LAIRD SUPERFOOD: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

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The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and
related notes thereto included elsewhere in this Quarterly Report on Form
10-Q.
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 in our Annual Report on Form 10-K
for the year ended December 31, 2020.
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, Hydrate hydration products and beverage enhancing
supplements, harvest snacks and other food items, and roasted and instant
coffees, teas and hot chocolate. Consumer preferences within the evolving food
and beverage industry are shifting away from processed and sugar-laden food and
beverage products, as well as those containing significant amounts of highly
processed and artificial ingredients. 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.
We have experienced strong sales growth since inception. Net sales increased to
$9.2 million for the three months ended June 30, 2021, from $5.6 million for the
three months ended June 30, 2020, representing net sales growth of 64%.
Likewise, net sales increased to $16.6 million for the six months ended June 30,
2021, from $11.1 million for the six months ended June 30, 2020, representing
net sales growth of 50%. The growth in the three and six months ended June 30,
2021 was primarily driven by a significant expansion of our customer base in
online channels and numerous new product offerings.
Our omnichannel distribution strategy has three key components: online,
wholesale and food service. In aggregate, this omnichannel strategy provides us
with a diverse set of customers and wholesale partners, along with an
opportunity to develop a direct relationship with our customers at
lairdsuperfood.com
. We believe that, along with a trusted brand name, extensive proprietary
distribution is a critical long-term and sustainable barrier to entry in the
food industry.
Our online business is two pronged and consists of
lairdsuperfood.com
and
Amazon.com
. For the three months ended June 30, 2021 and 2020, the online business made up
63% and 66% of our net sales, respectively. For the six months ended June 30,
2021 and 2020, the online business made up 61% and 59% of our net sales,
respectively.
Lairdsuperfood.com
is a platform that provides an authentic brand experience for our customers that
drives engagement and provides feedback for future product development, while
generating highly attractive margins. We view our growing 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 website allows Laird Superfood to educate consumers on the
benefits of our products and ingredients, while providing a positive customer
experience. We believe this experience leads to higher retention rates among
repeat users and subscribers, as evidenced by repeat users and subscribers
accounting for over
two-thirds
of
lairdsuperfood.com
sales for three and six months ended June 30, 2021.
Our wholesale business addresses the $759 billion grocery industry, specifically
the $174 billion Natural, Organic and Functional Foods and Beverages
sub-segment,
which has been increasing its proportion of the grocery industry, as well as
many
non-grocery
retail channels. For the three months ended June 30, 2021 and 2020, wholesale
revenue comprised 35% and 33% of our net sales, respectively. For the six months
ended June 30, 2021 and 2020, wholesale revenue comprised 37% and 41% of our net
sales, respectively. Laird Superfood products are sold through a diverse set of
retail channels, including conventional, natural and specialty grocery, club,
outdoor and drug stores. The diversity of our retail channel represents a strong
competitive advantage 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.

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Recent Developments

Capital Contribution
On December 3, 2020, the Company entered into an agreement with DMV for an
additional capital contribution as a participant in the DMV
COVID-19
Relief Fund. The agreement provided the Company with cash consideration of
$298,103 for the purpose of supporting three relief projects: (1) continual
sanitation rotation, (2) spend on increased labor, material and maintenance
costs in the face of adversity, and (3) new/existing hospitals relief
initiative. The Company has included the balance in cash and cash equivalents on
the Balance Sheet as of June 30, 2021. See Note 1 for more information.
Two-for-One
Stock Split
Our board of directors and stockholders approved a
two-for-one
split of our common stock, which was effected on August 19, 2020. The split
divided each outstanding share of our common stock into two shares of common
stock and correspondingly adjusted the conversion prices of our convertible
preferred stock. No fractional shares were issued in connection with the split.
All references to common stock, options to purchase common stock, restricted
stock, share data, per share data and related information have been
retroactively adjusted, where applicable, in this Quarterly Report to reflect
the split of our common stock, and the corresponding adjustment of the
conversion prices of our preferred stock, as if it had occurred at the beginning
of the earliest period presented.
Workforce Housing
On April 20, 2021, the Audit Committee of the Company's board of directors
consented to Mr. Hodge, CEO, pledging up to 150,000 of his shares of the
Company's common stock as collateral to a line of credit in support of Mr. Hodge
individually developing workforce housing in Sisters, Oregon, where the Company
is headquartered.
Picky Bars Acquisition
On May 3, 2021, the Company acquired Picky Bars, LLC ("Picky Bars"), an
innovator in the healthy snack industry focused on nutritionally balanced,
real-food products, for a cash-free, debtfree purchase price of $11.1 million,
subject to customary working capital adjustments, and 53,133 shares of Company
common stock, subject to certain vesting conditions.
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 Online and Traditional Wholesale
Distribution Channels
We are currently growing our customer base through both paid and organic online
channels, as well as by expanding our presence in a variety of physical retail
distribution channels. Online customer acquisitions typically occur at our
direct website
lairdsuperfood.com
and
Amazon.com
. Our online customer acquisition program includes paid and unpaid social media,
search, display and traditional media. Our products are also sold through a
growing number of physical retail channels. Wholesale customers include grocery
chains, natural food outlets, club stores, and drug stores, and food service
customers include coffee shops, gyms, restaurants, hospitality venues and
corporate dining services, among others. Customer acquisition in physical retail
channels depends on, among other things, paid promotions through retailers,
display and traditional media.
Ability to Acquire and Retain Customers at a Reasonable Cost
We believe an ability to consistently acquire and retain customers at a
reasonable cost relative to projected life-time value will be a key factor
affecting future performance. To accomplish this goal, we intend to balance
advertising spend between 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 substantially 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, as well as spreading other production-related costs over greater
manufacturing volumes.
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.

