Leafly Holdings, Inc. (NASDAQ:LFLY) Q2 2024 Earnings Call Transcript August 10, 2024
Operator: Hello and welcome to the Leafly Second Quarter 2024 Earnings Call. My name is Natasha and I will be coordinating your call today. I now have the pleasure of handing you over to your host, Eileen [indiscernible] to begin. Eileen, please go ahead.
Unidentified Company Representative: Good afternoon and welcome to Leafly’s Q2 2024 earnings call. Joining me on the call today are CEO, Yoko Miyashita; and CFO, Suresh Krishnaswamy. In addition, Peter Lee, our President and Chief Operating Officer, is also joining us on the call today to assist with Q&A. Today’s prepared remarks have been recorded. A copy of our press release can be found on our website at investor.leafly.com. Today’s call will contain forward-looking statements which are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995 as amended. Forward-looking statements include statements regarding the services offered by Leafly, the markets in which Leafly operate, business strategies, performance metrics, industry environment, potential growth opportunities and Leafly’s projected future results, financial outlook, expected results from cost-saving measures, management objectives and initiatives undertaken to improve our liquidity and capitalization and can be identified by words such as expect, anticipate, focus, intend, plan, believe, seek or will.
These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations, and we caution you not to place undue reliance on such statements. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today’s press release, our 2023 annual report on Form 10-K filed with the SEC on April 1, 2024, and our other periodic filings with the SEC. During the call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
A reconciliation of the GAAP and non-GAAP results is included in our earnings press release which has been filed with the SEC and is also available on our website at investor.leafly.com. We’ll answer a few pre-submitted questions at the end of this call. And with that, let me turn the call over to Yoko.
Yoko Miyashita: Good afternoon. Leafly remains steadfast in our commitment to enhancing operational efficiency on our path to profitability and while there is still work to be done, we’re making meaningful progress. We remain focused on delivering on our mission to help consumers discover the magic of cannabis. These efforts have concentrated on creating value at the intersection of consumers, brands and retailers by offering services and products to monetize the valuable connections created on the Leafly platform among these three groups. In an era of liberalized access to cannabis, the need for Leafly’s trusted voice and guidance has never been greater, and we remain invigorated by the opportunities to fill that need for the many millions on their journey of cannabis discovery.
Q&A Session
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Our revenue in the second quarter was in line with guidance at $8.7 million. Our net loss was $1.3 million, and we finished with our adjusted EBITDA and cash well ahead of guidance, posting $483,000 in positive adjusted EBITDA this quarter, which reflects our continued focus on building a path to profitability even while revenue performance remains muted. This beat on adjusted EBITDA in the quarter was the result of our ongoing focus on collection efforts. We were pleased to secure recoveries against previously written-off customers who are making good on their outstanding balances and reactivating on our platform. We are reaching a level of general stability with respect to bad debt. Payment delinquencies remain the largest segment of canceled customers, accounting for just under 40% of the monthly recurring revenue lost in the quarter.
Inability to pay remains a symptom of our capital-deprived industry, and we have implemented stricter controls to keep customers current. We expect this pressure to continue until macro conditions improve. As account declines flatten, we are building a foundation from which we can grow back our retail account base, which sat at 3,595 retail accounts at the end of Q2. This marks a 6.4% reduction quarter-over-quarter and reflects a similar decline in our ending retail accounts from Q1 over Q4 2023. Looking now to our brands business, over the second quarter, we revamped our brand subscription offering. We introduced tiers to our offering to pay-gate the most engagement driving features to our paying tiers, pro and basic, while offering a free listing that creates incentives to upgrade to a paying tier.
By pay-gating the most important features, such as more prominent placement in our products marketplace, we have seen a significant shift of GMV to subscribing brands and early results. We will be monitoring and optimizing this over the coming quarter. This is the direct power of the Leafly platform at play, and we can use these findings to prove the value of our platform in an effort to accelerate the sell-through of our updated brand subscription product. We have also used this product launch to test our one-to-many outbound lead generation efforts and are using learnings from this project to revisit our lead generation strategy for retailers. At Leafly, we have long been committed to helping individuals discover the power of the cannabis plant.
