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

The following discussion and analysis of the financial condition and results of operations of Laird Superfood, Inc. (together with its wholly owned subsidiary on a consolidated basis, the "Company," "Laird Superfood," "our," "us," or "we") 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 (i) Superfood Creamer coffee creamers, (ii) Hydrate hydration products and beverage enhancing supplements, (iii) Harvest snacks and other food items, and (iv) 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, which we believe will allow us to maximize penetration of a multi-billion-dollar opportunity in the grocery market. We generate revenue through two channels: e-commerce and wholesale.

Financial Highlights

Net sales were $11.8 million and $9.2 million, respectively, for the three months ended September 30, 2024 and 2023, representing 28% growth from the prior year period. For the nine months ended September 30, 2024 and 2023, net sales were $31.7 million and $25.0 million, respectively, representing 27% growth from the prior year period. E-commerce channel sales increased by 42% in the third quarter of 2024 and 41% in year-to-date ("YTD") 2024 compared to the same periods in 2023 despite significant, planned reductions in media spend. Sales through Amazon.com increased by 133% in the third quarter of 2024 ("Q3 2024") compared to the third quarter of 2023 ("Q3 2023"), and by 85% when comparing the 2024 and 2023 YTD periods, driven primarily by product availability and successful sales execution. Direct-to-Consumer ("DTC") sales, on lairdsuperfood.com and pickybars.com, increased by 10% in Q3 2024 compared to the prior year period, and increased by 22% 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 spend. Wholesale channel net sales increased by 13% in Q3 2024 compared to Q3 2023, and increased 11% comparing YTD periods, driven by distribution expansion in grocery as well as velocity growth and more efficient promotional spend across.

Our e-commerce channel is comprised of sales through DTC (lairdsuperfood.com and pickybars.com) and Amazon.com. For the three and nine months ended September 30, 2024, the e-commerce channel made up 58% and 59% of our net sales, respectively, compared to 53% and 54% for the three and nine months ended September 30, 2023, respectively. Amazon.com accounted for 43% and 40% of our e-commerce channel sales for the three and nine months ended September 30, 2024, respectively, as compared to 26% and 30% for the corresponding prior year 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 nine months ended September 30, 2024 and 2023.

For the three and nine months ended September 30, 2024, the wholesale channel made up 42% and 41% of our net sales, respectively, compared to 47% and 46% for the three and nine months ended September 30, 2023, respectively. Laird Superfood products are sold through a diverse set of retail channels, including conventional, natural, and specialty grocery stores, and club stores.

Recent Developments

Entry into an Accounts Receivable Factoring Agreement

On May 7, 2024, we entered into an accounts receivable factoring agreement (the “Factoring Agreement”) with Alterna Capital Solutions LLC (the “Purchaser”). The Factoring Agreement allows us 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 us upon collection by the Purchaser. The proceeds, if any, will be used to fund general working capital needs. Pursuant to the Factoring Agreement, we 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 Factoring Agreement provides that the Purchaser can require repurchase of uncollectable or ineligible accounts.

The Factoring Agreement has an initial term of 12 months and will automatically renew annually, unless terminated in accordance with the Factoring Agreement. We 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 (as defined in the Factoring Agreement) if terminated during the first 12 months and 1.0% of the Maximum Amount during the subsequent terms.

Pursuant to the Factoring Agreement, we granted a security interest to the Purchaser in our personal property to secure the payment and performance of all obligations under the Factoring Agreement.

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 through 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 is and will continue to 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 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, we do not expect any significant income tax expenses or benefits for the foreseeable future.

Results of Operations

Comparison of the three months ended September 30, 2024 (“Q3 2024”) and September 30, 2023 (“Q3 2023”)

The following tables summarize our results of operations for the periods indicated, as well as the monetary and percentage increase or decrease between those periods:

The increase in net sales was primarily driven by a 42% increase in sales in the e-commerce channel through both Amazon.com and DTC platforms. DTC grew despite planned reductions in media spend and was fueled by a growing subscription and repeat customer base as well as higher average order value ("AOV"). Amazon grew 133% 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 13% in Q3 2024 compared to Q3 2023 driven primarily by velocity improvements and distribution gains in grocery stores, and more efficient promotional spend.

The increase in cost of goods sold is driven by growth in sales volume, offset by lower product costs due to a shift to the direct procurement of key raw materials, as well as recoveries on costs previously incurred in connection with the quality event we experienced in 2023 as part of the settlement we reached with a supplier.

