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Laird Superfood, Inc. - Quarter Report: 2023 September (Form 10-Q)

lsf20230930_10q.htm
 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-39537


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Laird Superfood, Inc.

(Exact Name of Registrant as Specified in its Charter)


 

Delaware

81-1589788

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

5303 Spine Road, Suite 204, Boulder, Colorado 80301

(Address of principal executive offices, including Zip Code)

 

Registrants telephone number, including area code: (541) 588-3600


Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol

 

Name of each exchange

on which registered

Common Stock

 

LSF

 

NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

  

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of November 7, 2023 the registrant had 9,349,445 shares of common stock, $0.001 par value per share, outstanding.



 

 

TABLE OF CONTENTS

 

 

Page

Part I. Financial Information

 
   

Item 1. Unaudited Consolidated Condensed Financial Statements

4

   

Unaudited Consolidated Condensed Balance Sheets

4

   

Unaudited Consolidated Condensed Statements of Operations

5

   

Unaudited Consolidated Condensed Statements of Comprehensive Loss

6

   

Unaudited Consolidated Condensed Statements of Stockholders Equity

7

   

Unaudited Consolidated Condensed Statements of Cash Flows

8

   

Notes to Unaudited Consolidated Condensed Financial Statements

9

   

Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations

29

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

35

   

Item 4. Controls and Procedures

36

   

Part II. Other Information

36

   

Item 1. Legal Proceedings

36

   

Item 1A. Risk Factors

36

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

37

   

Item 3. Defaults Upon Senior Securities

37

   

Item 4. Mine Safety Disclosures

37

   

Item 5. Other Information

37

   

Item 6. Exhibits

37

   

Signatures

39

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements convey our current expectations or forecasts of future events and are not guarantees of future performance. They are based on numerous assumptions that we believe are reasonable, but they are open to a wide range of uncertainties and business risks. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be forward-looking statements. When we use the words “intends,” “estimates,” “predicts,” “potential,” “continues,” “anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,” “will,” “seeks,” or the negative of these terms or other comparable terminology, we are identifying forward-looking statements.

 

Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. Key factors that could cause actual results to be different than expected or anticipated include, but are not limited to:

 

 

our limited operating history and ability to become profitable;

 

 

our ability to manage our growth, including our human resource requirements;

 

 

our reliance on third parties for raw materials and production of our products to our quality standards;

 

 

our future capital resources and needs, including our ability to continue as a going concern;

 

 

our ability to retain and grow our customer base;

 

 

our reliance on independent distributors for substantially all of our sales;

 

 

our ability to evaluate and measure our business, prospects and performance metrics;

 

 

our ability to compete and succeed in a highly competitive and evolving industry;

 

 

the health of the premium organic and natural food industry as a whole;

 

 

risks related to our intellectual property rights and developing a strong brand;

 

 

our reliance on key personnel, including Laird Hamilton and Gabrielle Reece;

 

 

regulatory risks;

 

 

risks of major bank failure, sustained financial market illiquidity, or illiquidity at our financial institutions;

 

 

the risk of substantial dilution from future issuances of our equity securities; and

 

 

the other risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2022.

 

In light of these risks, uncertainties and assumptions, you are cautioned not to place undue reliance on forward-looking statements, which are inherently unreliable and speak only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q and the documents that we reference in this report with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. When considering forward-looking statements, you should keep in mind the cautionary statements in this report. We qualify all our forward-looking statements by these cautionary statements. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

 

 

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Condensed Financial Statements

 

LAIRD SUPERFOOD, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

  

As of

 
  

September 30, 2023

  

December 31, 2022

 

Assets

        

Current assets

        

Cash, cash equivalents, and restricted cash

 $7,425,050  $17,809,802 

Accounts receivable, net

  2,186,645   1,494,469 

Inventory, net

  6,552,571   5,696,565 

Prepaid expenses and other current assets, net

  1,436,035   2,530,075 

Total current assets

  17,600,301   27,530,911 

Noncurrent assets

        

Property and equipment, net

  138,604   150,289 

Fixed assets held-for-sale

     800,000 

Intangible assets, net

  1,136,953   1,292,118 

Related party license agreements

  132,100   132,100 

Right-of-use assets

  386,118   133,922 

Total noncurrent assets

  1,793,775   2,508,429 

Total assets

 $19,394,076  $30,039,340 

Liabilities and Stockholders’ Equity

        

Current liabilities

        

Accounts payable

 $1,869,458  $1,080,267 

Accrued expenses

  4,059,799   6,295,640 

Related party liabilities

  56,574   16,500 

Lease liabilities, current portion

  129,274   59,845 

Total current liabilities

  6,115,105   7,452,252 

Lease liabilities

  278,418   76,076 

Total liabilities

  6,393,523   7,528,328 

Stockholders’ equity

        

Common stock, $0.001 par value, 100,000,000 shares authorized as of September 30, 2023 and December 31, 2022; 9,709,347 and 9,343,643 issued and outstanding at September 30, 2023, respectively; and 9,576,117 and 9,210,414 issued and outstanding at December 31, 2022, respectively.

  9,344   9,210 

Additional paid-in capital

  119,432,281   118,636,834 

Accumulated deficit

  (106,441,072)  (96,135,032)

Total stockholders’ equity

  13,000,553   22,511,012 

Total liabilities and stockholders’ equity

 $19,394,076  $30,039,340 

 

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

 

 

 

LAIRD SUPERFOOD, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Sales, net

  $ 9,179,781     $ 8,844,845     $ 25,016,810     $ 26,858,864  

Cost of goods sold

    (6,332,624 )     (6,773,029 )     (18,419,709 )     (21,259,300 )

Gross profit

    2,847,157       2,071,816       6,597,101       5,599,564  

General and administrative

                               

Impairment of goodwill and long-lived assets

                      8,126,426  

Other expense

    2,208,213       4,383,868       7,822,834       10,721,611  

Total general and administrative expenses

    2,208,213       4,383,868       7,822,834       18,848,037  

Research and product development

    40,123       115,077       206,313       335,377  

Sales and marketing

                               

Advertising

    1,137,488       1,832,172       3,454,485       5,191,374  

Related party marketing agreements

    141,712       19,500       435,084       52,750  

Other expense

    2,106,690       1,539,185       5,423,541       5,871,375  

Total sales and marketing expenses

    3,385,890       3,390,857       9,313,110       11,115,499  

Total operating expenses

    5,634,226       7,889,802       17,342,257       30,298,913  

Operating loss

    (2,787,069 )     (5,817,986 )     (10,745,156 )     (24,699,349 )

Other income (expense)

    132,185       79,777       452,288       (77,008 )

Loss before income taxes

    (2,654,884 )     (5,738,209 )     (10,292,868 )     (24,776,357 )

Income tax expense

                (13,172 )     (5,774 )

Net loss

  $ (2,654,884 )   $ (5,738,209 )   $ (10,306,040 )   $ (24,782,131 )

Net loss per share:

                               

Basic

  $ (0.28 )   $ (0.63 )   $ (1.11 )   $ (2.71 )

Diluted

  $ (0.28 )   $ (0.63 )   $ (1.11 )   $ (2.71 )

Weighted-average shares of common stock outstanding used in computing net loss per share of common stock, basic and diluted

    9,337,789       9,178,533       9,279,541       9,136,071  

 

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

 

 

 

LAIRD SUPERFOOD, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Net loss

  $ (2,654,884 )   $ (5,738,209 )   $ (10,306,040 )   $ (24,782,131 )

Amounts reclassified from accumulated other comprehensive loss

                      61,016  

Total other comprehensive income

                      61,016  

Comprehensive loss

  $ (2,654,884 )   $ (5,738,209 )   $ (10,306,040 )   $ (24,721,115 )

 

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

 

 

 

LAIRD SUPERFOOD, INC.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY

(Unaudited)

 

   

Stockholders Equity

         
   

Common Stock

   

Additional

   

Accumulated Other Comprehensive

   

Accumulated

         
   

Shares

   

Amount

   

Paid-in Capital

   

Income (Loss)

   

Deficit

   

Total

 

Balances, January 1, 2023

    9,210,414     $ 9,210     $ 118,636,834     $     $ (96,135,032 )   $ 22,511,012  

Stock-based compensation

                147,635                   147,635  

Restricted stock units issued, net of taxes

    9,086       10       (4,420 )                 (4,410 )

Net loss

                            (4,143,910 )     (4,143,910 )

Balances, March 31, 2023

    9,219,500     $ 9,220     $ 118,780,049     $     $ (100,278,942 )   $ 18,510,327  

Stock-based compensation

                306,076                   306,076  

Restricted stock units issued, net of taxes

    114,662       115       (14,842 )                 (14,727 )

Net loss

                            (3,507,246 )     (3,507,246 )

Balances, June 30, 2023

    9,334,162     $ 9,335     $ 119,071,283     $     $ (103,786,188 )   $ 15,294,430  

Stock-based compensation

                364,936                   364,936  

Restricted stock units issued, net of taxes

    9,481       9       (3,938 )                 (3,929 )

Net loss

                            (2,654,884 )     (2,654,884 )

Balances, September 30, 2023

    9,343,643     $ 9,344     $ 119,432,281     $     $ (106,441,072 )   $ 13,000,553  

 

   

Stockholders Equity

         
   

Common Stock

   

Additional

   

Accumulated Other Comprehensive

   

Accumulated

         
   

Shares

   

Amount

   

Paid-in Capital

   

Income (Loss)

   

Deficit

   

Total

 

Balances, January 1, 2022

    9,094,539     $ 9,095     $ 117,903,455     $ (61,016 )   $ (55,797,714 )   $ 62,053,820  

Stock-based compensation

                10,796                   10,796  

Stock option exercises

    1,750       1       14,247                   14,248  

Restricted stock units issued, net of taxes

    5,164       5       (5 )                  

Amounts reclassified from accumulated other comprehensive loss

                      61,016             61,016  

Net loss

                            (14,139,402 )     (14,139,402 )

Balances, March 31, 2022

    9,101,453     $ 9,101     $ 117,928,493     $     $ (69,937,116 )   $ 48,000,478  

Stock-based compensation

                (209,242 )                 (209,242 )

Stock option exercises

    43,553       44       49,956                   50,000  

Restricted stock units issued, net of taxes

    13,897       14       (14 )                  

Employee stock purchase plan shares issued

    11,055       11       28,276                   28,287  

Recovery of short-swing profits

                28,555                   28,555  

Net loss

                            (4,904,520 )     (4,904,520 )

Balances, June 30, 2022

    9,169,958     $ 9,170     $ 117,826,024     $     $ (74,841,636 )   $ 42,993,558  

Stock-based compensation

                483,426                   483,426  

Restricted stock units issued, net of taxes

    30,512       31       (31 )                  

Net loss

                            (5,738,209 )     (5,738,209 )

Balances, September 30, 2022

    9,200,470     $ 9,201     $ 118,309,419     $     $ (80,579,845 )   $ 37,738,775  

 

