$	(0.13	)
Diluted	$	(0.04	)	$	0.37		$	(0.17	)	$	(0.13	)
Weighted average shares outstanding:
Basic		39,509			37,415			39,109			35,097
Diluted		39,509			42,041			39,109			35,097

See Notes to Condensed Consolidated Financial Statements.

4

LEAFLY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(in thousands)

	Three and Six Months Ended June 30, 2023
	Preferred Stock				Common Stock				Treasury Stock						Additional Paid-In Capital		Accumulated Deficit			Total
	Shares		Amount		Shares		Amount		Shares			Amount
Balance at January 1, 2023		—	$	—		43,275	$	4		(3,081	)	$	(31,663	)	$	89,952	$	(64,700	)	$	(6,407	)
Net loss		—		—		—		—		—			—			—		(5,397	)		(5,397	)
Stock-based compensation		—		—		—		—		—			—			658		—			658
Exercise of stock options		—		—		—		—		—			—			—		—			—
Issuance of common stock under ESPP		—		—		289		—		—			—			120		—			120
Issuance of common stock upon vesting of restricted stock units		—		—		285		—		—			—			—		—			—
Balance at April 1, 2023		—		—		43,849		4		(3,081	)		(31,663	)		90,730		(70,097	)		(11,026	)
Net loss		—		—		—		—		—			—			—		(1,436	)		(1,436	)
Stock-based compensation		—		—		—		—		—			—			580		—			580
Issuance of common stock upon vesting of restricted stock units		—		—		607		—		—			—			—		—			—
Balance at June 30, 2023		—	$	—		44,456	$	4		(3,081	)	$	(31,663	)	$	91,310	$	(71,533	)	$	(11,882	)

5

LEAFLY HOLDINGS, INC

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (Continued)

(in thousands)

	Three and Six Months Ended June 30, 2022
	Preferred Stock						Common Stock				Treasury Stock				Additional Paid-In Capital			Accumulated Deficit			Total
	Shares			Amount			Shares		Amount		Shares		Amount
Balance at January 1, 2022		6,140		$	1			25,086	$	3		—	$	—	$	61,194		$	(69,770	)	$	(8,572	)
Net loss		—			—			—		—		—		—		—			(19,376	)		(19,376	)
Stock-based compensation		—			—			—		—		—		—		1,924			—			1,924
Exercise of stock options		—			—			114		—		—		—		127			—			127
Conversion of 2021 Notes into Common Stock upon Business Combination		—			—			4,128		—		—		—		33,024			—			33,024
Conversion of Preferred Stock into Common Stock upon Business Combination		(6,140	)		(1	)		6,140		1		—		—		—			—			—
Merger and recapitalization, net of fees		—			—			2,007		—		—		—		27,997			—			27,997
Stockholder contribution for debt issuance costs		—			—			—		—		—		—		924			—			924
Escrow shares derivative liability		—			—			1,625		—		—		—		(6,867	)		—			(6,867	)
Private warrants derivative liability		—			—			—		—		—		—		(3,916	)		—			(3,916	)
Forward share purchase agreement derivative liability		—			—			3,861		—		—		—		(14,170	)		—			(14,170	)
Stockholder earn-out rights derivative liability		—			—			—		—		—		—		(26,131	)		—			(26,131	)
Balance at April 1, 2022		—		$	—			42,961	$	4		—	$	—	$	74,106		$	(89,146	)	$	(15,036	)
Net income		—			—			—		—		—		—		—			14,759			14,759
Stock-based compensation		—			—			—		—		—		—		464			—			464
Exercise of stock options		—			—			29		—		—		—		30			—			30
Balance at June 30, 2022		—		$	—			42,990	$	4		—	$	—	$	74,600		$	(74,387	)	$	217

See Notes to Condensed Consolidated Financial Statements.

6

LEAFLY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six Months Ended June 30,
	2023			2022
Cash flows from operating activities
Net loss	$	(6,833	)	$	(4,617	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		421			149
Stock-based compensation expense		1,238			2,388
Bad debt expense, net of recoveries		1,410			640
Loss on disposition of assets		9			—
Noncash amortization of debt discount		273			233
Noncash interest expense associated with convertible debt		—			243
Noncash change in fair value of derivatives		(281	)		(14,000	)
Other		(6	)		13
Changes in operating assets and liabilities:
Accounts receivable		(1,701	)		(687	)
Prepaid expenses and other current assets		(1,334	)		(3,977	)
Accounts payable		(663	)		1,456
Accrued expenses and other current liabilities		(2,399	)		(713	)
Deferred revenue		59			492
Net cash used in operating activities		(9,807	)		(18,380	)
Cash flows from investing activities
Additions of property, equipment, and software		(788	)		(1,415	)
Net cash used in investing activities		(788	)		(1,415	)
Cash flows from financing activities
Proceeds from exercise of stock options		—			157
Proceeds from convertible promissory notes		—			29,374
Proceeds from business combination placed in escrow and restricted		—			39,032
Trust proceeds received from recapitalization at closing		—			582
Issuance of common stock under ESPP		120			—
Transaction costs associated with recapitalization		—			(10,761	)
Advances (repayments) of related party payables		2			(18	)
Net cash provided by financing activities		122			58,366
Net (decrease) increase in cash, cash equivalents, and restricted cash		(10,473	)		38,571
Cash, cash equivalents, and restricted cash, beginning of period		25,202			28,695
Cash, cash equivalents, and restricted cash, end of period	$	14,729		$	67,266

	Six Months Ended June 30,
	2023		2022
Supplemental disclosure of non-cash financing activities:
Stockholder contribution for debt issuance costs	$	—	$	924
Conversion of promissory notes into common stock		—		33,024
Issuance of forward share purchase agreements		—		14,170
Issuance of private warrants		—		3,916
Issuance of sponsor shares subject to earn-out conditions		—		6,867
Issuance of stockholder earn-out rights		—		26,131

See Notes to Condensed Consolidated Financial Statements.

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)

NOTE 1 — Description of the Business and Merger

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 three wholly-owned subsidiaries, Leafly Canada Ltd., Leafly Deutschland GmbH and Leafly, LLC (“Legacy Leafly”). Legacy Leafly is the accounting predecessor of Leafly. The accompanying 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”) and 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 New Leafly. 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 accounting principles generally accepted in the United States of America (“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 13 and 18, 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.

8

NOTE 2 — Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The interim condensed consolidated financial statements have been prepared in accordance with 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, 2022 and 2021, and Management’s Discussion and Analysis of Financial Condition and Results of Operations of Leafly for the year ended December 31, 2022, each of which was filed with the SEC on March 29, 2023 (the “2022 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.

Going Concern Evaluation

Under the rules of ASC Subtopic 205-40 “Presentation of Financial Statements-Going Concern” (“ASC 205-40”), reporting companies are required to evaluate whether conditions and/or events raise substantial doubt about their ability to meet their future financial obligations as they become due within one year after the date that the financial statements are issued. This evaluation takes into account a company’s current available cash and projected cash needs over the one-year evaluation period but may not consider things beyond its control. Leafly has experienced revenue declines, incurred recurring operating losses, used cash from operations, and relied on the capital raised in the Business Combination to continue ongoing operations. These conditions, when considered in the aggregate, raise substantial doubt about Leafly’s ability to continue as a going concern within one year of the date these financial statements are issued. In response to these conditions, Leafly management took the following actions:

•

During the fourth quarter of 2022, Leafly implemented a restructuring plan, including a reduction in force reflecting primarily one-time severance and other employee-related termination benefits incurred during the fourth quarter of 2022.

•

During the three months ended March 31, 2023, Leafly announced a second restructuring plan further seeking to reduce recurring costs and identifying cost savings based on a reduction in force reflecting primarily one-time severance and other employee-related termination benefits incurred during the first quarter of 2023.

After considering all available evidence, Leafly’s management determined that, based on the cost reduction measures outlined in both actions above, Leafly’s current positive working capital will be sufficient to meet its capital requirements for a period of at least 12 months from the date that these June 30, 2023 financial statements are issued.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on the reported net (loss) income.

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.

9

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 EGC or (b) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates. Such estimates include those related to the fair value of derivative liabilities; the allowance for doubtful accounts; the valuation allowance for deferred income tax assets; the fair value of the convertible promissory notes; the estimate of capitalized software costs and useful life of capitalized software; and the fair value of equity issuances. Management bases its estimates on historical experience, knowledge of current events and actions it may undertake in the future that management believes to be reasonable under the circumstances. Actual results may differ from these estimates and assumptions.

Significant Accounting Policies

The unaudited interim financial statements should be read in conjunction with the Company's 2022 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 six months ended June 30, 2023 compared to our Annual Report on Form 10-K for the year ended December 31, 2022.

Recent Accounting Pronouncements

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 consolidated financial statements or related disclosures.

NOTE 3 — Cash, Cash Equivalents, and Restricted Cash

Cash, cash equivalents, and restricted cash consisted of the following:

	June 30, 2023		December 31, 2022
Cash and cash equivalents	$	14,118	$	24,594
Restricted cash		360		360
Restricted cash - long-term portion		251		248
	$	14,729	$	25,202

The restricted cash balances at June 30, 2023 and December 31, 2022 include $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. The amount was distributed subsequent to June 30, 2023 (Note 19). If unclaimed, the remaining

10

funds in escrow would have been distributed to the Company. Additional information regarding the FPAs is included in Notes 13 and 18.

