EDGAR 10-K Filing

Company CIK: 1650696
Filing Year: 2021
Filename: 1650696_10-K_2021_0001193125-21-082813.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS.
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, and roasted and instant coffees, teas and hot chocolate. Over time, Laird Superfood plans to grow revenues by further penetrating the multi-billion-dollar market opportunity presented by our current product lines, as well as expanding our platform to include additional products that meet our strict plant-based ingredient criteria.
As a result of growing consumer demand for Laird Superfood products and the continued expansion of our omnichannel distribution strategy, our net sales grew to $26 million in 2020 from $568 thousand in 2016. We operate in one operating segment and one reportable segment: Laird Superfood, Inc.
Market Opportunity
Laird Superfood participates in what the U.S. Census Bureau estimates to be a $759 billion grocery market as of 2020. Laird Superfood is specifically focused on the U.S. Natural, Organic and Functional Food and Beverages sub-segment of the food and beverage market. According to the Nutrition Business Journal, in 2020, U.S. Natural, Organic and Functional Food and Beverages sales were approximately $174 billion and grew 10% from the prior year. Further, according to the Nutrition Business Journal, during the same period, third-party and direct e-commerce sales represented two of the four fastest growing channels for U.S. Natural, Organic and Functional Food and Beverages sales.
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. There is also increasing recognition of the environmental impact of animal-based products. Per the Plant-Based Foods Association, U.S. retail sales of plant-based foods increased 11% from 2019 to 2020, reaching a market value of $5 billion, compared to increases of 2% in the general grocery category.
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.
Our Competitive Strengths
We believe the following strengths differentiate Laird Superfood and create long-term, sustainable competitive advantages.
An Emerging Platform Within the Rapidly Expanding Plant-Based Natural Foods Industry
Over the near and intermediate term, Laird Superfood is highly focused on maximizing revenue growth by further penetrating the multi-billion-dollar market opportunity presented by our current product lines. However, we believe the larger long-term opportunity lies in building Laird Superfood into a unique platform within the natural foods industry, which is currently dominated by single-product companies. The core tenets of this platform approach are strengthening our authentic and trusted brand name, growing our expansive omnichannel distribution strategy and the introduction of a constant flow of new products that align with our core ethos. This platform provides opportunities for continual expansion of our total addressable market (“TAM”) to allow long-duration growth, sustained differentiation of our brand, product diversification and leveraging our core strengths and operating costs to increase profit margins.
An Authentic and Trusted Brand Name
An authentic and trusted brand is one of the strongest long-term barriers to entry and sources of sustained differentiation in the consumer products industry. Since inception, Laird Superfood has invested heavily in building a trusted brand that consumers immediately identify as authentic, plant-based, nutrient-dense and functional. Along with more traditional methods of brand-building, we have effectively harnessed the authentic lifestyle of Laird Hamilton and Gabrielle Reece, both of whom have well-earned reputations for being on the cutting edge of fitness and nutrition. Our goal is to make Laird Superfood the choice for customers searching for nutrient dense, functional foods at a reasonable price. Our target market extends well beyond elite athletes into the mass market due to our recognition that Laird Superfood products must not only be natural, functional and nutrient-dense, they must also taste great and be affordable to provide access to all consumers.
Balanced and Highly Differentiated Omnichannel Distribution Strategy
Our highly differentiated 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, leading to a larger TAM opportunity than is normally available to products available primarily in grocery stores, 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 Growth Strategy
Our primary growth strategies are as follows:
Open-Ended and Long Duration Growth Opportunity in the Enormous Grocery Market
The U.S. grocery market is one of the largest retail end-markets in the world. Laird Superfood’s strategy is to maximize penetration of this opportunity through a variety of avenues, including growing brand trust and recognition, significantly expanding our grocery distribution footprint to multiples of our current level of approximately 7,100 retail doors, driving shelf velocity through an acceleration of online and offline advertising and introducing new products to expand our store footprint.
Exposure to Plant-Based, Functional and Natural Foods Portions of Grocery Market
Within the grocery category, there is an ongoing secular shift from highly processed legacy brands that demonstrate little nutritional benefit to natural, nutrient-dense, functional and plant-based alternatives. We expect the shift in consumer tastes driving the growth of natural and plant-based alternatives will continue throughout the foreseeable future as consumers become better educated on nutrition and focus on the health and wellness of themselves, their families and the environment. An increasing number of natural and plant-based products are moving beyond the natural and specialty stores and into conventional grocery stores. The continuation of these trends should benefit Laird Superfood as it seeks to penetrate the very large overall grocery market.
Business Model Characterized by Repeat and Recurring Revenues
Because the consumption of coffee, creamers, and hydration products is a daily ritual for many consumers, there is a natural and frequent repeat usage of Laird Superfood products among large portions of our customer base. For this reason, Laird Superfood has always enjoyed a meaningful base of recurring revenues due to repeat orders by its consumers and wholesale partners. Growing this base of recurring revenues is a strong focus of Laird Superfood as it evaluates new product development opportunities, acquisitions and marketing strategies.
Continued Expansion of Distribution Footprint
Currently, our products are marketed and sold through a diverse set of physical retail and online channels, including grocery chains, club stores, specialty and natural food outlets, coffee shops, juice bars, gyms,
restaurants, hospitality venues, corporate workplaces, lairdsuperfood.com and Amazon.com. Maximizing potential distribution will be a key growth driver for Laird Superfood and our goal is to expand distribution so that our products are available wherever our customers choose to shop, whether it be a retail store, food service environment or directly online.
Maximize Market Penetration of Existing Product Lines
Laird Superfood’s existing creamer, hydration and beverage enhancing supplement, and instant and roasted coffee categories represent a multi-billion-dollar TAM. We believe penetrating these core markets with our differentiated product lines provides Laird Superfood with a large and long-duration growth opportunity. In the near-term, Laird Superfood will focus on growing share within these categories.
New Product Development
While Laird Superfood’s current product lines are growing strongly and address multi-billion-dollar market opportunities with differentiated products, we intend to enhance our growth by launching new products over time. We are focused on creating products that conform to our uncompromising brand ethos of great taste, high-quality ingredients, nutritional density and functionality. Additional criteria for new product development include the potential for broad commercial acceptance, size of market opportunity, regulatory compliance issues, manufacturing process, availability and cost of raw materials, shelf-life and expected usage patterns by potential customers.
From a growth perspective, ongoing new product launches are expected to continually increase our TAM opportunity. Broadening our product line will also serve to diversify our revenue base and reduce exposure to potential competitive intensity in any one category. We expect all new products, whether developed internally or sourced externally, will ultimately be branded Laird Superfood and they will expand Laird Superfood’s opportunity to become part of our customer’s daily ritual of food and beverage consumption.
Opportunity for Tuck-In Acquisitions to Supplement Organic Growth and Expand Platform
To date, Laird Superfood’s revenues have been driven solely by organic growth, and while we anticipate continued organic growth, we believe there will be opportunities to expand our TAM and diversify our revenue base through acquisitions. In this scenario, our belief is acquisitions would be of a tuck-in nature and target highly fragmented markets within plant-based foods. All products acquired are expected to eventually be re-branded under the Laird Superfood platform, and would fit our ethos of great taste, nutrition, all-natural ingredients and functional benefits.
