10-K: Laird Superfood Reports Fiscal Year 2023 Results, Transitioning to Variable Cost Model

Laird Superfood's 2023 annual report highlights a shift to a variable cost model and a focus on long-term growth despite a slight decrease in net sales.

Summary

• Laird Superfood's net sales for 2023 decreased to $34.2 million from $35.8 million in 2022, primarily due to a decline in e-commerce sales.
• Wholesale net sales increased by 9% in 2023 compared to 2022, driven by growth in club stores and distribution expansion in grocery channels.
• E-commerce sales decreased by 13% year-over-year due to reduced marketing spend and out-of-stock issues in the first quarter of 2023.
• The company transitioned to a variable cost third-party co-manufacturing model, ceasing in-house manufacturing and fulfillment activities.
• Gross profit increased to $10.3 million in 2023 from $5.2 million in 2022, with gross margin improving to 30.1% from 14.5%.
• Operating expenses decreased significantly to $21.0 million in 2023 from $45.6 million in 2022, due to reduced general and administrative costs.
• The company incurred a net loss of $10.2 million in 2023, a significant improvement from the $40.3 million loss in 2022.
• The company had $7.7 million in cash and cash equivalents on hand as of December 31, 2023.
• The company experienced a product quality issue with coconut milk powder in the first quarter of 2023, incurring costs of $0.4 million, and recovered $0.3 million from the vendor.
• The company changed its state of incorporation from Delaware to Nevada on December 31, 2023.

Sentiment

Score: 7

Explanation: The document shows a positive shift in the company's financial performance, particularly in gross margins and reduced losses, but there are still challenges in sales growth and the competitive landscape. The transition to a variable cost model is a positive step, but the company needs to continue to execute its growth strategy.

Positives

• The shift to a variable cost model has led to a significant improvement in gross margins and a reduction in operating expenses.
• The company has successfully expanded its wholesale distribution channels, leading to increased sales in that segment.
• The company has demonstrated an ability to recover costs associated with a product quality issue.
• The company has significantly reduced its net loss year-over-year, indicating progress towards profitability.
• The company's e-commerce business showed signs of recovery in the fourth quarter of 2023.

Negatives

• Net sales decreased by 4% year-over-year, primarily due to a decline in e-commerce sales.
• The company experienced out-of-stock issues in the first quarter of 2023 due to a product quality issue.
• The company incurred costs associated with inventory obsolescence, quality testing, and remedial discounts and replacement orders related to the product quality issue.
• The company's e-commerce sales decreased by 13% year-over-year due to reduced marketing spend and out-of-stock issues.

Risks

• The company's reliance on third-party co-manufacturers and logistics partners poses a risk to its supply chain.
• The company faces strong competition in the food and beverage retail industry, especially from larger companies with greater resources.
• The company's success depends on its ability to predict changes in consumer preferences and develop successful new products.
• The company is subject to various governmental regulations and policies, and failure to comply could adversely affect its business.
• The company relies on Laird Hamilton and Gabrielle Reece to develop new products and market its brand, and any negative impact on their image could harm the company.
• The company's financial success is directly dependent on the consumer perception of its brand, and any damage to its reputation could have a material impact on its results of operations.
• The company relies on retailers and distributors for a substantial portion of its sales, and the loss of these relationships could harm its business.
• The company is dependent upon internet search engines and other providers of digital advertising to attract a significant portion of its potential customers to its websites, and any change in the prominence of its website in either paid or algorithmic search result listings or an increase in purchasing digital ads could cause the number of visitors to its websites and its revenue to decline.
• The company's customer acquisition costs may increase, and its customer lifetime values may decrease, harming its margins and results.
• The company's results may be negatively affected by changes in foreign currency exchange rates.
• The company may be unable to adequately protect its brand and its other intellectual property rights.
• A food safety or quality issue that results in a product disruption such as a recall, health issue, or death of a consumer could harm the company's business.
• The company may be subject to significant liability that is not covered by insurance.
• The company relies on independent certification for a number of its products, and the loss of any independent certifications could adversely affect its market position.
• The company's future results of operations may be adversely affected by the availability of Non-GMO and organic ingredients.
• Adverse weather conditions, fires, natural disasters, crop disease, pests and other natural conditions can impose significant costs and losses on the company's business.
• Climate change may negatively affect the company's business and operations.
• The company relies on a small number of suppliers to provide its raw materials, and its supply chain may be interrupted and prevent the company from obtaining the necessary materials it needs to operate.
• The company's future results of operations may be adversely affected by volatile commodity costs.
• Economic downturns could limit consumer demand for the company's products and negatively affect its sales and profitability.
• Technology failures or security breaches could disrupt the company's operations and negatively impact its business.
• The market price of the company's common stock may be highly volatile, and investors may not be able to resell their shares at or above the price they purchased them.
• The company will incur increased costs in connection with operating as a public company and its management will be required to devote substantial time to compliance initiatives and corporate governance practices.
• If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about the company's business, its stock price and trading volume could decline.
• The company may not be able to maintain a listing of its common stock on the NYSE American.
• Economic and business factors could result in impairment of intangible assets.
• Provisions in the company's governing documents under Nevada law could discourage a takeover that shareholders may consider favorable.
• The company is an emerging growth company, and the reduced disclosure requirements applicable to emerging growth companies may make its common stock less attractive to investors.
• Since the company does not anticipate paying any cash dividends on its capital stock in the foreseeable future, stock price appreciation, if any, will be the sole source of gain.
• The company's articles of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between the company and its shareholders, which could limit its shareholders ability to obtain a favorable judicial forum for disputes with the company or its directors, officers, or employees.