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

 

 

 

LAIRD SUPERFOOD, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2023

   

2022

 

Cash flows from operating activities

               

Net loss

  $ (10,306,040 )   $ (24,782,131 )

Adjustments to reconcile net loss to net cash from operating activities:

               

Depreciation and amortization

    235,025       846,356  

Stock-based compensation

    818,647       284,980  

Provision for inventory obsolescence

    1,260,580       342,178  

Impairment of goodwill and other long-lived assets

          8,126,426  

Other operating activities, net

    398,052       527,740  

Changes in operating assets and liabilities:

               

Accounts receivable

    (937,876 )     (417,670 )

Inventory

    (1,958,157 )     1,061,152  

Prepaid expenses and other current assets

    1,061,879       2,242,703  

Operating lease liability

    (94,679 )     (556,597 )

Accounts payable

    810,908       (62,080 )

Accrued expenses

    (2,217,484 )     1,253,566  

Net cash from operating activities

    (10,929,145 )     (11,133,377 )

Cash flows from investing activities

               

Proceeds from sale of investment securities available-for-sale

          8,513,783  

Other investing activities, net

    567,459       467,373  

Net cash from investing activities

    567,459       8,981,156  

Cash flows from financing activities

    (23,066 )     121,090  

Net change in cash and cash equivalents

    (10,384,752 )     (2,031,131 )

Cash, cash equivalents, and restricted cash, beginning of period

    17,809,802       23,049,234  

Cash, cash equivalents, and restricted cash, end of period

  $ 7,425,050     $ 21,018,103  

Supplemental disclosures of cash flow information

               

Right-of-use assets obtained in exchange for operating lease liabilities

  $ 344,382     $ 5,285,330  

Supplemental disclosures of non-cash investing activities

               

Receivable from sale of assets held-for-sale included in other current assets at the end of the period

  $ 126,268     $  

Receivable from sale of assets held-for-sale included in accrued expenses at the end of the period

  $     $ 28,240  

Settlement recovery from business interruption claims included in other current assets

  $ 158,429     $  

Amounts reclassified from accumulated other comprehensive loss

  $     $ 61,016  

Amounts reclassified from property, plant, and equipment to fixed assets held-for-sale

  $     $ 947,394  

Amounts reclassified from property, plant, and equipment to intangible assets

  $     $ 153,691  

Purchases of equipment included in deposits at the beginning of the period

  $     $ 372,507  

 

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

 

 

8

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements

 

 

1. Nature of Operations and Summary of Significant Accounting Policies

 

The accompanying unaudited consolidated condensed financial statements include the accounts of Laird Superfood, Inc., a Delaware corporation, and its wholly owned subsidiary, Picky Bars, LLC, (collectively, the “Company”, “Laird Superfood”, “we”, or "our").

 

Nature of Operations

 

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 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. The Company was founded in 2015.

 

Basis of Accounting

 

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and rules and regulations of the Securities and Exchange Commission (“SEC”). Operating results include the three and nine months ended September 30, 2023 and 2022. Certain information in footnote disclosures normally included in financial statements prepared in accordance with GAAP has been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements.

 

Principles of Consolidation

 

All significant intercompany accounts and transactions have been eliminated in our accompanying unaudited consolidated condensed financial statements.

 

Unaudited Interim Consolidated Condensed Financial Information

 

In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of its financial position and its results of operations, changes in stockholders’ equity and cash flows. The accompanying unaudited consolidated condensed financial statements and related financial information should be read in conjunction with the Company's fiscal year 2022 Form 10-K filed with the SEC on March 16, 2023. The unaudited consolidated condensed balance sheet as of December 31, 2022 was derived from the audited annual consolidated financial statements. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results expected for the fiscal year ending December 31, 2023.

 

Use of Estimates

 

The preparation of the unaudited consolidated condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses during the reporting period. The Company bases its estimates and assumptions on historical experience, known trends and events and various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Although management believes its estimates and assumptions are reasonable when made, they are based upon information available at the time they are made. Management evaluates the estimates and assumptions on an ongoing basis and, if necessary, makes adjustments. Due to the risks and uncertainties involved in the Company’s business and evolving market conditions and given the subjective element of the estimates and assumptions made, actual results may differ from estimated results. The most significant estimates and judgments include those related to allowances for doubtful accounts and returns, inventory obsolescence, goodwill, intangible assets, valuation allowance for deferred taxes, reserves on prepaid expenses, the discount rates used in determining right of use assets and related lease liabilities, valuation of inventory, trade and sales promotion liabilities, and fair value of stock-based compensation.

 

Segment reporting

 

The Company currently has one operating segment. In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company considers operating segments to be components of the Company’s business for which separate financial information is available and is evaluated regularly by management in deciding how to allocate resources and in assessing performance. Management reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, the Company has determined that it has a single operating and reportable segment.

 

Substantially all product sales for the periods provided were derived from domestic sales.

 

See Note 12 for additional information regarding sales by platform within the Company’s single segment.

 

9

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

Cash, Cash Equivalents, and Restricted Cash

 

Cash, cash equivalents, and restricted cash are highly liquid instruments with an original maturity of three months or less when purchased. For the purposes of the unaudited consolidated condensed statements of cash flows, the Company includes cash on hand, cash in clearing accounts, cash on deposit with financial institutions, investments with an original maturity of three months or less, and restricted cash in determining the total balance.

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the unaudited consolidated condensed balance sheets.

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

Cash and cash equivalents

 $7,136,639  $17,293,959 

Restricted cash

  288,411   515,843 

Total cash, cash equivalents, and restricted cash

 $7,425,050  $17,809,802 

 

Amounts in restricted cash represent those that are required to be set aside by the following contractual agreements:

 

 

On December 3, 2020, the Company entered into an agreement with Danone Manifesto Ventures, PBC, which provided the Company $298,103 in funds for the purpose of supporting three COVID-19 relief projects. As of September 30, 2023 and December 31, 2023, cash equivalents in the amount of $99,525 were restricted under this agreement. During the three and nine months ended September 30, 2023, we contributed $0 to these projects. During the three and nine months ended September 30, 2022, we contributed $1,864 and $16,703, respectively, to these projects. The restriction will be released upon the completion of the projects.

 

 

Cash equivalents of $530,000 were pledged to secure our company credit card limits. As of  September 30, 2023 and December 31, 2022, respectively, $188,886 and $416,318 of these funds were restricted to collateralize borrowings against these company credit cards. 

 

Cash, cash equivalents, and restricted cash balances that exceeded the Federal Deposit Insurance Corporation (“FDIC”) insurable limits as of September 30, 2023 and December 31, 2022 totaled $416,684 and $2,747,721, respectively. The Company has never experienced any losses related to these balances. The Company’s cash, cash equivalents, and restricted cash are with what the Company believes to be a high-quality financial institution and considers the risks associated with these funds in excess of FDIC insurable limits to be low.

 

Accounts Receivable, net

 

Accounts receivable, net consists principally of trade receivables, which are recorded at the invoiced amount, net of allowances for credit loss. Trade receivables do not bear interest. Receivables are considered past due or delinquent according to contract terms. Management closely monitors outstanding balances and writes off accounts receivable as they are determined uncollectible. The primary indicators of the credit quality of our receivables are aging and payment history and are assessed on a quarterly basis. Our credit loss exposure is concentrated in our accounts receivable portfolio. Our allowance for credit losses is calculated using a loss-rate method based on historical experience and reasonable forecasts. Based on these factors, management determined an allowance for credit loss of $323,136 and $77,436 as of September 30, 2023 and December 31, 2022, respectively.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value, or the value of consideration that can be received upon sale of said product, and approximate costs determined on the first-in first-out basis and consists primarily of raw materials and packaging and finished goods and includes co-packing fees, indirect labor and allocable overhead. The following table presents the components of inventory, net of reserves, as of:

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

Raw materials and packaging

 $1,854,333  $3,764,804 

Finished goods

  4,698,238   1,931,761 

Total inventory, net

 $6,552,571  $5,696,565 

 

The Company periodically reviews the value of items in inventory and provides write-offs of inventory based on current market assessment, which are charged to cost of goods sold. For the three and nine months ended September 30, 2023, the Company recorded $881,721 and $1,260,580, respectively, of inventory obsolescence and disposal costs. For the three and nine months ended September 30, 2022, the Company recorded $236,946 and $342,178, respectively, of inventory obsolescence and disposal costs.

 

As of September 30, 2023 inventory reserves totaled $1,614,840. This is comprised of estimated reserves based on inventory turnover, quantities on hand, and expiration dates of $473,888, as well as raw materials and finished goods specifically identified for disposal related to a product quality issue of $838,276 and discontinued inventories of $302,676. As of December 31, 2022, inventory reserves totaled $1,545,033. This was comprised of estimated reserves based on inventory turnover, quantities on hand, and expiration dates of $746,966, reserves specifically identified for disposal related to a product quality issue of $559,042 and discontinued inventories following exit activities of $239,025.

 

As of September 30, 2023 and December 31, 2022, the Company had a total of $482,585 and $897,108, respectively, of prepayments for future raw materials inventory which are included in prepaid expenses and other current assets, net on the unaudited consolidated condensed balance sheets.

 

10

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

Property and Equipment, net

 

Property and equipment are valued at cost, net of accumulated depreciation. Expenditures for maintenance and repairs that do not extend the useful life or increase the value of the assets are charged to expense in the period incurred. Additions and betterments are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives for depreciation purposes for furniture and factory equipment range from 3 to 7 years. The useful life for leasehold improvements is the lesser of the lease term or the useful life. Construction in progress is not depreciated until such a time that the assets are completed and placed into service.

 

Fixed Assets Held-for-Sale

 

Long-lived assets identified by the Company for sale, which have met all criteria to be classified as held for sale, are disclosed separately on the unaudited consolidated condensed balance sheets. Fixed assets held for sale are measured at the lower of the assets carrying amount or fair value less costs to sell, and depreciation is no longer recorded. See Note 4 for more information.

 

Leases

 

In accordance with ASC 842, Leases, the Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. We categorize leases at their inception as either operating, finance, or short-term leases and determine if an arrangement contains an embedded lease. For arrangements that meet the definition of a lease, the Company determines the initial classification and measurement of its right-of-use asset and lease liability at the lease commencement date and, thereafter, if modified. The lease term includes any renewal options that the Company is reasonably assured to exercise. Lease agreements effective during the three and nine months ended September 30, 2023 and 2022 cover, or covered, office space, warehouse and distribution space, vehicles, and equipment. All of our long-term leases are operating leases. Operating leases are included in right-of-use assets, current lease liabilities, and long-term lease liabilities in our unaudited consolidated condensed balance sheets.