Proven Efficiency in Marketing Spend to Drive Growth and Acquire New Customers
Throughout our history, Laird Superfood has maintained a disciplined, data-driven and returns-based focus on the deployment of marketing dollars to build our brand and acquire new customers. In our view, marketing dollars must be deployed efficiently to sustain growth over the long-term and eventually move Laird Superfood towards profitability. We have placed a strong focus on generating free and organic traffic for our website and social media channels, expanding our proprietary database of customers, growing subscriptions and acquiring customers from a wide variety of channels. These efforts are aimed at structurally reducing our dependence on the least proprietary and most competitive sources of online customer acquisition. Social media channels, in particular, are useful for launching new products and introducing promotions, as are the social media presences of Mr. Hamilton and Ms. Reece, and certain other influential persons who support the brand in their social media. We expect to remain disciplined in our customer acquisition efforts going forward and have plans to significantly expand the number of channels through which we will attempt to find additional sources of low-cost customer acquisition opportunities.
Vertically Integrated Business Model
Since inception, Laird Superfood has focused on building a vertically integrated business model. The core of this strategy is our highly efficient manufacturing process, which enables rapid expansion of production capacity, provides fixed-cost leverage on increased volumes and optimizes our ability to control quality. We produce our powdered creamers and hydration products on automated equipment. At this stage of revenue contribution, we have elected to co-pack our liquid creamers, harvest snacks, beverage enhancing supplements, and whole bean and ground coffee. Based on our current projections, we believe our existing footprint will support $100 million in annual gross sales of internally produced powdered products without a need for a material increase in capital expenditures. This provides us with substantial current excess manufacturing capacity to enable future growth in a capital efficient manner.
In addition to manufacturing capabilities, we have internalized branding, design, packaging, digital marketing, customer service and data analytic capabilities, along with finance, legal, research and development, and human resource functions. Our broad in-house capabilities and extensive manufacturing capacity are expected to enable significant fixed-cost leverage going forward in manufacturing, as well as most other operating expense line items.
Targeting Top-Tier Food Industry Gross Margins
Strong gross margins will provide Laird Superfood with a sustainable competitive advantage, as these gross profit dollars can be used to invest in growth initiatives to further differentiate our brand, expand our revenue opportunity and increasingly cover fixed costs as we move toward profitability.
Focus on Environmental, Social and Governance (ESG) Best Practices
Laird Superfood’s founders strongly believe we should seek to drive value for all relevant stakeholders, including customers, employees, community, shareholders and the broader environment. This philosophy of “Ohana” is particularly important to Laird Hamilton and Gabrielle Reece and permeates our culture. Laird Superfood is conscientious in its sourcing of raw materials, the carbon-benefits of facilitating plant-based alternatives, the impact of our operations on the environment and our community and providing products that discourage the culture of single-use plastics.
Our Products
Our authentic and sustainably differentiated plant-based products become part of our customer’s “Daily Ritual”, providing energy and hydration throughout the day, presenting the opportunity to expand a portfolio of plant-based products. As part of our focus on sustainability and a better-for-you “Daily Ritual”, the product categories we have focused on to date are powdered and liquid coffee creamers, hydration and beverage enhancing supplements, and coffee, tea and hot chocolate products, and recent expansion into snack products with the Harvest line of pili nuts and medjool dates.
Our gross sales by product category are reflected below:
Years Ended December 31,
$
% of Total
$
% of Total
Coffee creamers
$ 18,433,345
%
$ 9,330,678
%
Hydration and beverage enhancing supplements
3,887,198
%
2,022,269
%
Coffee, tea, and hot chocolate products
5,961,254
%
1,930,434
%
Other
675,339
%
471,097
%
Gross sales
28,957,136
%
13,754,478
%
Shipping income
248,865
%
464,551
%
Returns and discounts
(3,199,603 )
(12 %)
(1,115,301 )
(9 %)
Sales, net
$ 26,006,398
%
$ 13,103,728
%
Liquid coffee creamers represented 5% of our gross sales in 2020. Liquid coffee creamers became available for sale in April 2020 and therefore did not represent any of our 2019 sales results. Hydration and beverage enhancing supplements include sales of Hydrate coconut waters and our full Activate and Renew supplement line. Coffee, tea, and hot chocolate products include traditional and functional ground and whole bean coffee, Hot Chocolate with Functional Mushrooms, and our InstaFuel line of just-add-water coffee and tea products. Other products include Harvest snacks and miscellaneous branded goods, such as coffee mugs, thermoses, t-shirts, and hats.
Coffee Creamers
Laird Superfood is part of the $4 billion coffee creamer market with its cornerstone portfolio of Superfood Creamers. According to Information Resources, Inc. (IRI), the creamer category grew 13% in 2020, while Laird Superfood’s creamer business grew 98% in 2020.
In July 2015, we introduced the Original Laird Superfood Creamer and since that time have introduced several additional flavors. In April 2020, Laird Superfood entered the liquid creamer market, expanding its TAM to $4 billion.
Laird Superfood sells eight SKUs of powdered coffee creamers and four SKUs of liquid coffee creamer. Sales of powdered coffee creamer represented 59% of our gross sales in 2020 and 68% of our gross sales in 2019. We expect to continue expanding our Superfood Creamer platform going forward with additional flavors, nutritional profiles, and formulations based on consumer preferences and demand. Such products demonstrate attractive repeat usage and customer lifetime value characteristics.
The three main benefits and points of differentiation to consumers from our Superfood Creamer products are their taste, limited ingredient set, and their inclusion of plant-based fats. All creamers include Aquamin, a natural source of calcium and trace amounts of 72 other minerals, and all liquid creamers are differentiated by functional mushroom extracts in their ingredient set. Powdered creamers have the further appeal of shelf stability and on-the-go convenience.
The philosophy driving our pricing strategy is accessibility to consumers prioritizing less processed and more sustainable foods.
Powdered Coffee Creamers
Laird Superfood’s Superfood Creamer was originated in powdered form for convenience and sustainability. We have developed eight powdered SKUs: Original Superfood Creamer, Unsweetened Superfood Creamer,
Cacao Superfood Creamer, Turmeric Superfood Creamer, seasonal Pumpkin Spice Superfood Creamer, seasonal Chocolate Mint Superfood Creamer, Vanilla Superfood Creamer, and Original Superfood Creamer with Functional Mushrooms. Our powdered coffee creamers have an 18-month shelf life.
Powdered coffee creamers have historically represented a smaller, lower-price-point segment of the coffee creamer market, but we believe our powdered Superfood Creamers are expanding that segment and competing for customers who historically have purchased liquid coffee creamers.
Liquid Coffee Creamers
Our liquid coffee creamers were developed internally based on naturally sourced, delicious and functional ingredients. Liquid creamers provide the added benefits of being on the perimeter refrigerated shelf space, as well as a lower price point per unit.
We have developed four liquid SKUs: Original with Functional Mushrooms, Unsweetened with Functional Mushrooms, Vanilla with Functional Mushrooms, and Turmeric with Functional Mushrooms.
