Merida Corp (MCMJ) could become a very interesting SPAC

The spac is named Merida Merger Corp I, (MCMJ). The IPO took place in November 2019 and the spac target focus is the cannabis sector. The target company is Leafly, the DA was announced two months ago, on August 9th 2021, and the new ticker will eventually be $LFLY. The cannabis sector is not particularly my thing, but unfortunately for the case at hand, it is a somewhat retail-popular sector overall, so this might be seen as a downside. The stock had two recent short-lived spikes to ~10.5 after hours in the first half of August, but it has been trading under nav for most of the time since the ipo, so it’s not particularly popular.

The merger deadline, the deadline date by which the merge has to be consummated or go bust, is November 7 2021 (spactrack has the day wrong). However, according to the Pre 14A SEC form, in October Merida will be having a special stockholders meeting where they’ll attempt to extend the deadline to February 5 to “allow the Company more time to complete the Business Combination”.

The S-4 form, filed this September 8, contains most of the information I’ll now be discussing.2. The Float

Firstly, the spac has no PIPE, the Sponsor or Founder is Merida Capital Holdings LLC, and the Underwriter Representative is EarlyBirdCapital (EBC). As always, starting by assuming a no-redemption scenario, the structure of the ownership interests in Leafly (New Leafly) after the merger is as follows (units = shares):

Leafly stockholders (insiders):38,500,000
Merida public stockholders (IPO):13,001,552 = 4x Sponsor

So we have:

Shares Outstanding (IPO + Sponsor + Underwriter):16,371,940
Public Free Float:13,001,552

The number of Sponsor shares apparently went through some forfeiture and re-issuance over time, you can find a description of the events on p. 233 (in summary: 2,875,000 shares in August 2019 + 0.2 x 2,875,000 in November 2019 = aggregate 3,450,000; then, 450,000 were forfeited and 250,388 were issued).

The 120K shares assigned to the underwriter are not easy to find, you can find the statement on p. 262, but more clearly on page F-16 under Representative Shares. The underwriter shares are sometimes added to the Sponsor’s and referred to as being part of it.

The figure of 44.5M shares of common stock at the top of the S-4 consists of the estimated maximum number of shares to be issued to the Leafly stockholders (insiders), and it corresponds to the stated 38.5M shares + a potential 6M in Earnout Shares, the assignment of which is subject to company/stock performance as usual. You can find the description of the conditions the Earnout Shares are under on page 96.

On page 19, and again on p. 97, under Pro Forma Ownership of (New) Leafly Upon Closing, they state that, immediately after the closing of the Business Combination, the current securityholders of Leafly will own approximately 70% of the equity of the combined company, Merida’s public stockholders will own approximately 26% and Merida’s Sponsor (+ Underwriter) will own approximately 4%. However, there is a mistake in the calculation: the 26% should rather be 24% and the 4% should be 6% (you can confirm that yourself).3. The Redemptions

The maximum redemption scenario they consider in this form consists of a number of 7,658,804 shares being redeemed, see page 36. This value varies each 6 months, you can verify that in the previous filings. The maximum redemption amount is derived “on the basis that Merida is required to have $85M in Closing Cash immediately prior or upon the Closing, after giving effect to payments to redeeming stockholders”.

As stated in the form, compliance with this Minimum Cash Condition (search for this term in the S-4) can be waived by Merida and Leafly in case the number of redeemed shares is above the stated maximum redemption limit.

In a scenario where a moderately high number of shares are redeemed, say 75%, the public float after the merger will consist of 3.25M shares. In a high redemption rate scenario, say 90%, the float will be 1.3M. For comparison, IRNT and SPIR achieved 92% and 91% (post-redemption float of 1.4M and 2.1M) respectively, whereas OPAD and ML achieved 79.1% and 74% (post-redemption float of 3.4M and 9.1M) respectively. Their maximum redemption scenario corresponds to a rate of 40%, so if the previous values are attained, they’ll have to waive the minimum cash condition.4. Warrants

According to page 263, there are 10,451,087 Warrants of Merida outstanding, consisting of 6,500,776 Warrants originally sold as part of the units issued in the IPO, and 3,950,311 private warrants that were sold in a private placement to the Sponsor and the Underwriter (on page 5: 3,750,000 sold privately on Nov 7 2019 + 200,311 sold privately on Nov 13 2019 = aggregate 3,950,311 private). The Sponsor itself holds 3,318,262 Warrants (page 9 or 22). Therefore:

Private Warrants (dilutive):3,950,311
Public Warrants (dilutive):6,500,776

Note that there is (yet) another mistake on page “v” in their definition of “private warrants”: they state that it means 9,950,311 ( = 3,950,311 + 6,000,000) private Warrants of Merida sold to the Sponsor and the Underwriter, but that 9.9M number doesn’t appear anywhere else on the S-4 and the number of private warrants is always said to be that 3.9M number everywhere else across the form.5. The Lock-ups

Everything except the public float is subject to a lock-up.