 

In addition to rent, the leases may require the Company to pay additional costs, such as utilities, maintenance and other operating costs, which are generally referred to as non-lease components. The Company has elected to not separate lease and non-lease components. Only the fixed costs for lease components and their associated non-lease components are accounted for as a single lease component and recognized as part of a right-of-use asset and liability. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

 

Leased assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use a secured incremental borrowing rate as the discount rate for the present value of lease payments when the rate implicit in the contract is not readily determinable. For operating leases with variable payments dependent upon an index or rate that commenced subsequent to the adoption of ASC 842, Leases, we apply the active index or rate as of the lease commencement date. Variable lease payments not based on an index or rate are not included in the operating lease liability as they cannot be reasonably estimated and are recognized in the period in which the obligation for those payments is incurred. Leases that have a term of twelve months or less upon commencement date are considered short-term in nature. Accordingly, short-term leases are not included on the unaudited consolidated condensed balance sheets and are expensed on a straight-line basis over the lease term, which commences on the date we have the right to control the property.

 

We are the lessor in a sublease agreement. This lease is an operating lease and is recognized straight line over the lease term with a related sublease rental asset accounting for abatements and initial direct costs.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with the five-step model as prescribed by ASC 606, Revenue from Contracts with Customers, in which the Company evaluates the transfer of promised goods or services and recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the Company satisfies a performance obligation. The Company has elected, as a practical expedient, to account for the shipping and handling as fulfillment costs, rather than as a separate performance obligation. Methodologies for determining these provisions are dependent on customer pricing and promotional practices. The Company records reductions to revenue and a refund liability for estimated product returns and pricing adjustments in the same period that the related revenue is recorded. These estimates are based on industry-based historical data, historical sales returns, if any, analysis of credit memo data, and other factors known at the time. See Note 12 for additional information regarding revenue recognition.

 

Cost of Goods Sold

 

Cost of goods sold includes material, packaging, co-packing fees, distribution freight, indirect 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 labor, inbound freight for raw materials and warehouse rent, and in 2022 also included wages and benefits for manufacturing, planning, and logistics personnel, depreciation, and facility costs.

 

Shipping and Handling

 

Costs of shipping and handling related to sales revenue are included in cost of goods sold. Shipping and handling costs totaled $1,132,930 and $4,002,244, respectively, for the three and nine months ended September 30, 2023. Shipping and handling costs totaled $1,622,290 and $4,763,845 for the three and nine months ended September 30, 2022. Income generated from shipping costs billed through to customers was included in net sales in the unaudited consolidated condensed statements of operations. Shipping income totaled $214,982 and $778,051, respectively, for the three and nine months ended September 30, 2023. Shipping income totaled $289,505 and $829,107, respectively, for the three and nine months ended September 30, 2022.

 

11

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

Research and Product Development

 

Amounts spent on research and development activities are expensed as incurred as research and product development expense on the unaudited consolidated condensed statements of operations. Research and product development expense was $40,123 and $206,313, respectively, for the three and nine months ended September 30, 2023. Research and product development expense was $115,077 and $335,377, respectively, for the three and nine months ended September 30, 2022.

 

Advertising

 

Advertising costs are expensed when incurred. Advertising expenses for the three and nine months ended September 30, 2023 were $1,137,488 and $3,454,485, respectively. Advertising expenses for the three and nine months ended September 30, 2022 were $1,832,172 and $5,191,374, respectively.

 

Marketing

 

Marketing costs are expensed when incurred, and are included in other sales and marketing expenses on the unaudited consolidated condensed statements of operations. Marketing expenses for the three and nine months ended September 30, 2023 were $1,226,909 and $3,012,473, respectively. Marketing expenses for the three and nine months ended September 30, 2022 were $824,747 and $2,983,417, respectively.

 

Income Taxes

 

Income taxes provide for the tax effects of transactions reported in the unaudited consolidated condensed financial statements and consist of income taxes currently due and deferred tax assets and liabilities. The Company may also be subject to interest and penalties from taxing authorities on underpayment of income taxes. In such an event, interest and penalties are included in income tax expense. Deferred tax assets and liabilities are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate primarily to depreciable assets (use of different depreciation methods and lives for financial statement and income tax purposes), stock-based compensation, right of use assets, and net operating losses. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Due to the historical net loss position of the Company, the Company recorded a deferred tax valuation allowance of $26,661,284 and $23,928,265 as of  September 30, 2023 and  December 31, 2022, respectively.

 

Stock Incentive Plan

 

The compensation cost relating to share-based payment transactions is recognized in the unaudited consolidated condensed financial statements. The cost is measured based on the grant date fair value of the equity or liability instruments issued. Compensation cost for all employee stock awards 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. Compensation cost for all consultant stock awards is calculated and recognized over the consultant’s service period based on the grant date fair value of the equity or liability instruments issued. Upon exercise of stock option awards or vesting of restricted stock units ("RSUs") and market-based stock units ("MSUs"), recipients are issued shares of common stock. Pre-vesting forfeitures result in the reversal of all compensation cost as of the date of termination; post-vesting cancellation does not.

 

Earnings per Share

 

Basic earnings per share is computed on the basis of the weighted average number of shares of common stock that were outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if all dilutive potential common stock had been issued and is calculated under the treasury stock method. Due to the Company’s net loss, all outstanding stock options, RSUs, and MSUs are anti-dilutive and excluded.

 

License Agreement Indefinite Lived Intangible Asset

 

On August 3, 2015, the Company entered into a license agreement with the Company’s co-founder Laird Hamilton (the “LH License”). The LH License stated Mr. Hamilton’s contribution to the Company was in the form of intellectual property, granting the Company the right to use Mr. Hamilton’s name and likeness. This contribution, which was reported on the unaudited consolidated condensed balance sheets as of September 30, 2023 and December 31, 2022, was valued at $132,000 and satisfied with the issuance of 660,000 shares of common stock. The Company has determined that the intangible asset associated with the LH License has an indefinite life, as there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the Company.

 

On May 2, 2018, the Company entered into a license agreement with Gabrielle Reece, who is married to Mr. Hamilton (the “GR License”). Pursuant to the GR License, Ms. Reece granted the Company rights to her name, signature, voice, picture, image, likeness and biographical information commencing on July 1, 2015. This contribution, which is reported on the unaudited consolidated condensed balance sheets as of September 30, 2023 and December 31, 2022, was valued at $100 based on the consideration exchanged. The Company has determined that the intangible asset associated with the GR License has an indefinite life, as there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the Company.

 

On November 19, 2018, the Company executed a License and Preservation Agreement with Mr. Hamilton and Ms. Reece which superseded the predecessor license agreements with both individuals. The agreement added specific terms related to non-competition and allowable usage of the property under the license. No additional consideration was exchanged in connection with the agreement and the life of the agreement was set at 100 years.

 

12

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

On May 26, 2020, the Company executed a License and Preservation Agreement with Mr. Hamilton and Ms. Reece (the “2020 License”), which superseded the predecessor license and preservation agreement with both individuals. Among other modifications, the agreement (i) modified certain approval rights of Mr. Hamilton and Ms. Reece for use of their respective images, signatures, voices, and names (other than those owned by the Company), rights of publicity and common law and statutory rights to the foregoing in the Company’s products, (ii) modified certain assignment, change of control and indemnification provisions, and (iii) granted the Company the right to extend the term of the agreement for additional ten-year terms upon the expiration of the initial one-hundred year term. No additional consideration was exchanged in connection with the agreement. As indefinite-lived intangibles, the Company assesses qualitative factors each reporting period to determine whether events and circumstances exist that indicate that the fair values of the licensing agreements were less than the carrying amounts. Upon considering these factors, the Company determined it was more likely than not that the fair value of the 2020 License was not less than the carrying amount; therefore, the Company recognized no impairment for the three and nine months ended September 30, 2023 and 2022.

 

Definite Lived Intangible Assets, net

 

Definite lived intangible assets are valued at cost, net of accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives for amortization purposes range between 3 and 10 years. Amortization expense is allocated to general and administrative expense. For the three and nine months ended September 30, 2023, amortization expenses were $51,721 and $155,165, respectively. For the three and nine months ended September 30, 2022, amortization expenses were $104,201 and $349,424, respectively. The Company assesses qualitative factors each reporting period to determine whether events and circumstances exist that indicate that the fair values of the definite lived intangible assets were less than the carrying amounts. There were no impairment charges in the three and nine months ended September 30, 2023. In the last month of the first quarter of 2022, management determined the sustained decline in stock price, coupled with changes in market conditions, was a triggering event. Upon considering these factors, the Company determined it was more likely than not that the fair value was less than the carrying amounts of long-lived intangible assets; therefore, the Company recognized impairment charges of $0 and $1,540,000 for the three and nine months ended September 30, 2022, respectively. See Note 5 for more information.

 

Goodwill

 

Goodwill represents the excess of purchase price over the assigned fair values of the assets acquired and liabilities assumed in conjunction with a business combination. Goodwill is reviewed for impairment annually as of December 31, or whenever events occur or circumstances change that indicate goodwill may be impaired. In testing goodwill for impairment, the Company has the option to perform a qualitative assessment to determine whether the existence of events or circumstances indicate that it is more-likely-than-not (more than 50%) that the fair value of goodwill is less than its carrying amount. When performing a qualitative assessment, the Company evaluates factors such as industry and market conditions, cost factors, overall financial performance, and other relevant entity specific events and changes. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of goodwill is less than its carrying amount, or if the Company chooses not to perform the qualitative assessment, then a quantitative assessment is performed to determine the reporting unit’s fair value. If the carrying value exceeds its fair value, then an impairment loss is recognized for the amount of the excess of the carrying amount over the fair value, not to exceed the total amount of goodwill. In the last month of the first quarter of 2022, management had determined the sustained decline in stock price, coupled with a change in market conditions, was determined to be a triggering event. The Company performed a qualitative and quantitative analysis on the Company's goodwill for impairment concluding that the fair value of goodwill as calculated using a discounted cash flow model exceeds the carrying value, indicating that goodwill was impaired. The Company recorded goodwill impairment charges of $0 and $6,486,000, respectively, during the three and nine months ended September 30, 2022. There was no goodwill as of September 30, 2023 or December 31, 2022.

 

Employee Benefit Plan

 

The Company sponsors a defined contribution 401(k) plan (the “401(k) plan”) for all employees 18 years or older. The 401(k) plan was initiated on July 1, 2018. Employee contributions may be made on a before-tax basis, limited by Internal Revenue Service regulations. In 2023, the Company established a 3% safe harbor contribution to be remitted in the first quarter of 2024. As of September 30, 2023, there were $135,722 of 401(k) contribution liabilities included in accrued expenses on the unaudited consolidated condensed balance sheets. The Company recorded related expenses as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2023

  

September 30, 2023

 

Cost of goods sold

 $2,330  $9,624 

General and administrative

  16,359   76,235 

Research and development

  695   2,603 

Sales and marketing

  13,296   37,972 

Total 401(k) contribution expense

 $32,680  $126,434 

 

JOBS Act Accounting Election

 

The Company qualifies as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. An emerging growth company can elect to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. Currently, the Company has elected to file as an emerging growth company defined under the JOBS Act, and as such, these unaudited consolidated condensed financial statements may not be comparable to the financial statements of companies that comply with the new or revised accounting pronouncements as of public company effective dates.

