Laird Superfood, Inc.: Form 10-Q for the period ended Jun 30, 2023

The following discussion and analysis of our financial condition and results of operations is a supplement to and should be read in conjunction with the unaudited consolidated condensed financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2022. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q and the section titled “Risk Factors” included herein and in our Annual Report on Form 10-K for the year ended December 31, 2022.

Overview

Laird Superfood is an emerging consumer products platform focused on manufacturing and marketing highly differentiated plant-based and functional foods. The core pillars of the Laird Superfood platform are currently Superfood Creamer coffee creamers, Functional and organic roasted and instant coffees, teas, and hot chocolate, Hydrate hydration products and beverage enhancing supplements, and Harvest snacks and other food items. Consumer preferences within the evolving food and beverage industry are shifting away from processed and sugar-laden food and beverage products, as well as those containing significant amounts of highly processed and artificial ingredients. Laird Superfood’s long-term goal is to build the first scale-level and widely recognized brand that authentically focuses on natural ingredients, nutritional density and functionality, allowing the Company to maximize penetration of a multi-billion-dollar opportunity in the grocery market.

Net sales were $7.7 million and $15.8 million, respectively, for the three and six months ended June 30, 2023 and were $8.7 million and $18.0 million, respectively, for the three and six months ended June 30, 2022. Wholesale net sales grew 3% in the second quarter of 2023 compared to same period prior year, driven by the Club channel, where net sales grew 18%, as well as distribution expansion in the natural channel and improved velocities in our coffee creamer segment due to new branding and packaging. E-commerce channel sales decreased 20% in the second quarter of 2023 driven by Amazon sales, as well as significant planned reductions in marketing media spend. Amazon sales were negatively impacted by inventory out of stocks related to the product quality withdrawal issue we experienced in the first quarter of 2023. We expect to fully mitigate the out of stock issue in the third quarter of 2023. Wholesale net sales for the first half of 2023 declined 2% compared to the first half of 2022 primarily due to elevated trade discounts in 2023. E-commerce channel sales for the first half of 2023 decreased 19% year over year driven by significant planned reductions in marketing media spend, as well as out of stocks related to the product quality withdrawal issue as we rebuilt our inventory.

Our e-commerce business is two-pronged and consists of direct-to-consumer sales (lairdsuperfood.com and pickybars.com) and Amazon.com. For the three and six months ended June 30, 2023, the e-commerce business made up 54% of net sales. For the three and six months ended June 30, 2022 the e-commerce business made up 60% and 59% of net sales, respectively. Lairdsuperfood.com and pickybars.com are platforms that provide an authentic brand experience for our customers that drives engagement and provides feedback for future product development. We view our proprietary database of customers ordering directly from our website as a strategic asset, as it enhances our ability to develop a long-term relationship with these customers. Content on our websites allows Laird Superfood to educate consumers on the benefits of our products and ingredients, while providing a positive customer experience. We believe this experience leads to higher retention rates among repeat users and subscribers, as evidenced by repeat users and subscribers accounting for 87% of direct-to-consumer sales for the six months ended June 30, 2023.

For the three and six months ended June 30, 2023, Wholesale made up 46% of our net sales. For the three and six months ended June 30, 2022, Wholesale made up 40% and 41% of our net sales, respectively. Laird Superfood products are sold through a diverse set of wholesale channels, including conventional, natural and specialty grocery, club, food service, and drug stores. The diversity of our wholesale channel represents a strong competitive advantage for Laird Superfood and provides us with a larger total addressable market than would be considered normal for a food brand that is singularly focused on the grocery market.

Recent Developments

Exit activities

The Company ceased in-house production and fulfillment activities at the end of 2022 and moved to a third-party outsourced model for manufacturing and fulfillment. As part of this transition, the Company disposed of unusable inventory, terminated its leases of manufacturing facilities effective January 31, 2023, and eliminated substantially all production and fulfillment labor. Manufacturing equipment, furniture, tools, and internal-use production software were sold or abandoned and were impaired accordingly in the fourth quarter of 2022. Final transition costs were incurred in the first quarter of 2023 and there are no further expected costs. This move was undertaken to transform our supply chain to a variable cost third-party co-manufacturing business model that drastically reduces our overhead costs and allows for significant gross margin expansion. See Note 1 to the unaudited consolidated condensed financial statements elsewhere in this Quarterly Report on Form 10-Q.