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Ability to Manage Our Global Supply Chain and Expand Production
In-line
with Demand
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. As an example, one of our suppliers entered voluntary receivership in
June 2021, and we may be unable to find a suitable replacement supplier on
substantially similar terms or at all.
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 website, as well as third-party online
channels.
Cost of Goods Sold
Our cost of goods sold consists primarily of raw material costs, labor costs
directly related to producing our products, including wages and benefits,
shipping costs, lease expenses and other factory overhead costs related to
various aspects of production, warehousing and shipping.
Operating Expenses
Our operating expenses consist of general and administrative, research and
product development, and sales and marketing expenses.
We expect to incur additional expenses as a result of operating as a public
company, including costs to comply with the rules and regulations applicable to
companies listed on a national securities exchange, costs related to compliance
and reporting obligations pursuant to the rules and regulations of the SEC and
higher expenses for insurance, investor relations and professional services. We
expect our general and administrative expenses will increase as our business
grows.
Benefit from Income Taxes
Due to our history of operating losses and expectation of future operating
losses, we do not expect any significant income tax expenses and benefits for
the foreseeable future.
Results of Operations
Comparison of the three months ended June 30, 2021 ("Q2 2021") and June 30, 2020
("Q2 2020")
The following table summarizes our results of operations for the periods
indicated:

                                           For the Three Months Ended
                                                    June 30,                      Change
                                             2021                2020               $              %
Sales, net                              $     9,195,786      $  5,608,830      $  3,586,956         64 %
Cost of goods sold                           (6,998,695 )      (4,285,128 )      (2,713,567 )       63 %

Gross profit                                  2,197,091         1,323,702           873,389         66 %

Gross Margin                                       23.9 %            23.6 %
General and administrative                    4,162,911         1,832,442         2,330,469        127 %
Research and product development                374,852           117,797           257,055        218 %
Sales and marketing                           3,936,492         2,395,701         1,540,791         64 %

Total expenses                                8,474,255         4,345,940         4,128,315         95 %

Operating loss                               (6,277,164 )      (3,022,238 )      (3,254,926 )      108 %
Other income (expense)                           11,623            15,848            (4,225 )      (27 %)

Loss before income taxes                     (6,265,541 )      (3,006,390 )      (3,259,151 )      108 %
Income tax expense                              (36,718 )              -            (36,718 )        0 %

Net loss                                  $ (6,302,259)      $ (3,006,390 )    $ (3,295,869 )      110 %




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Sales, Net

               For the Three Months Ended
                        June 30,                   Change
                  2021              2020              $           %
Sales, net   $    9,195,786     $  5,608,830     $ 3,586,956       64 %


Net sales increased by $3.6 million to $9.2 million in Q2 2021, compared to
$5.6 million in Q2 2020. This increase was due primarily to the acquisition of
Picky Bars, and growth in our direct online sales channel. Products introduced
after Q2 2020 including OatMac Superfood Creamers, Chai Instafuel, Activate
Daily Greens, Renew Rest & Recover, Functional Coffees, Pili Nuts, Renew
Protein, and Turmeric Liquid Creamer, accounted for $1.3 million of gross sales
in Q2 2021.
Cost of Goods Sold

                        For the Three Months Ended
                                 June 30,                     Change
                          2021               2020               $             %
Cost of goods sold     $ (6,998,695)     $ (4,285,128 )    $ (2,713,567 )      63 %