 

13

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

Exit and Disposal Costs

 

The Company follows the guidance in ASC 420, Exit or Disposal Cost Obligations, to record exit and disposal related costs. The Company recorded $8.7 million of exit and disposal costs in the fourth quarter of 2022 and insignificant residual costs in the nine months ended September 30, 2023, associated with the closure of the Sisters, Oregon manufacturing sites and subsequent transition to a co-manufacturing model for all production and fulfillment. ASC 420 requires the recognition of costs associated with exit or disposal activities when they are incurred, generally the cease-use date. Exit and disposal activities are summarized below:

 

 

We entered into a lease termination agreement on December 12, 2022. All production activities taking place in the related properties ceased in December 2022. Pursuant to this agreement, our lease was fully terminated as of January 31, 2023, and we owed a total of $1.6 million in early lease termination costs of which $0.5 million was remitted in December 2022 and $1.1 million was satisfied in January 2023. We recognized lease termination costs, including the elimination of right of use assets net of lease liabilities, and early lease termination penalties, of $3.6 million which are included in general and administrative expenses for the year ended December 31, 2022.

 

 

We signed an asset purchase agreement with our new co-manufacturer for the sale of the majority of our production equipment for a purchase price of $0.8 million and an agreement to sell certain leasehold improvements for $0.1 million. Certain equipment, furniture, and leasehold improvements were abandoned upon exit of the lease. The net book value of this property exceeds the recoverability of the assets. As such, we recorded impairment charges of property, plant, and equipment and internal-use production software of $3.1 million and $0.1 million, respectively, which are included in general and administrative expenses for the year ended December 31, 2022. Consideration was received in the amount of $0.7 million in the first half of 2023 and consideration receivable of $0.1 million is included in Prepaid and other current assets on the unaudited consolidated condensed balance sheets as of September 30, 2023.

 

 

We incurred one-time termination benefits consisting of severances primarily for operations, production, and fulfillment personnel, of $0.6 million, which are included in general and administrative expenses for the year ended December 31, 2022. These were paid by January 2023. In the first quarter of 2023, we recognized a net reversal of expense of $0.1 million related to severances and forfeitures of stock-based compensation, which are included in general and administrative expenses.

 

 

We moved the majority of our raw materials inventory to our co-manufacturer and the majority of our finished goods inventory to our third-party logistics partners. Because we no longer have storage space in our warehouses, we determined that it was not cost-effective to pay for freight and storage fees to move and house certain inventories at our third-party partners' facilities. As a result, we disposed of, or reserved for disposal, certain inventories remaining at the Sisters, Oregon facilities which were not shipped to our third-party partners' facilities, in the amount of $1.1 million, which are included in cost of goods sold for the year ended December 31, 2022. All such inventory remaining on-hand as of December 31, 2022 was disposed of in January 2023.

 

 

We incurred other costs for moving inventory, IT setup and integration costs, repayment of property tax abatements, and other costs totaling $0.2 million, which were included in general and administrative expenses for the year ended December 31, 2022. We recognize these costs as incurred or when they become realizable.

 

Loss Contingencies

 

We may be subject to contingencies arising in the ordinary course of business, such as product liability and other product-related litigation, commercial litigation, environmental claims and proceedings, government investigations and guarantees and indemnifications. In assessing contingencies related to legal and environmental proceedings that are pending against the Company, or unasserted claims that are probable of being asserted, we record accruals for these contingencies to the extent that we conclude that a loss is both probable and reasonably estimable. If an amount within a range of loss appears to be a better estimate than any other amount within the range, we accrue that amount. Alternatively, when no amount within a range of loss appears to be a better estimate than any other amount, we accrue the lowest amount in the range. We record anticipated recoveries under existing insurance contracts when recovery is assured.

 

14

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

Going Concern

 

The unaudited consolidated condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

 

As reflected in the unaudited consolidated condensed financial statements, the Company has $7.4 million of cash and cash equivalents, and cash used in operations was $10.9 million in the nine months ended September 30, 2023. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Absent any other action, the Company will require additional liquidity to continue its operations over the next 12 months from the date of this Quarterly Report on Form 10-Q.

 

At the end of the fourth quarter of 2022, the Company transitioned to a variable cost third-party co-manufacturing business model. As part of this transition, the Company greatly reduced overhead costs while simultaneously improving margins. Cash used in operations in the first nine months of 2023 is inclusive of costs which were incurred in connection with the exit and disposal activities, annual bonus payments, discounts for replacement orders, as well as out of stock items following a product quality issue which resulted in reduced top line revenue for the impacted SKUs in the quarter. These factors exacerbate the cash used in the first half of the year. Even with a product quality issue impacting net sales and cost of goods sold we have already realized margin improvements to 26.4% in the first nine months of 2023 compared to 14.5% for fiscal year 2022. Management has specific plans to further improve gross margins, optimize marketing spend, and cut selling, general, and administrative costs later in the year which management believes will significantly reduce expected future cash outlays.

 

However, the Company’s cash position may not be sufficient to support its daily operations. While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenue and in its ability to raise additional funds by way of a public or private offering, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering.

 

The unaudited consolidated condensed financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.

 

Recoveries on claims for business interruptions

 

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. In the third quarter of 2023, we reached settlement with the vendor and recognized $0.2 million of recoveries which were included in cost of goods sold in the unaudited consolidated condensed statements of operations. As of September 30, 2023, $0.2 million of these recoveries were included in other current assets on the unaudited consolidated condensed balance sheets. 

 

Recently Adopted Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as modified by subsequently issued ASUs 2018-19 (issued November 2018), 2019-04 (issued April 2019), 2019-05 (issued May 2019), 2019-11 (issued November 2019), 2020-02 (issued February 2020) and 2020-03 (issued March 2020). Topic 326 modifies the measurement and recognition of credit losses for most financial assets and certain other instruments, requiring the use of forward-looking expected credit loss models based on historical experience, current economic conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new standard. It also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The standard requires a modified retrospective approach with a cumulative effect adjustment to retained earnings. ASU 2016-13 is effective for the Company’s annual periods beginning after December 15, 2022, including interim periods within those fiscal years. We adopted ASU 2016-13 in the first quarter of 2023. The adoption had no impact on our unaudited consolidated condensed financial position, results of operations, or cash flows.

 

Subsequent Events

 

Subsequent events are events or transactions that occur after the balance sheet date but before the unaudited consolidated condensed financial statements are available to be issued. The Company has evaluated events and transactions subsequent to September 30, 2023 for potential recognition of disclosure in the unaudited consolidated condensed financial statements. There were no such subsequent events.

 

15

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 
 

2. Prepaid Expenses and Other Current Assets

 

The following table presents the components of prepaid expenses and other current assets, as of:

 

   

September 30,

   

December 31,

 
   

2023

   

2022

 

Prepaid insurance

  $ 107,762     $ 761,147  

Prepaid inventory

    482,585       897,108  

Prepaid subscriptions and license fees

    173,684       292,622  

Prepaid advertising

    154,033       166,872  

Deposits

    197,643       134,896  

Other current assets

    320,328       277,430  

Prepaid and other current assets

  $ 1,436,035     $ 2,530,075  

 

 

3. Revolving Lines of Credit

 

On September 2, 2021, the Company entered into a revolving line of credit with Wells Fargo Bank National Association in a principal amount not exceeding $9,500,000. The line of credit was renewed on September 1, 2022, with a maturity date of August 31, 2023, and the available credit was reduced to $5,000,000. The line of credit was not renewed on August 31, 2023. The outstanding amounts under the line of credit had an interest rate calculated as Daily Simple Secured Overnight Financing Rate (“SOFR”) plus 1.5% per annum until paid in full. The balance on the line of credit was $0 as of September 30, 2023 and December 31, 2022. Management was in compliance with all financial covenants as of  December 31, 2022.

 

On August 10, 2017, the Company entered into a revolving line of credit with East Asset Management, LLC (“East”) in a principal amount not exceeding the lesser of the borrowing base or $3,000,000. The outstanding amounts under the line of credit had a fixed interest rate of 15% per annum until paid in full and the line of credit had a maturity date of August 10, 2022. The loan agreement was closed on May 19, 2022.

 

A secondary line of credit with East in an amount up to $200,000 was available to the Company, which was not subject to the requirements of the borrowing base. The secondary line was available with the same draw and payback conditions as the primary line. The loan agreement was closed on May 19, 2022.

 

East was also granted a right of first refusal on any future equity offerings by the Company to purchase up to 20% of equity in any such offerings at a 20% price per share discount, subject to certain exclusions. These rights terminated concurrently with the closure of the associated loan agreements on May 19, 2022.

 

16

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 
 

4. Property and Equipment, net

 

Property and Equipment, net

 

Property and equipment, net is comprised of the following as of:

 

  

September 30, 2023

  

December 31, 2022

 
  

Gross Carrying Amount

  

Accumulated Depreciation

  

Net Carrying Amount

  

Gross Carrying Amount

  

Accumulated Depreciation

  

Net Carrying Amount

 

Factory equipment

 $  $  $  $66,276  $(43,051) $23,225 

Furniture and office equipment

  220,190   (107,393)  112,797   318,795   (211,529)  107,266 

Leasehold improvements

  46,276   (20,469)  25,807   34,946   (15,148)  19,798 
  $266,466  $(127,862) $138,604  $420,017  $(269,728) $150,289 

 

Depreciation expense was $19,772 and $79,860 for the three and nine months ended September 30, 2023, respectively. Depreciation expense was $167,794 and $496,932 for the three and nine months ended September 30, 2022, respectively.

 

Assets Classified as Held-for-Sale

 

In the first quarter of 2022, the Company entered into a vacant land real estate sale agreement for the sale of excess unused lots in Sisters, Oregon for a sales price of $1,572,512. The Company sold the land in the second quarter of 2022 resulting in a gain of $573,818 included in general and administrative expenses.

 

In the second quarter of 2022, the Company entered into a purchase order agreement for the sale of the intermittent motion form production line for a sales price of $100,000. The book value exceeded the fair market value and, as such, the Company recorded an impairment charge of $100,426 in the second quarter of 2022. The Company sold these assets in the third quarter of 2022 for $103,240, recording a gain of $3,240 included in general and administrative expenses.

 

In the fourth quarter of 2022, the Company entered into purchase agreements for the sale of the production equipment for a sales price of $800,000. The book value exceeded the fair market value and, as such, the Company recorded impairment charges of $3,105,435, included in general and administrative expenses. In the first three quarters of 2023, consideration amounting to $673,732 was received and $126,268 was receivable and included in other current assets as of September 30, 2023.