Gross margin improved to 43.0% in Q3 2024 from 31.0% in the prior year period. The increase in gross profit and expansion of gross margin is driven primarily by lower ingredient costs due to a shift to the direct procurement of key raw materials, settlement recoveries, and a reduction in trade discounts due to a pullback in inefficient trade spend.

The increase in general and administrative expenses was primarily driven by personnel costs as well as by professional and accounting fees.

The decrease in sales and marketing expenses was 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 nine months ended September 30, 2024 ("YTD 2024”) and September 30, 2023 (“YTD 2023”)

The following tables summarize our results of operations for the periods indicated, as well as the monetary and percentage increase or decrease between those periods:

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The increase in net sales was primarily driven by 41% growth in the e-commerce channel sales through both the Amazon.com and DTC platforms. DTC grew despite reductions in media spend and was fueled by a growing subscriber and repeat customer base as well as higher AOV. Amazon grew 85% as compared to reduced sales volume in 2023 from out-of-stocks associated with a quality event. Further, the wholesale channel also grew by 11% in the nine months ended September 30, 2024 as compared to the corresponding 2023 period, driven primarily by distribution expansion, growing velocities, and more efficient promotional spend.

Cost of goods sold were nearly flat despite a period of 27% sales growth, which was offset by the full benefits realization of the transition to a variable cost third-party co-manufacturing business model, lower ingredient costs due to a shift to the direct procurement of key raw materials, and recoveries of costs previously incurred in connection with the quality event experienced in 2023 as part of a settlement with a supplier.

Gross margin improved to 41.7% in YTD 2024 from 26.4% in YTD 2023. The increase in gross profit and gross margin expansion reflects increased net sales, due to both increased sales volume and a reduction in trade discounts due to improved promotional efficiencies compared to elevated trade spend in the prior year associated with the quality event that occurred in 2023, lower ingredient costs, settlement recoveries, and the full benefit realization of outsourcing.

The decrease in general and administrative expenses was primarily driven by lower personnel costs and broad, strategic reductions in spending.

The decrease in sales and marketing expenses was 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 nine months ended September 30, 2024 and 2023:

Cash provided by operating activities for YTD 2024 was enabled by our greatly improved margins and reduced selling, marketing, and administrative expenses resulting from the business model transformation we undertook over the last twelve months, as well as efficient working capital management.

Cash used in investing activities for YTD 2024 consists of purchases of office equipment. The cash generated in in the prior year period 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, offset in part by stock option exercises.

Liquidity and Capital Resources

As of September 30, 2024, we had an accumulated deficit of $107.7 million, which includes operating losses of $1.7 million and $10.7 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 September 30, 2024 and December 31, 2023, we had $8.2 million and $7.7 million, respectively, of cash-on-hand, and total net working capital of $11.8 million and $12.0 million for the same periods. As of September 30, 2024, we had access to up to $1.2 million of advances under the Factoring Agreement, of which none had been utilized. We have no significant unused sources of liquid assets outside of our working capital.

Additionally, on September 15, 2023, we entered into a settlement agreement (the "2023 Settlement Agreement") with a supplier (the "Supplier") to recover losses incurred in connection with the product quality issue with coconut milk powder that we experienced in 2023, pursuant to which the Supplier was obligated to, among other things, pay the Company $50,000 and provide a discount to the Company on the sale of future products of up to $950,000. On February 27, 2024, we filed a complaint against the Supplier in the District Court of Boulder, Colorado alleging that the Supplier breached the 2023 Settlement Agreement by failing to deliver acceptable coconut milk powder (the "Litigation"). Both parties dispute liability. As a result of the Litigation, on July 30, 2024, the Company entered into an additional settlement agreement with the Supplier, pursuant to which, among other things, the Supplier agreed to remit cash payment to us of approximately $500,000. As of September 30, 2024, $285,000 was receivable from the Supplier and was included in prepaid and other current assets on the balance sheets.

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 September 30, 2024, we had fixed lease payment obligations of $0.3 million, with $0.1 million payable within 12 months.
• As of September 30, 2024, $5.4 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, including related party advertising costs, were $5.2 million in YTD 2024 and $6.7 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 report. 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.

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 September 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 September 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 the three and nine months ended September 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.