Hydration and Beverage Enhancing Supplements
Laird Superfood’s hydration and beverage enhancer portfolio includes our Hydrate coconut water products (four SKUs), our Activate Platform (two SKUs), our Performance Mushroom supplement (one SKU), and our Renew Plant-Based Protein (one SKU). These products represented 13% of our gross sales in 2020 and 5% of our gross sales in 2019.
The main benefits and points of differentiation to consumers from our Hydrate products are a limited number of ingredients; no artificial sugars, ingredients or colors that are prevalent in most competing sports drinks; and a lower cost per serving than traditional single-use packaged sports drinks and coconut waters. Hydrate is also environmentally friendly due to its powdered form, avoiding single use plastics. The main benefits of our beverage enhancing supplements are a plant-based, less processed and recognizable ingredients set.
Hydrate
We currently produce four SKUs of our powdered coconut water Hydrate platform: Original Hydrate, Pineapple Mango Hydrate, Matcha Hydrate, and Orange Guava Hydrate.
In our Hydrate products, we focus on price per serving, emphasizing value in our products compared to single-use products.
Beverage Enhancing Supplements
Our beverage enhancing supplement line is currently four SKUs: Performance Mushrooms, Activate Daily Jumpstart, Activate Prebiotic Daily Greens, and Renew Plant-Based Protein.
Our Activate Prebiotic Daily Greens and Renew Plant-Based Protein were launched in December 2020. We are in the early stages of building out our supplements portfolio and will continue to expand the breadth of our Activate, Renew and Mushroom offerings over the course of the next several years.
Coffee, Tea, and Hot Chocolate Products
InstaFuel and Hot Chocolate with Functional Mushrooms
Laird Superfood sells four SKUs of high-quality instant beverage products pre-mixed with its superfood creamer, in a just-add-hot-water line InstaFuel products: Original InstaFuel (coffee with Original Superfood
Creamer), Unsweetened InstaFuel (coffee with Unsweetened Superfood Creamer), Matcha InstaFuel (green tea and Original Superfood Creamer), and Chai InstaFuel (black tea and Original Superfood Creamer). Laird Superfood also sells one SKU of Hot Chocolate with functional mushrooms.
We currently self-manufacture all our InstaFuel and Hot Chocolate products to maximize long-term margin and control quality.
Whole Bean and Ground Coffee
Coffees offer an intuitive and complementary sale to individuals purchasing our creamers and we believe that our new organic coffee blended with functional mushrooms is a point of differentiation in the coffee segment. We currently sell nine whole and ground roasts. Ground and whole bean coffee products represented 9% of our gross sales in 2020 and 5% of our gross sales in 2019.
Our coffees are sourced from Peru, and are a hand-picked, high altitude, shade grown variety selected for their low acidity.
Harvest Snack Products
Pili Nuts and Harvest Dates
Laird Superfood started selling four SKUs of high-quality, naturally sourced, functional snack products including Pili Nuts and Harvest Dates in Q4 2020. We have developed three Pili Nut SKUs, including Himalayan Salt Pili Nuts, Matcha Pili Nuts, and Cacao Pili Nuts, and one SKU of Original Harvest Dates.
Our Customer Usage Patterns
All Laird Superfood products are focused on providing nutrient dense and functional alternatives in multi-billion-dollar market categories, such as coffee creamers and sports drinks. Laird Superfood products are also designed to become part of an individual’s daily ritual and repeated usage patterns.
The majority of our business is currently conducted online, and we expect that percentage will decrease over time due to our anticipated roll-out across physical retail channels. We have over thirty-six months of cohort data on all customers that have ordered through our direct website. We view this data as indicative of expected customer usage patterns across all channels on the basis of historic trend analysis.
Subscriptions play an important role in driving retention rates for our direct online business and in 2020 and 2019 subscriptions made up 30% and 32% of our direct online net sales, respectively. In addition to subscriptions, lairdsuperfood.com has a high percentage of repeat users. In both 2020 and 2019, 66% of the net sales at lairdsuperfood.com came from either subscribers or repeat users. These dynamics create meaningful recurring revenues and the combination of repeat usage, order frequency and retention rates informs our views on strategic marketing spend and customer unit economics.
Distribution Channels
We generate revenue through three channels: online, wholesale, and food service. Our customers and distribution channels include our online business through our website, lairdsuperfood.com, and Amazon.com our wholesale sales to distributors and retailers in channels such as specialty, conventional grocery, mass market retail and drug retail and food service customers.
Our net sales by distribution channel are reflected below:
Years Ended December 31,
$
% of Total
$
% of Total
Online
$ 14,501,706
%
$ 7,646,864
%
Wholesale
10,996,517
%
5,295,024
%
Food service
508,175
%
161,840
%
Sales, net
$ 26,006,398
%
$ 13,103,728
%
Online
Our online business consists of lairdsuperfood.com and Amazon.com.
Lairdsuperfood.com sells all of our SKUs with the exception of our refrigerated liquid Superfood Creamers. Lairdsuperfood.com allows for online-only sales of trial products, prior to the investment necessary to launch in wholesale.
Content on our website allows Laird Superfood to educate consumers on the benefits of our products and ingredients, market and cross-sell new products. It also facilitates our subscription business which has shown consistent revenue growth since its inception in May 2017.
For sales through Amazon.com, we send products to Amazon, and Amazon fulfills orders placed through its online marketplace from its fulfillment centers. Amazon charges us fulfillment fees for this service and may charge storage fees for certain inventory. We sell a number of our SKUs on Amazon.com. Sales through Amazon.com accounted for 21% and 30% of our total net sales in 2020 and 2019, respectively.
Our net sales from our online business are reflected below:
Years Ended December 31,
Lairdsuperfood.com
$ 8,964,625
$ 3,692,845
Amazon
5,537,081
3,954,019
Total Sales, net
$ 14,501,706
$ 7,646,864
Wholesale
Our wholesale business addresses the $759 billion grocery industry, as well as many non-grocery retail channels. In 2020, wholesale made up 42% of our net sales, and in 2019, wholesale made up 40% of our net sales. Laird Superfood products are sold through a diverse set of retail channels, including conventional, natural and specialty grocery, club, outdoor and drug stores. We estimate our products are in over 7,100 retail door locations across the United States as of December 31, 2020.
Our wholesale net sales include sales into wholesale grocery distribution, such as United Natural Foods, Inc. and KeHE Distributors, distributing to clients such as Whole Foods, Erewhon, Sprouts, and Safeway, as well as direct wholesale sales to retailers across diverse channels, such as Costco, HEB, Hyvee, Natural Grocers, CVS, Kroger and REI.
In 2020 and 2019, the wholesale business represented $11 million and $5 million of net sales, or 42% and 40% of our net sales, respectively. Our largest wholesale customer in 2020 and 2019 was Costco which represented 23% and 11% of our total net sales, respectively. No other customer represented more than 10% of our total net sales in 2020 or 2019.
According to SPINS, as of December 31, 2020, we have achieved an All Commodity Volume (ACV) of 52% in the natural enhanced retailer channel, up from 35% as of December 31, 2019. In the conventional grocery channel, we estimate we have achieved 11% of ACV.
Food Service
Our food service business addresses a broad set of customers including local and regional coffee shops, juice bars, corporate offices, hotels, restaurants, college campuses, professional sports teams and gyms. In 2020 and 2019, food service was 2% and 1% of our net sales, respectively.