 

 

5. Goodwill and Intangible Assets, Net

 

Goodwill

 

The carrying amount of goodwill attributed to the acquisition of Picky Bars was $6,486,000 as of the acquisition date. In the last month of the first quarter of 2022, management determined the sustained decline in stock price, coupled with changes in market conditions, was a triggering event. The Company performed a qualitative and quantitative analysis on the Company's goodwill for impairment, concluding that the fair value of goodwill as calculated using a discounted cash flow model exceeds the carrying value, this indicating that goodwill is impaired. As such, the Company recorded a goodwill impairment of $0 and $6,486,000 for the three and nine months ended September 30, 2022. There was no goodwill as of September 30, 2023 or December 31, 2022.

 

17

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

Intangible Assets, Net

 

Intangible Assets, net is comprised of the following:

 

  

September 30, 2023

  

December 31, 2022

 
  

Gross Carrying Amount

  

Accumulated Amortization

  

Net Carrying Amount

  

Gross Carrying Amount

  

Accumulated Amortization

  

Net Carrying Amount

 

Trade names (10 years)

 $890,827  $(80,175) $810,652  $890,827  $  $890,827 

Recipes (10 years)

  330,000   (79,750)  250,250   330,000   (55,000)  275,000 

Social media agreements (3 years)

  80,000   (64,444)  15,556   80,000   (44,444)  35,556 

Software (3 years)

  131,709   (71,214)  60,495   131,710   (40,975)  90,735 

Definite-lived intangible assets

  1,432,536   (295,583)  1,136,953   1,432,537   (140,419)  1,292,118 

Licensing agreements (indefinite)

  132,100      132,100   132,100      132,100 

Total intangible assets

 $1,564,636  $(295,583) $1,269,053  $1,564,637  $(140,419) $1,424,218 

 

The weighted-average useful life of all the Company’s intangible assets is 7.1 years.

 

For the three and nine months ended September 30, 2023, amortization expense was $51,721 and $155,165, respectively. For the three and nine months ended September 30, 2022, amortization expense was $104,201 and $349,424, respectively.

 

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, or an unexpected change in financial performance. When evaluating 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. The Company considered the above factors when assessing whether the Company’s long-lived assets will be recoverable.

 

Based on the analysis of the qualitative factors above, management determined that there were no triggering events or impairment charges in the three and nine months ended September 30, 2023. In 2022, with changes in market conditions and developments in the forecasts for e-commerce and wholesale sales of legacy Picky Bars products were triggering events during the nine months ended September 30, 2022 and in the three months ended December 31, 2022.

 

The Company performed a qualitative and quantitative analysis over the period May 1, 2021 through March 31, 2022 and from March 31, 2022 through December 31, 2022 on the Company's estimates of the fair values of acquired customer relationships utilizing the Multiperiod Excess Earnings Method variation of discounted cash-flow model, which exceeded the carrying value, indicating that these assets were impaired. In the three and nine months ended September 30, 2022, the Company recorded impairment charges of $0 and $1,432,000, respectively, net of accumulated amortization. In the three months ended December 31, 2022, the Company recorded impairment charges of $344,006, net of accumulated amortization.

 

The Company performed a qualitative and quantitative analysis over the period May 1, 2021 through March 31, 2022 and from March 31, 2022 through December 31, 2022 on the Company's estimates of the fair values of acquired trade names utilizing the Relief From Royalty Method variation discounted cash-flow model, which exceeded the carrying value, indicating that these assets were impaired. In the three and nine months ended September 30, 2022, the Company recorded impairment charges of $0 and $108,000, respectively, net of accumulated amortization. In the three months ended December 31, 2022, the Company recorded impairment charges of $1,135,000, net of accumulated amortization.

 

Intangible assets are amortized using the straight-line method over estimated useful lives ranging from three to ten years. The estimated amortization expense for each of the next five years and thereafter is as follows:

 

2023 (excluding the nine months ended September 30, 2023)

 $51,721 

2024

  189,108 

2025

  149,994 

2026

  139,899 

2027

  139,899 

Thereafter

  466,332 
  $1,136,953 

 

18

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 
 

6. Leases

 

Lessee

 

The Company leased its warehouse space under a commercial lease with RII Lundgren Mill, LLC, dated March 1, 2018. The lease commenced March 1, 2018. The initial lease term was ten years, and the Company had the option to renew the lease for two additional five-year periods.

 

The Company executed a second lease for additional warehouse and office space under a commercial lease with RII Lundgren Mill, LLC, dated December 17, 2018. The lease commenced on July 1, 2019. However, for accounting purposes the lease commencement date was June 6, 2019. The initial lease term was ten years.

 

The Company executed a third lease for additional warehouse and office space under a commercial lease with RII Lundgren Mill, LLC, dated October 1, 2021. The lease commenced on October 1, 2021. The initial lease term was ten years.

 

The Company executed a lease cancellation agreement dated December 12, 2022. Under this agreement, the Company's three leases with RII Lundgren Mill, LLC, were terminated effective January 31, 2023, and the Company agreed to pay $1,550,000, of which $500,000 was remitted in 2022 and $1,050,000 was satisfied in the first quarter of 2023. The Company ceased to realize any operational benefit from the leases as of December 31, 2022, and recorded losses on lease termination consisting of the write off of the related right of use assets, net of lease liabilities, as well as the lease termination fee, for a total of $3,596,365, which were included in General and administrative expenses for the year ended December 31, 2022.

 

The Company assumed an operating lease in the acquisition of Picky Bars, LLC on May 3, 2021. The initial lease term is 62 months, and the Company has the option to renew the lease for two additional three-year periods.

 

The Company entered into a sublease agreement with Somatic Experiencing Trauma Institute with a commencement date of January 1, 2023, for a 5,257 square foot office space in Boulder, Colorado which serves as the Company's new headquarters. This lease will expire on July 1, 2027.

 

The components of lease expense were as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2023

  

September 30, 2023

 

Operating leases

        

Operating lease cost

 $38,085  $114,254 

Variable lease cost

  5,554   24,022 

Operating lease expense

  43,639   138,276 

Short-term lease rent expense

  69,630   242,817 

Total rent expense

 $113,269  $381,093 

 

  

Nine Months Ended

  

Nine Months Ended

 
  

September 30, 2023

  

September 30, 2022

 

Operating cash flows - operating leases

 $94,679  $556,597 

Right-of-use assets obtained in exchange for operating lease liabilities

 $344,382  $5,285,330 

 

  

September 30, 2023

  

September 30, 2022

 

Weighted-average remaining lease term – operating leases (in years)

  3.2   8.1 

Weighted-average discount rate – operating leases

  6.63%  3.75%

 

19

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

As of September 30, 2023, future minimum payments during the next five years and thereafter are as follows:

 

2023 (excluding the nine months ended September 30, 2023)

 $31,755 

2024

  138,800 

2025

  126,714 

2026

  109,145 

2027

  56,210 

Total

  462,624 

Less imputed interest

  (54,932)

Operating lease liabilities

 $407,692 

 

Lessor

 

The Company executed a sublease agreement of the Picky Bars, LLC operating lease on March 1, 2022. The lease commenced on April 1, 2022. The initial lease term expires on April 30, 2025. The lease meets all of the criteria of an operating lease and is accordingly recognized straight line over the lease term with a related sublease rental asset accounting for abatements and initial direct costs. The Company had $13,769 and $18,846 of sublease rental assets as of September 30, 2023 and December 31, 2022, respectively, included in prepaid and other current assets on the unaudited consolidated condensed balance sheets.

 

The components of rental income were as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2023

  

September 30, 2023

 

Operating leases

        

Operating lease income

 $14,054  $42,164 

Variable lease income

  5,318   15,953 

Total rental income

 $19,372  $58,117 

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2022

  

September 30, 2022

 

Operating leases

        

Operating lease income

 $14,055  $42,164 

Variable lease income

  5,318   15,953 

Total rental income

 $19,373  $58,117 

 

As of September 30, 2023, future minimum payments to be received during the next five years and thereafter are as follows:

 

2023 (excluding the nine months ended September 30, 2023)

  30,216 

2024

  61,640 

2025

  20,748 

Total

 $112,604 

 

 

7. Deferred Tax Assets and Liabilities

 

The Company had a tax net loss for the three and nine months ended September 30, 2023 and 2022, and therefore has recorded no assessment of current federal income taxes. The Company is subject to minimum state taxes for various jurisdictions as well as subject to franchise taxes considered income taxes under ASC 740, Income Taxes. A reconciliation of income tax expense at the federal statutory rate to the income tax provision at the Company's effective rate is as follows:

 

  

Nine Months Ended

 
  

September 30, 2023

  

September 30, 2022

 
         

Income tax benefit at statutory rates

 $2,184,272  $2,968,062 

Valuation allowance for deferred tax assets

  (2,239,858)  (2,947,086)

Stock-based compensation

  (16,751)  (12,642)

Other benefit, net

  59,165   (14,108)

Reported income tax expense

 $(13,172) $(5,774)

Effective tax rate:

  0.1%  0.0%

 

20

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

The Company’s deferred tax assets consisted of the following as of:

 

  

September 30, 2023

  

December 31, 2022

 

Noncurrent deferred tax assets:

        

Net operating loss carryforwards

 $20,070,340  $17,428,266 

Intangible assets

  2,262,377   2,382,397 

Property and equipment

  1,587,209   1,660,954 

Research and development credits

  372,587   300,105 

Accrued expenses

  544,246   766,385 

Right of use asset

  5,652   524 

Bad debt allowance

  84,637   20,282 

Charitable contributions

  40,867   38,557 

Unexercised options

  1,436,395   1,136,475 

Capitalized research and development costs

  256,974   194,320 

Total noncurrent deferred tax assets

  26,661,284   23,928,265 

Valuation allowance

  (26,661,284)  (23,928,265)

Total net deferred tax assets

 $  $ 

 

The Company assesses its deferred tax assets and liabilities to determine if it is more likely than not that they will be realized; if not, a valuation allowance is required to be recorded. As of September 30, 2023, the Company did not provide a current or deferred U.S. federal or state income tax provision or benefit for any of the periods presented because the Company has reported cumulative losses since inception. Management has determined that it was not more likely than not that the deferred tax assets would be realized, thus a full valuation allowance was recorded against the deferred tax assets. The Company may reduce the valuation allowance against definite-lived deferred tax assets at such a time when it becomes more likely than not that the definite-lived deferred tax assets will be realized. The Company has recorded a provision for state income taxes and a corresponding current state tax payable of approximately $9,850 and $9,803 as of September 30, 2023 and December 31, 2022, respectively. 

 

The changes in the valuation allowance for deferred tax assets and liabilities for the nine months ended September 30, 2023 and 2022 were net increases of $2.7 million and $5.8 million, respectively. At September 30, 2023 and December 31, 2022, the Company had net operating loss carryforwards ("NOLs") totaling approximately $137.0 million and $118.6 million, respectively. At September 30, 2023 and December 31, 2022, the Company had federal NOLs totaling approximately $1.9 million from 2017 and prior years that can be carried forward for 20 years, which begin to expire in 2036. At September 30, 2023 and December 31, 2022, the Company had federal NOLs totaling approximately $77.6 million and $67.5 million, respectively from 2018 and subsequent years that can be carried forward indefinitely. At September 30, 2023 and December 31, 2022, the Company had state NOLs totaling $57.6 million and $49.3 million, respectively, that can be carried forward for between 15 and 20 years. At September 30, 2023 and December 31, 2022, the Company had credits totaling $0.4 million and $0.3 million, respectively, that can be carried forward for between 5 and 20 years.