Cost of goods sold increased by $2.7 million in Q2 2021 to $7.0 million from
$4.3 million in Q2 2020, primarily due to sales growth in the 2021 period,
elevated outbound shipping costs, increased personnel costs, and increased
co-packing
costs primarily associated with our liquid creamer product line.
Gross Profit

                 For the Three Months Ended
                          June 30,                  Change
                    2021              2020             $          %
Gross profit   $     2,197,091     $ 1,323,702     $ 873,389       66 %


Gross profit increased by $0.9 million in Q2 2021 to $2.2 million from
$1.3 million in Q2 2020, primarily due to sales growth in the 2021 period. Gross
margins increased slightly to 23.9% in Q2 2021 from 23.6% in Q2 2020, primarily
due to optimization of direct to consumer shipping costs and improvements in
liquid creamer distribution and disposals.
Operating Expenses

                                     For the Three Months Ended
                                              June 30,                   Change
                                        2021              2020              $            %
Operating expenses
General and administrative         $     4,162,911     $ 1,832,442     $ 2,330,469       127 %
Research and product development           374,852         117,797         257,055       218 %
Sales and marketing                      3,936,492       2,395,701       1,540,791        64 %

Total operating expenses                 8,474,255       4,345,940     $ 4,128,315        95 %


General and administrative expense increased by $2.3 million in Q2 2021 to
$4.1 million from $1.8 million in Q2 2020, primarily due to stock-based
compensation, personnel costs, reserve against prepaid assets, insurance
expense, and professional fees.
Research and product development expense increased by $0.3 million to
$0.4 million in Q2 2021 from $0.1 million in Q2 2020, primarily due to costs to
bring new products to market.
Sales and marketing expense increased by $1.5 million in Q2 2021 to $3.9 million
from $2.4 million in Q2 2020, primarily due to advertising expense and marketing
fees.

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Other Income (Expense)

                             For the Three Months Ended
                                      June 30,                   Change
                              2021                2020             $            %
Other income (expense)   $       11,623       $      15,848     $ (4,225 )      (27 %)


Other income (expense) is composed of interest income and dividend income
related to investment securities
available-for-sale
as well as other
non-operating
costs. Other income (expense) decreased $4 thousand in Q2 2021 to $12 thousand
of income from $16 thousand of income in Q2 2020, primarily due to realized
gains on the sale of available for sale securities in Q2 2020.
Comparison of the six months ended June 30, 2021 ("YTD 2021") and June 30, 2020
("YTD 2020")
The following table summarizes our results of operations for the periods
indicated:

                                            For the Six Months Ended
                                                    June 30,                      Change
                                             2021                2020               $              %
Sales, net                             $     16,622,039      $ 11,092,055      $  5,529,984         50 %
Cost of goods sold                          (12,558,194 )      (7,650,736 )      (4,907,458 )       64 %

Gross profit                                  4,063,845         3,441,319           622,526         18 %

Gross Margin                                       24.4 %            31.0 %
General and administrative                    7,803,980         3,432,012         4,371,968        127 %
Research and product development                615,539           261,111           354,428        136 %
Sales and marketing                           7,263,571         4,788,518         2,475,053         52 %

Total expenses                               15,683,090         8,481,641         7,201,449         85 %

Operating loss                              (11,619,245 )      (5,040,322 )      (6,578,923 )      131 %
Other income (expense)                           23,200            38,702           (15,502 )      (40 %)

Loss before income taxes                    (11,596,045 )      (5,001,620 )      (6,594,425 )      132 %
Income tax expense                              (36,718 )              -            (36,718 )        0 %

Net loss                                 $ (11,632,763)      $ (5,001,620 )    $ (6,631,143 )      133 %



Sales, Net

                For the Six Months Ended
                        June 30,                  Change
                 2021              2020              $           %
Sales, net   $  16,622,039     $ 11,092,055     $ 5,529,984       50 %


Net sales increased by $5.5 million to $16.6 million in YTD 2021, compared to
$11.1 million in YTD 2020. This increase was due to growth in our online and
wholesale channels, primarily caused by an increase in sales volume as well as
the acquisition of Picky Bars. Products introduced after YTD 2020, including
OatMac Superfood Creamers, Chai Instafuel, Activate Daily Greens, Renew Rest &
Recover, Functional Coffees, Pili Nuts, Renew Protein, and Turmeric Liquid
Creamer, accounted for $2.1 million of gross sales in YTD 2021.
Cost of Goods Sold

                         For the Six Months Ended
                                 June 30,                      Change
                           2021               2020               $             %
Cost of goods sold     $ (12,558,194)     $ (7,650,736 )    $ (4,907,458 )      64 %


Cost of goods sold increased by $4.9 million in YTD 2021 to $12.6 million from
$7.7 million in YTD 2020, primarily due to sales growth in the 2021 period,
elevated outbound shipping costs, increased personnel costs, and increased
co-packing
costs primarily associated with our liquid creamer product line.