Future Outlook

The company aims to maximize penetration of the U.S. grocery market through brand growth, expanded retail distribution, and new product introductions. They also expect the shift in consumer tastes driving the growth of natural and plant-based alternatives will continue throughout the foreseeable future.

Management Comments

• Laird Superfoods 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 believe consumers want more transparency and understanding of what they are putting in their bodies and are seeking less-processed alternatives.
• We are driving those trends through a trusted, authentic brand platform.

Industry Context

The company operates in the U.S. Natural, Organic and Functional Food and Beverages sub-segment of the food and beverage market, which is expected to grow to $300 billion by 2024. The company is also exposed to the plant-based foods market, which saw a 6.2% increase in retail sales from 2022 to 2023.

Comparison to Industry Standards

• The company competes with legacy products that are refined-sugar laden and highly processed, as well as other natural, organic, and functional food and beverage producers.
• The company's coffee creamers compete within the $6.9 billion domestic creamer market, which is expected to grow at a 6.3% CAGR through 2027, and includes products offered by Danone SA, TreeHouse Foods Inc., Nestle SA and Dean Foods Co, among others.
• The company's instant latte products compete in the U.S. instant coffee market, which is estimated to reach $1.9 billion in 2024.
• The company's hot chocolate products compete in the U.S. hot chocolate market, which is estimated to reach $1.8 billion in 2024.
• The company's protein powder products compete in the ready-to-drink protein powder market, which was estimated to reach slightly over $2 billion in 2023.
• The company's bars compete in the $20.0 billion snack bar market, which is expected to grow at 6.6% CAGR through 2025.
• The company's granola and oatmeal products compete in the $36.5 billion global cereal market, which is expected to grow at a 3.7% CAGR through 2030.

Related Party Transactions

• The company has an influencer agreement with Gabby Reece to provide certain marketing services. In connection with these services, in the years ended December 31, 2023 and 2022, respectively, advertising expenses totaling $213,051 and $51,812 were included in sales and marketing expenses in the consolidated statements of operations.

Stakeholder Impact

• Shareholders will benefit from the company's improved financial performance and reduced losses.
• Employees will benefit from the company's focus on creating a positive and productive work environment.
• Customers will benefit from the company's focus on providing high-quality, natural, and functional food products.
• Suppliers will benefit from the company's commitment to ethical sourcing of raw materials.
• Creditors will benefit from the company's improved financial stability and reduced risk of default.

Next Steps

• The company will continue to focus on expanding its retail distribution footprint.
• The company will continue to drive shelf velocity through an acceleration of online and offline advertising.
• The company will continue to introduce new products to expand its store footprint.
• The company will continue to evaluate new product development opportunities and marketing strategies.

Key Dates

Keywords

Laird Superfood, plant-based foods, functional foods, coffee creamers, hydration supplements, harvest snacks, e-commerce, wholesale, co-manufacturing, gross margin, operating expenses, net loss, supply chain, product quality, financial results