Laird Superfood has worked with Bunn, one of the largest coffee capital equipment manufacturers in the United States, to create the Laird Superfood Crescendo®, a plant-based latte machine that is a convenient solution for a variety of office, gym, restaurant, and other food service environments.
In addition to our Crescendo® machines, our machines platform also includes our other hot beverage machines (HBM), offering a convenient solution for office, food service, and coffee shop environments. As of December 31, 2020, 34 HBMs were operating as an installed base, with average sales per installed HBM per month of Superfood Creamers and coffee of $128. Our HBM business is currently a small part of our business, but we believe it has potential to become meaningful given strong usage dynamics. As of December 31, 2020, last twelve-month net sales to food service customers were 2% of net sales, and our machine platform represented less than 1% during the same period.
Competition
Fundamentally, we do not believe our competition is our peer better-for-you, less processed creamer companies. We view our competition as the legacy products which are refined-sugar laden, highly processed, and have undecipherable ingredient lists. We believe consumers want more transparency and understanding of what they are putting in their bodies, and are seeking less-processed alternatives, and we are driving those trends through a trusted, authentic brand platform.
We compete in the following markets, based on how we categorize our core products:
Coffee Creamers
Our creamer products primarily compete within the $4 billion domestic creamer market that, according to IRI, grew 13% in 2020 and includes products offered by Danone SA, TreeHouse Foods Inc., Nestle SA and Dean Foods Co, among others.
We believe our creamers are differentiated from competing products due to their superior taste profile, a limited ingredient set, and a differentiated energy profile due to the inclusion of plant-based fats. In addition to being coffee additives, our powdered creamers are used by consumers in a variety of different applications, such as smoothies and baked goods.
Hydration and Beverage Enhancing Supplements
Our Hydrate platform primarily competes against hydration enhancing sports drinks. The two dominant competitors in the $7 billion sports drink market are Gatorade, owned by PepsiCo, and PowerAde, owned by The Coca-Cola Company.
Hydrate also competes within the $3 billion coconut water market (360 Research Reports), which is highly fragmented relative to the sports drink market.
We believe that our Hydrate platform is differentiated from competing products due to a very limited ingredient set that contains none of the artificial sugars, ingredients or colors that are prevalent in most competing sports drinks. Due to its convenient powdered form, Hydrate also allows customers to adjust serving size based on individual taste preference, has a lower cost per serving than traditional sports drinks or coconut waters and is environmentally friendly due to its powdered form and elimination of single-use plastics.
Activate, Renew and Performance Mushroom Supplements
Our Activate Daily Jumpstart and Activate Prebiotic Daily Greens lines compete in the $61 billion global vitamin and supplements market (Reportlinker.com). Activate Daily Jumpstart and Activate Prebiotic Daily Greens compete largely as an alternative to single-serve cold-pressed juices which frequently focus on similar ingredients (lemon cayenne mixes, and superfood greens mixes), and certain other powdered beverages.
Our Renew Plant-Based Protein line competes in the ready to drink protein powder market which is highly fragmented. The protein supplement industry was estimated to be $18 billion in 2019. Ready-to-drink and pre-formulated drinks were anticipated to be the fastest in revenue growth in the segment. Renew is differentiated amid this market with a short, understandable ingredient list.
Our Performance Mushroom supplement competes in the natural supplement market, which is highly fragmented with several peer companies.
InstaFuel and Hot Chocolate with Functional Mushrooms
InstaFuel instant beverage products and our Hot Chocolate with Functional Mushrooms compete with other just-add-hot-water lines of instant coffee products and hot chocolate. The annual revenue generated from the instant coffee market in the U.S. was estimated to be $15 million according to Statista in 2020. The national hot chocolate market was $950 million in the United States in 2020 according to IBISWorld. Due to being made with coconut sugar rather than refined sugars and inclusion of functional mushrooms, we believe our hot chocolate product to be highly differentiated from legacy hot chocolate brands.
Whole Bean and Ground Coffee
According to the Specialty Coffee Association of America, the retail value of the U.S. coffee market is estimated to be $89 billion as of May 2020. We believe that our line of high quality Peruvian organic roasts, as well as our more highly differentiated functional coffee blends, incorporating functional mushroom extracts, superfoods, and botanical adaptogens, have natural synergies for many buyers of our creamer products, and convenience of combined ordering on our online platform.
In 2020, we launched our functional coffee blends, created to support consumers through the addition of plant-based ingredients including functional mushroom extracts, superfoods, and botanical adaptogens. These products are considered to be a differentiated offering within the coffee category.
Supply Chain
Laird Superfood sources its raw materials from a variety of suppliers located both inside and outside the United States. The Company purchases substantial portions of its roasted coffee products from one supplier, coconut milk powder from two suppliers, and coconut water powder from one supplier. There are multiple sources of roasted coffee products, coconut milk powder and coconut water powder available to the Company, and management believes that the Company could find suitable replacements for these suppliers on substantially similar terms. In addition, the Company sources all of its Aquamin from a single supplier, Stauber Performance Ingredients. Raw materials are shipped to our production facility in Sisters, Oregon where they are stored in our warehouse and production facility. For products we self-manufacture, these raw materials are then mixed and
packaged into finished goods. Finished goods are then warehoused and shipped out of Sisters to both retail and wholesale customers, as well as distributors across the country. A minority of our products are manufactured and packaged offsite. The finished goods are then typically shipped by our co-packers to our warehouse in Sisters where we then ship them to end-customers.
Laird Superfood has a supplier code of conduct for the ethical sourcing of raw materials from within and outside the United States, which it provides to suppliers as part of its supplier-onboarding process.
Regulation
We are subject to a wide range of governmental regulations and policies. We are required to comply with the regulations and policies promulgated by the Environmental Protection Agency (the “EPA”) and corresponding state agencies, as well as the United States Department of Agriculture (the “USDA”), the Food and Drug Administration (the “FDA”), the Federal Trade Commission (the “FTC”), the Equal Employment Opportunity Commission (EEOC), the United States Department of Health and Human Services (HHS), the United States Department of Labor (DOL), and the Occupational Safety and Health Administration (“OSHA”). In addition, the Federal Communications Commission (the “FCC”), monitors claims made by companies, particularly with celebrity spokespeople.
USDA National Organic Program and Similar Regulations
We are involved in the sourcing, manufacturing, supplying, processing, marketing, selling and distribution of organic food products and, as such, are subject to certain organic quality assurance standards. The Organic Foods Production Act mandates that the USDA develop national standards for organically produced agricultural products to assure consumers that those products marketed as organic meet consistent, uniform standards. We currently manufacture and distribute a number of organic products that are subject to the standards set forth in the Organic Foods Production Act and the regulations adopted thereunder by the USDA National Organic Program. Our organic products are certified organic by a USDA-accredited certifying agent, and we believe that we are in material compliance with the organic regulations applicable to our business.
Additionally, our organic products may be subject to various state regulations. Many states have adopted their own organic programs making the state agency responsible for enforcing USDA regulations for organic operations. However, state organic programs may also add more restrictive requirements due to specific environmental conditions or the necessity of production and handling practices in the state.
