Q2 2023 Leafly Holdings Inc Earnings Call

Yeah.

Good afternoon, and thank you for attending today's gleefully second quarter 2023 earnings call. My name is Jason and I'll be the moderator for todays call all lines will be muted during the presentation portion of the call an opportunity for questions and answers at the end if you'd like to ask a question. Please press star one on your telephone keypad I'd now like to pass the conference over to our hosts.

Josh to Berg.

Good afternoon, and welcome to a weekly as Q2 2023 earnings call. Joining me on the call today are CEO yoga, Asta and CFO Suresh Krishna Swamy.

Today's prepared remarks have been recorded after which yoko into the rush will host the live Q&A a copy of our press release, along with an accompanying earnings presentation can be found on our website at investor Dot Lethally Dot com.

Today's call will contain forward looking statements, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

Forward looking statements include statements regarding the services offered by <unk> the markets in which we operate business strategies performance metrics industry environment potential growth opportunities and Lee please projected future results and financial outlook and can be identified by words, such as expect anticipate 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 risk 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 annual report on Form 10-K filed with the SEC on March 29, 2023, and 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 <unk>.

<unk> in our earnings press release, which has been filed with the SEC and is also available on our website at Investor Dot <unk> Dot com with that let me turn the call over to Yokohama.

Thanks, Jos and Hello to everyone, who is joining us today revenue for the quarter was $10 7 million slightly above our guidance given in May there are a few themes driving this which I'll speak to in a moment overall I'm pleased with the considerable amount of work. The team has accomplished over the past several months to put us on stronger footing as we head into the <unk>.

Half of this year.

Our focus on new go to market initiatives, coupled with strong value prop.

Has strengthened relationship with high value customers.

We also delivered positive adjusted EBITDA, highlighting our efforts towards building, a durable and profitable business.

This was driven by the upside in revenue and continued focus and discipline on operational efficiencies.

As expected, we significantly reduced our cash burn in the second quarter to approximately 850000 from just under $10 million in the first quarter.

Operationally, we are in a stronger position than a year ago, which positions us well for long term sustainability.

The industry continues to consolidate and face some instability in light of that there are signs that the efforts we have taken over the last nine months to navigate these challenges are becoming more deeply rooted and we are seeing some green shoots across the company.

We continue to highlight the weekly value prop and our new team structure implemented last quarter has allowed us to invest in and strengthen our relationships with our high value clients, particularly when critical momentum events occur such as the introduction of adult use market.

We've also continued our efforts to reduce retailer friction and focused on enhancing the consumer experience by improving functionality in deal search and delivery.

We have been focused on building a healthier subscription base of revenue and when combined with out of business churn as a result of the softer macro environment over the past year, we saw a sequential decline in ending retail account.

As a reminder, we have a wide range of retail accounts on our platform from small single store owners to large msos across all legal market and each faces its own set of challenges.

Looking ahead, we continue to actively manage delinquencies and emphasize collection effort, which along with the difficult environment for some operators will likely result in a decline in ending retail accounts in the short term.

In addition, we expect to see additional cancellations are rising out of price increased conversations.

We will continue to focus on building our platform leveraging our local market strategy, where we utilize the playbook tailored to specific key markets and their local needs.

In May we began rolling out new rate cards and price increases in select markets to select clients to better align our pricing with the value we deliver to our partners.

We've been pleased with the response, so far as it validates we believe as well as an integral part of retailers businesses and the value we provide.

We've also emphasized annual subscription agreements to lock in revenue and lower our servicing costs. These.

These new contracts also now have an established escalator upon annual renewal.

The net of these changes have resulted in some less profitable accounts churning, which will likely continue into Q3.

And while they count base will decline in the short term, we expect to evolve to a healthier customer base importing more durable revenue overtime and make progress to that end in Q2.

As a result total lending retail accounts declined 8% from Q1, but ARPA in Q2 remained steady.

It is likely that delinquencies and churn will lead to further declines in total ending retail accounts in Q3, but we expect improvements ARPA in subsequent quarters, particularly as the price increases take effect insurance stabilizes.