Product quality issue

In the first quarter of 2023, we discovered a product quality issue with coconut milk powder from one of our suppliers and immediately initiated a voluntary product withdrawal and contacted all impacted wholesale customers and e-commerce consumers to aggressively pull back as much as of the affected product as possible. In connection with this withdrawal, we incurred costs associated with inventory obsolescence, quality testing, and remedial discounts and replacement orders of $0.5 million in the fourth quarter of 2022 and $0.4 million in the first quarter of 2023. In addition, we implemented a robust new sensory testing program to prevent future quality issues.

Key Factors Affecting our Performance

We believe that our future performance will depend on many factors, including the following:

Ability to Grow Our Customer Base in both E-commerce and Traditional Wholesale Distribution Channels

We are currently seeking to grow our customer base through both paid and organic online channels, as well as by expanding our presence in a variety of physical wholesale distribution channels. E-commerce customer acquisitions typically occur at our websites, Lairdsuperfood.com and Pickybars.com, and Amazon.com. Our e-commerce customer acquisition program includes paid and unpaid social media, search, display and traditional media. Our products are also sold through a growing number of wholesale channels. Wholesale customers include grocery chains, natural food outlets, club stores, drug stores, and food service customers including coffee shops, gyms, restaurants, hospitality venues and corporate dining services, among others. Customer acquisition in physical wholesale channels depends on, among other things, paid promotions through retailers, display and traditional media.

Ability to Manage Co-Manufacturer and Third-Party Logistics Relationships

All of our production and logistics is handled by third-parties, and our performance will be highly dependent on the ability of these partners to produce and deliver our products in a timely manner and to our standards and at a reasonable cost.

Ability to Acquire and Retain Customers at a Reasonable Cost

We believe an ability to consistently acquire and retain customers at a reasonable cost relative to projected lifetime value will be a key factor affecting future performance. To accomplish this goal, we intend to balance advertising spend between online and offline channels, as well as balancing more targeted and measurable “direct response” marketing spend with advertising focused on increasing our long-term brand recognition, where success attribution is less directly measurable on a near-term basis.

Ability to Drive Repeat Usage of Our Products

We accrue substantial economic value from repeat users of our products who consistently re-order our products. The pace of our growth will be affected by the repeat usage dynamics of existing and newly acquired customers.

Ability to Expand Our Product Line

Our goal is to expand our product line over time to increase our growth opportunity and reduce product-specific risks through diversification into multiple products, each designed around daily use. Our pace of growth will be partially affected by the cadence and magnitude of new product launches over time.

Ability to Expand Gross Margins

Our overall profitability will be impacted by our ability to expand gross margins through effective sourcing of raw materials, controlling labor and shipping costs, controlling the impacts of inflationary market factors, as well as managing co-packer relationships.

Ability to Expand Operating Margins

Our ability to expand operating margins will be impacted by our ability to cover fixed general and administrative costs and variable sales and marketing costs with higher revenues and gross profit dollars.

Ability to Manage Our Global Supply Chain

Our ability to grow and meet future demand will be affected by our ability to properly plan for and source inventory from a variety of suppliers located inside and outside the United States. We may encounter difficulties in sourcing products.

Ability to Optimize Key Components of Working Capital

Our ability to reduce cash burn in the near-term and eventually generate positive cash flow will be partially impacted by our ability to effectively manage all the key working capital components that could influence our cash conversion cycle.

Components of Results of Operations

Sales, net

We sell our products indirectly to consumers through a broad set of physical wholesale channels. We also derive revenue from the sale of our products directly to consumers through our direct websites, as well as third-party online channels.