Food-Related Regulations
As a manufacturer and distributor of food products, we are also subject to a number of federal, state and local food-related regulations, including, but not limited to, the Federal Food, Drug and Cosmetic Act of 1938 (the “FDCA”) and regulations promulgated thereunder by the FDA. This comprehensive regulatory framework governs the manufacture (including composition and ingredients), labeling, packaging and safety of food in the U.S. The FDA:
•
regulates manufacturing practices for foods through its current good manufacturing practices and regulations affecting food manufacturing;
•
regulates ingredient safety; and
•
prescribes the format and content of certain information required to appear on food product labels.
Some of the key food safety and food labeling regulations in the U.S. are discussed in the following sections.
Food Safety Regulations
The FDA Food Safety Modernization Act (“FSMA”) enables the FDA to better protect public health by strengthening the food safety system. The law provides the FDA with new enforcement authorities and tools designed to achieve higher rates of compliance with prevention- and risk-based food safety standards and to better respond to and contain problems when they do occur.
We believe that we are in material compliance with the current regulations promulgated to implement FSMA that are applicable to our business. We are continuing to develop internal compliance policies and practices for those rules that have future compliance dates in order to ensure compliance by the required deadlines.
The FDA’s Foreign Supplier Verification Program requires that the United States owner or consignee of imported food take steps to verify that the foreign supplier of imported food is manufacturing the food in accordance with FDA requirements, that the importer understand what hazards the foreign supplier is controlling and how those hazards are controlled, and that this oversight program is documented. The regulation is being implemented using a tiered series of compliance dates based on the size of the U.S. importer and the foreign supplier. We have developed a program that we believe is in compliance with this regulation and are monitoring its ongoing implementation.
We are subject to numerous other federal, state and local regulations involving such matters as the licensing and registration of manufacturing facilities, food safety systems, transportation of food products, record keeping, enforcement by government health agencies of standards for our products, inspection of our facilities and regulation of our trade practices in connection with the sale of food products.
Food Labeling Regulations
The Company is subject to certain requirements relating to food labeling under the FDCA and corresponding FDA regulations as well as the Fair Packaging and Labeling Act enacted in 1967 and corresponding FTC regulations. Although the FTC and FDA share jurisdiction over claims made by manufacturers of food products (with the USDA also having jurisdiction over “organic” claims), the FDA retains primary jurisdiction over the labeling of food products whereas the FTC regulates advertising.
The FDA and FTC require that all food products be labeled to disclose the net contents, the identity of commodity, nutrition information, and the name and place of business of the product’s manufacturer, packer, or distributor. Both agencies also require that any claim on the product be truthful and not misleading. The FDA also has detailed regulations and requirements governing various types of claims about products’ nutritional value and wellness benefits, such as a nutrient content claims, health claims, and structure-function claims. Claims falling under these regulations must be phrased in specific ways to avoid misbranding the food. We believe we are in compliance with applicable FDA claims regulations.
Other state and local statutes and regulations may impose additional food labeling requirements. For instance, the California Safe Drinking Water and Toxic Enforcement Act of 1986 (commonly known as Proposition 65) requires, with a few exceptions, that a specific warning appear on any consumer product sold in California that contains a substance, above certain levels, listed by that state as having been found to cause cancer or birth defects. This law exposes all food and beverage producers to the possibility of having to provide warnings on their products.
Environmental Regulations
We are also subject to various U.S. federal, state and local environmental regulations. Some of the key environmental regulations in the U.S. include, but are not limited to, the following:
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Air quality regulations-air quality is regulated by the EPA and certain city/state air pollution control groups. We file emission reports annually.
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Waste treatment/disposal regulations-solid waste is either disposed of by a third-party or, in some cases, we have a permit to haul and apply the sludge to land. Agreements exist with local city sewer districts to treat waste at specified levels of Biological Oxygen Demand (“BOD”), Total Suspended Solids (“TSS”) and other constituents. This can require weekly/monthly reporting as well as annual inspection.
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Sewer regulations-we have agreements with the local city sewer districts to treat waste at specified limits of BOD and TSS. This requires weekly/monthly reporting as well as annual inspection.
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Hazardous chemicals regulations-we file various reports with local city/state emergency response agencies to identify potential hazardous chemicals being used in our facilities.
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Storm water-all our facilities are inspected annually and must comply with an approved storm water plan to protect water supplies.
Consumer Protection Regulations
The FTC has the authority to regulate traditional and digital advertising for most types of consumer products, including our product offerings. The FTC has interpreted the Federal Trade Commission Act (the “FTC Act”) to prohibit unfair or deceptive acts or practices in commerce and oversees express and implied claims in advertising as well as certain promotional activities such as the use of social media influencers by advertising companies.
Our marketing, advertising, and promotional activities for our consumer products must adhere to the FTC Act’s requirement for truthful, non-misleading and adequately substantiated claims. If our advertising does not comply with FTC and similar State requirements, we could become subject to an investigation by FTC or a consent decree, which could have a material adverse impact on our business and reputation.
Employee Safety Regulations
We are subject to certain safety regulations, including OSHA regulations. These regulations require us to comply with certain manufacturing safety standards to protect our employees from accidents. We believe that we are in material compliance with all employee safety regulations applicable to our business.
Intellectual Property
We have the right to the following material trademarks: Laird Superfood, Superfood Creamer and InstaFuel in the United States, and Laird Superfood in several international jurisdictions, including the European Union.
Human Capital Resources
As of December 31, 2020, we had 145 full-time employees and five part-time employees. None of these employees are represented by labor unions or covered by collective bargaining agreements. We believe that our employee relations are good.
We have developed and are executing on a complete program to manage the full employee life cycle, which begins with talent acquisition, focuses on robust onboarding and effective communication, includes a dynamic performance management program, utilizes engagement best practices, and is rounded out by career development and succession planning across our organization. We continuously strive to cultivate and support a highly engaged and productive workforce.
Talent Acquisition
We have a strong track record of directly recruiting top talent but we also partner with external professional recruiting firms to enhance our recruiting efforts when appropriate. We have relationships with local and targeted
colleges and universities to support our intern programs and for supplying key talent in areas like Food Science and Quality Assurance. We have also developed a partnership with our community high school to offer skills training and career experience to establish a pipeline of talent for our front-line workforce.
Onboarding and Communication
In order to create a high-performing team, we establish a firm foundation of business understanding through a robust and cross-functional onboarding process. Every employee begins with a common understanding of our history, vision, mission, values, and goals and objectives, and we train employees regarding fundamentals such as workplace and food safety and their employee rights and benefits.
We actively seek opportunities for effective communication, and our CEO each month communicates to all staff via an all-employee letter. Departments meet individually and cross-functionally in a variety of ways. Managers are trained to hold regular one-on-one meetings to communicate on projects, tasks, feedback, and development. Individuals are encouraged to communicate through both formal methods and our Open-Door Policy.
Engagement
Our engagement program is centered upon an annual engagement survey, which serves as an annual benchmark and leads into a series of in-person focus groups to further understand and act upon our employee feedback. The focus groups allow us to drill down on employee feedback, give voice to our workforce, and create an annual action plan for increasing our engagement and productivity.