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Gross Profit

                 For the Six Months Ended
                         June 30,                      Change
                   2021             2020             $          %
Gross profit   $   4,063,845     $ 3,441,319     $ 622,526       18 %


Gross profit increased by $622 thousand in YTD 2021 to $4.1 million from
$3.4 million in YTD 2020. Gross margins decreased to 24.4% in YTD 2021 from
31.0% in YTD 2020 primarily due to elevated outbound shipping costs combined
with the launch of a free shipping initiative for direct online purchases made
on
lairdsuperfood.com
, increased personnel costs, disposal costs related to the initial production
and distribution of our liquid creamer product line and increased
co-packing
costs primarily associated with our liquid creamer product line.
Operating Expenses

                                     For the Six Months Ended
                                             June 30,                       Change
                                       2021             2020              $            %
Operating expenses
General and administrative         $   7,803,980     $ 3,432,012     $ 4,371,968       127 %
Research and product development         615,539         261,111         354,428       136 %
Sales and marketing                    7,263,571       4,788,518       2,475,053        52 %

Total operating expenses              15,683,090       8,481,641     $ 7,201,449        85 %



General and administrative expense increased by $4.4 million in YTD 2021 to
$7.8 million from $3.4 million in YTD 2020, primarily due to stock-based
compensation, personnel costs, reserve against prepaid assets, insurance
expense, and professional fees.
Research and product development expense increased by $0.4 million to
$0.6 million in YTD 2021 from $0.3 million in YTD 2020, primarily due to costs
to bring new products to market.
Sales and marketing expense increased by $2.5 million in YTD 2021 to
$7.3 million from $4.8 million in YTD 2020, primarily due to advertising expense
and marketing fees.
Other Income (Expense)

                           For the Six Months
                             Ended June 30,                 Change
                            2021          2020           $            %

Other income (expenses) $ 23,200 $ 38,702 $ (15,502) (40%)


Other income is composed of interest income and dividend income related to
investment securities
available-for-sale
as well as other
non-operating
costs. Other income decreased $16 thousand in YTD 2021 to $23 thousand of income
from $39 thousand of income in YTD 2020, primarily the result of decreased
realized gains on the sale of available for sale securities in YTD 2021 relative
to YTD 2020.

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Liquidity and Capital Resources
As of June 30, 2021, we had incurred accumulated net losses of $43.6 million,
including operating losses of $6.3 million and $3.0 million for Q2 2021 and Q2
2020, respectively, and $11.6 million and $5.0 million for YTD 2021 and YTD
2020, respectively. We expect to incur additional operating losses as we
continue efforts to grow our business, and we expect to incur additional
expenses associated with being a public company. We have historically financed
our operations and capital expenditures through private placements of our
preferred stock and common stock, our Initial Public Offering, as well as lines
of credit and term loans.
Our historical uses of cash have primarily consisted of cash used in operating
activities to fund our operating losses and working capital needs.
As of June 30, 2021, we had $43.5 million of
cash-on-hand
and investments and $14.8 million of available borrowings under our lines of
credit. As of December 31, 2020, we had $65.9 million of
cash-on-hand
and investments and $11.1 million of available borrowings under our lines of
credit. As of June 30, 2021, and December 31, 2020, we had $51 thousand
outstanding under our forgivable loans with the City of Sisters, Oregon and no
amounts were outstanding under our lines of credit.
We currently have an approximately 26,000 square foot warehouse under
construction by a third party adjacent to our current buildings which we intend
to lease and have purchased five adjoining lots providing opportunity for
expansion of our campus if needed. Our future capital requirements will depend
on many factors, including our growth rate, the timing and extent of spending to
support research and development efforts, the continued expansion of sales and
marketing activities, the enhancement of our product platforms, the introduction
of new products and acquisition activity. We expect to continue to incur
operating losses for the foreseeable future and may require additional capital
resources to continue to grow our business. We believe that current cash and
cash equivalents will be sufficient to fund our operations and capital
requirements for at least the next 12 months following the date of this report.
We have based this estimate on assumptions that may prove to be wrong, and we
could use our available capital resources sooner than we currently expect. In
addition, if additional financing is required from outside sources, we may not
be able to raise such financing on terms acceptable to us or at all.
Cash Flows
Comparison of the six months ended June 30, 2021 and June 30, 2020:
The following table shows a summary of our cash flows for the periods presented:

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