Cost of Goods Sold

Cost of goods sold includes material, packaging, co-packing fees, distribution, freight, labor, and overhead costs incurred in the storage and distribution of products sold in the period. Material costs include the cost of products purchased. In 2023, labor and overhead costs consisted of indirect product costs and freight, and in 2022 also included wages and benefits for manufacturing, planning, and logistics personnel, depreciation, and facility costs.

Operating Expenses

Our operating expenses consist of general and administrative, research and product development, and sales and marketing expenses.

Income Taxes

Due to our history of operating losses and expectation of future operating losses, we do not expect any significant income tax expenses and benefits for the foreseeable future.

Results of Operations

Comparison of the three months ended June 30, 2023 (“Q2 2023”) and June 30, 2022 (“Q2 2022”)

The following table summarizes our results of operations for the periods indicated:

Sales, Net

Net sales decreased to $7.7 million in Q2 2023 from $8.7 million in Q2 2022. The decline was primarily due to a 20% decline in our e-commerce channels, driven by out of stocks on Amazon and DTC related to the product quality issue as well as planned reductions in media spend in the DTC channel offset by 3% Wholesale growth.

Cost of Goods Sold

Cost of goods sold decreased to $5.8 million in Q2 2023 from $7.1 million in Q2 2022 in line with sales, with favorability as we realize the benefits of the transition to a variable cost third-party co-manufacturing business model.

Gross Profit

Gross profit increased to $1.9 million in Q2 2023 from $1.6 million in Q2 2022. Gross margin improved to 24.3% in Q2 2023 from 18.2% in Q2 2022 driven by the transition to a co-manufactured model as well as price increases implemented in Q2 2023.

Operating Expenses

General and administrative expenses decreased to $2.6 million in Q2 2023 from $2.6 million in Q2 2022, primarily driven by increases in stock-based compensation due to executive forfeitures in Q2 2022.

Research and product development expenses were $0.1 million in Q2 2023 and Q2 2022. We are focused on strengthening the performance of current product offerings.

Sales and marketing expenses decreased to $2.8 million in Q2 2023 from $3.8 million in Q2 2022, primarily due to a planned reduction in inefficient spend and lower personnel costs.

Other Income

Other income is composed of interest income and expense, rental income, income and losses related to investment securities available-for-sale, and other non-operating gains and losses.

Comparison of the six months ended June 30, 2023 (“YTD 2023”) and June 30, 2022 (“YTD 2022”)

The following table summarizes our results of operations for the periods indicated:

Sales, Net

Net sales decreased to $15.8 million in YTD 2023 from $18.0 million in YTD 2022. The decline was primarily due to a 19% decline in our e-commerce channels, driven by out of stocks on Amazon and DTC related to the product quality issue as well as planned reductions in media spend in the DTC channel. Wholesale sales decreased by 2% driven primarily by elevated trade promotional activity in YTD 2023 and timing of Club orders.

Cost of Goods Sold

Cost of goods sold decreased to $12.1 million in YTD 2023 from $14.5 million in YTD 2022 in line with sales, with favorability as we realize the benefits of the transition to a variable cost third-party co-manufacturing business model.

Gross Profit

Gross profit increased to $3.7 million in YTD 2023 from $3.5 million in YTD 2022. Gross margin improved to 23.7% in YTD 2023 from 19.6% in YTD 2022, driven by benefits of the transition to a variable cost third-party co-manufacturing business model and pricing, offset in part by elevated promotional spend.

Operating Expenses

General and administrative expenses decreased to $5.6 million in YTD 2023 from $14.5 million in YTD 2022, primarily due to impairment of goodwill and long-lived acquisition intangible assets of $8.0 million in the first quarter of 2022, as well as reduced personnel costs and other general and administrative expenses following the exit activities in the fourth quarter of 2022.

Research and product development expenses were $0.2 million in YTD 2023 and YTD 2022.

Sales and marketing expenses decreased to $5.9 million in YTD 2023 from $7.7 million in YTD 2022, primarily due to a planned reduction in inefficient spend and lower personnel costs.