Performance Management
We have built a robust performance management program that seeks to combine best practices and innovation. Our program begins with goal setting at the company, department, and individual level. The program incorporates regular, direct feedback in one-to-one conversations between managers and direct reports across all levels of the organization. A major component of our performance management program is our Annual 360 Feedback Event ensuring performance is measured and enhanced not only by the manager’s assessment but through peer feedback and feedback on management as well. Any time of the year, employees can ask for or offer feedback transparently and easily through a shared platform in support of our feedback-focused performance management culture.
Talent Development
We conduct an annual talent review to identify top performers and high potential talent. This review informs our development activities and skill-building opportunities of our employees across all levels. We have a strong track record of internal growth and development with many examples of employees growing into new roles with increasing responsibility. We offer employees the opportunity to participate in external leadership development programs in person or online, as well through professional associations and conferences. Additionally, we offer internal training on targeted competencies such as giving and receiving feedback and effective goal setting.
Succession Planning
We have begun a formal succession planning process that is designed to work in concert with our talent review and performance management processes. A systematic and regular review of our internal talent is critical to meeting the future needs of our business. Our process allows us to both identify immediate and long-range succession planning to ensure our business can continue operating at the highest level.
Compensation
Our total rewards program is designed to ensure our talented team is both fairly paid and rewarded for performance. We invested significant time in establishing market competitiveness in 2020 and making adjustments where necessary with the goal of retaining top talent and ensuring equitable pay practices. We offer competitive benefits to ensure that our employees are provided for across the full range of employee rewards.
Diversity and Inclusion
We believe diversity and inclusion enable the company to benefit from multiple points of view and broad thinking innovation. Diversity and inclusion better positions us to understand our customers’ needs and to ultimately succeed in our vision of providing better food for a better world. Our senior leadership team is 50/50 male/female, and our workforce is similarly gender diverse with 55% male and 45% female. Throughout 2020 we partnered with youth special needs organizations to provide job opportunities, career education, and skills training in our facilities. Our hiring efforts include the employment of special needs individuals. We continue to seek opportunities for building an inclusive culture that encourages, supports, and celebrates the diverse voices of our world.
Corporate Information
We were formed as a limited liability company on June 25, 2015 under the laws of the State of Oregon, converted to a corporation under the laws of the State of Oregon on February 18, 2016, and converted to a corporation under the laws of the State of Delaware on July 3, 2018. Our principal executive offices are located at 275 W. Lundgren Mill Drive, Sisters, Oregon 97759. Our website is www.lairdsuperfood.com. We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make this information available on or through our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings, at www.sec.gov. We have included our website address in this Annual Report as an inactive textual reference only. Information contained on, or that can be accessed through, our website is not part of this Annual Report. You should not rely on any information contained or included on our website in making your decision whether to purchase our common stock.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS.
Our business is subject to various risks and uncertainties. Investors should carefully read the following factors as well as the cautionary statements referred to in “Cautionary Note Regarding Forward-Looking Statements” in herein. If any of the risks and uncertainties described below or elsewhere in this annual report on Form 10-K occur, the Company’s business, financial condition, or results of operations could be materially adversely affected.
Risks Relating to Our Limited Operating History, Financial Position and Capital Needs
We are an early stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
We are an early stage company. We were formed and commenced operations in June 2015. We face all the risks faced by newer companies, including significant competition from existing and emerging competitors, many of which are established and have access to capital. In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from an early stage company to a company capable of supporting larger scale commercial activities. If we are not successful in such a transition, our business, results and financial condition will be harmed.
We have not been profitable to date and we expect operating losses for the near future. During the year ended December 31, 2020, we achieved net sales of approximately $26 million and incurred net losses of approximately $13 million. During the year ended December 31, 2019, we achieved net sales of approximately $13 million and incurred net losses of approximately $9 million. Furthermore, to the extent our business strategy is successful, we must control overhead expenses and we may need to incur the expense of additional reliance on outside co-packers or hire additional personnel as needed. We may not succeed in expanding our customer base and product offerings and even if we do, we may never generate revenue that is significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress our value and could impair our ability to raise capital, expand our business, diversify our product offerings or even continue our operations.
We may need additional funding in order to grow our business.
To date, we have financed our operations through our initial public offering, private placements of our common and preferred stock and borrowings under loan agreements. We have devoted substantially all our financial resources and efforts to developing our products, workforce, and manufacturing capabilities. Our long-term growth and success are dependent upon our ability to generate cash from operating activities. There is no assurance that we will be able to generate sufficient cash from operations or access the capital we need to grow our business. Our inability to obtain additional capital could have a material adverse effect on our ability to fully implement our business plan and grow our business, to a greater extent than we can with our existing financial resources.
If our available cash balances and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements including lower demand for our products or due to other risks described herein, we may seek to sell common stock or preferred stock or convertible debt securities, enter into an additional credit facility or another form of third-party funding or seek other debt financing.
We may also consider raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to:
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acquire or invest in complementary businesses or assets;
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increase our sales and marketing efforts and address competitive developments;
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provide for supply and inventory costs;
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fund development and marketing efforts of any future products or additional features to then-current products;
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acquire, license or invest in new technologies;
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finance capital expenditures and general and administrative expenses.
Our present and future funding requirements will depend on many factors, including:
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our ability to achieve revenue growth and improve gross margins;
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the cost of expanding our operations and offerings, including our sales and marketing efforts;
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the effect of competing market developments; and
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costs related to international expansion.
The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, dilution to our shareholders could result. Any equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights or grant licenses on terms that are not favorable to us.
Our rapid growth may not be indicative of our future growth, and our limited operating history may make it difficult to assess our future viability.
Our net sales grew to approximately $26 million for the year ended December 31, 2020, from $13 million for the year ended December 31, 2019. We expect that, in the future, as our revenue increases to higher levels, our revenue growth rate will decline. We also believe that growth of our revenue depends on several factors, including our ability to:
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expand our existing channels of distribution;
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develop additional channels of distribution;
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grow our customer base;
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cost-effectively increase online sales at our direct website and third-party marketplaces;
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effectively introduce new products;
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increase awareness of our brand;
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manufacture at a scale that satisfies future demand; and
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effectively source key raw materials.
We may not successfully accomplish any of these objectives. Since our inception in June 2015, we have not yet demonstrated the ability to manage rapid growth over a long period of time or achieve profitability at scale. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history or had previously achieved profitability.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
Our rapid growth has placed and may continue to place significant demands on our organizational, administrative and operational infrastructure, including manufacturing operations, quality control, technical
support and customer service, sales force management and general and financial administration. As we continue to grow, we will need to make significant investments in multiple facets of our company, including in sales, marketing, product development, information technology, equipment, facilities and personnel. We will also need to improve our operational, financial and management controls as well as our reporting systems and procedures.
If we are unable to manage our growth effectively, we may be unable to execute our business plan, which could have a material adverse effect on our business and our results of operations. Managing our planned growth effectively will require us to:
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maintain a low cost of customer acquisition relative to customer lifetime value;
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identify products that will be viewed favorably by customers;
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enhance our facilities and purchase additional equipment at our facility in Sisters, Oregon; and
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successfully hire, train and motivate additional employees, including additional personnel for our technological, sales and marketing efforts.
