Laird Superfood, Inc.: Form 10-Q for the period ended Jun 30, 2024

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, 2023(the "2023 Form 10-K"). 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 the 2023 Form 10-K.

Overview

Laird Superfood creates highly differentiated, plant-based, and functional foods, many of which incorporate adaptogens which may support a variety of brain functions. The core pillars of the Laird Superfood platform are currently Superfood Creamer coffee creamers, Hydrate hydration products and beverage enhancing supplements, Harvest snacks and other food items, and functional roasted and instant coffees, teas, and hot chocolate. 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. Our 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 us to maximize penetration of a multi-billion-dollar opportunity in the grocery market.

Net sales were $10.0 million and $7.7 million, respectively, for the three months ended June 30, 2024 and 2023, representing 30% growth. For the six months ended June 30, 2024 and 2023, net sales were $19.9 million and $15.8 million, respectively, representing 26% growth. E-commerce channel sales increased by 47% in the second quarter of 2024 and 40% in year-to-date ("YTD") 2024 compared to the same periods in 2023 despite significant, planned reductions in media spend in the e-commerce channel. Sales through Amazon.com increased by 80% in Q2 2024 compared to Q2 2023, and by 63% comparing the 2024 and 2023 year-to-date periods, driven by growth in subscription revenue as well as new customer sales. Direct-to-Consumer ("DTC") sales, on lairdsuperfood.com and pickybars.com, increased by 32% comparing Q2 2024 to Q2 2023 and by 29% comparing YTD periods, driven by strong performance in both subscription and repeat customers, increasing average order value, and improved discount rates due to strategic shifts in promotional strategies. Wholesale channel net sales increased by 9% in both Q2 2024 and YTD 2024 as compared to the corresponding prior year periods, driven by sales growth in club stores, as well as velocity improvement and distribution expansion in grocery, and more efficient promotional spend across the wholesale channel.

Our e-commerce channel is comprised of DTC (lairdsuperfood.com and pickybars.com) and Amazon.com. For the three and six months ended June 30, 2024, the e-commerce channel made up 61% and 60% of our net sales, respectively, compared to 54% for the three and six months ended June 30, 2023. Amazon.com accounted for 39% and 38%, respectively, of e-commerce channel sales, as compared to 32% for the corresponding 2023 periods. Lairdsuperfood.com and pickybars.com are platforms that provide an authentic brand experience for our consumers that drive engagement through educational content and provide 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. We believe the 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 over three quarters of DTC sales for the three and six months ended June 30, 2024 and 2023.

For the three and six months ended June 30, 2024, the wholesale channel made up 39% and 40% of our net sales, respectively, compared to 46% for the three and six months ended June 30, 2023. Laird Superfood products are sold through a diverse set of retail channels, including conventional, natural, and specialty grocery stores, and club stores. The diversity of our retail 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

Redomestication

On December 31, 2023 (the “Effective Date”), we changed our state of incorporation from the state of Delaware to the state of Nevada (the “Redomestication”) by means of a plan of conversion, as described in our definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission (the “SEC”) on October 10, 2023.

As of the Effective Date:

• our domicile changed from the state of Delaware to the state of Nevada; and
• the affairs of the Company ceased to be governed by the Delaware General Corporation Law and the Company’s then existing certificate of incorporation and bylaws, and instead became governed by the Nevada Revised Statutes and the Company's new articles of incorporation and bylaws.

The Redomestication was previously submitted to a vote of, and was approved by, our stockholders at our Annual Meeting of Stockholders held on November 28, 2023. The Redomestication did not result in any change in the business, physical location, management, assets, liabilities, or net worth of the Company, nor did it result in any change in location of our current employees, including management. The Redomestication did not affect any of our material contracts with any third parties, and our rights and obligations under those material contractual arrangements continue to be the rights and obligations of the Company after the Redomestication. The daily business operations of the Company will continue as they have been conducted prior to the Redomestication. The consolidated financial condition and results of operations of the Company immediately after consummation of the Redomestication remains the same as immediately before the Redomestication.