Increasingly, for many consumers, that means turning to hemp-derived cannabinoids to fill a supply gap created by State and Federal legislative failure to legalize and regulate cannabis. From the introduction of popular hemp-derived CBD products following passage of the Farm Bill in 2018 to hemp-derived delta-8 and increasingly hemp-derived delta-9 products, Leafly has played a pivotal role in connecting brands and consumers looking for these products. Since the start of the year, we have had very active dialogue with a number of hemp brands. While we are in the early stages of exploring this opportunity, we believe that hemp-based cannabinoids present another avenue for us to fulfill our mission to help connect consumers with the cannabis products that are right for them wherever they are located.
Now turning our attention to various states and provinces that are showing strong momentum within the market, we are so excited to see the launch of Ohio’s recreational program ahead of schedule this week. By 2030, annual legal adult-use marijuana sales in Ohio could top $2.8 billion according to estimates from New Frontier Data. We are bullish on the state’s approach of creating a smooth transition for existing medical cultivators, processors, testing labs and retailers as we believe this will create a robust market that’s not as challenged by competition from the illicit market that other states have experienced. We are also very pleased to be able to offer our online ordering features to Ohio consumers, a service we were unable to offer under previous medical cannabis regulations.
We also saw an expansion of the medical program in Washington, D.C. with the regulators that are broadening the medical program to open access to licensees from the legacy cannabis gifting stores as well as allowing for consumers to self-certify to their qualifying medical conditions. This removes the need to obtain a doctor’s recommendation to purchase from medical stores. Just last week, we expanded our partnership with Uber Eats into Alberta, Canada, delivering safe, legal cannabis straight to people’s homes. Albertans 18 and over can now place orders from local licensed cannabis retailers in the Uber Eats app and have it delivered to their door by the retailers provincially certified staff. Finally, we remain cautiously optimistic about Florida’s ballot initiative in the fall, along with awaiting the DEA’s actions and rulemaking to formalize the rescheduling announcement made earlier this year.
The need for educated consumers and a trusted source to inform cannabis purchasing decisions has never been greater, and we are enthused and optimistic about our ability to create value for all participants on the Leafly platform through a premium content in connections between consumers and the local retailers and brands that serve them. I will now turn it over to Suresh.
Suresh Krishnaswamy: Thank you, Yoko, and welcome, everyone. In the second quarter, we reported revenue of $8.7 million, down 18.3% year-over-year and down 3.6% sequentially. Retail revenue in Q2 was $7.3 million and brand revenue was $1.4 million. The year-over-year decline in total revenue was primarily driven by the removal of non-paying retail accounts from the platform over the last 12 months. At the end of Q2, our ending retail accounts totaled 3,595, which was a sequential decline of 245 accounts compared to the end of the first quarter. The account declines were concentrated in a handful of markets with Florida, California and Oklahoma, accounting for about 40% of the decline in ending retail accounts. It’s important to note that the accounts that came off the platform during Q2 had a lower average ARPA as that cohort remains under pressure.
Based on what we are seeing so far in Q3, cancellations are lower, and we expect a decrease in ending retail accounts to moderate. As a result of lower ARPA accounts being removed from our site, our ARPA for the second quarter was $684, which was up 23% year-over-year and up about 1% sequentially. Brand revenue in the second quarter was $1.4 million, down 25% year-over-year, but up from the $1.2 million reported in Q1. Our second quarter is typically a seasonally strong quarter for brand revenue due to the 4/20 holiday, and this year was no different. We saw brands investing in marketing during April in advance of 4/20. Following the holiday bump in spend, brands return to the spend levels we saw in Q1. Gross margin in the second quarter improved year-over-year to 89% compared to 88% in Q2 of ‘23.
