LAIRD SUPERFOOD, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on 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 "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this Annual Report on Form 10-K.
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 theLaird Superfood platform are currentlySuperfood 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 decreased to$35.8 million for the year endedDecember 31, 2022 , from$36.8 million for the year endedDecember 31, 2021 . Consistent with our strategy for omni-channel growth, we delivered double digit growth in Retail and Amazon channels. This growth was offset by a challenging direct to consumer ("DTC") marketplace. We were, in part, able to offset these difficulties through increased promotions designed to encourage repeat purchases. Lower media spend resulted in significant reduction of new customer orders in the year. Additionally, e-commerce sales were impacted by price increases implemented at the end of the second quarter and cancellation of free shipping. Both are necessary measures to improve our profitability in these channels. Our e-commerce business is two-pronged and consists of direct-to-consumer sales (lairdsuperfood.com and pickybars.com) and Amazon.com. For the years endedDecember 31, 2022 and 2021, the e-commerce business made up 62% of our 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 allowsLaird 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-fourths of direct-to-consumer sales for the years endedDecember 31, 2022 and 2021. For the years endedDecember 31, 2022 and 2021, wholesale made up 38% of our net sales, respectively.Laird Superfood products are sold through a diverse set of retail channels, including conventional, natural and specialty grocery, club, outdoor and drug stores. The diversity of our retail channel represents a strong competitive advantage forLaird 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 manufacturing and fulfillment activities at the end of 2022 and moved strategic raw material, packaging and finished goods inventory to co-manufacturer and third-party logistics partners, disposing of the remaining inventory, and terminating its leases of manufacturing facilities effectiveJanuary 31, 2023 , and eliminated substantially all production and fulfillment labor. Manufacturing equipment, furniture, tools, and internal-use production software are being sold or abandoned and were impaired accordingly in the fourth quarter of 2022. This move was undertaken to transform our supply chain to a variable cost model to strengthen our margins and drastically reduce our overhead costs. See Note 1 to the consolidated financial statements elsewhere in this Annual Report on Form 10-K. Executive Transitions EffectiveJanuary 31, 2022 , the Company's Board of Directors appointedJason Vieth as the Company's President and Chief Executive Officer and electedMr. Vieth as a director of the Company.Mr. Vieth joined the Company from Sovos Brands, Inc., where he most recently served as executive vice president and group general manager of the Breakfast and Snacks segment. Before joining Sovos Brands inJanuary 2020 ,Mr. Vieth served as chief executive officer of Poppi, a producer of prebiotic soda, fromApril 2019 toJanuary 2020 and president ofLife Time Fitness' Life Cafe fromApril 2017 toApril 2019 and held various management positions forWhiteWave Foods Company fromJanuary 2008 toApril 2017 . 33 -------------------------------------------------------------------------------- OnApril 1, 2022 ,Andrew Judd was appointed as Chief Commercial Officer, responsible for the commercial strategy and the development of the Company.Mr. Judd oversees marketing, sales, product development, and customer experience to drive business growth and expand market share.Mr. Judd is an experienced marketing leader focused on building exceptional teams and go-to-market models that build brands and businesses. He has led teams across brand marketing, insights, and creative services from large strategic CPG enterprises to emerging high-growth brands. Most recently, he was CMO of Yasso. Before that he served as CMO of ONE Brands and VP Marketing for the Boulder Brands business unit ofPinnacle Foods . Previous roles included leading the management of the So Delicious brand at WhiteWave, Category Director for ice cream, iced coffee, blended beverages and value-added milk portfolio atSaputo Dairy Foods , and various roles at Campbell Soup Company. OnMay 17, 2022 , the Company's Board of Directors appointedAnya Kochetova Hamill as the Company's interim Chief Financial Officer, effectiveJuly 1, 2022 and subsequently as Chief Financial Officer effectiveNovember 4, 2022 .Ms. Hamill possesses more than 20 years of strategic finance experience in both public consumer packaged goods and private equity backed emerging companies in the natural foods and beverages space.Ms. Hamill joined the Company as Vice President, Financial Planning and Analysis inApril 2022 from Little Secrets Chocolate, where she served as chief financial officer fromSeptember 2018 . Previously,Ms. Hamill served as the senior director of finance, premium yogurt atDanone North America fromMay 2017 throughMarch 2018 , and as senior director of finance, plant-based beverage and food and various other finance positions atWhiteWave Foods fromMarch 2003 throughMay 2017 .Ms. Hamill holds an MBA with a finance concentration fromLeeds School of Business at theUniversity of Colorado and a Bachelor of Arts fromSaint-Petersburg State University of Engineering and Economics.