In addition, as we've noted in previous calls we have adjusted our go to market team to align our resources to our highest value clients and better optimized for individual customer needs and market dynamics.

For lower paying clients, we have implemented a one to many more cost optimized approach.

Given the current industry wide softness in brand advertising, we're opening up our expansive brand advertising products and inventory to retailers for additional add on purchase.

To do this we cross trained our sales staff on retail and brand products to empower the team to leverage our whole suite of products and customized solution based on customer needs.

We've made our teams smaller and more agile, including our product and engineering teams. This has allowed us to make quick and meaningful improvements to the platform that reduce retailer friction based on customer feedback, which in turn has allowed us to create additional value on our platform.

In June we launched a beta version of our new order API, which allows any P. O S system to integrate with lately rather than the select few with custom integrations historically.

This opens a wider opportunity for retailers to work with lately and allows them to seamlessly integrate weekly orders into the system. They are already using in store.

Our belief is that unlocking additional order integrations through this new API will enhance retailers order processing capabilities, leading to an increase in customer retention over time and boosting the average number of quarters per retailer.

We plan to make this API more broadly available over the next couple of months.

We also improved our delivery experience for both retailers and consumers. We now support scheduled delivery windows, which allows retailers to receive orders for future delivery time, enhancing the delivery experience for the customer and making it easier for the retailer to plan for it.

It's early but we have already seen early adoption amongst delivery enabled retailers.

Deals continue to be an important driver of borders as consumers look for value in a softer macro environment and we've made significant improvements to our deals engine to enable retailers more flexibility in the types of deals they are able to offer and the ease with which they are able to close them.

Over the course of Q2, we saw the number of deals live on lease fleet increased by 31% and the percentage of orders using a deal increased by nearly 8% over the same period.

Okay.

We also enhance the consumer experience on lately, particularly around shopping we improve the user journey to make it easier and faster for consumers to create an account or Simon so that check out is faster.

These enhancements led to immediate improvements in the number of new accounts created this is important as consumers and create an account a farmer likely to place an order and users that happened and it gives us greater opportunities to build shopper retention and improve our targeting capabilities.

We're also focused on features that drive consumer engagement and conversion to orders.

For example, we enhanced our strain effects based shopping experience by better aligning the consumer search to local retailer inventory.

This is our data advantage at play leveraging our proprietary strained database and our substantial effects data to drive better discovery and shopping for consumers.

We also revamped our order history page, creating a seamless reordering experience we are all accustomed to on larger e-commerce platforms.

While some of these are incremental improvements they are making the shopping experience on the sleep better the number of orders has grown year over year and just as importantly, the number of customers ordering on lately is up year over year as well.

This is in part we believe because of our focus on the consumer experience over the past year.

All of these initiatives have been focused around improving conversion to sales, which drives direct value for retailers and we're seeing some encouraging results, which we believe will provide long term revenue opportunity.

We will continue to focus efforts in these mid to lower funnel areas engaging our most valuable consumers and driving increased orders.

This includes producing compelling and engaging content that helps inform their shopping decision.

This content shift is a change from our previous focus on general cannabis smells that drove top of funnel consumer traffic.

As our business and the industry has evolved and mainstream media has taken on a larger role in covering cannabis related news, we can focus greater effort on deeper funnel content and monetization.

Overtime, we expect growth in MAU to become less relevant to the overall health of the business. We will continue to develop and create content that gives consumers valuable information to help educate them about Canada and inform their shopping decisions and content that demonstrates our presence in local markets across the country.

Finally, there continues to be legalization momentum that brings long term opportunity in Minnesota recreational use became legal at the beginning of the month with tribal sales commencing on the first and broader retail sales expected to begin next year.

Florida about initiatives to legalize recreational use received enough signatures to move forward in 2024.

And in Pennsylvania lawmakers introduced a rec legalization Bill which is now in committee.

While the path isn't always a straight line for states moving towards legalization. We believe we'll be there to welcome millions of new shoppers and the legal cannabis market when they finally win legal access.

Now I'll turn it over to Suresh.

Thank you Yoko and welcome everyone.