NOTE 4 — Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist of the following:

	June 30, 2023		December 31, 2022
Prepaid subscriptions	$	697	$	916
Prepaid insurance		2,204		533
Other prepaid assets		254		272
Other current assets		31		71
Subtotal, current portion		3,186		1,792
Prepaid expenses, long-term portion		75		135
Total	$	3,261	$	1,927

NOTE 5 — Accounts Receivable, Net

Accounts receivable, net of $3,589 and $3,298 as of June 30, 2023 and December 31, 2022, respectively, 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 June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Balance, beginning of period	$	1,091		$	1,682		$	908		$	1,848
Add: provision for doubtful accounts, net of recoveries		685			764			1,410			640
Less: write-offs		(372	)		(977	)		(914	)		(1,019	)
Balance, end of period	$	1,404		$	1,469		$	1,404		$	1,469

NOTE 6 — Property, Equipment, and Software, Net

Property, equipment, and software consisted of the following:

	June 30, 2023			December 31, 2022
Furniture and equipment	$	706		$	740
Capitalized internal-use software		3,095			2,310
		3,801			3,050
Less: accumulated depreciation and amortization		(1,152	)		(765	)
	$	2,649		$	2,285

The Company recognized depreciation and amortization expense as follows:

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	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Depreciation expense	$	24	$	46	$	47	$	98
Amortization of capitalized internal-use software		202		51		374		51
Total depreciation and amortization	$	226	$	97	$	421	$	149

NOTE 7 — Accrued Expenses and Other Current Liabilities

Accrued expenses consist of the following:

	June 30, 2023		December 31, 2022
Accrued bonuses	$	562	$	1,309
Other employee-related liabilities		1,282		2,403
Accrued interest		1,000		1,000
Other accrued expenses 1		994		1,523
	$	3,838	$	6,235

1.

There are no individual items within this balance that exceed 10% of the total of the table.

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 consolidated financial statements.

Leases

The Company does not have any leases with an original term longer than 12 months as of June 30, 2023. The Company has short-term arrangements with immaterial rental obligations for office space.

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 complied with the $50 million in market value of listed securities standard for continued listing on the Nasdaq Global Market under Nasdaq Listing Rule 5450(b)(2)(A) and that the Company also did 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 April 19, 2023, Nasdaq approved the Company’s application to transfer the listing of its common stock and warrants from the Nasdaq Global Market to the Nasdaq Capital Market, effective April 21, 2023. The Company complies with the net income from continuing operations listing standard of the Nasdaq Capital Market, and the transfer of the listing resolved the October 28, 2022 noncompliance notification.

On November 2, 2022, the Company received another letter from the Staff providing notification that, for 30 consecutive business days, the bid price of the Company’s common stock had closed below the $1.00 per share minimum bid price requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5450(a)(1) (the “Bid Price Requirement”). To regain compliance, the closing bid price of the Company’s common stock must have been $1.00 per share or more per share for a minimum of ten consecutive business days at any time before May 1, 2023.

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On May 2, 2023, the Company received a letter from Nasdaq notifying it that the Company’s common stock would be subject to delisting from Nasdaq unless the Company timely requested a hearing before a Nasdaq Hearings Panel (the “Panel”). On May 8, 2023, the Company timely requested a hearing before the Panel, and on May 11, 2023, the Company submitted a plan of compliance and requested an extension of time to regain compliance with the Bid Price Requirement (the “Request”). On May 23, 2023, the Company received a letter from the Panel confirming that the Request was granted and that the Company has until October 17, 2023 to effect a reverse stock split and until October 30, 2023 to regain compliance with the Bid Price Requirement, subject to meeting certain milestones including obtaining stockholder approval of a reverse stock split on or before July 12, 2023. On July 12, 2023 (Note 19), at the Company’s Annual Meeting of Stockholders, the stockholders approved a proposal to effect a reverse stock split of the Company’s outstanding shares of common stock by a ratio of not less than 1 for 10 and not more than 1 for 25 at any time prior to the Company’s 2024 Annual Meeting of Stockholders, with the exact ratio to be set by the Leafly Board of Directors (the “Board”) in the future, if at all, within the above range in its sole discretion, without further approval or authorization of the Company’s stockholders. The Request stayed any further action by Nasdaq, during the remainder of the approved extension.

NOTE 9 — Revenue and Contract Balances

The following table presents the Company's revenue by service type:

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Advertising 1	$	10,554	$	11,854	$	21,740	$	23,183
Other services 1		121		196		184		287
	$	10,675	$	12,050	$	21,924	$	23,470

1.

Amounts for the prior period have been reclassified to conform to the current period presentation.

The following table presents the Company's revenue by geographic region:

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
United States 1	$	10,253	$	11,076	$	21,058	$	21,602
All other countries 1		422		974		866		1,868
	$	10,675	$	12,050	$	21,924	$	23,470

1.

Amounts for the prior period have been reclassified to conform to the current period presentation.

The following table presents the Company's revenue by state:

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Arizona		20	%		20	%		20	%		19	%
California		12	%		13	%		12	%		12	%
Oregon		10	%		11	%		11	%		10	%

No other state comprised 10% or more of Leafly’s revenue during the six months ended June 30, 2023 and 2022. We have a diversified set of customers; no single customer accounted for 10% or more of our revenue for the six months ended June 30, 2023 or 2022.

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The following table presents the Company's revenue by timing of recognition:

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Over Time 1
Retail 2	$	8,840	$	9,065	$	18,310	$	18,244
Brands 3		1,280		1,745		2,642		3,309
		10,120		10,810		20,952		21,553
Point in time 1
Brands 4		555		1,240		972		1,917
	$	10,675	$	12,050	$	21,924	$	23,470

1.

Amounts for the prior period have been reclassified to conform to the current period presentation.

2.

Revenues from subscription services and display ads.

3.

Revenues from brand profile subscriptions and digital media (including display ads and audience extension).

4.

Revenues from 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 balances and changes therein:

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Balance, beginning of period	$	2,180		$	2,566		$	1,958		$	1,975
Add: net increase in current period contract liabilities		1,710			1,591			1,932			2,239
Less: revenue recognized from beginning balance		(1,873	)		(1,690	)		(1,873	)		(1,747	)
Balance, end of period	$	2,017		$	2,467		$	2,017		$	2,467

A majority of the deferred revenue balance as of June 30, 2023 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 June 30, 2023 and December 31, 2022.

NOTE 10 — Income Taxes

The Company’s effective tax rate was 0% for the three and six months ended June 30, 2023 and 2022. 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

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its deferred tax assets.
 

The Company had net operating loss carryforwards (“NOLs”) for federal, state and foreign income tax purposes of approximately $85,430, $60,478 and $5,801, respectively, as of December 31, 2022. The Company's state NOL will begin to expire in 2039, and all of the Company's federal NOLs will last indefinitely.

The Internal Revenue Code of 1986, as amended (the “Code”), imposes restrictions on the utilization of NOLs in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use NOLs may be limited as prescribed under Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the NOLs that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Utilization of the federal and state NOLs may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 and similar state provisions.

ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of June 30, 2023 and December 31, 2022. 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 is subject to income tax examinations by major taxing authorities since inception.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Management believes all the income tax returns filed since inception remain open to examination by the major domestic and foreign taxing jurisdictions to which the Company is subject due to NOLs.

NOTE 11 — Convertible Promissory Notes

2022 Notes

Merida entered into a $30,000 convertible note purchase agreement (the “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 Merida Holdings, LLC (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 per $1,000 principal amount of 2022 Notes and per $1,000 of accrued but unpaid interest on any converted 2022 Notes. 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 in the Note Purchase Agreement) 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 June 30, 2023, the net carrying amount of the 2022 Notes was $29,136, which includes unamortized issuance costs and debt discount of $864, which will be amortized over the remaining term. The estimated fair value of the convertible debt

15

instruments was approximately $27,000 as of June 30, 2023. The fair value of the 2022 Notes was measured using the Bloomberg OVCV model and CNVI model which modifies the underlying OVCV program. These models incorporate inputs for volatility, Leafly’s stock price, time to maturity, the risk-free rate and Leafly’s credit spread, some 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 Leafly securities.

NOTE 12 — Stockholders’ Deficit

The Consolidated Statements of Changes in Stockholders' Deficit reflect the reverse recapitalization on February 4, 2022, as discussed in Note 1. Since Legacy Leafly was determined to be the accounting acquirer in the Business Combination, all periods presented prior to consummation of the Business Combination reflect the historical activity and balances of Legacy Leafly (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. In connection with the settlement of the FPAs (Note 13), 25 shares of the Company’s common stock held by the Sponsor were canceled, according to an agreement between the Company and the Sponsor entered into upon execution of the FPAs.

As of June 30, 2023, 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.

Sponsor Shares Subject to Earn-Out Conditions

In accordance with the Merger Agreement, upon closing of the Business Combination, 1,625 of the shares of the Company’s common stock 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 for 20 out of 30 consecutive trading days 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 for 20 out of 30 consecutive trading days 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.

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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 18 for additional information.

