Leafly(US:LFLY)2023-03-29 00:05Part I Business Leafly operates a content-first, multi-sided marketplace connecting cannabis consumers with brands and licensed retailers, primarily generating revenue from subscription-based listings and advertising - Leafly's business model is a content-first, community-driven, multi-sided marketplace connecting consumers to cannabis brands and licensed retailers through subscription-based listings14 Key Operational Metrics (as of Dec 31, 2022) | Metric | Value | | :--- | :--- | | Average Monthly Active Users (2022) | 8.0 million | | Total Retail Listings | > 11,700 | | Paid Retail Listings | > 5,000 | | Total Brand Listings | > 9,800 | Revenue Breakdown by Partner Type (FY 2022 vs FY 2021) | Partner Type | FY 2022 Revenue % | FY 2021 Revenue % | | :--- | :--- | :--- | | Retail Partners | 77.6% | 78.1% | | Brand Partners | 22.4% | 21.9% | - The company's primary competitors include Weedmaps for marketplace services and e-commerce enablers like Dutchie and Jane Technologies. Leafly differentiates itself with a content-first strategy that builds a consumer audience even before a market is legalized4344 - For the year ended December 31, 2022, revenue was concentrated in Arizona (18%), California (12%), and Oregon (10%). No single customer accounted for 10% or more of revenue56 - As of December 31, 2022, Leafly had 204 employees, with 104 in sales and marketing, 63 in product development, and 37 in general and administration63 Risk Factors The company faces significant risks from operating losses, dependence on cannabis legalization, intense competition, federal illegality, regulatory challenges, and public company obligations Risks Relating to Our Business and Industry Leafly faces risks from its short operating history, recurring losses, dependence on cannabis legalization, intense competition, and reliance on search engine traffic - The company has a history of operating losses, with net income of $5.1 million in 2022 compared to a net loss of $12.0 million in 2021, and may not maintain profitability as it continues to invest in growth109 - The company's ability to grow is dependent on the continued legislative authorization of cannabis in new jurisdictions and the absence of laws repealing existing legalization95 - Leafly faces intense competition from direct competitors like Weedmaps, media companies, and major internet platforms like Google and Meta, should they enter the cannabis advertising space97 - The company relies heavily on unpaid search engine traffic, with search engines accounting for approximately 73% of platform sessions in 2022. Google alone accounted for over 97% of this search-generated traffic138139 Regulatory Risks The business is highly dependent on varying state and Canadian laws, as cannabis remains a Schedule I controlled substance under U.S. federal law - Cannabis remains a Schedule I controlled substance under the U.S. federal Controlled Substances Act (CSA), making possession, distribution, or sale a federal crime, regardless of state laws. Strict federal enforcement would materially harm the business163199 - The company is subject to numerous evolving privacy and data protection laws, such as the CCPA in California and PIPEDA in Canada, and failure to comply could result in significant fines and reputational damage182185 - The company could be deemed responsible for collecting and remitting state sales taxes for suppliers using its order functionality, which could result in substantial tax liabilities for past sales192 Additional Risks Related to the Cannabis Industry The cannabis industry faces unique risks including federal illegality, banking difficulties, and unfavorable tax treatment under Section 280E for clients - Due to cannabis's federal status, most banks are reluctant to serve cannabis-related businesses, creating difficulties for Leafly and its clients in accessing banking and payment processing services209210 - Cannabis businesses are subject to Section 280E of the U.S. tax code, which prohibits them from deducting ordinary business expenses, significantly reducing their profitability and potentially their budget for advertising services221 - Obtaining necessary insurance, such as general liability and D&O insurance, is more difficult and expensive for companies involved in the cannabis industry, exposing Leafly to additional financial risk224 Risks Related to Our Intellectual Property Leafly faces risks of intellectual property disputes and the need to protect its brand, trademarks, and proprietary technology to maintain its competitive position - The company may be subject to costly intellectual property infringement claims from third parties, which could require it to stop using certain features, purchase licenses, or modify its services229230 - Failure to protect and enforce its intellectual property rights, particularly the "Leafly" brand and trademarks, could harm the company's business, as these are critical to its success234 Public Company and Financial Reporting Risks As a public company, Leafly incurs increased costs, faces Nasdaq non-compliance risks, and utilizes reduced disclosure requirements as an emerging growth company - In October and November 2022, Leafly received non-compliance notices from Nasdaq for failing to meet the $50 million minimum market value and $1.00 minimum bid price requirements, creating a risk of delisting240241 - The company qualifies as an "emerging growth company" and "smaller reporting company," allowing it to use certain exemptions from disclosure requirements, which could make its securities less attractive to investors258262 Risks Relating to Ownership of our Common Stock Ownership of Leafly's common stock involves risks such as price volatility, potential lack of an active trading market, and no foreseeable dividends - The market price of the company's common stock may be volatile and could decline regardless of operating performance264 - The company does not intend to pay dividends for the foreseeable future, meaning investors must rely on stock price appreciation for returns277 - The company's warrants, with an exercise price of $11.50 per share, may expire worthless if the stock price does not appreciate significantly before their expiration on February 4, 2027279 Unresolved Staff Comments None - The company reports no unresolved staff comments306 Properties Leafly's corporate headquarters is in Seattle, Washington, but the company operates with a fully remote workforce and has no material physical properties - The company does not own or lease any material physical properties and operates with a remote workforce, with its corporate headquarters address in Seattle, WA308 Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, not expected to result in material liability - The company is involved in ordinary course legal proceedings but has not recognized a material accrual and does not expect these matters to result in a material liability309311 Mine Safety Disclosures Not applicable - This item is not applicable to the company312 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock and warrants trade on Nasdaq, with 613 stockholders of record, and no cash dividends are expected in the foreseeable future - Common stock and warrants trade on the Nasdaq Global Market under symbols LFLY and LFLYW315 - As of March 20, 2023, there were 613 stockholders of record316 - The company has never paid cash dividends and does not anticipate paying them in the foreseeable future317 Management's Discussion and Analysis of Financial Condition and Results of Operations Leafly's 2022 revenue grew 10% to $47.4 million, with a $5.1 million net income driven by a non-cash gain on derivatives, and cost-cutting measures alleviating going concern doubts Results of Operations Total revenue increased 10% to $47.4 million in 2022, but operating expenses rose 43%, leading to a net income of $5.1 million primarily due to a non-cash gain on derivatives Key Operating Metrics (YoY Change) | Metric | 2022 | 2021 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Average MAUs (in thousands) | 7,962 | 10,005 | (2,043) | -20% | | Ending retail accounts | 5,806 | 5,265 | 541 | 10% | | Retailer ARPA | $566 | $636 | ($70) | -11% | Consolidated Statement of Operations Summary (in thousands) | Line Item | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $47,363 | $43,036 | $4,327 | 10% | | Gross Profit | $41,503 | $38,053 | $3,450 | 9% | | Total Operating Expenses | $69,508 | $48,678 | $20,830 | 43% | | Loss from Operations | ($28,005) | ($10,625) | ($17,380) | 164% | | Net Income (Loss) | $5,070 | ($12,024) | $17,094 | N/M | Non-GAAP Reconciliation: Adjusted EBITDA (in thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net income (loss) | $5,070 | ($12,024) | | EBITDA | $8,330 | ($10,422) | | Adjusted EBITDA | ($23,210) | ($9,400) | Liquidity and Capital Resources Despite a history of operating losses, management's cost-cutting measures are expected to provide sufficient working capital for the next twelve months, alleviating going concern risk - The company's history of recurring operating losses raised substantial doubt about its ability to continue as a going concern364 - Management implemented restructuring plans, including workforce reductions in Q4 2022 and Q1 2023, expected to result in combined annual cash savings of approximately $24 million ($16 million + $8 million)324364 - Based on cost reduction measures, management believes its current working capital is sufficient to meet capital requirements for at least the next 12 months, alleviating the substantial doubt about its ability to continue as a going concern364366 - As of December 31, 2022, cash, cash equivalents, and restricted cash totaled $25.2 million358 Critical Accounting Estimates Critical accounting estimates include derivative liability valuation, income taxes, stock-based compensation, and allowance for credit losses - Valuation of derivative liabilities, including private warrants and earn-out rights, is a critical estimate, measured at fair value using Monte Carlo or Black-Scholes models with significant assumptions374 - The company maintains a full valuation allowance against its U.S. net deferred tax assets of $35.8 million due to a history of U.S. tax losses376480 - Stock-based compensation is estimated using option-pricing models (Black-Scholes, Monte Carlo) that require significant assumptions about volatility, term, and interest rates377457 Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Leafly is not required to provide information regarding market risk - The company is a smaller reporting company and is not required