Business Overview and History: Leafly Holdings, Inc. (NASDAQ:LFLY) is a leading online cannabis discovery marketplace and resource for cannabis consumers. Founded in 2010 and headquartered in Seattle, Washington, Leafly has established itself as a trusted destination for consumers seeking guidance and information on the ever-evolving cannabis industry.
Leafly was initially launched as a platform focused on providing detailed information about cannabis strains, retailers, and industry news. Over the years, the company has evolved into a multi-faceted business, offering a range of services and products to connect consumers with legal and licensed cannabis retailers and brands.
In 2022, Leafly underwent a significant transformation when it merged with Merida Merger Corp. I, a special purpose acquisition company (SPAC). This transaction allowed Leafly to become a publicly-traded company, providing access to additional capital and resources to support its growth initiatives. The business combination was accounted for as a reverse recapitalization, with Legacy Leafly being the accounting acquirer.
Prior to the business combination, Legacy Leafly faced several challenges, including recurring operating losses and reliance on capital raised through financing activities to continue ongoing operations. In response to these challenges, the company implemented restructuring plans in 2023 that reduced its labor force and substantially decreased costs.
More recently, in 2024, Leafly has encountered additional challenges in maintaining its Nasdaq listing. The company received notifications of noncompliance with Nasdaq’s continued listing requirements and is currently appealing a delisting determination. To address these issues, Leafly is working with advisors to explore financing and strategic opportunities to maximize stakeholder value.
Despite these challenges, Leafly has achieved several milestones over the years. The company has successfully built a trusted brand in the cannabis industry and expanded its geographic reach, launching partnerships to deliver cannabis products in new markets.
Since the merger, Leafly has continued to execute on its strategic plan, leveraging its established brand and user base to monetize the valuable connections between consumers, retailers, and brands. The company’s primary revenue streams include subscription-based products for retailers, digital advertising solutions for brands, and online order reservation enablement services.
Financial Performance: Leafly’s financial performance has been impacted by the dynamic nature of the cannabis industry, as well as broader macroeconomic factors. In the most recent fiscal year ended December 31, 2023, the company reported total revenue of $42.25 million, a decline of 10.8% compared to the prior year. This decrease was primarily driven by a reduction in retail accounts and lower advertising spend from brands amid challenging market conditions.
Despite the revenue decline, Leafly has remained focused on cost optimization and operational efficiency. In 2023, the company implemented a series of restructuring initiatives, which included a reduction in workforce and other cost-saving measures. These actions, combined with the company’s ongoing efforts to improve collections and bad debt management, contributed to a year-over-year improvement in adjusted EBITDA, which reached negative $6.04 million in 2023 compared to negative $28.49 million in 2022.
For the three months ended September 30, 2024, Leafly reported total revenue of $8.35 million, representing a 21% decrease compared to the same period in 2023. This decline was primarily due to a 20% decrease in Retail segment revenue and a 26% decrease in Brands segment revenue. The Retail segment experienced a $870,000 decrease in subscription revenue, a $979,000 decrease in digital display ads, and a $39,000 decrease in other revenues. The Brands segment saw reductions across various revenue streams, including display ads, branded content, and direct-to-consumer marketing.
Despite the revenue challenges, Leafly’s cost-cutting initiatives, including headcount reductions and other expense management, led to a significant improvement in operating expenses, which decreased 27% year-over-year. As a result, the company’s net loss improved to $1.14 million in Q3 2024, compared to $2.21 million in Q3 2023.
Liquidity: As of September 30, 2024, Leafly’s balance sheet showed $13.57 million in cash and cash equivalents. The company’s debt-to-equity ratio stood at -2.04, while its current ratio and quick ratio were both 0.49. Leafly faces a significant near-term challenge with the maturity of its $29.43 million in convertible notes due in January 2025. The company’s management team has been actively exploring options to address this upcoming debt obligation, including potential refinancing or capital-raising initiatives.
Leafly’s operating cash flow (OCF) for Q3 2024 was $0.14 million, while free cash flow (FCF) remained negative at -$0.35 million. Although these figures represent an improvement from the prior year period, they highlight the ongoing financial challenges faced by the company.
Market Opportunities and Challenges: The cannabis industry continues to evolve rapidly, with an increasing number of states and jurisdictions legalizing the use of cannabis for both medical and adult-use purposes. This dynamic landscape presents both opportunities and challenges for Leafly.
On the positive side, the legalization of cannabis in new markets creates growth opportunities for Leafly’s retail and brand customers, potentially driving increased demand for the company’s services. Additionally, the growing acceptance of alternative cannabinoids, such as hemp-derived products, has opened up new avenues for Leafly to expand its product and service offerings.
However, the industry’s capital-constrained nature and ongoing regulatory complexities have also posed challenges for Leafly. The company has experienced increased pressure from customer payment delinquencies and account churn, which have negatively impacted its financial performance. In Q3 2024, Leafly reported a reduction of 912 retail accounts compared to the prior year period, highlighting the ongoing challenges in customer retention.
Leafly’s management team has been actively addressing these challenges, implementing tighter credit controls, enhancing its sales and marketing strategies, and exploring new initiatives to diversify its revenue streams and stabilize its customer base. The company is focused on stabilizing its account base and revenues, with management reporting “green shoots” associated with new sales efforts and product enhancements.
Business Segments Leafly operates two primary business segments: Retail and Brands.
The Retail segment generates revenue through monthly subscriptions that enable cannabis retailers to advertise and acquire potential customers on the Leafly platform. Retail 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 the Leafly iOS app. For Q3 2024, Retail revenue was $7.38 million, a 20% decrease compared to the same period in 2023. Despite the revenue decline, the Retail gross margin improved to 89.3% in Q3 2024, up from 88.5% in Q3 2023, due to increased efficiency and lower platform costs.
The Brands segment generates revenue by creating custom advertising campaigns for cannabis brands targeting Leafly’s audience, as well as offering monthly subscription-based brand profile listings on the platform. Advertising opportunities include on-site digital display, native placements, email, branded content, and off-site audience extension. In Q3 2024, Brands revenue was $975,000, a 26% decrease compared to Q3 2023. Despite the revenue decline, the Brands gross margin improved to 88.6% in Q3 2024, up from 88.1% in Q3 2023, as a result of increased efficiency.
Outlook and Conclusion: Leafly’s future success will depend on its ability to navigate the ever-changing cannabis landscape, capitalize on emerging market trends, and execute its strategic initiatives effectively. The company’s strong brand recognition, robust content platform, and diverse service offerings position it well to continue serving as a trusted resource for cannabis consumers.
However, Leafly’s near-term financial and operational challenges, including the looming debt maturity and ongoing customer retention issues, will require focused execution and potentially additional capital resources to address. The company’s management team has demonstrated its commitment to driving operational efficiency and identifying solutions to strengthen the business, but the path forward remains uncertain.
In terms of guidance, Leafly reported that its Q2 2024 revenue of $8.7 million was in line with previous guidance, while its positive adjusted EBITDA of $483,000 was well ahead of expectations. For Q3 2024, the company expects revenue of around $8.4 million and an adjusted EBITDA loss of less than $1 million.
Ultimately, Leafly’s ability to adapt to the industry’s evolving dynamics, deliver value to its customers, and secure its long-term financial stability will be critical factors in determining the company’s future prospects. With 119 employees as of September 30, 2024, Leafly continues to navigate the challenges of the cannabis industry while striving to maintain its position as a leading online cannabis discovery marketplace.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.