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 held in escrow at the time and $360 remaining in accrued expenses and other current liabilities on our consolidated balance sheets at June 30, 2023 and December 31, 2022. These repurchases were in settlement of the FPAs. 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 18 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 ended December 31, 2022 equaled or exceeded $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 (“first target price”) 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 of the Business Combination) (the “first target period”), 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 (“second target price”) 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 of the Business Combination) (the “second target period”), 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

17

•

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 target or second target price is met in full, the respective first revenue target or first target price, as applicable, will be deemed to have been met as well if it had not been met during the first target period.

Preferred Stock

The Board 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 Board 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 Board 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 Board 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 June 30, 2023 or December 31, 2022.

NOTE 13 — Warrants and Forward Share Purchase Agreements

Public Warrants

At each of June 30, 2023 and December 31, 2022, 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 became exercisable 30 days after the completion of the Business Combination. 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.

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Private Warrants

At each of June 30, 2023 and December 31, 2022, 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 Private Warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the Private 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 Private 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 18 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 of the escrow accounts.

During the year ended December 31, 2022, a total of $8,089 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 of the Company’s common stock held by the Sponsor were canceled, according to an agreement between the Company and the Sponsor entered into upon execution of the FPAs.

19

NOTE 14 — Equity Incentive and Other 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 (the “Earn-Out Plan”), and the New Leafly 2021 Employee Stock Purchase Plan (the “ESPP”). Activity under the 2021 Plan and the ESPP are detailed below. There were no options or other equity awards granted under the 2018 Plan or the Earn-Out Plan during the six months ended June 30, 2023.

Stock-Based Compensation

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). Effective January 1, 2023, 4,416 shares of common stock were available for issuance under the 2021 Plan and 4,601 remained available at June 30, 2023.

2022 Awards

In August 2022 and October 2022, the compensation committee of the Board and an authorized executive of the Company, as applicable, granted stock options to purchase an aggregate of approximately 102 shares of common stock at a weighted-average exercise price of $1.98 per share and granted an aggregate of 2,560 restricted stock units (”RSUs”) and performance stock units (”PSUs”). Of the PSUs granted, 683 were market-based awards made to executives with a grant date fair value of $0.04 per share with vesting based on achievement of a $1.0 billion market cap by February 4, 2026, and 137 were performance awards made to executives with a grant date fair value of $0.81 per share with vesting based in part on achievement of a fiscal year 2022 Adjusted EBITDA target, which was achieved. Prior to such grants, no grants had been made under the 2021 Plan. Leafly’s compensation committee approved the vesting of 137 PSUs awarded in 2022, which vested based on the achievement of the Company’s 2022 Adjusted EBITDA target, on March 13, 2023.

2023 Awards

Leafly’s compensation committee approved the grant of 631 annual incentive plan RSUs on March 14, 2023, which vested over four months. See Note 19 for equity awards subsequent to June 30, 2023.

Stock Options

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. No options were granted under the 2021 Plan during the six months ended June 30, 2023 or 2022.

20

Stock option activity under the 2021 Plan for the six months ended June 30, 2023 was as follows:

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term (in years)
Outstanding at January 1, 2023		101		$	1.98	$	—	9.61
Forfeited or expired		—			1.60
Outstanding at March 31, 2023		101		$	1.98
Forfeited or expired		(1	)		1.92
Outstanding at June 30, 2023		100		$	1.98	$	—		9.14
Vested and exercisable		33		$	1.98	$	—		9.14

As of June 30, 2023, there was $75 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 2.61 years.

Restricted Stock Units and Performance Stock Units

RSU and PSU activity under the 2021 Plan for the six months ended June 30, 2023 was as follows:

	Number of Shares			Weighted Average Grant Date Fair Value		Total Fair Value
Unvested at January 1, 2023		2,058		$	1.30
Granted		631			0.48	$	305
Vested		(359	)		0.94	$	188
Forfeited		(485	)		1.00
Unvested at March 31, 2023		1,845			0.89
Vested		(524	)		0.59	$	199
Forfeited		(331	)		0.93
Unvested at June 30, 2023		990		$	1.03

As of June 30, 2023, there was $928 total unrecognized compensation cost related to unvested RSUs and $10 total unrecognized compensation cost related to market-based PSUs granted under the 2021 Plan. The total cost is expected to be recognized over a weighted-average period of 2.61 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.

The fair value of each stock option award to employees is estimated on the date of grant using the Black-Scholes option pricing model. There were no grants made in 2023 or 2022 under the 2018 Plan.

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Stock option activity under the 2018 Plan for the periods presented was as follows:

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term (in years)
Outstanding at January 1, 2023		3,431		$	1.60
Exercised		—			0.40
Forfeited or expired		(446	)		1.40
Outstanding at March 31, 2023		2,985		$	1.63
Forfeited or expired		(513	)		1.27
Outstanding at June 30, 2023 1		2,472		$	1.71	$	6		4.88
Vested and exercisable		1,380		$	1.34	$	6		5.58

1.

Includes 1,416 and 1,056 awards accounted for as service-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 market-based options will vest only if the price of the Company's common stock reaches a $1 billion market capitalization target for any 20 days during a 30-day period on or before February 4, 2026.

As of June 30, 2023, there was: (i) $423 of unrecognized compensation cost related to service-based 2018 Plan option awards, which is expected to be recognized over a remaining weighted-average service period of approximately 1.81 years; and (ii) $862 of unrecognized compensation cost related to market-based 2018 Plan option awards, which is expected to be recognized over a remaining weighted-average service period of approximately 0.81 years.

Stock-Based Compensation Expense

The following table presents the classification of stock-based compensation expense under the 2021 Plan and the 2018 Plan:

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Sales and marketing	$	60	$	26	$	136	$	60
Product development		97		19		206		37
General and administrative		423		419		896		2,291
	$	580	$	464	$	1,238	$	2,388

2022 Option Modification

Concurrent with the closing of the Business Combination, the vesting provisions of certain stock options previously granted in 2021 under the 2018 Plan to our Chief Executive Officer to purchase 2,917 shares of common stock were modified, and a corresponding charge of $1,366 was recorded during the three months ended March 31, 2022 to general and administrative expenses and additional paid-in capital.

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 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 June 30, 2023.

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Employee Stock Purchase Plan

The ESPP became effective immediately upon closing of the Business Combination. 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). Effective January 1, 2023, 1,104 shares of common stock were available for issuance under the ESPP and 815 remained available at June 30, 2023. On March 15, 2023, Leafly’s employees purchased 289 shares for a total purchase price of $120. The Company's current offering period runs from March 16, 2023 through September 15, 2023.

Defined Contribution Plan

The Company recognized expense from matching contributions to the Company-sponsored defined contribution retirement (401k) plan as follows for the periods presented:

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
401(k) matching contributions	$	153	$	215	$	386	$	459

NOTE 15 — Related Party Transactions

In June 2021, Merida Capital, an affiliate of Merida, 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.

At December 31, 2022, the Company owed $10 to two members of its Board, which is included in accrued expenses and other current liabilities on Leafly's consolidated balance sheet and was repaid prior to June 30, 2023.

NOTE 16 — Net (Loss) Income Per Share

Basic and diluted net (loss) income 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 (loss) income per share attributable to common stockholders is computed by dividing the net (loss) income 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 June 30, 2023 and June 30, 2022, the Company had 1,625 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 for additional information). Net (loss) income is attributed to common stockholders and participating securities based on their participation rights. Net 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.

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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 (loss) income per share attributable to common stockholders, as a group, for the periods presented:

	Three Months Ended June 30,					Six Months Ended June 30,
	2023			2022		2023			2022
Net (loss) income	$	(1,436	)	$	14,759	$	(6,833	)	$	(4,617	)
Income impact of convertible promissory notes		—			600		—			—
Total undistributed (loss) income	$	(1,436	)	$	15,359	$	(6,833	)	$	(4,617	)
Weighted average shares outstanding		39,509			37,415		39,109			35,097
Dilutive effect of convertible promissory notes		—			2,429		—			—
Dilutive effect of stock-based awards		—			2,197		—			—
Common stock and common stock equivalents		39,509			42,041		39,109			35,097
Basic net (loss) income per share	$	(0.04	)	$	0.39	$	(0.17	)	$	(0.13	)
Diluted net (loss) income per share	$	(0.04	)	$	0.37	$	(0.17	)	$	(0.13	)

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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Shares subject to warrants		10,451		10,451		10,451		10,451
Shares subject to convertible promissory notes		2,480		—		2,480		2,429
Shares subject to forward purchase agreements		—		3,819		—		3,819
Escrow Shares		1,625		1,625		1,625		1,625
Shares subject to outstanding common stock options, RSUs and PSUs		3,825		1,105		4,336		1,105
Shares subject to stockholder earn-out rights		5,429		5,429		5,429		5,429
		23,810		22,429		24,321		24,858

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, RSUs and PSUs.

NOTE 17 — Segment Reporting

Segment revenue and gross profit were as follows during the periods presented:

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	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenue:
Retail	$	8,840	$	9,065	$	18,310	$	18,244
Brands		1,835		2,985		3,614		5,226
Total revenue	$	10,675	$	12,050	$	21,924	$	23,470
Gross profit:
Retail	$	7,863	$	8,075	$	16,254	$	16,214
Brands		1,574		2,534		3,086		4,360
Total gross profit	$	9,437	$	10,609	$	19,340	$	20,574

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 Canada. Refer to Note 9 for revenue classified by major geographic area.