Last quarter, we're carefully managing expenses and are committed to a sustainable path to profitability.

In the second quarter, we achieved positive adjusted EBITDA of 80000.

The environment continues to be challenging for companies like kind of mistake.

And we're focusing on those things we can control.

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Partnering with our customers to highlight the value we can provide their businesses.

Additionally work continues in our product and engineering teams to elevate the consumer experience on our platform.

Importantly, all of this work and investment is taking place with an eye towards managing our expenses bottom line and cash burn.

Now to our results.

In the second quarter, our revenue was $10 7 million down 11, 4% year over year.

Honestly above our expectation.

Retail revenue was $8 8 million and brand revenue was $1 8 million.

Looking more closely at our retail results.

And then retail accounts in Q2 were essentially flat year over year and declined 8% sequentially to $52 61.

As we discussed last quarter, we expected some churn due to industry instability and adjustments to our go to market strategy.

There are pockets of strength across the industry, but we're also seeing some areas where retailers are pulling back on spend going out of business.

While this activity causes disruptions in the subscribed listings on our platform and will likely continue into Q3, we're working on building a healthier base of retail accounts and a better consumer experience.

Our retail ARPA in the second quarter was $558.

Decline of 4% year over year, and up about 1% quarter over quarter.

As we noted last quarter ARPA has been stabilizing over the last several quarters.

In addition, we began rolling out price increases in May and June to better align our pricing with the value we deliver to our partners.

Spectra complete ease across most of the constant region by the end of Q3.

As we work to implement our new pricing structure, we anticipate further customer count adjustment.

We expect to see modest ARPA growth from this level for the balance of the year as our new pricing takes effect as we grow share of wallet with customers.

Luiz lower producing thing.

Turning to brand on a sequential basis revenue was up 3%.

Other sectors may be seeing the early signs of a recovery.

They'll seeing downward pressure in brand marketing in the cannabis space and we're not forecasting a recovery in this area in 2023.

Continuing down the financial statement.

Our total gross margin in the second quarter remained stable at 88%.

Expect to remain at similar levels this year.

For operating expenses Q2 totaled $10 2 million down 48% year over year and down 31% sequentially.

We've made meaningful progress in reducing costs across the business.

Through our two headcount reductions in Q4 of 22 in Q1 of 'twenty, three as well as our cost cutting efforts.

As a result of this focused execution, our adjusted EBITDA for Q2 was positive 80000 above the guidance. We provided of negative $2 1 million. We continue to focus on managing costs and expect adjusted EBITDA in the second half of the year to improve from the negative $3 2 million in the first half.

Now turning to the balance sheet.

Our team has been diligent in managing our cash resources and we remain committed to prudently managing our capital.

We ended the quarter with just over $14 million in cash and equivalents excluding restricted cash.

Our cash burn in Q2 was just below 850000.

As a reminder, we paid an interest payment in Q3 of $1 2 million.

Even including this payment we plan on ending the year with around $14 million in cash similar to current levels.

At our annual shareholder meeting held on July 12, stockholders approved the reverse split for lean clean <expletive> to help restore lease visibility to trade above a dollar a share for NASDAQ market requirement.

We expect the reverse split to occur in the first half of September and we will announce the details including the split ratio as we near the effective date.

Now onto our guidance for Q3, 2023, we expect revenue of around $11 million and adjusted EBITDA loss around negative <unk> 5 million.

As the cannabis industry continues to evolve we remain focused on running the fleet with efficiency and firmly on a path towards profitable growth without a need for additional capital.

We will continue to enhance the platform to build a robust marketplace and be the leading destination for informed cannabis shopping.

We'll now open up the call for questions.

Operator.

Yeah.

If you would like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove that question. Please press star followed by two again to ask a question. It is star one.

Our first question comes from Vivien <unk> with CD Cowen Your line is now open.

Yeah.

Hi, This is James KFC on for Vivien. Thanks for the question.

Hoping you can maybe comment on the recent announcement that Mastercard will be banning debit card transactions cannabis dispensaries understanding that youre not exposed on the payment side, but can you maybe offer any context on how this has maybe impacted your retail partners and their willingness to spend more on ads.