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 e-commerce channels, as well as by expanding our presence in a variety of physical retail distribution channels. E-commerce customer acquisitions typically occur at our direct 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 retail channels. Wholesale customers include grocery chains, natural food outlets, club stores, drug stores, and food service customers which include coffee shops, gyms, restaurants, hospitality venues and corporate dining services, among others. Customer acquisition in physical retail 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 will be handled by third-parties, and our performance will be highly dependent on the ability of these partners to produce and deliver our products timely 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 life-time value will be a key factor affecting future performance. To accomplish this goal, we intend to balance advertising spend between e-commerce and wholesale 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 input and shipping costs, controlling the impacts of inflationary market factors, as well as managing co-packer relationships.
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--------------------------------------------------------------------------------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 outsidethe 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 retail outlets. We also derive revenue from the sale of our products directly to consumers through our direct websites, as well as third-party e-commerce channels such as Amazon.com.
Cost of Goods Sold
Our cost of goods sold consists primarily of raw material costs, labor costs directly related to producing our products, including wages and benefits, shipping costs, lease expenses and other factory overhead costs related to various aspects of production, warehousing and shipping.
Operating Expenses
Our operating expenses consist of general and administrative, research and product development, and sales and marketing expenses, including non-production personnel costs.
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 years ended
The following table summarizes our results of operations:
Year Ended December 31, $ %
2022 2021 Change Change
Sales, net $ 35,828,392 $ 36,810,953 $ (982,561 ) (3 )%
Cost of goods sold (30,641,125 ) (27,379,082 ) (3,262,043 ) 12 %
Gross profit 5,187,267 9,431,871 (4,244,604 ) (45.0 )%
Gross margin 14.5 % 25.6 %
General and administrative 30,595,163 16,459,262 14,135,901 86 %Research and product development 427,537 1,030,127
(602,590 ) (58 )% Sales and marketing 14,528,704 15,894,898 (1,366,194 ) (9 )% Total expenses 45,551,404 33,384,287 12,167,117 36 % Operating loss (40,364,137 ) (23,952,416 ) (16,411,721 ) 69 % Total other income (expense) 47,088 99,704 (52,616 ) (53 )% Loss before income taxes (40,317,049 ) (23,852,712 ) (16,464,337 ) 69 % Income tax expense (20,269 ) (17,834 ) (2,435 ) 14 % Net loss$ (40,337,318 ) $ (23,870,546 ) $ (16,466,772 ) 69 % Sales, Net Year Ended December 31, 2022 v. 2021 Change 2022 2021 $ %
Sales, net
Net sales decreased to
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Cost of Goods Sold
Year Ended December 31, 2022 v. 2021 Change
2022 2021 $ %
Costs of goods sold $ (30,641,125 ) $ (27,379,082 ) $ (3,262,043 ) 12 %
Cost of goods sold increased to $30.6 million in FY2022 from $27.4 million in
FY2021, primarily due to $1.2 million in one-time exit and disposal costs
related to the transition to a co-manufacturing model and $0.6 million of
inventory obsolescence charges related to a product quality issue which was
identified in the first quarter of 2023. The remaining increase of $1.5 million
is primarily due to fixed costs deleverage on lower production volumes,
inflationary pressures in costs of raw materials and packaging, inbound and
outbound freight expenses offset in part by decrease in labor costs due to
gained efficiencies and organizational rightsizing earlier in the year.
Gross Profit
Year Ended December 31, 2022 v. 2021 Change
2022 2021 $ %
Gross Profit $ 5,187,267 $ 9,431,871 $ (4,244,604 ) (45 )%
Gross profit decreased to $5.2 million in FY2022 from $9.4 million in FY2021.
Gross margin was 14.5% in FY2022 compared to 25.6% in FY2021. We incurred $1.2
million in one-time exit and disposal costs related to the transition to a
co-manufacturing model, as well as $0.6 million of inventory obsolescence
charges related to a product quality issue which was identified in the first
quarter of 2023 for which we expect to incur less than $0.5 million of
additional costs in the first quarter of 2023. The remaining margin decrease of
$2.4 million is driven by elevated promotional activity, and general
inflationary pressures on raw materials, packaging and freight combined with
fixed costs deleverage on lower production volumes this year as compared to
prior year as we focused on optimizing inventory levels to improve working
capital turns.