NOTE 18 — 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

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were assumed, and discloses the fair value hierarchy level of the valuation inputs the Company utilized to determine such fair value:

			Fair Value at										Change in Fair Value of Derivatives
Description	Level		June 30, 2023		March 31, 2023		December 31, 2022		June 30, 2022		March 31, 2022		Three Months Ended June 30, 2023		Three Months Ended June 30, 2022			Six Months Ended June 30, 2023		Six Months Ended June 30, 2022
Private Warrants derivative liability		3	$	121	$	130	$	182	$	3,693	$	7,989	$	9	$	4,296		$	61	$	223
Forward share purchase agreements derivative liability 1		3		—		—		—		17,763		7,452		—		(10,311	)		0		(3,593	)
Escrow Shares derivative liability		3		6		7		52		3,481		10,129		1		6,648			46		3,387
Stockholder earn-out rights derivative liability		3		30		34		204		12,148		35,912		4		23,764			174		13,983
Total			$	157	$	171	$	438	$	37,085	$	61,482	$	14	$	24,397		$	281	$	14,000

1.

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:

	June 30, 2023			March 31, 2023			December 31, 2022			June 30, 2022			March 31, 2022
Exercise price	$	11.50		$	11.50		$	11.50		$	11.50		$	11.50
Stock price	$	0.29		$	0.40		$	0.65		$	4.50		$	8.28
Volatility		99.9	%		88.8	%		75.0	%		51.6	%		36.7	%
Term (in years)		3.60			3.84			4.09			4.59			4.85
Risk-free rate		4.5	%		3.7	%		4.1	%		3.0	%		2.4	%
Dividend yield		0.0	%		0.0	%		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.

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Forward Share Purchase Agreements Derivative Liability

The FPAs were valued using a Black-Scholes model and the following Level 3 inputs:

	June 30, 2022			March 31, 2022
Exercise price - one agreement	$	10.31		$	10.16
Exercise price - three agreements	$	10.16		$	10.01
Stock price	$	4.50		$	8.28
Volatility		70.4	%		72.6	%
Term (in years)		0.09			0.09
Risk-free rate		1.3	%		0.2	%
Dividend yield		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 were in some cases sold by the holders into the open market earlier (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 Monte Carlo simulation and the following Level 3 inputs:

	June 30, 2023			March 31, 2023			December 31, 2022			June 30, 2022			March 31, 2022
First stock price trigger	$	13.50		$	13.50		$	13.50		$	13.50		$	13.50
Second stock price trigger	$	15.50		$	15.50		$	15.50		$	15.50		$	15.50
Stock price	$	0.29		$	0.40		$	0.65		$	4.50		$	8.28
Volatility		98.6	%		87.5	%		86.0	%		68.0	%		63.0	%
Term (in years)		1.60			1.84			2.09			2.59			2.85
Risk-free rate		5.1	%		4.1	%		4.4	%		3.0	%		2.4	%
Dividend yield		0.0	%		0.0	%		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.

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Stockholder Earn-Out Rights Derivative Liability

The stockholder earn-out rights were valued using a Monte Carlo simulation and the following Level 3 inputs:

	June 30, 2023			March 31, 2023			December 31, 2022			June 30, 2022			March 31, 2022
First stock price trigger	$	13.50		$	13.50		$	13.50		$	13.50		$	13.50
Second stock price trigger	$	15.50		$	15.50		$	15.50		$	15.50		$	15.50
First revenue trigger	$	65,000		$	65,000		$	65,000		$	65,000		$	65,000
Second revenue trigger	$	101,000		$	101,000		$	101,000		$	101,000		$	101,000
Stock price	$	0.29		$	0.40		$	0.65		$	4.50		$	8.28
Base year revenue assumption	$	44,000		$	44,000		$	48,000		$	49,500		$	55,500
Volatility		98.6	%		87.5	%		86.0	%		68.0	%		63.0	%
Term (in years)		1.60			1.84			2.09			2.59			2.85
Risk-free rate		5.1	%		4.1	%		4.4	%		3.0	%		2.4	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%

The revenue assumption input relates to projected revenue for fiscal year 2022 (for the periods ended June 30, 2022 and March 31, 2022) and fiscal year 2023 (for the periods ended June 30, 2023 and March 31, 2023) and 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 19 — Subsequent Events

Restricted Cash

On July 11, 2023, Leafly returned $360 of restricted cash to the FPA Holders pursuant to the terms of the FPAs (Note 3).

Reverse Stock Split

On July 12, 2023, during the Company’s 2023 Annual Meeting of Stockholders, Leafly’s stockholders approved a proposal for a reverse stock split as part of the Company’s plan to regain compliance with the Bid Price Requirement under Nasdaq listing rules (Note 8). The Board retains sole discretion to determine the ratio and effective date of the reverse stock split, if at all, at a later date.

Equity Awards

On July 25, 2023, Leafly awarded: 2,512 service-based RSUs to employees, which will vest over two years; 655 RSUs to non-employee Board members, which will vest on August 20, 2023; and 473 PSUs to senior management, contingent upon fiscal year 2023 financial performance.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our financial statements and the notes related thereto which are included in “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q. Certain information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Item 1A. Risk Factors” and elsewhere in our 2022 Annual Report and Q1 2023 10-Q.

Amounts in this section are presented in thousands, except for per share numbers and percentages.

Business Overview

Leafly is a leading online cannabis discovery marketplace and resource for cannabis consumers. Leafly provides an information resource platform with a deep library of content, including detailed information about cannabis strains, retailers and cannabis products. We are a trusted destination to discover legal cannabis products and order them from licensed retailers with offerings that include subscription-based products and digital advertising. Legacy Leafly was founded in 2010 and is headquartered in Seattle with 140 total employees, including 135 in the U.S. and 5 in Canada as of June 30, 2023.

Leafly is one of the cannabis industry’s leading marketplaces for brands and retailers to reach one of the largest audiences of consumers interested in cannabis. Our platform includes educational information, strains data, and lifestyle content, enabling consumers to use Leafly’s content library to have an informed shopping experience. Leafly reduces the friction caused by fragmented regulation of cannabis across North America and offers a compliant digital marketplace that connects cannabis consumers with legal and licensed retailers and brands nearest them.

Leafly allows each shopper to tailor their journey, selecting the store, brand, and cannabis form-factor that appeals to them. Once that shopper builds a basket and is ready to order, our non-plant-touching business model sends that order reservation to the store for payment and fulfillment. By matching stores and shoppers, we deliver value to all constituencies. We monetize our platform primarily through the sale of subscription packages, bundling e-commerce software and advertising solutions, as well as non-subscription-based advertising to retailers and brands. Through the participation on our platform, retailers and brands can reach and engage the millions of monthly average users (“MAUs”) on our platform, one of the largest cannabis-focused audiences in the world.

Significant Events

Content Shift

During the first half of 2023, in conjunction with our reductions in staffing and cost cutting (see “Reductions in Force” below), Leafly began its transition from a news-centric platform to a marketplace platform. In this “content shift,” we changed our focus from providing content to drive traffic to maximizing customer demand for our retailers by attracting visitors that are more likely to order from our retailers. Leafly has enhanced its deal types, delivery options and created deeper search capabilities intended to drive conversion to sales back to retailers and brands. Our strategy is to focus on key and emerging retailer and brand accounts by strongly aligning our sales and marketing resources with their needs. In addition, at the end of the second quarter, we implemented select pricing increases, pass-throughs of certain costs and annual subscription agreements in select markets. As expected, we experienced some slowing of the topline as our team was focused on process change, which will likely continue into the third quarter of 2023, but believe that with these changes, we are positioned to evolve to a healthier customer base supporting more durable revenue over time.

Reductions in Force

In light of the current macroeconomic environment, we have taken steps to manage the business accordingly. We implemented plans to reduce operating expenses, including previously announced headcount reductions:

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•

on October 18, 2022 of 56 employees, or approximately 21% of our workforce at the time. We incurred cash charges of $492 associated with the headcount reductions during the fourth quarter of 2022.

•

on March 16, 2023 of approximately 40 employees, or approximately 21% of our workforce at the time. We incurred cash charges of $754 associated with the headcount reductions during the first quarter of 2023.

We anticipate these and other changes we made to our cost structure in 2022 and 2023 will save a total of approximately $24,000 in cash costs annually (beginning in the second quarter of 2023), now that all of the restructuring and other cost savings initiatives are fully implemented. These cost reductions are not expected to have a significant impact on the scope of our business. We will focus on maximizing efficiencies across all areas, investing in projects and products that we expect will result in the highest returns. By coupling cost savings with our strategic content shift, we believe Leafly will be better situated to become profitable in future periods.

Key Metrics

In addition to the measures presented in our consolidated financial statements, our management regularly monitors certain metrics in the operation of our business:

Monthly Active Users

MAUs represents the total unique visitors to Leafly websites and native apps each month, which in turn is a top-of-the-funnel metric that represents the maximum potential unique visitors that could become a customer of a dispensary or brand listed on Leafly’s platform within a given month. Leafly is reexamining its MAU metric and expects to discontinue reporting it in its next quarterly filing as we continue to implement a content-shift to focus on compelling and engaging content that helps drive shopping behaviors farther down the funnel.

Ending Retail Accounts

Ending retail accounts is the number of paying retailer accounts with Leafly as of the last month of the respective period. Retail accounts can include more than one retailer. This metric is helpful because it represents a portion of the volume element of our revenue and provides an indication of our market share.