Hey, Seamus go here. Thanks for the question. This is just one of the cat challenges continuing challenges that our client base and our ecosystem suffers from and as part of being a stiff legal federally legal business. There's no direct impact that we see is just another one of those challenges that retailers.

Navigate and the reality is this is one of many nimble as they continue to navigate these challenges we don't see the impact of direct spend with us.

We'll say is that this is the largest challenge for consumers and really from a policy perspective, it's incumbent on all of US to advocate for continued access to legal payments just as consumers are used to and regular ecommerce.

[noise].

Understood. That's helpful. And then just one more from me you touched a bit on new adult use market. Our divisions I was hoping maybe you could comment on sort of trends in upticks uptake that you've seen in those markets.

Specifically, maybe in Maryland in Minnesota, which has seen it all yourself start recently.

Yes, Marilynn just started in July and we couldnt be happier about that transition.

And I think they've done that right as a market for US, Maryland has been a strong market and that provided provided a foundation on which we could build on those relationships why is building on those relationships as important it's because Maryland gave that first priority on first right to those existing med dispensaries, so that we come into this market.

The structure is such a strong base both across customers, who were really get used to using our pick up and online ordering product and those relationships with our existing medical dispensaries. So we're super excited about being able to bring all of the power of the platform to play that's our content. That's our sales that's our relationships in that.

Platform services, we provide to grow on our base in Maryland as it relates to Minnesota very excited about what that market will offer as you know it just started up August one, but it will take until sometime next year for us to see broad retailer access to that market, but we'll be ready and again, we love These mark.

Start with Med, we've got the consumer attention they are reading on lately and ready to serve them when the stores open.

Perfect. Thanks, I'll hop back in the queue.

Thanks Seamus.

Thanks Rocco.

Our next question is from Jason <unk> with Oppenheimer. Your line is now open.

Hi, This is Steve Hoffman on for Jason.

I just have two questions. One is can you give us a sense of client retention from pre imposed price increases meaning of those clients in those markets, where you put on the price increases how many.

Jade on versus how many less I know you said.

That generally is the unprofitable businesses that was and then secondly, more G&A much lower than we expected do you have plans to cut more or do you kind of feel like $5 million is the lowest absolute level.

That you see from an efficiency basis. Thank you.

Yeah, Let me take the first one on price increases and I'll hand, it over to Suresh on the SG&A piece as it relates to the client retention and the price increases we are midstream in this whole process and we'll have more share as we worked through that data over the course of the next quarter, what I will say is that I'm incredibly.

He used with how we rolled this out and we've talked about our shift and go to market strategy and really that focus on account management and as it relates to that topic.

85% of clients accounting for top 85% of revenue we ceded all of those conversations with an account review first communicating the value of that lease leave us providing converted situated and have these very personal one on one conversations about the price increases. So we have very clear visibility as to how those will stick.

I'm pleased with the results so far.

Unpredictable part of this yet where we're expecting to see more data come through as time passes the last of the notifications went out at the end of July is related to that broader base of clients that account for a lower dollar revenue overall, so really can't speak to that yet we will just need a little more time to work through that so.

Let me hand, it over to rationalize SG&A questions Hey, Steve.

On the Opex I mean, we've said that our focus is on managing to the bottom line and staying on this path to profitability and that's exactly what we're doing so in Q2 and as you see the overall opex.

Excluding stock based comp was 50% lower year over year and in the last call. We said you know we're looking at closer to 30% savings So we've realized higher than expected savings.

And that being said.

Looking forward to the second half.

We're looking at the quarterly average in the second half to be very similar to what we saw in Q2. So we're going to maintain our cost discipline, we're going to continue to manage to the bottom line and really focus on that cash balance.

Okay.

Yeah.

Once again, if you'd like to ask a question. It is star one on your telephone keypad.

Yeah.

There are no more questions. So I'll pass the call back over to the management team.

Okay.

Thank you again for joining us and for your interest in Lee Fleet, and we'll look forward to speaking with you again next quarter Goodbye.

Okay.

Everyone else has left the call.

Now disconnect your lines.