 

GAAP requires management to evaluate and report information regarding its exposure to various tax positions taken by the Company. The Company has determined whether there are any tax positions that have met the recognition threshold and has measured the Company’s exposure to those tax positions. Management believes that the Company has adequately addressed all relevant tax positions and that there are no unrecorded tax liabilities.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. U.S. and state jurisdictions have statutes of limitations that generally range from 3 to 5 years.

 

21

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 
 

8. Stock Incentive Plan

 

The Company adopted an incentive plan (the “2020 Omnibus Incentive Plan”) on September 22, 2020, to provide for the grant of stock options, stock appreciation rights, restricted stock, RSUs, deferred stock units, unrestricted stock, dividend equivalent rights, performance shares and other performance-based awards, other equity-based awards and cash bonus awards to Company employees, non-employee directors, and certain consultants and advisors. As of September 30, 2023, the Company is authorized to award 1,124,160 shares under the 2020 Omnibus Incentive Plan. Previously, the Company had adopted its 2018 Equity Incentive Plan and 2016 Stock Incentive Plan (together with the 2020 Omnibus Incentive Plan, the “Stock Incentive Plans”), under which the Company had issued stock options and restricted stock units. Following the effective date of the 2020 Omnibus Incentive Plan, no additional awards may be made under the 2018 Equity Incentive Plan or 2016 Stock Incentive Plan. 

 

Stock Options

 

The Stock Incentive Plans prescribe various terms and conditions for the award of options and the total number of shares authorized for this purpose. For options, the strike price is equal to the fair value of the Company’s stock price at the date of grant. Generally, options become exercisable based on years of service and vesting schedules, and expire after (i) a period of ten years from the date of grant, (ii) three months following the date of termination of employment from the Company, (iii) one year following the date of termination from the Company by reason of death or disability, (iv) the date of termination of employment for cause, or (v) the fifth anniversary of the date of the grant if it is held by a 10 percent or greater stockholder.

 

The following tables summarize the Company’s stock option activity:

 

      

Weighted

  

Weighted

     
      

Average

  

Average

     
  

Options

  

Exercise Price

  

Contractual

  

Aggregate

 
  

Activity

  

(per share)

  

Term (years)

  

Intrinsic Value

 

Balance at January 1, 2023

  921,657  $6.86   8.00  $ 

Granted

  700,000  $0.89         

Exercised/released

    $         

Cancelled/forfeited

  (360,317) $3.52         

Balance at September 30, 2023

  1,261,340  $4.50   8.17  $75,000 

Exercisable at September 30, 2023

  672,187  $4.69   7.53  $9,000 

 

      

Weighted

  

Weighted

     
      

Average

  

Average

     
  

Options

  

Exercise Price

  

Contractual

  

Aggregate

 
  

Activity

  

(per share)

  

Term (years)

  

Intrinsic Value

 

Balance at January 1, 2022

  747,800  $11.51   6.57  $1,143,013 

Granted

  453,498  $7.21         

Exercised/released

  (76,750) $2.14         

Cancelled/forfeited

  (317,185) $15.25         

Balance at September 30, 2022

  807,363  $8.50   7.73  $ 

Exercisable at September 30, 2022

  314,343  $8.72   5.42  $ 

 

22

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

The Company estimates the fair value of each stock option award on the date of grant using a Black-Scholes option-pricing model. ASC 718, Compensation - Stock Compensation (“ASC 718”), requires the use of the fair-value-based method for measuring the value of stock-based compensation. The estimated fair value of each grant of stock options awarded was determined using the following assumptions:

 

 

Expected Volatility. The expected volatility is based on the volatility of the historical stock prices of identified peer companies.

 

 

Expected Term. Due to the lack of a public market for the trading of shares of the Company’s common stock prior to the Company’s initial public offering that closed on September 25, 2020, and the lack of sufficient Company-specific historical data, the expected term of employee stock options is determined using the “simplified” method, as prescribed in SEC Staff Accounting Bulletin No. 107, Share Based Payments, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option.

 

 

Risk-free Interest Rate. The risk-free interest rate is based on the interest rate payable on the United States Treasury yield curve in effect at the time of grant for a period that is commensurate with the assumed expected term.

 

 

Dividend Yield. The dividend yield is 0% because the Company has never paid, and for the foreseeable future does not expect to pay, dividends on its shares of common stock.

 

The inputs and assumptions used to estimate the fair value of share-based payment awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different inputs and assumptions, the Company’s share-based compensation expense could be materially different for future awards.

 

The grant-date fair value of stock options was estimated at the time of grant using the following weighted-average inputs and assumptions in the Black-Scholes option pricing model:

 

  

Nine Months Ended

 
  

September 30,

 
  

2023

  

2022

 

Weighted-average expected volatility

  59.43%  52.36%

Weighted-average expected term (years)

  5.71   6.25 

Weighted-average expected risk-free interest rate

  3.87%  2.27%

Dividend yield

      

Weighted-average fair value of options granted

 $0.57  $2.79 

 

Restricted Stock Units

 

The following tables summarize the Company’s RSU activity:

 

      

Weighted Average

  

Weighted Average

     
      

Grant Date Fair

  

Remaining Vesting

  

Aggregate

 
  

Number of RSUs

  

Value (per share)

  

Term (years)

  

Fair Value

 

Balance at January 1, 2023

  504,420  $4.22   2.94  $2,127,734 

Granted

  745,000  $0.81         

Exercised/released

  (154,674) $4.36         

Cancelled/forfeited

  (260,639) $2.20         

Balance at September 30, 2023

  834,107  $1.77   2.18  $1,480,161 

 

      

Weighted Average

  

Weighted Average

     
      

Grant Date Fair

  

Remaining Vesting

  

Aggregate

 
  

Number of RSUs

  

Value (per share)

  

Term (years)

  

Fair Value

 

Balance at January 1, 2022

  91,438  $32.91   2.17  $2,982,931 

Granted

  452,702  $4.70         

Exercised/released

  (55,634) $20.62         

Cancelled/forfeited

  (46,240) $21.63         

Balance at September 30, 2022

  442,266  $6.74   2.99  $2,980,838 

 

The Company estimates the fair value of each restricted stock unit using the fair value of the Company’s stock on the date of grant.

 

23

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

Market-Based Stock Units

 

The following tables summarize the Company’s MSU activity:

 

      

Weighted Average

  

Weighted Average

     
      

Grant Date Fair

  

Remaining Vesting

  

Aggregate

 
  

Number of MSUs

  

Value (per share)

  

Term (years)

  

Fair Value

 

Balance at January 1, 2023

  31,083  $43.53   0.60  $1,353,043 

Granted

  600,000  $0.08         

Exercised/released

    $         

Cancelled/forfeited

  (9,769) $43.53         

Balance at September 30, 2023

  621,314  $1.57   0.85  $977,558 

 

      

Weighted Average

  

Weighted Average

     
      

Grant Date Fair

  

Remaining Vesting

  

Aggregate

 
  

Number of MSUs

  

Value (per share)

  

Term (years)

  

Fair Value

 

Balance at January 1, 2022

  160,301  $43.53   1.20  $6,977,903 

Granted

    $         

Exercised/released

    $         

Cancelled/forfeited

  (129,218) $43.53         

Balance at September 30, 2022

  31,083  $43.53   0.73  $1,353,043 

 

These MSUs vest upon the 30-day weighted average stock price reaching or exceeding established targets, after reaching certain time targets. We estimate the grant-date fair value of the MSUs using a Monte Carlo simulation which requires assumptions for expected volatility, risk-free rate of return and dividend yield. Expected volatility within the index are derived using historical volatility of a selected peer group over a period equal to the length of the performance period. We base the risk-free rate of return on the yield of a zero-coupon U.S. Treasury bond with a maturity equal to the performance period and assume a 0% dividend rate. Compensation expense for these MSUs is recognized over the requisite service period regardless of whether the market conditions are satisfied.

 

Employee Stock Purchase Plan

 

On September 25, 2020, the Company established an Employee Stock Purchase Plan (“ESPP”) which allows employees of the Company to purchase common stock of the Company through accumulated payroll deductions. Offerings under this plan have a duration of six months. On the exercise date, the participant may acquire a maximum of 650 shares per participant, per offering period, at the lower of 85% of the market value of a share of our common stock on the enrollment date or the exercise date. Participants may terminate their interest in a given offering or a given exercise period by withdrawing all of their accumulated payroll deductions at any time prior to the end of the offering period. The fair value of the estimated number of shares to be issued under each offering was determined using a component valuation model. This plan was terminated in the fourth quarter of 2022.

 

Stock-Based Compensation

 

Stock-based compensation expense is recognized ratably over the requisite service period for all awards. The following tables summarize the Company’s stock-based compensation recorded as a result of applying the provisions of ASC 718 to equity awards:

 

  

Three Months Ended

  

Nine Months Ended

  

Unrecognized Compensation Cost Related to Non-Vested Awards as of

  

Weighted-Average Remaining Vesting Period as of

 
  

September 30, 2023

  

September 30, 2023

  

September 30, 2023

  

September 30, 2023 (years)

 

Stock options

 $221,106  $382,790  $728,426   2.59 

RSUs

  127,252   481,881   1,296,981   2.34 

MSUs

  16,578   (46,024)  56,830   0.75 

Total stock-based compensation

 $364,936  $818,647  $2,082,236   2.79 
                 

Cost of goods sold

 $146  $30  $3,450   1.87 

General and administrative

  195,458   617,382   1,913,478   2.49 

Sales and marketing

  169,332   201,235   165,308   1.25 

Total stock-based compensation

 $364,936  $818,647  $2,082,236   2.79 

 

24

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 
  

Three Months Ended

  

Nine Months Ended

  

Unrecognized Compensation Cost Related to Non-Vested Awards as of

  

Weighted-Average Remaining Vesting Period as of

 
  

September 30, 2022

  

September 30, 2022

  

December 31, 2022

  

December 31, 2022 (years)

 

Stock options

 $96,897  $283,754  $1,173,758   3.24 

RSUs

  341,798   1,082,674   1,707,145   2.91 

MSUs

  43,380   (1,089,864)  71,059   1.09 

ESPP

  1,351   8,416       

Total stock-based compensation

 $483,426  $284,980  $2,951,962   3.07 
                 

Cost of goods sold

 $8,384  $33,890  $14,354   2.56 

General and administrative

  462,474   148,505   2,734,728   2.93 

Research and product development

  2,575   (3,492)  2,517   0.73 

Sales and marketing

  9,993   106,077   200,363   3.84 

Total stock-based compensation

 $483,426  $284,980  $2,951,962   3.07 

 

There were forfeitures of MSU awards of certain members of executive leadership of $0 and $149,735 for the three and nine months ended September 30, 2023, and of $0 and $1,785,125 during the three and nine months ended September 30, 2022, respectively, representing discrete reversals of stock compensation expense to the periods.