Retailer Average Revenue Per Account (“ARPA”)

Retailer ARPA is calculated as monthly retail revenue, on an account basis, divided by the number of retail accounts that were active during that same month. An active account is one that had an active paying subscription with Leafly in the month. Leafly does not provide retailers with an ongoing free subscription offering but may offer a free introductory period with certain subscriptions. This metric is helpful because it represents the price element of our revenue.

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Results of Operations

Key Metrics

The table below presents these measures for the respective periods:

	Three Months Ended June 30,
	2023		2022		Change			Change (%)
Key Operating Metrics:
Average MAUs (in thousands)1		7,374		7,885		(511	)		-6	%
Ending retail accounts2		5,261		5,251		10			0	%
Retailer ARPA3	$	558	$	579	$	(21	)		-4	%

	Six Months Ended June 30,
	2023		2022		Change			Change (%)
Key Operating Metrics:
Average MAUs (in thousands)1		7,729		7,817		(88	)		-1	%
Ending retail accounts2		5,261		5,251		10			0	%
Retailer ARPA3	$	555	$	577	$	(22	)		-4	%

1.

Calculated as a simple average for the period presented.

2.

Represents the amount outstanding on the last day of the month of the respective period.

3.

Calculated as a simple average of monthly retailer ARPA for the period presented.

MAUs decreased 6% and 1% for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, due to the optimization of our marketplace on Leafly’s site (see “Content Shift” above). As noted above, Leafly is reexamining its MAU metric and expects to discontinue reporting it in its next quarterly filing.

While we optimized our marketplace, we were impacted by the loss of multi-retailer and poorly performing accounts, which were more than offset by organic growth, leading to 0% growth in year-over-year ending retail accounts for the three and six months ended June 30, 2023, compared to the same periods in 2022.

Declining pricing as compared to 2022 for platinum placement ads contributed to a 4% decline in ARPA for both the three and six months ended June 30, 2023, compared to the same periods in 2022. However, second quarter 2023 ARPA is up 1% compared to $553 for the first quarter of 2023. Going forward, Leafly is focused on increasing ARPA supported by the second quarter 2023 pricing increases, the majority of which will be effective in the third quarter.

Revenue

We generate our revenue through the sale of online advertising and online order reservation enablement on the Leafly platform for suppliers in our Retail and Brands segments. Within our Retail segment, we monetize our multi-sided retail marketplace through monthly subscriptions that enable retailers to advertise to and acquire potential shoppers. Our solutions allow retailers, where legally permissible, to accept online orders from shoppers, who visit Leafly.com or use a Leafly-powered online order reservation solution, including our iOS app. Within our Brands segment, our revenue is derived by creating custom advertising campaigns for both small and large brands that target Leafly’s broad and diverse audience and offering brands profile listings on our platform, which are sold on a monthly recurring subscription or annual basis. Advertising opportunities include on-site digital display, native placements, email, branded content, and off-site audience

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extension. Leafly’s advertising partners span a variety of verticals including hardware and accessories, THC-infused products, hemp, CBD, and seed.

	Three Months Ended June 30,
	2023		2022		Change ($)			Change (%)
Revenue:
Retail	$	8,840	$	9,065	$	(225	)		-2	%
Brands		1,835		2,985		(1,150	)		-39	%
Total revenue	$	10,675	$	12,050	$	(1,375	)		-11	%

	Six Months Ended June 30,
	2023		2022		Change ($)			Change (%)
Revenue:
Retail	$	18,310	$	18,244	$	66			0	%
Brands		3,614		5,226		(1,612	)		-31	%
Total revenue	$	21,924	$	23,470	$	(1,546	)		-7	%

Retail

Retail subscriptions revenue decreased $312, partially offset by an increase in digital display ads and other revenues of $69, accounting for a significant portion of the overall decrease in retail revenue for the three months ended June 30, 2023. Digital media display ads revenue growth was due to increased volumes of display ads sold. For the three months ended June 30, 2023, the decrease in retail subscription revenue was primarily due to customer churn and marketplace dynamics in selected states.

Retail subscriptions revenue decreased $520, more than offset by an increase in digital display ads and other revenues of $569, driving a slight increase in retail revenue for the six months ended June 30, 2023. Digital media display ads revenue growth was caused by increased volumes of display ads sold. For the six months ended June 30, 2023, the decrease in retail subscription revenue was primarily due to customer churn and marketplace dynamics which more than offset growth in new markets.

Brands

Macro challenges have put overall pressure on the cannabis industry, particularly in our brand advertising business.

Second quarter 2023 Brands revenue increased 3% over the first quarter’s revenue of $1,779. However, for the three months ended June 30, 2023 as compared to the same period in 2022, Brands revenue decreased $1,131, mostly in Canada, due primarily to:

•

direct-to-consumer marketing revenue decrease of $330;

•

reduction in display ads of $331; and

•

branded content decrease of $380.

For the six months ended June 30, 2023, Brands revenue decreased $1,593, mostly in Canada, due primarily to:

•

direct-to-consumer marketing revenue decrease of $562;

•

reduction in display ads of $494; and

•

branded content decrease of $399.

The Company’s current systems do not allow us to precisely quantify changes in Brands revenue attributable to price and volume. The information we have from our existing systems, combined with our knowledge of changes in list prices, informs

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the discussion of Brands volume and pricing that follows. We believe Brands revenue declined due to decreased volume and reduced advertising spend per ad from our clients.

Cost of Revenue

	Three Months Ended June 30,
	2023		2022		Change ($)			Change (%)
Cost of sales:
Retail	$	977	$	990	$	(13	)		-1	%
Brands		261		451		(190	)		-42	%
Total cost of sales	$	1,238	$	1,441	$	(203	)		-14	%

	Six Months Ended June 30,
	2023		2022		Change ($)			Change (%)
Cost of sales:
Retail	$	2,056	$	2,030	$	26			1	%
Brands		528		866		(338	)		-39	%
Total cost of sales	$	2,584	$	2,896	$	(312	)		-11	%

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Retail

For the three months ended June 30, 2023, retail cost of revenue decreased due to a reduction in headcount costs of $67 partially offset by increased website infrastructure costs of $7 and a $46 increase in business platform and merchant processing costs.

For the six months ended June 30, 2023, retail cost of revenue increased due to $152 increase in business platform and merchant processing costs partially offset by increased website infrastructure costs of $29 and headcount costs of $98.

Brands

Brands cost of revenue decreased for the three months ended June 30, 2023, primarily reflecting a decrease of $71 in costs of display advertising and $42 in merchant processing fees, corresponding to decreased associated revenue, and $27 of lower website infrastructure costs, as described under Retail cost of revenue above, as these costs are shared across both of our segments. Brands cost of revenue also decreased $55 for the three months ended June 30, 2023, due to reduced headcount costs.

Brands cost of revenue decreased for the six months ended June 30, 2023, primarily reflecting a decrease of $171 in costs of display advertising and $44 in merchant processing fees, corresponding to decreased associated revenue, and $50 of lower website infrastructure costs, as described under Retail cost of revenue above, as these costs are shared across both of our segments. Brands cost of revenue also decreased $79 for the six months ended June 30, 2023, due to reduced headcount costs.

Operating Expenses

Operating expenses declined significantly overall as we implemented the two reductions in force and cost reduction activities discussed above.

	Three Months Ended June 30,
	2023		2022		Change ($)			Change (%)
Operating expenses:
Sales and marketing	$	2,852	$	8,112	$	(5,260	)		-65	%
Product development		2,320		4,056		(1,736	)		-43	%
General and administrative		5,016		7,310		(2,294	)		-31	%
Total operating expenses	$	10,188	$	19,478	$	(9,290	)		-48	%

	Six Months Ended June 30,
	2023		2022		Change ($)			Change (%)
Operating expenses:
Sales and marketing	$	7,763	$	15,126	$	(7,363	)		-49	%
Product development		5,600		7,521		(1,921	)		-26	%
General and administrative		11,676		14,241		(2,565	)		-18	%
Total operating expenses	$	25,039	$	36,888	$	(11,849	)		-32	%

Sales and Marketing

Sales and marketing expenses decreased $5,260 for the three months ended June 30, 2023 compared to the same period in 2022 due to:

•

a $2,768 decrease in compensation costs;

•

a $2,117 reduction in advertising and marketing spending;

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•

a $198 decline in professional services; and

•

a $176 reduction in other costs.

Sales and marketing expenses decreased $7,363 for the six months ended June 30, 2023 compared to the same period in 2022 due to:

•

a $3,519 decrease in compensation costs;

•

a $3,168 reduction in advertising and marketing spending;

•

a $443 reduction in professional services; and

•

a $233 reduction in other costs.

Product Development

Product development expenses decreased $1,736 for the three months ended June 30, 2023 compared to the same period in 2022 due to:

•

a $1,293 decrease in compensation costs (or $1,697 excluding capitalized costs). Product development expenses are reported net of $250 and $658 of costs capitalized to internal-use software for the three months ended June 30, 2023 and 2022, respectively;

•

a $516 reduction in professional services; and

•

a $68 reduction in other costs; partially offset by:

•

a $141 increase in depreciation expense primarily related to capitalized internal use software.

