Laird Superfood, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The unaudited filing covers the company and its wholly owned subsidiary. Laird Superfood sells plant-based and functional foods through e-commerce and wholesale channels.
Financial performance and liquidity
- Q2 revenue: Net sales were $7.72 million, down 11% year over year. Gross profit was $1.88 million and gross margin was 24.3%, versus 18.2% in Q2 2022. Operating loss was $3.66 million; net loss was $3.51 million, or $0.38 per share, compared with a $4.90 million net loss, or $0.54 per share.
- First-half revenue: Net sales were $15.84 million, down 12%. Gross profit was $3.75 million and gross margin was 23.7%, versus 19.6% in the first half of 2022. Operating loss was $7.96 million and net loss was $7.65 million, or $0.83 per share, compared with a $19.04 million net loss, or $2.09 per share.
- Cash flow: Operating activities used $7.46 million in the first half, similar to $7.54 million in the prior-year period. Investing activities provided $0.25 million and financing activities used $0.02 million. Cash, cash equivalents and restricted cash fell $7.23 million to $10.58 million.
- Balance sheet: Current assets were $19.90 million and current liabilities were $6.19 million at June 30. Total liabilities were $6.50 million, including $0.43 million of lease liabilities; the company reported no borrowings under its credit line and no notes payable. The $5.0 million revolving facility was undrawn, but its stated maturity was August 31, 2023. Cash equivalents of $6.325 million were pledged to secure the facility and company credit-card limits.
- Other metrics: Accumulated deficit was $103.79 million. Inventory-obsolescence and disposal costs were $0.63 million in the first half, versus $0.14 million in the prior-year period. The company had $1.39 million of inventory reserves at June 30.
Changes versus the prior comparable period
- Q2 wholesale sales increased 3%, while e-commerce sales declined 20%. For the first half, wholesale sales declined 2% and e-commerce sales declined 19%. Management attributed e-commerce weakness to planned reductions in marketing spend and product-related out-of-stocks; first-half wholesale sales were also affected by elevated trade discounts and timing of club orders.
- Margins improved as the company shifted from in-house production and fulfillment to third-party co-manufacturing, and implemented price increases. First-half improvement was partly offset by promotional activity.
- Operating expenses fell 15% in Q2 and 48% in the first half. The first-half comparison includes $8.0 million of goodwill and long-lived asset impairments recorded in the first half of 2022, so the reduction does not reflect only current-period cost savings.
- Net sales deductions for returns and discounts rose to $2.11 million in Q2 from $1.31 million, and to $3.84 million for the first half from $2.87 million.
Outlook, risks and unusual items
- Going concern: Management said recurring losses, limited cash and dependence on additional financing raise substantial doubt about the company’s ability to continue as a going concern for the 12 months following the report. The filing says additional liquidity will be needed absent other actions; management’s ability to raise capital or execute its plans is not assured.
- Management plans: The company expects continued operating losses for the foreseeable future. Management plans further gross-margin improvement, marketing optimization and reductions in selling, general and administrative costs, and said it expects to mitigate the product-related out-of-stock issue in Q3 2023. No numerical earnings or revenue guidance was provided.
- Product quality and operating model: A coconut milk powder quality issue from a supplier prompted a voluntary product withdrawal in Q1 2023, replacement orders and inventory write-offs. The company introduced additional sensory testing. It completed the move to outsourced manufacturing and fulfillment, with final transition costs incurred in Q1 and no further costs expected.
- Concentration and execution risks: Three customers accounted for 49% of Q2 sales and 45% of first-half sales; three customers represented 78% of receivables at June 30. Production and logistics depend on third parties, and suppliers are geographically concentrated. The filing also identifies risks involving customer retention, competition, financing needs, dilution and access to banking services.
- Contingency: The company accrued $0.1 million for an ongoing product-labeling class action after failing to prevail on a motion to dismiss. It says it believes its claims and defenses are substantial and does not expect a material adverse effect on financial position, but acknowledges litigation outcomes are uncertain.
Important facts for investors to verify
- Whether the company renewed or replaced the revolving credit facility when it reached its August 31, 2023 maturity, and the resulting availability and terms.
- Cash burn, liquidity runway and any financing plans or subsequent developments after June 30, given the going-concern warning and pledged cash.
- Whether product availability recovered as expected in Q3 and how the quality issue affected sales, returns, discounts and inventory reserves.
- Whether margin improvement persists as outsourced production scales, including the effects of co-manufacturer costs, freight and promotional spending.
- Developments in the product-labeling lawsuit and customer concentration, including changes in receivables exposure.