Entry into an Accounts Receivable Factoring Agreement

On May 7, 2024, the Company entered into an accounts receivable factoring agreement (the “Factoring Agreement”) with Alterna Capital Solutions LLC (the “Purchaser”). The Factoring Agreement allows the Company to access up to $2 million on a revolving basis. The upfront purchase price for factored accounts is up to 70% of their face value, with the remainder payable to the Company upon collection by the Purchaser. The proceeds will be used to fund general working capital needs. The Company will pay fees, including a funds usage fee (prime rate + 1.5%, minimum 10% per annum) and a collateral monitoring fee (0.05% per month). The Purchaser can require repurchase of uncollectable or ineligible accounts.

The Factoring Agreement has an initial term of 12 months and will renew annually, unless terminated in accordance with the Factoring Agreement. The Company may terminate the Factoring Agreement at any time upon 30 days prior written notice and payment to Purchaser of an early termination fee equal to 2.0% of the Maximum Amount if terminated during the first 12 months and 1.0% of the Maximum Amount during the subsequent terms.

The Company has granted a security interest it's personal property to secure the payment and performance of all obligations under the Factoring Agreement. The Factoring Agreement includes customary provisions, including representations, warranties and covenants, indemnification, waiver of jury trial, and the exercise of remedies upon a breach or default. Such description is qualified in its entirety by reference to the full text of the Factoring Agreement, a copy of which is attached as Exhibit 10.1 to this Quarterly Report on Form 10-Q.

Our Strategy and 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 customers 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 the cost of raw materials and packaging, and overhead including inbound and outbound freight, direct and indirect labor, third-party logistics ("3PL") fees, warehouse storage costs, and other miscellaneous costs related to manufacturing and distributing our products.

Operating Expenses

Our operating expenses consist of general and administrative expenses 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 or benefits for the foreseeable future.

Results of Operations

Comparison of the three months ended June 30, 2024 (“Q2 2024”) and June 30, 2023 (“Q2 2023”)

The following tables summarize our results of operations for the periods indicated:

Net sales increased to $10.0 million in Q2 2024 from $7.7 million in Q2 2023, representing 30% growth year-over-year. The increase was primarily driven by a 47% increase in sales in the e-commerce channel through both platforms, Amazon.com and DTC, despite a planned reduction in promotional spend in DTC, as compared to reduced sales volume in the 2023 period from out-of-stocks associated with a quality event. Further, the wholesale channel also grew by 9% driven primarily by sales growth in club stores, velocity improvements and distribution gains in grocery stores, and more efficient promotional spend.

Cost of goods sold was flat at approximately $5.8 million in Q2 2024 and Q2 2023, in a period of sales growth reflecting the full benefit realization of the transition to a variable cost third-party co-manufacturing business model.

Gross profit increased to $4.2 million in Q2 2024 from $1.9 million in Q2 2023. Gross margin improved to 41.8% in Q2 2024 from 24.3% in Q2 2023. This expansion of gross margin is driven by full benefit realization of the transition to a third-party co-manufacturing model and a reduction in trade discounts due to a pullback in inefficient trade spend and elevated trade spend in the prior year associated with the quality event that occurred in 2023.

General and administrative expenses decreased to $2.1 million in Q2 2024 from $2.7 million in Q2 2023, primarily driven by lower personnel costs and broad, strategic reductions in spending.

Sales and marketing expenses were $2.4 million in Q2 2024 compared to $2.8 million in Q2 2023, driven by planned reductions in marketing and advertising spend as we improve our media efficiency.

Other income is composed of interest income and expense, rental income, and other non-operating gains and losses. The decrease in other income was driven by decreases in dividend income on money market funds as the amounts carried in those accounts decreased.

Comparison of the six months ended June 30, 2024 ("YTD 2024”) and June 30, 2023 (“YTD 2023”)

The following tables summarize our results of operations for the periods indicated:

27

Net sales increased to $19.9 million in YTD 2024 from $15.8 million in YTD 2023, representing 26% growth year-over-year. The increase was primarily driven by a 40% increase in the e-commerce channel in sales through both platforms, Amazon.com and DTC, as well as reductions in promotional spend in DTC, as compared to reduced sales volume in 2023 from out-of-stocks associated with a quality event. Further, the wholesale channel also grew by 9% in the six months ended June 30, 2024 as compared to the corresponding 2023 period, driven primarily by sales growth in club stores, velocity improvements and distribution gains in grocery stores, and more efficient promotional spend.

Cost of goods sold decreased to $11.8 million in YTD 2024 from $12.1 million in YTD 2023, which reflects the full benefits realization of the transition to a variable cost third-party co-manufacturing business model, which was partially offset by higher sales volume.