The expansion of our products and customer base may result in increases in our overhead and selling expenses. Any increase in expenditures in anticipation of future sales that do not materialize would adversely affect our profitability. In addition, if we are unable to effectively manage the growth of our business, the quality of our products may suffer and we may be unable to address competitive challenges, which would adversely affect our overall business, operations and financial condition.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are subject to the periodic reporting requirements of the Exchange Act. We must design our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. For example, our directors or executive officers could inadvertently fail to disclose a new relationship or arrangement causing us to fail to make a required related party transaction disclosure. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Risks Relating to Our Business
Competition in the food and beverage retail industry, especially Internet-based competition, is strong and presents an ongoing threat to the success of our business.
The food and beverage retail industry is very competitive. In our online and wholesale business, we compete with food and beverage retail stores, supermarkets, warehouse clubs and other mass and general retail and online merchandisers, including Internet retailers, many of which are larger than us and have significantly greater capital resources than we do, selling both competitive products and retailing our own products, competing against our direct online business. We also compete with a number of natural, organic, and functional food and beverage producers.
We face significant competition from these and other retailers and producers. Any changes in their merchandising and operational strategies could negatively affect our sales and profitability. In particular, if natural, organic, and functional food and beverage competitors seek to gain or retain market share by reducing
prices, we would likely be forced to reduce our prices on similar product offerings in order to remain competitive, which may result in a decrease in our market share, net sales and profitability and may require a change in our operating strategies.
We have been able to compete successfully by differentiating ourselves from our competitors by providing an expanding selection of natural, organic, and functional products, competitive pricing, convenience and exceptional customer service. If changes in consumer preferences decrease the competitive advantage attributable to these factors, or if we fail to otherwise positively differentiate our product offering or customer experience from our competitors, our business, financial condition, and results of operations could be materially and adversely affected.
Many of our current competitors have, and potential competitors may have longer operating histories, greater brand recognition, larger fulfillment infrastructures, greater technical capabilities, significantly greater financial, marketing and other resources and larger customer bases than we do. These factors may allow our competitors to derive greater net sales and profits from their existing customer base, acquire customers at lower costs or respond more quickly than we can to new or emerging technologies and changes in consumer preferences or habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies (including but not limited to predatory pricing policies and the provision of substantial discounts), which may allow them to build larger customer bases or generate net sales from those customer bases more effectively than we are able to execute upon.
We expect competition in the natural, organic, and functional food and beverage industry, and in particular Internet-based competition, generally to continue to increase. We believe that our ability to compete successfully in this market depends upon many factors both within and beyond our control, including:
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the size and composition of our customer base;
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the number of products that we feature on our website;
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the quality and responsiveness of customer service;
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our selling and marketing efforts;
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the quality and price of the products that we offer;
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the convenience of the shopping experience that we provide;
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our ability to distribute our products and manage our operations; and
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our reputation and brand strength.
If we fail to compete successfully in this market, our business, financial condition, and results of operations would be materially and adversely affected.
We have less capital and resources than many of our competitors which may give them an advantage in developing and marketing products like ours or make our products less desirable to consumers.
We are involved in a highly competitive industry. Many of our current and potential competitors have longer operating histories, significantly greater financial, marketing and other resources, and larger client bases than we have (or may be expected to have). Such resources may give our competitors an advantage in developing and marketing products like ours or products that make our products less desirable to consumers. There can be no assurance that we will be able to successfully compete against these competitors.
Given the rapid changes affecting the global, national, and regional economies generally and the natural, organic, and functional food and beverage industry, we may not be able to create and maintain a competitive
advantage in the marketplace. Our success will depend on our ability to respond to, among other things, changes in consumer preferences, laws and regulations, market conditions, and competitive pressures. Any failure by us to anticipate or respond adequately to such changes could have a material adverse effect on our financial condition, operating results, liquidity, cash flow and our operational performance.
We may not be able to successfully implement our growth strategy for our brand on a timely basis or at all.
We believe that our future success depends, in part, on our ability to implement our growth strategy of leveraging our existing brand and products to drive increased sales. However, we face many risks, uncertainties and difficulties frequently encountered by companies in their early stage of development, particularly companies in the rapidly evolving natural, organic, and functional food and beverage industry. Our ability to implement our growth strategy depends, among other things, on our ability to:
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develop, manufacture and introduce new and appealing products in our Laird Superfood brand and successfully innovate on our existing products;
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successfully compete in the product categories in which we choose to operate;
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attract and maintain a large customer base and develop and grow that customer base;
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increase awareness of our Laird Superfood brand and develop effective marketing strategies to ensure consumer loyalty;
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establish and maintain strategic relationships with key sales, marketing, manufacturing and distribution providers; and
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attract, retain and motivate qualified personnel.
We may not be able to implement this growth strategy successfully. Our planned marketing expenditures may not result in increased total sales or generate sufficient levels of consumer interest or brand awareness, and our high rates of sales and income growth may not be sustainable over time. Our sales and results of operations will be negatively affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful.
Our Laird Superfood products are new, and our industry is rapidly evolving.
Some of our Laird Superfood products are new, such as our currently released liquid Superfood Creamers, and are only in early stages of commercialization, and some products that are important to our growth strategy are in various stages of research and development, and have not yet been commercialized. We are not certain that these, or any other future products, will be developed to commercialization, sell as anticipated, be manufactured as anticipated, or be desirable to their intended markets. Also, some of our products may have limited uses and benefits, which may limit their appeal to consumers and put us at a competitive disadvantage. Developing new products and placing them into wholesale channels and into conventional and natural grocery environments is an expensive and time-consuming process, and if a product fails to sustain market acceptance or is unable to be manufactured as anticipated, the investment made in the product may be lost.
If our current or future Laird Superfood products fail in the development stage, or fail our customer’s expectation of quality, or if we do not achieve or sustain market acceptance, we could lose customers or could be subject to claims which could have a material adverse effect on our business, financial condition and operating results.
As is typical in a rapidly evolving industry, the development process and demand and market acceptance for recently introduced products are subject to a high level of uncertainty and risk. Because the market for our products is new and evolving, it is difficult to predict with any certainty the size of this market and its growth rate, if any, and costs of manufacturing as a product is developed. We cannot guarantee that we will be successful
in developing new or existing products or manufacturing new products including through copackers, that our copackers perform as expected, or that a market for our products will develop or that demand for our products will be sustainable. If we fail to develop or manufacture new products, or the market for new products fails to develop, develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
We are subject to the risks associated with conducting business operations outside of the U.S., which could adversely affect our business.
We purchase our products from a variety of suppliers, including international suppliers. Our direct purchases from non-US suppliers represented a majority of our raw materials in 2020 and 2019, and we expect our international purchases may grow with time. We also sell our products to consumers through our website and other online and physical distributors that are in foreign countries, and we may in the future enter into agreements with distributors in foreign countries to sell our products. All of these activities are subject to the uncertainties associated with international business operations, including:
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difficulties with foreign and geographically dispersed operations;
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having to comply with various U.S. and international laws;
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changes and uncertainties relating to foreign rules and regulations;
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tariffs, export or import restrictions, restrictions on remittances abroad, imposition of duties or taxes that limit our ability to import necessary materials;
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limitations on our ability to enter into cost-effective arrangements with distributors, or at all;
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fluctuations in foreign currency exchange rates;
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imposition of limitations on production, sale or export in foreign countries, including due to pandemic or quarantine;
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imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign processors or joint ventures;
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imposition of differing labor laws and standards;
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economic, political, environmental, health-related or social instability in foreign countries and regions;
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an inability, or reduced ability, to protect our intellectual property;
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availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us;
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difficulties in recruiting and retaining personnel, and managing international operations;
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difficulties in enforcing contracts and legal decisions; and
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less developed infrastructure.