Product development expenses decreased $1,921 for the six months ended June 30, 2023 compared to the same period in 2022 due to:

•

a $1,277 decrease in compensation costs (or $1,904 excluding capitalized costs). Product development expenses are reported net of $785 and $1,415 of costs capitalized to internal-use software for the six months ended June 30, 2023 and 2022, respectively;

•

a $875 reduction in professional services; and

•

a $73 reduction in other costs; partially offset by:

•

a $304 increase in depreciation expense primarily related to capitalized internal use software.

General and Administrative

General and administrative expenses decreased $2,294 for the three months ended June 30, 2023 compared to the same period in 2022 due to:

•

a $843 decrease in professional services primarily related to regulatory filings; and

•

a $574 reduction in insurance;

•

a $358 decrease in compensation costs; and

•

a $519 decline in other costs.

General and administrative expenses decreased $2,565 for the six months ended June 30, 2023 compared to the same period in 2022 due to:

•

a $1,998 decrease in compensation costs, including a $1,395 decrease in stock-based compensation expense, which was attributable to the modification of awards in the first quarter of 2022 (Note 14);

•

a $612 reduction in insurance;

•

a $556 decline in other costs;

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•

a $169 decrease in professional services; partially offset by:

•

a $770 increase in bad debts expense due to net recoveries in the prior year period.

Other Income and Expense

	Three Months Ended June 30,
	2023			2022			Change ($)			Change (%) 1
Other income (expense):
Interest expense, net	$	(724	)	$	(717	)	$	(7	)		1	%
Change in fair value of derivatives		14			24,397			(24,383	)	nm
Other expense, net		25			(52	)		77		nm
Total other income (expense)	$	(685	)	$	23,628		$	(24,313	)	nm

	Six Months Ended June 30,
	2023			2022			Change ($)			Change (%) 1
Other income (expense):
Interest expense, net	$	(1,437	)	$	(1,414	)	$	(23	)		2	%
Change in fair value of derivatives		281			14,000			(13,719	)	nm
Other expense, net		22			(889	)		911		nm
Total other income (expense)	$	(1,134	)	$	11,697		$	(12,831	)	nm

1.

An “nm” reference means the percentage is not meaningful.

Interest expense for the three and six months ended June 30, 2023 was similar to that of the same period in 2022.

The change in fair value of derivatives for the three and six months ended June 30, 2023 is due to the recognition of derivatives in connection with the Business Combination and changes in their valuations, which were primarily driven by the decline in Leafly’s stock price during the 2022 periods. See Note 18 to our consolidated financial statements within this Quarterly Report for details on the valuations and the fair value changes in the periods presented.

Other expense, net decreased for the six months ended June 30, 2023 due primarily to $874 of costs incurred in connection with the Business Combination during 2022, which were allocated upon closing of the Business Combination to newly issued derivative liabilities that are recorded at fair value on a recurring basis.

Non-GAAP Financial Measures

Earnings Before Interest, Taxes and Depreciation and Amortization (EBITDA) and Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed EBITDA and Adjusted EBITDA, both of which are non-GAAP financial measures that we calculate as net (loss) income before interest, taxes and depreciation and amortization expense in the case of EBITDA and further adjusted to exclude non-cash, unusual and/or infrequent costs in the case of Adjusted EBITDA. Below we have provided a reconciliation of net (loss) income (the most directly comparable GAAP financial measure) to EBITDA and from EBITDA to Adjusted EBITDA.

We present EBITDA and Adjusted EBITDA because these metrics are a key measure used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of investment capacity. Accordingly, we believe that EBITDA and Adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management.

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EBITDA and Adjusted EBITDA have limitations as an analytical tool, and you should not consider these in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and both EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

•

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; and

•

EBITDA and Adjusted EBITDA do not reflect interest or tax payments that may represent a reduction in cash available to us.

Because of these limitations, you should consider EBITDA and Adjusted EBITDA alongside other financial performance measures, including net (loss) income and our other GAAP results.

A reconciliation of net (loss) income to non-GAAP EBITDA and Adjusted EBITDA follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Net (loss) income	$	(1,436	)	$	14,759		$	(6,833	)	$	(4,617	)
Interest expense, net		724			717			1,437			1,414
Depreciation and amortization expense		226			97			421			149
EBITDA		(486	)		15,573			(4,975	)		(3,054	)
Stock-based compensation		580			464			1,238			2,388
Transaction expenses allocated    to derivatives		—			—			—			874
Severance costs		—			—			754			—
Change in fair value of derivatives		(14	)		(24,397	)		(281	)		(14,000	)
Adjusted EBITDA	$	80		$	(8,360	)	$	(3,264	)	$	(13,792	)

The decrease in EBITDA for the three and six months ended June 30, 2023 versus the same periods in 2022 is primarily due to the change in fair value of derivatives in 2022 as a result of the decline in Leafly’s stock price. See Note 18 to our consolidated financial statements within this Quarterly Report for more information regarding the fair value of derivatives. The increase in Adjusted EBITDA for the three and six months ended June 30, 2023 versus the same periods in 2022 relates to cost savings related to Leafly’s reductions in force and cost cutting measures described above.

Financial Condition

Cash, Cash Equivalents, and Restricted Cash

Cash, cash equivalents, and restricted cash totaled $14,729 and $25,202 as of June 30, 2023 and December 31, 2022, respectively. Explanations of our cash flows for the periods presented follow.

Cash Flows

First Half 2023

During the first half of 2023, the Company utilized a total of $10,473 of cash, primarily to fund cash operating losses of approximately $3,772, to fund changes in current assets and liabilities of $6,038 and for capitalized software costs of $788. The changes in current assets and liabilities during the six months ended June 30, 2023 included primarily reductions in accrued expenses of $2,399 primarily related to the payment of 2022 bonuses and accrued interest as well as the change in accounts receivable of $1,701 and prepaid expenses and other current assets of $1,334 related to the payment of directors

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and officers insurance. Of the $10,473 of cash used in the first half of 2023, only $834 was expended during the second quarter, reflecting our concerted efforts to become cash flow positive.

First Half 2023 Compared to First Half 2022

As compared to the six months ended June 30, 2022, cash used in operations decreased by $8,573 to $9,807 for the six months ended June 30, 2023, mainly due to decreased net loss from operations as a result of the reductions in force and the cost cutting measures employed in 2022 and 2023. See discussions under “— Significant Events” and “— Results of Operations” above for more information. Cash used in investing activities decreased $627 to a use of $788 primarily due to lower software capitalization in the current year. Cash and restricted cash provided by financing decreased $58,244 over this same period to $122 for the six months ended June 30, 2023, primarily due to proceeds from the convertible promissory notes and the Merger in 2022. See Notes 1, 12, and 13 to our consolidated financial statements within this Quarterly Report for more information.

Deferred Revenue

Deferred revenue is primarily related to software subscriptions and display ads. The revenue deferred at June 30, 2023 is expected to be recognized in the subsequent 12-month period. See Note 9 to our consolidated financial statements within this Quarterly Report for further discussion.

Contractual Obligations and Other Planned Uses of Capital

We are obligated to repay any convertible notes that do not ultimately convert to equity, as well as the other operating liabilities on our Consolidated Balance Sheets, such as accrued liabilities.

Liquidity and Capital Resources

Leafly has incurred operating losses since its inception and had an accumulated deficit of $71,533 and $64,700 at June 30, 2023 and December 31, 2022, respectively.

Under the rules of ASC Subtopic 205-40 “Presentation of Financial Statements — Going Concern” (“ASC 205-40”), reporting companies are required to evaluate whether conditions and/or events raise substantial doubt about their ability to meet their future financial obligations as they become due within one year after the date that the financial statements are issued. This evaluation takes into account a company’s current available cash and projected cash needs over the one-year evaluation period but may not consider things beyond its control. As noted above, we have experienced revenue declines, incurred recurring operating losses, used cash from operations, and relied on the capital raised in the Business Combination to continue ongoing operations. These conditions, when considered in the aggregate, raise substantial doubt about our ability to continue as a going concern within one year of the date the financial statements included in this Quarterly Report are issued.

•

During the fourth quarter of the year ended December 31, 2022, we implemented a restructuring plan, including a reduction in force of approximately 56 persons and other cost cutting measures, with an estimated expected annual cash savings of approximately $16,000 beginning in 2023. These cost-cutting measures are expected to allow the Company to prioritize growth opportunities, realign its expense structure, and preserve capital while strengthening its financial position. The cash cost for this initiative was $492 reflecting primarily one-time severance and other employee-related termination benefits incurred during the fourth quarter of 2022.

•

On March 16, 2023, we announced a second restructuring plan further reducing recurring costs and identifying cost savings that we expect to result in an estimated annual cash savings of an additional $8,000 based on a reduction of an additional 40 personnel at a cash cost of $754 recognized in the first quarter of 2023.

After considering all available evidence, we determined that, based on both of our cost reduction measures, our current positive working capital of $14,436 as of June 30, 2023 will be sufficient to meet our capital requirements for a period of at least twelve months from the date that our June 30, 2023 financial statements are issued. We believe our restructuring plans

38

alleviate the substantial doubt about our ability to continue as a going concern within one year of the date these financial statements are issued. Management will continue to evaluate our liquidity and capital resources.

Upon the closing of the Business Combination, Leafly issued the 2022 Notes, which provided incremental funding for our operations. Note 11 to our consolidated financial statements within this Quarterly Report provides additional information regarding the 2022 Notes.

We believe that our capital resources are sufficient to fund our operations for at least the following 12 months.