Other Income (Expense)

Other income (expense) is composed of interest income and expense, rental income, income and losses related to investment securities available-for-sale, and other non-operating gains and losses.

Cash Flows

Comparison of the six months ended June 30, 2023 and 2022:

The following table shows a summary of our cash flows for the periods presented:

Cash Flows from Operating Activities

Cash used in operating activities was $7.5 million for YTD 2023 and 2022. Cash burn in the first quarter of 2023 of $6.1 million was elevated by increasing accounts receivable levels due to the timing of collections of large wholesale orders and decreases in current liabilities which included $1.1 million payments in connection with the Sisters lease exit and $0.6 million in severances and bonuses. In the second quarter of 2023, cash used in operations was $1.4 million, the improvement driven by reduction in accounts receivables due to collections timing and overall reduction in loss from operations following the change in business model.

Cash Flows from Investing Activities

Cash provided by investing activities was $0.2 million for YTD 2023 as compared to cash provided by investing activities of $8.9 million for YTD 2022. The change is primarily due to proceeds from the sale of available-for-sale securities in the first quarter of 2022 and assets held for sale in the second quarter of 2022.

Cash Flows from Financing Activities

Cash used in financing activities was $19.1 thousand for YTD 2023 compared to $121.1 thousand of cash provided in YTD 2022, primarily related to inflows from stock option exercises.

Liquidity and Capital Resources

As of June 30, 2023, we had incurred accumulated net losses of $103.8 million, including operating losses of $8.0 million and $18.9 million for YTD 2023 and YTD 2022, respectively. We expect to incur additional operating losses as we continue efforts to grow our business, however we took several strategic steps in 2022 to optimize spending and improve gross margins. These steps include transitioning out of in-house manufacturing to a third-party co-manufactured model, closing manufacturing facilities and offices in Sisters, Oregon, several rounds of organizational restructuring reducing our workforce, and reducing marketing and administrative investment through eliminating non-essential spend. We will continue to seek to optimize spending and expand gross margins. We have historically financed our operations and capital expenditures through private placements of our common stock, our initial public offering, our lines of credit, and term loans.

Our historical uses of cash have primarily consisted of cash used in operating activities to fund our operating losses and working capital needs. Cash used in operations was $7.5 million for YTD 2023 and 2022.

As of June 30, 2023, we had $10.6 million of cash-on-hand and $5.0 million of available borrowings under our lines of credit. As of December 31, 2022, we had $17.8 million of cash-on-hand and $5.0 million of available borrowings under our lines of credit. As of June 30, 2023, and December 31, 2022, we had no outstanding notes payable and no amounts were outstanding under our lines of credit.

Our future capital requirements will depend on many factors, including our ability to execute on our planned sales growth and the continued improvement of our operating margins, the enhancement of our product platforms, the introduction of new products, and acquisition activity. Recent and expected working and other capital requirements, in addition to the above matters, also include the items described below:

• The Company has lease arrangements for corporate office space. As of June 30, 2023, the Company had fixed lease payment obligations of $0.5 million, with $0.1 million payable within 12 months.
• As of June 30, 2023, $6.1 million of current liabilities were accrued related to short term operating activities and personnel costs.
• Advertising and marketing expenditures were $4.1 million in YTD 2023 and $5.5 million in YTD 2022. We expect to continue to invest in these activities as part of the strategic expansion of sales volume, however, we have made strategic shifts to reduce and improve the efficacy of future customer acquisition costs.

We expect to continue to incur operating losses for the foreseeable future and may require additional capital resources to continue to grow our business. Our management concluded that our recurring losses from operations, our limited cash resources on hand and the dependence by the Company on its ability to obtain additional financing to fund its operations after the current cash resources are exhausted raise substantial doubt about our ability to continue as a going concern for the twelve months following the date of this report.

Segment Information

We have one operating segment and one reportable segment. Our Chief Executive Officer reviews financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 1, “Summary of Significant Accounting Policies” of the Notes to the Unaudited Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2022 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s unaudited consolidated condensed financial statements. There have been no material changes to the Company’s critical accounting estimates since the 2022 Form 10-K.