Operating Expenses
Year Ended December 31, 2022 v. 2021 Change
2022 2021 $ %
Operating Expenses
General and Administrative $ 30,595,163 $ 16,459,262 $ 14,135,901 86 %
Research and Product Development 427,537 1,030,127 (602,590 ) (58 )%
Sales and Marketing 14,528,704 15,894,898 (1,366,194 ) (9 )%
Total Operating Expenses $ 45,551,404 $ 33,384,287 $ 12,167,117 36 %
General and administrative expense increased to $30.6 million in FY2022 from
$16.5 million in FY2021, primarily due to impairment of goodwill and long-lived
acquisition intangible assets of $9.6 million , as well as exit and disposal
costs including impairment charges of factory equipment, furniture, and
production software of $3.2 million , losses on the termination of the Company's
leases of manufacturing facilities in the amount of $3.6 million , severances and
retention bonuses of $0.5 million , and other associated costs of $0.1 million .
See Notes 7 and 8, respectively, to our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for more information on
the aforementioned impairments. The remaining $2.9 million decrease is driven
primarily by reduced personnel costs including stock-based compensation.
Research and product development expense decreased to $0.4 million in FY2022
from $1.0 million in FY2021, as we continue to focus on strengthening the
performance of current product offerings in 2022 rather than the rapid product
development strategy in 2021 and prior.
Sales and marketing expense decreased to
Other Income
Year Ended December 31, 2022 v. 2021 Change
2022 2021 $ %
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.
Liquidity and Capital Resources
As ofDecember 31, 2022 , we had incurred accumulated net losses of$96.1 million , including operating losses of$40.4 million and$24.0 million for FY2022 and FY2021, respectively. We expect to incur additional operating losses as we continue efforts to grow our business, however we have taken several strategic steps in 2022 to optimize spending and improve gross margins. These steps include transitioning out of in-house manufacturing to a fully co-manufactured model, closing manufacturing facilities and offices inSisters, Oregon , several rounds of organizational restructuring reducing our workforce, reducing marketing and administrative investment through eliminating non-essential spend. We will continue to seek to optimize spending and gross margins. We have historically financed our operations and capital expenditures through private placements of our preferred stock and common stock, our initial public offering, as well as 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.
As ofDecember 31, 2022 , we had$17.8 million of cash-on-hand and investments and$5.0 million of available borrowings under our lines of credit. As ofDecember 31, 2021 , we had$31.7 million of cash-on-hand and investments and$12.7 million of available borrowings under our lines of credit. As ofDecember 31, 2022 and 2021, we had no outstanding notes payable and no amounts were outstanding under our lines of credit. 36 -------------------------------------------------------------------------------- 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, 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:
•
Cash outflows for capital expenditures were
•
As of
•
Advertising and marketing expenditures were$10.7 million in 2022 and$12.1 million in 2021. 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 spending and to improve the efficacy of future customer acquisition costs.
•
We have drastically reduced our future rental obligations with the shutdown of theSisters, Oregon facilities. InJanuary 2023 , we remitted the remaining$1.0 million of the early termination penalty to the former landlord.
•
In 2023, we sold$0.8 million of property, plant, and equipment held for sale as ofDecember 31, 2022 to our co-manufacturing partner. We will collect payment for this equipment in the form of credits on tolling charges between the periodDecember 9, 2022 andDecember 9, 2023 , after which the remainder, if any, will be collected in cash no later thanFebruary 9, 2024 . We expect to continue to incur operating losses for the foreseeable future and may require additional capital resources to continue to grow our business. We believe our cash, cash equivalents and marketable securities, our expected cash flow generated from operations and our expected financing activities will satisfy our working and other capital requirements for at least the next 12 months from the filing of this Annual Report on Form 10-K based on our current business plans.
Comparison of the years ended
Cash Flows
The following table shows a summary of our cash flows for the periods presented:
Year Ended December 31,
2022 2021
Cash flows from operating activities
576,247
Net change in cash $ (5,239,432 ) $ (34,158,846 ) Cash Flows used in Operating Activities
Cash used in operating activities was
Cash Flows used in Investing Activities
Cash provided by investing activities was$9.0 million in FY2022 as compared to$12.6 million used in FY2021. The cash inflow in 2022 is primarily related to the sales of equipment and available-for-sale securities. The cash outflow in 2021 was primarily related to the acquisition of Picky Bars in FY2021.