 

 

9. Earnings per Share

 

Basic earnings (loss) per share is determined by dividing the net loss attributable to Laird Superfood, Inc. common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist of employee stock options, RSUs, and MSUs. The dilutive effect of employee stock options, RSUs, and MSUs by the Company are calculated using the treasury stock method. Basic earnings per share is reconciled to diluted earnings per share in the following table:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Net loss

  $ (2,654,884 )   $ (5,738,209 )   $ (10,306,040 )   $ (24,782,131 )

Weighted average shares outstanding - basic and diluted

    9,337,789       9,178,533       9,279,541       9,136,071  

Basic and diluted:

                               

Net loss per share, basic and diluted

  $ (0.28 )   $ (0.63 )   $ (1.11 )   $ (2.71 )

Common stock options, restricted stock awards, and market-based stock awards excluded due to anti-dilutive effect

    2,716,761       1,280,712       2,716,761       1,280,712  

 

 

10. Concentrations

 

The Company had 85% of trade accounts receivable from three customers as of September 30, 2023. The Company had 68% of trade accounts receivable from two customers as of December 31, 2022.

 

The Company had no significant accounts payable concentrations due to a vendor as of September 30, 2023. The Company had 41% of accounts payable due to two vendors as of December 31, 2022.

 

The Company sold a substantial portion of products to three customers (50%) and three customers (46%), respectively, for the three and nine months ended September 30, 2023. As of September 30, 2023, the amount due from these customers was $2,439,551. The Company sold a substantial portion of products to two customers (21%) and no customers for the three and nine months ended September 30, 2022. As of September 30, 2022, the amount due from these customers included in accounts receivable was $1,134,994.

 

The Company purchased a substantial portion of products from two suppliers (52%) and two suppliers (40%), respectively, for the three and nine months ended September 30, 2023. The Company purchased a substantial portion of products from three suppliers (68%) and one supplier (48%), respectively, for the three and nine months ended September 30, 2022.

 

In addition, our top suppliers are in a similar geographic area, which increases the risk of significant supply disruptions from local and regional events. Vietnam geographically accounted for approximately 29% and 17%, respectively, of our total raw materials and packaging purchases for the three and nine months ended September 30, 2023. Vietnam geographically accounted for approximately 41% and 48%, respectively, of our total raw materials and packaging purchases for the three and nine months ended September 30, 2022.

 

25

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 
 

11. Related Party

 

FASB ASC Topic 850, Related Party Disclosures, requires that information about transactions with related parties that would influence decision making shall be disclosed so that users of the financial statements can evaluate their significance. The Company conducts business with suppliers and service providers who are also stockholders of the Company. From time to time, service providers are offered shares of common stock as compensation for their services. Shares provided as compensation are calculated based on the grant date fair value of the service provided. Additional material related party transactions are noted below.

 

License Agreements

 

On May 26, 2020, the Company executed a License and Preservation Agreement which superseded the predecessor license and preservation agreement with both Mr. Hamilton and Ms. Reece. Among other modifications, the agreement (i) modified certain approval rights, (ii) modified certain assignment, change of control and indemnification provisions, and (iii) granted the Company the right to extend the term of the agreement for additional ten-year terms upon the expiration of the initial one-hundred-year term. No additional consideration was exchanged in connection with the agreement. See additional discussion related to the 2020 License in Note 1 of the unaudited consolidated condensed financial statements.

 

Marketing Agreements

 

The Company has an influencer agreement with Gabby Reece to provide certain marketing services. In connection with these services, in the three and nine months ended September 30, 2023, advertising expenses totaling $141,712 and $435,084, respectively, were included in sales and marketing expenses in the unaudited consolidated condensed statements of operations. In the three and nine months ended September 30, 2022, advertising expenses totaling $19,500 and $52,750, respectively, were included in sales and marketing expenses in the unaudited consolidated condensed statements of operations. As of September 30, 2023 and December 31, 2022, amounts payable to Gabby Reece of $56,574 and $16,500, respectively, included in related party liabilities in the unaudited consolidated condensed balance sheets.

 

26

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 
 

12. Revenue Recognition

 

The Company’s primary source of revenue is sales of coffee creamers, hydration and beverage enhancing supplements, harvest snacks and other food items, and coffee, tea and hot chocolate products. The Company recognizes revenue when control of the promised good is transferred to the customer and in amounts that the Company expects to collect. The timing of revenue recognition takes into consideration the various shipping terms applicable to the Company’s sales. Each delivery or shipment made to a third-party customer is considered to satisfy a performance obligation. Performance obligations generally occur at a point in time and are satisfied when control of the goods passes to the customer. The Company is entitled to collect the sales price under normal credit terms. Additionally, the Company estimates the impact of certain common practices employed by us and other manufacturers of consumer products, such as scan-based trading, product rebate and other pricing allowances, product returns, trade promotions, sales broker commissions and slotting fees. These estimates are recorded at the end of each reporting period.

 

In accordance with ASC 606, the Company disaggregates net sales from contracts with customers based on the characteristics of the products sold:

 

   

Three Months Ended September 30,

 
   

2023

   

2022

 
   

$

   

% of Total

   

$

   

% of Total

 

Coffee creamers

  $ 5,795,991       63 %   $ 4,716,650       53 %

Hydration and beverage enhancing supplements

    1,726,512       19 %     1,061,136       12 %

Harvest snacks and other food items

    1,747,873       19 %     1,935,812       22 %

Coffee, tea, and hot chocolate products

    1,990,013       22 %     1,455,888       16 %

Other

    132,319       1 %     437,210       5 %

Gross sales

    11,392,708       124 %     9,606,696       108 %

Shipping income

    214,982       2 %     289,505       3 %

Returns and discounts

    (2,427,909 )     (26 )%     (1,051,356 )     (11 )%

Sales, net

  $ 9,179,781       100 %   $ 8,844,845       100 %

 

   

Nine Months Ended September 30,

 
   

2023

   

2022

 
   

$

   

% of Total

   

$

   

% of Total

 

Coffee creamers

  $ 15,550,157       62 %   $ 14,866,032       55 %

Hydration and beverage enhancing supplements

    3,395,671       14 %     3,815,346       14 %

Harvest snacks and other food items

    5,345,915       21 %     5,336,043       20 %

Coffee, tea, and hot chocolate products

    5,932,745       24 %     4,840,215       18 %

Other

    287,001       1 %     1,094,924       4 %

Gross sales

    30,511,489       122 %     29,952,560       111 %

Shipping income

    778,051       3 %     829,107       3 %

Returns and discounts

    (6,272,730 )     (25 )%     (3,922,803 )     (14 )%

Sales, net

  $ 25,016,810       100 %   $ 26,858,864       100 %

 

27

LAIRD SUPERFOOD, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
 

The Company generates revenue through two channels: e-commerce and wholesale:

 

   

Three Months Ended September 30,

 
   

2023

   

2022

 
   

$

   

% of Total

   

$

   

% of Total

 

E-commerce

  $ 4,842,389       53 %   $ 5,808,186       66 %

Wholesale

    4,337,392       47 %     3,036,659       34 %

Sales, net

  $ 9,179,781       100 %   $ 8,844,845       100 %

 

   

Nine Months Ended September 30,

 
   

2023

   

2022

 
   

$

   

% of Total

   

$

   

% of Total

 

E-commerce

  $ 13,409,443       54 %   $ 16,410,956       61 %

Wholesale

    11,607,367       46 %     10,447,908       39 %

Sales, net

  $ 25,016,810       100 %   $ 26,858,864       100 %

 

Receivables from contracts with customers are included in accounts receivable. Contract assets include deferred cost of goods sold associated with deferred revenue and are included in finished goods inventories. Contract liabilities include deferred revenue, customer deposits, rewards programs, and refund liabilities, and are included in accrued expenses. The balances of receivables from contracts with customers, contract assets, and contract liabilities were as follow:

 

   

January 1,

   

December 31,

   

September 30,

 
   

2022

   

2022

   

2023

 

Accounts receivable, net

  $ 1,268,718     $ 1,494,469     $ 2,186,645  

Contract assets

  $ 8,316     $ 57,249     $  

Contract liabilities

  $ (467,861 )   $ (729,667 )   $ (625,557 )
 

 

28

 
 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 $9.2 million and $25.0 million, respectively, for the three and nine months ended September 30, 2023 and were $8.8 million and $26.9 million, respectively, for the three and nine months ended September 30, 2022. Wholesale net sales grew 43% in the third quarter of 2023 compared to same period prior year, driven by distribution gains in the natural and conventional channels, seasonal program expansion in the club channel, pricing actions, and velocity improvements behind our new packaging and the re-branding campaign launched earlier this year. E-commerce channel sales decreased 17% in the third quarter of 2023 driven by a planned media spend reduction across the Amazon and direct-to-consumer channels. Amazon sales were also negatively impacted by inventory out of stocks related to the product quality withdrawal issue that we experienced in the first quarter of 2023. By the end of the third quarter of 2023, we had fully mitigated the out-of-stock issue. Wholesale net sales for year-to-date ("YTD") 2023 increased by 11% compared to YTD 2022 primarily due to club sales, despite elevated trade discounts in 2023. E-commerce channel sales for YTD 2023 decreased 18% 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 nine months ended September 30, 2023, the e-commerce business made up 53% and 54% of net sales, respectively. For the three and nine months ended September 30, 2022 the e-commerce business made up 66% and 61% 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 nine months ended September 30, 2023.

 

For the three and nine months ended September 30, 2023, wholesale made up 47% and 46% of our net sales, respectively. For the three and nine months ended September 30, 2022, wholesale made up 34% and 39% of our net sales, respectively. Laird Superfood products are sold through a diverse set of wholesale channels, including natural and specialty grocery, conventional 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

 

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. In the third quarter of 2023, we reached settlement with the vendor and recovered $0.2 million of these costs. 