A) Shares

The shares of the Leafly stockholders (insiders) are locked for a period of 180 days after the Closing:

  1. See the definition of “Merger Consideration” and then of “Merger Shares” on page v;
  2. Then, on page 2 we have: “All of the Merger Shares and Earnout Shares, if issued, will be subject to transfer restrictions for a period of 180 days following completion of the Business Combination”.

The Sponsor shares are also locked. On page 108, we have, under Sponsor Agreement: “the sponsor shares will be subject to transfer restrictions for a period of 180 days following completion of the Business Combination”.

The 120,000 representative shares are also locked for a period of 180 days, see page F-16.

A summary of the lock-up can be found on page 101: “All of the Merida Common Stock issuable to Leafly’s stockholders and all of the Merida Common Stock held by the Sponsor would be subject to a 180-day lockup”.

This info is further scattered across the form (see mainly: Sales Restrictions – page 97/98). A further summary of the 180 day lock-up can be found on page 262.

B) Warrants

On page 231 regarding private Warrants, we find: “The amount of beneficial ownership for each individual or entity post-Business Combination includes shares of Common Stock issuable upon exercise of Merida’s Warrants, as such warrants will become exercisable 30 days after the consummation of the Business Combination.”

On page 236 we also find some information about this 30 day period, but the main Warrants lock-up statements are on page F-14: “Public Warrants will become exercisable on the later of (a) 30 days after the completion of a Business Combination or (b) 12 months from the closing of the IPO.” The same applies to the Private Warrants according to the above and to page F-15 (they are identical).6. Further Notes

Therefore, for at least 30 days following the Closing, the free public float will consist exclusively of the shares that have not been redeemed (13M minus the redeemed shares). However, it’s important to emphasize that many sources derive their data from bloomberg. Bloomberg, as it appears on bloomberg terminals, defines Free Float or Equity Float (see page 6 or 22 of their Methodology PDF) as: “Number of shares that are available to the public. This figure is calculated by subtracting the shares held by insiders and those deemed to be stagnant shareholders from the shares outstanding. Stagnant holders include ESOP’s, ESOT’s, QUEST’s, employee benefit trusts, corporations’ not actively managing money, venture capital companies and shares held by governments”.

We do not have access to that information, we don’t know the stagnant shareholders, so our free float value rather represents an upper bound (the bloomberg float will always be less than ours).7. The Target Company

As someone else put it, Leafly is surprisingly unprofitable, with a net negative revenue until 2024 on strong projected growth. According to page 41:

“We began operating in 2011 and have yet to generate a profit. We incurred a net loss of $10 million and $32 million for the calendar years ended December 31, 2020 and 2019, respectively. We intend to continue to expend significant funds to support platform feature development, expanding our service offerings, expand our marketing and sales operations, improve and expand our technology infrastructure, hire additional employees, pursue strategic opportunities, meet the increased compliance requirements associated with our transition to and operation as a public company and otherwise support our operations and growth. As we continue to grow, we expect the aggregate amount of these expenses will also continue to grow.”

“We have a history of net losses, and we may not achieve or maintain profitability in the future, especially as our costs increase.”

You can also find the Investors Presentation here. 8. Final Remarks

The target company is not great in terms of revenue, but deSPAC squeeze plays are not based on fundamentals, quite the opposite. The setup is all there, the spac has options, a low IPO float to begin with, lock-ups on everything, it has been trading under nav for a long time and has a proper chance of a reasonably high redemption rate.

What is missing yet is a high options OI, but it doesn’t really make sense to speak about that yet, or of gamma ramps yet, since we don’t have further dates for the redemptions deadline (which will be 2 days before the vote meeting, called the Special Meeting on the S-4; if they are trying to extend the merger deadline beyond Nov 7, then it should not be sooner than that date), merger vote, ticker change, etc.

No one is chasing this spac for a deSPAC play at the moment, and the average 3-month stock volume is 80K and lately it has been around 11K daily. Touching the stock right now is a bad idea, we want it to trade at or below nav as it has been until the redemption deadline. Before that, the stock would have to be bought “adiabatically” and with the sole purpose of redeeming the shares later on. Starting to trade options is also not a good idea, we don’t want a massive OI right now that attracts all sorts of attention, we only want to set the OI up closer to the redemptions and merger vote.

So, for now, this is a stock that those interested in deSPAC squeezes should be watching closely and without interfering much (yet).

This article was written by u/Quarantinus.


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