Cash Flows from Financing Activities
Cash provided by financing activities was
Segment Information
We have one operating segment and one reportable segment, as our Chief Executive Officer reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance.
Critical Accounting Estimates
The preparation of consolidated financial statements and related disclosures in conformity withU.S. generally accepted accounting principles ("GAAP") 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 Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. 37 --------------------------------------------------------------------------------
Revenue Recognition
We recognize revenue for the sale of our product at the point in time when our performance obligation has been satisfied and control of the product has transferred to our customer, which generally occurs upon shipment or delivery to a customer based on terms of the sale. Revenue is measured by the transaction price, which is defined as the amount of consideration we expect to receive in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes consumer incentives, trade promotions, and allowances, such as coupons, discounts, rebates, incentives, cooperative advertising, and other programs. Variable consideration related to these programs is recorded as a reduction to revenue based on amounts we expect to pay.
The transaction price contains estimates of known or expected variable consideration. We base these estimates on current performance, historical utilization, and projected redemption rates of each program. We review and update these estimates regularly until the incentives or product returns are realized and the impact of any adjustments are recognized in the period the adjustments are identified.
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to recognize revenue. As noted above, estimates are made based on historical experience and other factors. Typically, programs that are offered have a short duration and, historically, the difference between actual experience compared to estimated redemption and performance has not been significant to the quarterly or annual consolidated financial statements. However, if the level of redemption rates or performance were to vary significantly from estimates, we may be exposed to gains or losses that could be material. We have not made any material changes in the accounting methodology used to recognize revenue during the past three fiscal years.
Business Combinations
We account for acquired businesses using the acquisition method of accounting, which requires that once control of a business is obtained, 100% of the assets acquired and liabilities assumed, including amounts attributed to non-controlling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. We use various models to determine the value of assets acquired and liabilities assumed such as net realizable value to value inventory, cost method and market approach to value property, and multi-period excess earnings to value intangible assets and discounted cash flow to value goodwill.
For significant acquisitions, we may use independent third-party valuation specialists to assist us in determining the fair value of assets acquired and liabilities assumed.
Significant judgment is often required in estimating the fair value of assets acquired and liabilities assumed, particularly intangible assets. We make estimates and assumptions about projected future cash flows including sales growth, operating margins, attrition rates, and discount rates based on historical results, business plans, expected synergies, perceived risk and marketplace data considering the perspective of marketplace participants. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may be considered to have indefinite useful lives. While management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions, which could result in subsequent impairments. During the year endedDecember 31, 2021 , we had a material business combination with Picky Bars. See Note 16 to our audited consolidated financial statements included elsewhere in this Form 10-K for more information.
Impairment of
Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, the fair value of the reporting unit may be more likely than not less than its carrying amount or if significant changes to macro-economic factors related to the reporting unit have occurred that could materially impact fair value, a quantitative goodwill impairment test would be required. The quantitative test compares the fair value of a reporting unit with its carrying amount. Upon performing the quantitative test, if the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of goodwill. Long-lived assets and definite life intangible assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Examples include a significant adverse change in the extent or manner in which we use the asset, a change in its physical condition, or an unexpected change in financial performance. When evaluating long-lived assets and definite life intangible assets for impairment, we compare the carrying value of the asset to the asset's estimated undiscounted future cash flows. An impairment is indicated if the estimated future cash flows are less than the carrying value of the asset. For assets held for sale, we compare the carrying value of the disposal group to fair value. The impairment is the excess of the carrying value over the fair value of the asset. 38 --------------------------------------------------------------------------------
Stock Incentive Plan
Compensation cost relating to share-based payment transactions is measured based on the grant date fair value of the equity or liability instruments issued. The fair value of the compensation is estimated utilizing valuation methods including Black-Scholes andMonte Carlo , and is calculated and recognized over the employees' service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. While there is inherent uncertainty in the estimated fair value of the awards, management believes that the expectations and assumptions are reasonable.
Recent Accounting Pronouncements
See Recently Issued Accounting Pronouncements in Note 1 to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.
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