to provide this information382 Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2022 and 2021, including balance sheets, income statements, cash flows, and notes, with the independent auditor's report Consolidated Financial Statements The consolidated financial statements show total assets of $32.7 million, total liabilities of $39.1 million, and a net income of $5.1 million in 2022, driven by a non-cash gain Key Balance Sheet Data (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $24,594 | $28,565 | | Total Assets | $32,712 | $36,153 | | Total Liabilities | $39,119 | $44,725 | | Total Stockholders' Deficit | ($6,407) | ($8,572) | Key Income Statement Data (in thousands) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Revenue | $47,363 | $43,036 | | Gross Profit | $41,503 | $38,053 | | Loss from Operations | ($28,005) | ($10,625) | | Net Income (Loss) | $5,070 | ($12,024) | Notes to Consolidated Financial Statements The notes detail accounting policies, the reverse recapitalization merger, going concern evaluation, revenue recognition, convertible notes, and derivative liabilities - The business combination with Merida on February 4, 2022, was accounted for as a reverse recapitalization, with Legacy Leafly as the accounting acquirer412 - In January 2022, the company entered into a $30 million convertible note purchase agreement. The notes bear 8% interest, mature in 2025, and are convertible at a price of $12.50 per share486 - The company accounts for private warrants, escrow shares, and stockholder earn-out rights as derivative liabilities, which are remeasured to fair value each reporting period. This resulted in a non-cash gain of $36.8 million in 2022351502505513 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022562 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework566 Part III Directors, Executive Officers and Corporate Governance This section provides information on the company's directors and executive officers, board structure, and adopted code of ethics and business conduct - The company's executive officers include Yoko Miyashita as Chief Executive Officer and Suresh Krishnaswamy as Chief Financial Officer574 - The Board of Directors is classified into three classes with staggered three-year terms. Michael Blue serves as Board Chair574575 - The company has adopted a code of ethics and business conduct that applies to all directors, officers, and employees591 Executive Compensation Compensation for Named Executive Officers includes base salary, annual incentives, and equity awards, with non-employee directors receiving cash retainers and RSU grants - The Named Executive Officers for 2022 were Yoko Miyashita (CEO), Suresh Krishnaswamy (CFO), and Samuel Martin (former COO)594 2022 Summary Compensation | Name | Position | Total Compensation ($) | | :--- | :--- | :--- | | Yoko Miyashita | Chief Executive Officer | 2,766,497 | | Suresh Krishnaswamy | Chief Financial Officer | 799,727 | | Samuel Martin | Chief Operating Officer (former) | 1,030,627 | - The 2022 Annual Incentive Plan paid out at 50% of target for eligible NEOs, as the company achieved its Adjusted EBITDA goal but missed its top-line revenue goal606 - Non-employee directors receive annual compensation consisting of cash retainers (e.g., $45,000 for board members, $75,000 for chair) and RSU grants646647 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Directors and executive officers beneficially owned 11.8% of common stock, with Brendan Kennedy and Michael Blue as largest owners Principal Stockholders (as of March 3, 2023) | Name of Beneficial Owner | % of Outstanding Common Stock | | :--- | :--- | | Brendan Kennedy | 8.5% | | Michael Blue | 7.3% | | All directors and executive officers as a group (8 individuals) | 11.8% | - As of December 31, 2022, a total of 5,590,208 securities were to be issued upon exercise of outstanding options, warrants, and rights under equity compensation plans, with a weighted-average exercise price of $1.75658 Certain Relationships and Related Transactions, and Director Independence The company has a policy for related person transactions, and a majority of its directors are independent under Nasdaq rules - The Board has adopted a written policy for the review and approval of related person transactions, which is overseen by the Audit Committee661 - A majority of the company's board of directors qualifies as independent under Nasdaq listing rules677 Principal Accountant Fees and Services Marcum LLP served as the independent auditor, with total fees of $634,514 in 2022, all pre-approved by the Audit Committee Accountant Fees (Marcum LLP) | Fee Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit Fees | $574,514 | $299,000 | | Audit-related fees | $60,000 | $176,739 | | Total fees | $634,514 | $475,739 | - All audit and non-audit services provided by Marcum LLP in 2022 were pre-approved by the Audit Committee681 Part IV Exhibits and Financial Statement Schedule This section lists the financial statements and exhibits filed as part of the Form 10-K report, including corporate governance documents and certifications - This section contains the index of all exhibits filed with the annual report, including material agreements and certifications684 Form 10-K Summary None - The company has not provided a summary for this item687