Gross profit increased to $8.1 million in YTD 2024 from $3.7 million in YTD 2023. Gross margin improved to 40.9% in YTD 2024 from 23.7% in YTD 2023. This improvement reflects increased net sales as well as the full benefits of the transition to a variable cost third-party co-manufacturing business model and a reduction in trade discounts due to improved promotional efficiencies and elevated trade spend in the prior year associated with the quality event that occurred in 2023.

General and administrative expenses decreased to $4.3 million in YTD 2024 from $5.8 million in YTD 2023, primarily driven by lower personnel costs and broad, strategic reductions in spending.

Sales and marketing expenses were $5.3 million in YTD 2024 compared to $5.9 million in YTD 2023, driven by planned reductions in marketing and advertising spend.

Other income is composed of interest income and expense, rental income, and other non-operating gains and losses. The decrease in other income was driven by decreases in dividend income on money market funds as the amounts carried in those accounts decrease.

Cash Flows

The following table shows a summary of our cash flows for the six months ended June 30, 2024 and 2023

Cash provided by operating activities in FY2024 was enabled by our greatly improved margins and lower overhead enabled by our transition to a third-party co-manufacturing business model which we executed in 2023, reduced selling, marketing, and administrative spend, and efficient working capital management.

Cash used in investing activities in FY2024 consists of purchases of office equipment. The cash generated in FY2023 was due to the sale of property and equipment related to the Sisters, Oregon exit.

Cash used in financing activities consists of common stock related costs. The increase in FY2024 was driven by common stock registration costs incurred, offset in part by stock option exercises.

Liquidity and Capital Resources

As of June 30, 2024, we had an accumulated deficit of $107.6 million, which includes operating losses of $1.4 million and $8.0 million for YTD 2024 and YTD 2023, respectively. While we expect to incur additional operating losses as we continue efforts to grow our business, the strategic business transformation that we have undertaken over the last two years has become evident in our significant gross margin expansion, optimized investments in trade and marketing, lower selling, general, and administrative spending, and reduced cash burn. We will continue to seek opportunities to optimize spending, expand gross margins, and free up cash flow through efficient working capital management. We have historically financed our operations and capital expenditures through private placements of our common stock, our initial public offering ("IPO"), lines of credit, and term loans. Our historical uses of cash have primarily consisted of cash used in operating activities and working capital needs.

As of June 30, 2024 and December 31, 2023, we had $7.8 million and $7.7 million, respectively, of cash-on-hand, and total net working capital of $11.4 million and $12.0 million for the same periods. As of June 30, 2024, we had access to up to $0.8 million of advances under an accounts receivable factoring agreement, of which $0.1 million had been utilized and was due to the Purchaser. We have no significant unused sources of liquid assets outside of our working capital.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the enhancement of our product platforms, and 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:

• We have lease arrangements for corporate office space. As of June 30, 2024, we had fixed lease payment obligations of $0.3 million, with $0.1 million payable within 12 months.
• As of June 30, 2024, $5.1 million of current liabilities were accrued related to short-term operating activities and personnel costs, excluding the aforementioned current lease liabilities.
• Marketing and advertising expenditures were $3.6 million in YTD 2024 and $4.4 million in YTD 2023. 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.

Based on our current business plans, we believe that our existing cash balances, including our anticipated cash flow from operations, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the eighteen months following the date of this filing. In the future, we may raise funds by issuing debt or equity securities, or securities convertible into or exchangeable for our common stock. Such financing and other potential financing may result in dilution to stockholders, reduction in the market price of our common stock, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. However, we may be unable to raise additional funds or enter into such other arrangements when needed, on favorable terms, or at all.

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 our management's discussion and analysis of our financial condition and operating results require our 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 Quarterly Report on Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2023 Form 10-K describe the significant accounting policies and methods used in the preparation of our financial statements. There have been no material changes to our critical accounting estimates since the 2023 Form 10-K.

Recent Accounting Pronouncements

See Recently Issued Accounting Pronouncements in Note 1 to our 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 will 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 Securities Exchange Act of 1934, as amended (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, 2024, 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, 2024.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There were no material changes to the Risk Factors disclosed in "Item 1A. Risk Factors" in the 2023 Form 10-K during these three and six months ended June 30, 2024. This quarterly report on Form 10-Q should be read in conjunction with the risk factors previously described in the Company's 2023 Form 10-K.