Recent Accounting Pronouncements

See Recently Adopted Accounting Pronouncements in Note 1 to our unaudited consolidated condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Emerging Growth Company Status

As a company with less than $1.235 billion in annual gross revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

• a requirement to have only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations;
• an exemption from the auditor attestation requirement on the effectiveness of our internal control over financial reporting;
• reduced disclosure about our executive compensation arrangements; and
• no non-binding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of these provisions until the end of the fiscal year in which the fifth anniversary of our IPO occurs, or such earlier time when we no longer qualify as an emerging growth company. We would cease to be an emerging growth company on the earlier of (1) the last day of the fiscal year (a) in which we have more than $1.235 billion in annual gross revenue or (b) in which we have more than $700 million in market value of our capital stock held by non-affiliates, or (2) the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all these reduced burdens.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards, and therefore we will not be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Company management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosure.

Our management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2023, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended of June 30, 2023, aside from those described above, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The following risk factor disclosures should be read in conjunction with the risk factors described in the Company's 2022 Form 10-K and subsequent periodic filings with the SEC. We are supplementing the risk factors previously disclosed in such filings to include the following updated risk factors:

Our historical operating results indicate substantial doubt exists related to our ability to operate as a going concern.

Our unaudited consolidated condensed financial statements for the six months ended June 30, 2023 were prepared assuming that we will continue as a going concern. The going concern basis of presentation assumes that we will continue in operation for the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. Our management concluded that our recurring losses from operations, our limited cash resources on hand and the dependence by the Company on its ability to obtain additional financing to fund its operations after the current cash resources are exhausted raise substantial doubt about our ability to continue as a going concern for the twelve months following the date of this report.

As reflected in the accompanying unaudited consolidated condensed financial statements, the Company had cash and cash equivalents of $10.6 million and an accumulated deficit of $103.8 million at June 30, 2023, and cash used in operations was $7.5 million in the six months ended June 30, 2023. We expect to continue to generate operating losses for the foreseeable future. There can be no assurance that the Company will be able to raise additional funds, whether through public offerings, private placements or otherwise, on terms acceptable to the Company or at all. If we are delayed in completing or are unable to raise additional funds, we may seek to reduce our cash outflows, but there are no assurances that these reductions would be sufficient to allow us to continue to operate as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation and dissolution could be significantly lower than the values reflected in our unaudited consolidated condensed financial statements and an investor could lose all or part of its investment in our equity. In addition, the perception that we may not be able to continue as a going concern may have an adverse impact on our business due to concerns about our ability to meet our future contractual obligations or pursue additional strategic transactions.

Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material effect on the Company’s operations.

Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10 and March 12, 2023, the Federal Deposit Insurance Corporation took control and was appointed receiver of Silicon Valley Bank (“SVB”), and Signature Bank, respectively, after each bank was unable to continue their operations. These events exposed vulnerabilities in the banking sector, including legal uncertainties, significant deposit outflows, volatility and contagion risk, and caused market prices of regional bank stocks to plummet.

We have not experienced any adverse impact to our current and projected business operations, financial condition and results of operations as a result of the SVB, Signature Bank or other recent bank failures; however, we are unable to predict the extent or nature of the impacts of these evolving circumstances at this time. If, for example, other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened. Therefore, while it is not currently possible to predict the potential impact that the failure of SVB, Signature Bank, or other bank failures could have on economic activity or our business in particular, the failure of other banks and financial institutions and the measures taken by governments, businesses and other organizations in response to these events could adversely impact our business, financial condition and results of operations.

Although we expect to continue to assess our banking relationships as we believe necessary or appropriate, our access to cash in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect the financial institutions with which we have banking relationships, and in turn, us. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could also include factors involving financial markets or the financial services industry generally. The results of events or concerns that involve one or more of these factors could include a variety of material and adverse impacts on our current and projected business operations and our financial condition and results of operations. These could include, but may not be limited to, delayed access to deposits or other financial assets or the uninsured loss of deposits or other financial assets.