Moving to operating expenses, in Q2, OpEx totaled $8.4 million, down 17.5% year-over-year. We continue to focus on keeping our costs in check and aligning to our revenue opportunities. Looking to Q3, we expect our OpEx excluding stock-based comp to be at similar levels to Q2. Our net loss in Q2 was $1.3 million, a modest improvement from the $1.4 million net loss reported in Q2 of ‘23. We are pleased to report that our adjusted EBITDA in Q2 was positive $483,000 compared to $80,000 reported in Q2 of ‘23. As Yoko discussed, our success in recovery of bad debt expense contributed to the positive EBITDA in Q2. We continue to work towards building a long-term profitable business and leveraging our business model to achieve this. Before turning to the balance sheet, I want to highlight the progress we have made with our bad debt and collections.
As we mentioned last quarter, we have been very focused on improvements and saw the results of those efforts in Q2 with a net recovery in the quarter. Year-to-date, our bad debt expense as a percentage of revenue is 2.4% compared to the 6.5% average for the full year 2023. Overall, our number of delinquent accounts continues to trend downwards. Based on what we are seeing so far in July, this trend has continued, and we plan to maintain these tighter processes to sustain and improve on this trend. Now to the balance sheet, we ended the quarter with $13.6 million in cash, excluding restricted cash. We expect Q3 cash burn to come in just a little more than the $1.2 million interest payment on the convertible notes. In order to allow us flexibility around offering our common stock from time-to-time and giving us additional optionality in raising capital, in late June, we launched an at-the-market, or ATM offering program.
Since the end of the second quarter, we have raised a modest amount of capital in our ATM offering. Going forward, we will be opportunistic based on market conditions in our use of this facility. We also continue to have conversations with our lender and our financial advisors regarding our outstanding $29.4 million convertible notes that are due in January of 2025. We don’t have any further updates on this today, but look forward to keeping you informed of this matter as appropriate. Now to our guidance, for Q3 ‘24, we expect revenue of around $8.4 million and an adjusted EBITDA loss of less than $1 million. We have a number of projects and initiatives underway in both product development and sales strategy to stabilize revenues. We are seeing green shoots associated with these efforts, and we will have more confidence as we see the results of these initiatives over the next few quarters.
The team is focused on executing on these projects, and we look forward to updating you on our progress. I will now turn the call back to Yoko.
Yoko Miyashita: Thanks Suresh. As Eileen mentioned, Peter Lee, our President and Chief Operating Officer, is also joining us on the call today to assist with Q&A. Eileen, we will now move to the questions that we received prior to the call.
A – Unidentified Company Representative: Thanks Yoko. First, we received this question. How is the second half of the year shaping up? When can you get back to top line growth?
Suresh Krishnaswamy: Thanks for the question, Eileen. We did provide guidance for revenue and adjusted EBITDA for Q3, and we are not providing guidance beyond that. What I can say is that the team is hard at work to stabilize both the account base and revenues. As I said earlier, we are seeing green shoots associated with the new sales efforts and product enhancements. It’s a high priority across the business, and we are working closely with customers and are encouraged by the responses to our efforts.
Unidentified Company Representative: Another question we received, which I will have Peter answer is, how many new accounts did you add in the second quarter?
Peter Lee: Sure. The gross account adds in Q2 were similar to those in Q1. We continue to have net declines in retail accounts, and we believe our work over the past few quarters in delinquent accounts will help stabilize the account base in the upcoming quarters. As Suresh mentioned in his closing remarks, we are executing our new sales initiatives and strategies with the goal of winning new business and mitigating churn.
Unidentified Company Representative: And the final question we received, which Yoko can address is, can you provide an update on the status of your Nasdaq listing?
Yoko Miyashita: Thanks for the question. In late May, we submitted a proposed plan of compliance to Nasdaq, and we are continuing to work with them and provide them updates on our progress to regain compliance with the applicable listing standards. In the meantime, our stock continues to be listed and traded on the Nasdaq Capital Market, and we will provide updates on this when we have more information to share.
Unidentified Company Representative: That’s it for questions.
Yoko Miyashita: Great. Thanks Eileen. Thanks so much for your questions. I want to thank you all for your participation today and for your continued interest in Leafly.
Operator: Ladies and gentlemen, this concludes today’s call. You may now disconnect your lines.