Nasdaq Notifications of Noncompliance

On October 28, 2022, we received a notice from the Nasdaq Staff informing us that Leafly was not in compliance with the $50 million minimum market value requirement for continued listing on the Nasdaq Global Market and that we had until April 26, 2023 to regain compliance. On April 19, 2023, Nasdaq approved our application to transfer the listing of Leafly’s common stock and warrants from the Nasdaq Global Market to The Nasdaq Capital Market (“Capital Market”), effective April 21, 2023. The Company complies with the net income from continuing operations listing standard of the Capital Market, and the transfer of the listing resolved the October 28, 2022 noncompliance notification.

On November 2, 2022, we received another letter from the Nasdaq Staff notifying us that, for 30 consecutive business days, the bid price of Leafly’s common stock had closed below the $1.00 per share minimum bid price requirement for continued inclusion on Nasdaq under Nasdaq Listing Rule 5450(a)(1) (“Bid Price Requirement”). To regain compliance, the closing bid price of Leafly’s common stock must have been $1.00 or more per share for a minimum of ten consecutive business days at any time before May 1, 2023. We were unable to regain compliance with the Bid Price Requirement by May 1, 2023, and on May 2, 2023, we received a letter from Nasdaq notifying us that Leafly’s common stock would be subject to delisting from Nasdaq unless we timely requested a hearing before a Nasdaq Listing Panel (the “Panel”). On May 8, 2023, we timely requested a hearing before the Panel, and on May 11, 2023, we submitted a plan of compliance and requested an extension of time to regain compliance with the Bid Price Requirement (the “Request”). On May 23, 2023, we received a letter from the Panel confirming that our Request was granted and that we have until October 17, 2023 to effect a reverse stock split and until October 30, 2023 to regain compliance with the Bid Price Requirement, subject to meeting certain milestones including obtaining stockholder approval of the reverse stock split on or before July 12, 2023. On July 12, 2023, at our 2023 Annual Meeting of Stockholders, our stockholders approved a proposal to effect a reverse stock split of the outstanding shares of Leafly’s common stock by a ratio of not less than 1 for 10 and not more than 1 for 25 at any time prior to Leafly’s 2024 Annual Meeting of Stockholders, with the exact ratio to be set by the Board in the future, if at all, within the above range in its sole discretion, without further approval or authorization of our stockholders.

During the remainder of the approved extension from Nasdaq, we expect that Leafly’s common stock and warrants will continue to be listed and traded on Nasdaq; however, if we are unable to effect a reverse stock split by October 17, 2023 or regain compliance with the Bid Price Requirement by October 30, 2023, Nasdaq has informed us that Leafly’s common stock will be subject to immediate delisting. We believe we are taking prudent steps to ultimately be successful in effecting a reverse stock split and regaining compliance with the Bid Price Requirement. However, there can be no assurances that any of these efforts will be successful, and if we are unable to regain compliance with the Bid Price Requirement, Leafly’s common stock and warrants would be subject to delisting from Nasdaq. See Part II, Item 1A Risk Factors in this Quarterly Report under the heading“— Our shares of common stock are listed on Nasdaq, but we cannot guarantee that we will be able to satisfy the applicable listing standards going forward.”

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of June 30, 2023.

Contractual Obligations

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Other than our 2022 Notes (see Note 11 to our consolidated financial statements), we do not have any long-term debt, lease obligations or other long-term liabilities. We have entered into several multi-year licensing and administration agreements in the ordinary course of business, the cost of which are reflected within general and administrative expense within our statements of operations as costs are incurred.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates.

We believe there have been no material changes to the items that we disclosed as our critical accounting estimates under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2022 Annual Report.


 

Recently Issued and Adopted Accounting Pronouncements

Reference is made to Note 2 for information about recently issued accounting pronouncements.
 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Leafly is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information otherwise required with respect to market risk.
 

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15 and 15d-15 under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Because there are inherent limitations in all control systems, a control system, no matter how well conceived and operated, can provide only reasonable, as opposed to absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this Quarterly Report.



Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended June 30, 2023.

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Part II - Other Information

Item 1. LEGAL PROCEEDINGS.

We are involved in legal and administrative proceedings and litigation arising in the ordinary course of business. We believe that the potential liability, if any, in excess of amounts already accrued from all proceedings, claims and litigation will not have a material effect on our financial position, cash flows or results of operations when resolved in a future period. There have been no material developments to the legal proceedings reported in the 2022 Annual Report.

Item 1A. RISK FACTORS.

Risk factors that affect our business and financial results are discussed in Part I, Item 1A of our 2022 Annual Report and in Part II, Item 1A of our Q1 2023 10-Q. As of the date of this report, other than as set forth below, we are not aware of any material changes in the risk factors disclosed in our 2022 Annual Report or in our Q1 2023 10-Q. You should carefully consider the risks and uncertainties described herein and in our 2022 Annual Report and Q1 2023 10-Q, which have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner. The risks described herein and in our 2022 Annual Report and Q1 2023 10-Q are not the only risks we face, as there are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial which may in the future adversely affect our business, financial condition and/or operating results.

Our shares of common stock are listed on Nasdaq, but we cannot guarantee that we will be able to satisfy the applicable listing standards going forward.

Nasdaq requires listed companies to comply with certain standards to remain listed. On November 2, 2022, we received a letter from the Nasdaq Staff notifying us that we did not meet the Bid Price Requirement. To regain compliance, the closing bid price of Leafly’s common stock must have been $1.00 or more per share for a minimum of ten consecutive business days at any time before May 1, 2023. We were unable to regain compliance with the Bid Price Requirement by May 1, 2023, and on May 2, 2023, we received a letter from Nasdaq notifying us that Leafly’s common stock would be subject to delisting from Nasdaq unless we timely requested a hearing before the Panel. On May 8, 2023, we timely requested a hearing before the Panel, and on May 11, 2023, we submitted a plan of compliance and the Request. On May 23, 2023, we received a letter from the Panel confirming that our Request was granted and that we have until October 17, 2023 to effect a reverse stock split and until October 30, 2023 to regain compliance with the Bid Price Requirement, subject to meeting certain milestones including obtaining stockholder approval of the reverse stock split on or before July 12, 2023. On July 12, 2023, at our 2023 Annual Meeting of Stockholders, our stockholders approved a proposal to effect a reverse stock split of the outstanding shares of Leafly’s common stock by a ratio of not less than 1 for 10 and not more than 1 for 25 at any time prior to Leafly’s 2024 Annual Meeting of Stockholders, with the exact ratio to be set by the Board within the above range in its sole discretion, without further approval or authorization of our stockholders.

During the remainder of the approved extension from Nasdaq, we expect that Leafly’s common stock and warrants will continue to be listed and traded on Nasdaq; however, if we are unable to effect a reverse stock split by October 17, 2023 or regain compliance with the Bid Price Requirement by October 30, 2023, Nasdaq has informed us that Leafly’s common stock will be subject to immediate delisting.

We believe we are taking prudent steps to ultimately be successful in effecting a reverse stock split and regaining compliance with the Bid Price Requirement. However, there can be no assurances that any of these efforts will be successful, and if we are unable to regain compliance with the Bid Price Requirement, our common stock and warrants would be subject to delisting from Nasdaq. Delisting from the Capital Market could make trading our common stock more difficult for investors, potentially leading to declines in our share price and liquidity. In addition, without a Nasdaq market listing, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock would likely be made more difficult and the trading volume of our stock could decline. Delisting from Nasdaq could also result in negative publicity and make it more difficult for us to raise additional capital. The absence of such a listing may adversely affect the acceptance of our common stock as transaction consideration or the value accorded our common stock by other parties.

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Further, if we are delisted, we would also incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in the secondary market. We cannot assure you that our common stock and/or warrants, if delisted from Nasdaq, will be listed on another securities exchange or quoted on an over-the counter quotation system. If our common stock is delisted, it may come within the definition of “penny stock” as defined in the Exchange Act and would be covered by Rule 15g-9 of the Exchange Act. That Rule imposes additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors.

There are significant risks associated with effecting a reverse stock split.

The principal purpose of effecting the reverse stock split approved by our stockholders is to increase the trading price of our common stock to meet the Bid Price Requirement and remain listed on the Capital Market. However, the long-term effect of a reverse stock split on the market price of our common stock cannot be predicted with any certainty, and we cannot assure you that a reverse stock split will accomplish this objective for any meaningful period of time, or at all. While we expect that the reduction in the number of outstanding shares of common stock will proportionally increase the market price of our common stock, we cannot assure you that a reverse stock split will increase the market price of our common stock by a multiple of the reverse stock split ratio, or result in any permanent or sustained increase in the market price of our common stock. The market price of our common stock may be affected by other factors which may be unrelated to the number of shares outstanding, including the Company’s business and financial performance, general market conditions, and prospects for future success.

If effected, a reverse stock split will reduce the total number of outstanding shares of our common stock, which may lead to reduced trading and a smaller number of market makers for our common stock, particularly if the price per share of our common stock does not increase as a result of the reverse stock split. If a reverse stock split is effected, it will increase the number of stockholders who own “odd lots” of less than 100 shares of common stock. A purchase or sale of less than 100 shares of common stock (an “odd lot” transaction) may result in incrementally higher trading costs through certain brokers, particularly “full service” brokers. Therefore, those stockholders who own fewer than 100 shares of common stock following a reverse stock split may be required to pay higher transaction costs if they sell their common stock. A reverse stock split may be viewed negatively by the market and, consequently, could lead to a decrease in our overall market capitalization. If the per share market price of our common stock does not increase in proportion to the reverse stock split ratio, or following such increase does not maintain or exceed such price, then the value of our Company, as measured by our market capitalization, will be reduced. Additionally, any reduction in our market capitalization may be magnified as a result of the smaller number of total shares of common stock outstanding following the reverse stock split.