 

 

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, inbound and outbound freight costs, 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, in addition to material and packaging costs, cost of goods sold consisted of co-packers' tolling fees, third party labor to store and ship our products, indirect labor costs, and inbound and outbound freight. In 2022, it 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 September 30, 2023 (Q3 2023) and September 30, 2022 (Q3 2022)

 

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

 

   

Three Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Sales, net

  $ 9,179,781     $ 8,844,845     $ 334,936       4 %

Cost of goods sold

    (6,332,624 )     (6,773,029 )     440,405       (7 )%

Gross profit

    2,847,157       2,071,816       775,341       37 %

Gross margin

    31.0 %     23.4 %                

General and administrative

    2,208,213       4,383,868       (2,175,655 )     (50 )%

Research and product development

    40,123       115,077       (74,954 )     (65 )%

Sales and marketing

    3,385,890       3,390,857       (4,967 )     (0 )%

Total operating expenses

    5,634,226       7,889,802       (2,255,576 )     (29 )%

Operating loss

    (2,787,069 )     (5,817,986 )     3,030,917       (52 )%

Other income

    132,185       79,777       52,408       66 %

Loss before income taxes

    (2,654,884 )     (5,738,209 )     3,083,325       (54 )%

Income tax expense

                      100 %

Net loss

  $ (2,654,884 )   $ (5,738,209 )   $ 3,083,325       (54 )%

 

Sales, Net

 

   

Three Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Sales, net

  $ 9,179,781     $ 8,844,845     $ 334,936       4 %

 

Net sales increased to $9.2 million in Q3 2023 from $8.8 million in Q3 2022. The increase was primarily driven by a 43% increase in the wholesale channel driven by distribution gains in the natural and conventional channels, seasonal program expansion in the club channel, pricing actions, and velocity improvements behind our new packaging and the re-branding campaign that took place earlier in the year, offset in part by elevated trade spend investment to drive growth and a 17% decline in our e-commerce channels, driven by out of stocks on Amazon and DTC related to the product quality issue experienced in the first quarter of 2023 as well as planned reductions in media spend.

 

Cost of Goods Sold

 

   

Three Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Cost of goods sold

  $ (6,332,624 )   $ (6,773,029 )   $ 440,405       (7 )%

 

Cost of goods sold decreased to $6.3 million in Q3 2023 from $6.8 million in Q3 2022 which translates to a reduction of 7% and accounts for approximately 15-basis points of gross margin expansion, reflecting the benefits of the transition to a variable cost third-party co-manufacturing business model. 

 

Gross Profit

 

   

Three Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Gross profit

  $ 2,847,157     $ 2,071,816     $ 775,341       37 %

 

Gross profit increased to $2.8 million in Q3 2023 from $2.1 million in Q3 2022. Gross margin improved to 31.0% in Q3 2023 from 23.4% in Q3 2022 driven by a reduction in cost of goods sold which accounted for 15-basis points of gross margin expansion due to the transition to a variable cost third-party co-manufacturing business model offset in part by elevated trade investments to grow the retail channel.

 

Operating Expenses

 

   

Three Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Operating Expenses

                               

General and administrative

  $ 2,208,213     $ 4,383,868     $ (2,175,655 )     (50 )%

Research and product development

    40,123       115,077       (74,954 )     (65 )%

Sales and marketing

    3,385,890       3,390,857       (4,967 )     (0 )%

Total operating expenses

  $ 5,634,226     $ 7,889,802     $ (2,255,576 )     (29 )%

 

General and administrative expenses decreased to $2.2 million in Q3 2023 from $4.4 million in Q3 2022, primarily driven by lower personnel costs and broad, strategic reductions in spending. 

 

 

Research and product development expenses were $40.1 thousand and $115.1 thousand in Q3 2023 and Q3 2022, respectively, as we are focused on strengthening the performance of current product offerings and allocating fewer resources into developing new product offerings.

 

Sales and marketing expenses were $3.4 million in Q3 2023 and Q3 2022, as planned reductions in inefficient spending and lower personnel costs were offset by stock-based compensation expense related to strategic partnerships established in the third quarter. 

 

Other Income

 

   

Three Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Other income

  $ 132,185     $ 79,777     $ 52,408       66 %

 

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. The increase in other income was driven by increases in dividend income on money market funds as interest rates rise. 

 

Comparison of the nine months ended September 30, 2023 (YTD 2023) and September 30, 2022 (YTD 2022)

 

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

 

   

Nine Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Sales, net

  $ 25,016,810     $ 26,858,864     $ (1,842,054 )     (7 )%

Cost of goods sold

    (18,419,709 )     (21,259,300 )     2,839,591       (13 )%

Gross profit

    6,597,101       5,599,564       997,537       18 %

Gross margin

    26.4 %     20.8 %                

General and administrative

    7,822,834       18,848,037       (11,025,203 )     (58 )%

Research and product development

    206,313       335,377       (129,064 )     (38 )%

Sales and marketing

    9,313,110       11,115,499       (1,802,389 )     (16 )%

Total operating expenses

    17,342,257       30,298,913       (12,956,656 )     (43 )%

Operating loss

    (10,745,156 )     (24,699,349 )     13,954,193       (56 )%

Other income (expense)

    452,288       (77,008 )     529,296       (687 )%

Loss before income taxes

    (10,292,868 )     (24,776,357 )     14,483,489       (58 )%

Income tax expense

    (13,172 )     (5,774 )     (7,398 )     128 %

Net loss

  $ (10,306,040 )   $ (24,782,131 )   $ 14,476,091       (58 )%

 

Sales, Net

 

   

Nine Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Sales, net

  $ 25,016,810     $ 26,858,864     $ (1,842,054 )     (7 )%

 

Net sales decreased to $25.0 million in YTD 2023 from $26.9 million in YTD 2022. The decline was primarily due to an 18% decline in our e-commerce channels, driven by out of stocks on Amazon and DTC related to the product quality issue experienced in the first quarter of 2023, as well as planned reductions in media spending across both channels. Wholesale sales increased by 11% in YTD 2023 driven by the timing of club orders, offset by elevated trade promotional activity.

 

Cost of Goods Sold

 

   

Nine Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Cost of goods sold

  $ (18,419,709 )   $ (21,259,300 )   $ 2,839,591       (13 )%

 

Cost of goods sold decreased to $18.4 million in YTD 2023 from $21.3 million in YTD 2022 which equates to a 13% reduction and accounts for approximately 10.5-basis points of margin expansion as we realize the benefits of the transition to a variable cost third-party co-manufacturing business model.

 

Gross Profit

 

   

Nine Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Gross profit

  $ 6,597,101     $ 5,599,564     $ 997,537       18 %

 

Gross profit increased to $6.6 million in YTD 2023 from $5.6 million in YTD 2022. Gross margin improved to 26.4% in YTD 2023 from 20.8% 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

 

   

Nine Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Operating expenses

                               

General and administrative

  $ 7,822,834     $ 18,848,037     $ (11,025,203 )     (58 )%

Research and product development

    206,313       335,377       (129,064 )     (38 )%

Sales and marketing

    9,313,110       11,115,499       (1,802,389 )     (16 )%

Total operating expenses

  $ 17,342,257     $ 30,298,913     $ (12,956,656 )     (43 )%

 

General and administrative expenses decreased to $7.8 million in YTD 2023 from $18.8 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 decreased to $0.2 million in YTD 2023 from $0.3 million in YTD 2022.

 

Sales and marketing expenses decreased to $9.3 million in YTD 2023 from $11.1 million in YTD 2022, primarily due to a planned reduction in inefficient spending and lower personnel costs.

 

Other Income (Expense)

 

   

Nine Months Ended September 30,

   

$

    %  
   

2023

   

2022

   

Change

   

Change

 

Other income (expense)

  $ 452,288     $ (77,008 )   $ 529,296       (687 )%

 

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. The increase in other income was driven by increases in dividend income on money market funds as interest rates rise in YTD 2023 and losses on sales of available securities in YTD 2022. 

 

Cash Flows

 

Comparison of the nine months ended September 30, 2023 and 2022:

 

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

 

   

Nine Months Ended September 30,

 
   

2023

   

2022

 

Cash flows from operating activities

  $ (10,929,145 )   $ (11,133,377 )

Cash flows from investing activities

    567,459       8,981,156  

Cash flows from financing activities

    (23,066 )     121,090  

Net change in cash, cash equivalents, and restricted cash

  $ (10,384,752 )   $ (2,031,131 )

 

Cash Flows from Operating Activities

 

Cash used in operating activities was $10.9 million for YTD 2023 and $11.1 million for YTD  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, Oregon lease exit and $0.6 million in severances and bonuses. In the second and third quarters of 2023, normalized cash used in operations was $2.4 million per quarter, the improvement driven by overall reductions in net operating losses following the change in our business model offset by increases in inventory to prepare for seasonal demand and reductions in accrued expenses. 

 

Cash Flows from Investing Activities

 

Cash provided by investing activities was $0.6 million for YTD 2023 as compared to cash provided by investing activities of $9.0 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 $23.1 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 September 30, 2023, we had incurred accumulated net losses of $106.4 million, including operating losses of $10.7 million and $24.7 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 2023 and 2022 to optimize spending and improve gross margins in order to significantly reduce cash burn and bring the business closer to breakeven and profitability in future quarters. These steps included 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 to optimize our workforce, and reducing marketing and administrative investment through eliminating non-essential spending. 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 $10.9 million for YTD 2023 and $11.1 million for YTD  2022.

 

As of September 30, 2023, we had $7.4 million of cash-on-hand. 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 September 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 September 30, 2023, the Company had fixed lease payment obligations of $0.5 million, with $0.1 million payable within 12 months.

 

 

As of September 30, 2023, $6.0 million of current liabilities were accrued related to short-term operating activities and personnel costs.

 

 

Advertising and marketing expenditures were $6.5 million in YTD 2023 and $8.2 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.

 

While we expect the strategic actions outlined above to drive meaningful improvements in our operating cash flows in the future, there are critical uncertainties in forward-looking statements. Until such a time that we begin got realize the full benefits of these strategic actions, considering 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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

As a smaller reporting company, we are not required to provide this information in our Quarterly Reports.

 

 

Item 4. Controls and Procedures.

 

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 September 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 September 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 September 30, 2023, aside from those described above, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information

 

Item 1. Legal Proceedings.

 

We are not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations.

 

Item 1A. Risk Factors.

 

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 nine months ended September 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 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 $7.4 million and an accumulated deficit of $106.4 million at September 30, 2023, and cash used in operations was $10.7 million in the nine months ended September 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 Companys 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.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

Not Applicable.

 

Item 6. Exhibits.

 

 

The documents set forth below are filed herewith or incorporated herein by reference to the location indicated.

 

       

Incorporated by Reference

   

Exhibit Number

 

Description

 

Form

 

File No.

 

Exhibit

 

Filing Date

 

Filed /
Furnished
Herewith

                         

31.1

 

Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a).

                 

*

               

31.2

 

Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a).

                 

*

               

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

                 

**

               

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

                 

**

               

101.INS

 

Inline XBRL Instance Document

                 

*

               

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

                 

*

               

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

                 

*

               

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

                 

*

               

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

                 

*

               

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

                 

*

               

104

 

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

                   

 

* Filed herewith.

** The certifications attached as Exhibit 32.1 and 32.2 are not deemed filed with the SEC and are not incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Laird Superfood, Inc.

 

(Registrant)

   

Date: November 9, 2023

/s/ Jason Vieth

 

Jason Vieth

 

President and Chief Executive Officer

   

Date: November 9, 2023

/s/ Anya Hamill

 

Anya Hamill

 

Chief Financial Officer

 

39