Our payment system and the payment systems of our suppliers depend on third-party providers and are subject to evolving laws and regulations.

We have engaged third-party service providers to perform credit and debit card processing services for suppliers’ payments to us. If these service providers do not perform adequately or if our relationships with these service providers were to terminate, our ability to process payments could be adversely affected and our business could be harmed. Additionally, some of our suppliers use similar third-party providers for processing services. If these service providers do not perform adequately or if the relationships of our suppliers with these service providers were to terminate, the ability of our suppliers to process payments could be adversely affected and our business could be harmed. The laws and regulations related to payments are complex and are potentially affected by tensions between federal and state treatment of the cannabis and other industries. These laws and regulations also vary across different jurisdictions in the United States, Canada and globally. As a result, we are required to spend significant time and effort to comply with those laws and regulations. Any failure or claim of our failure to comply, or any failure by our third-party service providers to comply, could cost us substantial resources, could result in liabilities, or could force us to stop offering our suppliers the ability to pay with credit cards, debit cards and bank transfers. As we expand the availability of these payment methods or offer new payment methods to our suppliers in the future, we may become subject to additional regulations and compliance requirements.

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Due to the constantly evolving and complex laws and regulations applicable to our industry, third-party merchant banks and third-party payment processors may consider our business a high risk. This could cause a third party to discontinue its services to us, and we may not be able to find a suitable replacement. If this were to occur, we would need to collect from our suppliers using less efficient methods, which could adversely impact our collections, revenues and financial performance. Additionally, if a third party were to discontinue its services to us or if the applicable laws and regulations were to evolve in a way that impacted us negatively, we may not be able to realize our plans of expanding our business offerings, which could have a material adverse effect on our operations and our plans for expansion.

Moreover, Visa and Mastercard reportedly prohibit processing of transactions involving cannabis on their networks. In July 2023, Mastercard instructed financial institutions and payment processors that they must stop permitting cannabis transactions on its debit cards. Although U.S. consumers cannot purchase products on our listings marketplace and we do not currently use, nor have we historically used, any of our merchant processing relationships to process payments for cannabis transactions, to the extent Visa or Mastercard restrict cannabis-related transactions, our merchant processing relationships could be terminated, or we could be prevented from processing any Visa or Mastercard transactions, which could have a material adverse effect on our business and results of operations.

Further, through our agreement with our third-party credit card processors, we are subject to payment card association operating rules and certification requirements, including restrictions on product mix and the Payment Card Industry Data Security Standard (“PCI-DSS”). We are also subject to rules governing electronic funds transfers. Any change in these rules and requirements could make it difficult or impossible for us to comply. Additionally, any data breach or failure to hold certain information in accordance with PCI-DSS may have an adverse effect on our business and results of operations.

We are dependent on our banking relationships, and due to our connection with the cannabis industry, we may have difficulty accessing or consistently maintaining banking or other financial services.

Although we do not grow or sell cannabis products, our general connection with the cannabis industry may hamper our efforts to do business or establish collaborative relationships with others that may fear disruption or increased regulatory scrutiny of their own activities.

We are dependent on the banking industry to support the financial functions of our services and advertising solutions. Our business operating functions including payroll for our employees, real estate leases, and other expenses are reliant on traditional banking. Additionally, many of our suppliers pay us via wire transfer to our bank accounts, or via checks that we deposit into our bank accounts. We require access to banking services for both us and our suppliers to receive payments in a timely manner. Lastly, to the extent we rely on any lines of credit, these could be affected by our relationships with financial institutions and could be jeopardized if we lose access to a bank account. Important components of our offerings depend on supplier accounts and relationships, which in turn depend on banking functions. Most federal and federally-insured state banks currently do not serve businesses that grow and sell cannabis products on the stated ground that growing and selling cannabis is illegal under federal law, even though the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued guidelines to banks in February 2014 that clarified how financial institutions can provide services to cannabis-related businesses, consistent with financial institutions’ obligations under the Bank Secrecy Act. While the federal government has generally not initiated financial crimes prosecutions against state-law compliant cannabis companies or their vendors, the government has the ability to do so, at minimum against companies in the adult-use markets. The continued uncertainty surrounding financial transactions related to cannabis activities and the subsequent risks this uncertainty presents to financial institutions may result in their discontinuing services to the cannabis industry or limit their ability to provide services to the cannabis industry or ancillary businesses providing services to the cannabis industry.

As a result of federal-level illegality and the risk that providing services to state-licensed cannabis businesses poses to banks, cannabis-related businesses face difficulties accessing banks that will provide services to them. When cannabis businesses are able to find a bank that will provide services, they face extensive client due diligence in light of complex state regulatory requirements and guidance from FinCEN, and these reviews may be time-consuming and costly, potentially creating additional barriers to financial services for, and imposing additional compliance requirements on, us and our suppliers. FinCEN requires a party in trade or business to file with the U.S. Internal Revenue Service (the “IRS”), a Form 8300 report

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within 15 days of receiving a cash payment of over $10,000. While we receive very few cash payments for the products we sell, if we fail to comply with these laws and regulations, the imposition of a substantial penalty could have a material adverse effect on our business, results of operations and financial condition. We cannot ensure that our strategies and techniques for designing our platform features and services, including our advertising solutions, for our suppliers will operate effectively and efficiently and not be adversely impacted by any refusal or reluctance of banks to serve businesses that grow and sell cannabis products. A change in banking regulations or a change in the position of the banking industry that permits banks to serve businesses that grow and sell cannabis products may increase competition for us, facilitate new entrants into the industry offering platform features and services similar to those that we offer, or otherwise adversely affect our results of operations. Also, the inability of potential suppliers in our target market to open accounts and otherwise use the services of banks or other financial institutions may make it difficult for us to conduct business, including receiving payments in a timely manner.

We do not sell cannabis, or products that contain cannabis; accordingly, our company is not part of the cannabis industry that would be restricted from using federal and federally insured banks. However, because our revenue is generated largely from companies licensed as operators in the cannabis industry, banks have and may continue to consider us to be part of the cannabis industry that is subject to banking restrictions. If we were to lose any of our banking relationships or fail to secure additional banking relationships in the future, we could experience difficulty and incur increased costs in the administration of our business, paying our employees, and accepting payments from suppliers, each of which may adversely affect our reputation or results of operations. Additionally, the closure of many or one of our bank accounts due to a bank’s reluctance to provide services to a business working with state-legal cannabis businesses would require significant management attention from us and could materially adversely affect our business and operations. In addition to banks and financial institutions, merchant processors may take a similar view of the risks of working with us since we provide services to cannabis businesses, and loss of any of our merchant processor relationships could have similar results. Moreover, Visa and Mastercard reportedly prohibit processing of transactions involving cannabis on their networks. In addition, in July 2023, Mastercard instructed financial institutions and payment processors that they must stop permitting cannabis transactions on its debit cards. Although U.S. consumers cannot purchase products on our listings marketplace and we do not currently use, nor have we historically used, any of our merchant processing relationships to process payments for cannabis transactions, to the extent Visa or Mastercard restrict cannabis-related transactions, our merchant processing relationships could be terminated, or we could be prevented from processing any Visa or Mastercard transactions, which could have a material adverse effect on our business and results of operations.

Item 6. EXHIBITS.

The following documents are included as exhibits to this Quarterly Report on Form 10-Q:

			Incorporated by Reference
Exhibit Number		Exhibit Description	Form	Period Ending	Exhibit	Filing Date
10.1	* +	Form of Restricted Stock Unit Award Agreement, 2021 Equity Incentive Plan, Employee
10.2	* +	Form of Restricted Stock Unit Award Agreement, 2021 Equity Incentive Plan, Directors
10.3	* +	Form of Performance Stock Unit Award Agreement, 2021 Equity Incentive Plan
31.1	*	Certification of Chief Executive Officer of Leafly pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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			Incorporated by Reference
Exhibit Number		Exhibit Description	Form	Period Ending	Exhibit	Filing Date
31.2	*	Certification of Chief Financial Officer of Leafly pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	*	Certifications of Chief Executive Officer and Chief Financial Officer of Leafly pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	***	Inline XBRL Instance Document
101.SCH	****	Inline XBRL Taxonomy Extension Schema Document
101.CAL	****	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	****	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	****	Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	****	Inline XBRL Taxonomy Extension Definition Linkbase Document
104	***	Cover Page Interactive Data File

*	Filed herewith.
***	The XBRL Instance Document and Cover Page Interactive Data File do not appear in the Interactive Data File because their XBRL tags are embedded within the Inline XBRL document.
****	Submitted electronically herewith
+	Management contract or compensation plan or arrangement.

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SIGNATURES

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 11, 2023.

Leafly Holdings, Inc.
By:	/s/ Yoko Miyashita
	Yoko Miyashita
	Chief Executive Officer
By:	/s/ Suresh Krishnaswamy
	Suresh Krishnaswamy
	Chief Financial Officer

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