If we expand into other target markets, we cannot assure you that our expansion plans will be realized, or if realized, be successful. We expect each market to have particular regulatory and funding hurdles to overcome and future developments in these markets, including the uncertainty relating to governmental policies and regulations, could harm our business. If we expend significant time and resources on expansion plans that fail or are delayed, our reputation, business and financial condition may be harmed.
In addition, we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials or other third parties for the purpose of obtaining or retaining business.
While our policies mandate compliance with these anti-bribery laws, our internal control policies and procedures may not protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations, cash flows and financial condition.
Our results may be negatively affected by changes in foreign currency exchange rates.
Currently, substantially all of our international purchase and sales contracts are denominated in U.S. dollars, and generally do not guarantee long term pricing. As a result, a decrease in the value of the U.S. dollar relative to foreign currencies could increase our costs in dollars for the food products and ingredients that we import from other countries. In addition, an increase in the value of the U.S. dollar relative to foreign currencies could require us to reduce our selling price or risk making our products less competitive in international markets. The Company has not historically hedged foreign exchange risks.
A larger portion of our revenues may be denominated in other foreign currencies if we expand our international operations. Conducting business in currencies other than U.S. dollars could subject us to fluctuations in currency exchange rates that could negatively affect our revenues, cost of revenues and operating margins and result in foreign currency translation gains and losses.
Pandemics, epidemics, or disease outbreaks, such as the COVID-19 pandemic could have a material adverse impact on our business including, among other things, consumption and trade patterns, our supply chain and production processes, each of which could materially affect our operations, liquidity, financial condition, and results of operations.
In December 2019, a novel strain of coronavirus disease (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The outbreak has resulted in the implementation of significant governmental measures, including lockdowns, closures, shelter-in-place orders, quarantines and travel bans, intended to control the spread of the virus. These restrictions, and future prevention and mitigation measures by governments and private entities, have had and are likely to continue to have an adverse impact on global economic conditions and consumer confidence and spending, which could materially adversely affect the supply of materials for our products as well as the demand for our products.
The extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on our business. However, if this pandemic continues to be a severe worldwide health crisis, or in the regions from which we source our raw materials, the disease could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In addition, a significant proportion of our products are produced at our manufacturing facility in Sisters, Oregon. If we are forced to scale back hours of production or close this facility in response to the pandemic, we expect our business, financial condition and results of operations would be materially adversely affected.
The actual or perceived effects of a disease outbreak, epidemic, pandemic or similar widespread public health concern, such as COVID-19, could negatively affect our operations, liquidity, financial condition and results of operations. Pandemics, epidemics or disease outbreaks may affect demand for our products because quarantines or other government restrictions on movement may cause erratic consumer purchase behavior. Governmental or societal impositions of restrictions on public gatherings, especially if prolonged, may have adverse effects on in-person traffic to retail stores, and in turn, our business. Even the perceived risk of infection or health risk may adversely affect traffic to our store-based retail customers and, in turn, our business, liquidity, financial condition and results of operations, particularly if any self-imposed or government-imposed restrictions are in place for significant time.
The spread of pandemics, epidemics or disease outbreaks such as COVID-19 may also disrupt our third-party business partners’ ability to meet their obligations to us, which may negatively affect our operations. These third parties include those who supply our ingredients, packaging, and other necessary operating materials, contract manufacturers, distributors, and logistics and transportation services providers. Ports and other channels of entry may be closed or operate at only a portion of capacity, as workers may be prohibited or otherwise unable to report to work and means of transporting products within regions or countries may be limited for the same reason. Our contract manufacturers’ ability to manufacture our products may be impaired by any material disruption to their employee staffing, procurement, manufacturing, or warehousing capabilities because of COVID-19 or similar outbreaks.
Our results of operations depend on, among other things, our ability to maintain and increase sales volume with our existing customers, to attract new consumers and to provide products that appeal to consumers at prices they are willing and able to pay. Our ability to implement our innovation, advertising, display and promotion activities designed to maintain and increase our sales volumes on a timely basis may be negatively affected because of modifications to in-person promotional activities during the COVID-19 outbreak or similar situations. Retailers may also alter their normal inventory receiving and product restocking practices during pandemics, epidemics or disease outbreaks such as COVID-19, which may negatively affect our business.
Workforce limitations and travel restrictions resulting from pandemics, epidemics or disease outbreaks such as COVID-19 and related government actions may affect many aspects of our business. If a significant percentage of our workforce cannot work, including because of illness, travel or government restrictions in connection with pandemics or disease outbreaks, our operations may be negatively affected.
Adverse and uncertain economic conditions, such as decreases in per capita income and level of disposable income, increased unemployment or a decline in consumer confidence because of the COVID-19 outbreak or similar situations, could have an adverse effect on distributor, retailer and consumer demand for our products. Consumers may shift purchases to lower-priced or other perceived value offerings during economic downturns. Prolonged unfavorable economic conditions, including because of COVID-19 or similar outbreaks, and any resulting recession or slowed economic growth, may have an adverse effect on our sales and profitability.
Our efforts to manage and mitigate these factors may be unsuccessful, and the effectiveness of these efforts depends on factors beyond our control, including the duration and severity of any pandemic, epidemic or disease outbreak, and third party actions taken to contain its spread and mitigate public health effects.
We may be unable to adequately protect our brand and our other intellectual property rights.
We regard our brand, customer lists, trademarks, domain names, trade secrets and similar intellectual property as critical to our success. We may rely on trademark, copyright and patent law, trade secret protection, agreements and other methods with our employees and others to protect our proprietary rights. We might not be able to obtain broad protection in the United States for all our intellectual property. The protection of our intellectual property rights may require the expenditure of significant financial, managerial and operational resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights, and we may be unable to broadly enforce all our trademarks. Any of our patents, trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Our patent and trademark applications may never be granted. To date, the Company has not applied for patent protection on any of its technology. The process of obtaining patent protection is expensive and time-consuming, and we may be unable to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or intellectual property rights. Furthermore, our confidentiality agreements
may not effectively prevent disclosure of our proprietary information, technologies and processes and may not provide an adequate remedy in the event of unauthorized disclosure of such information.
We might be required to spend significant resources to monitor and protect our intellectual property rights. For example, we may initiate claims or litigation against others for infringement, misappropriation or violation of our intellectual property rights or other proprietary rights or to establish the validity of such rights. However, we may be unable to discover or determine the extent of any infringement, misappropriation or other violation of our intellectual property rights and other proprietary rights. In addition, despite our efforts, we may be unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights and other proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may materially and adversely affect our business, financial condition, and results of operations.
In addition, our technology platform may use open source software. The use of such open source software may subject us to certain conditions, including the obligation to offer, distribute, or disclose our technology platform for no or reduced cost, make the proprietary source code subject to open source software licenses available to the public, license our software and systems that use open source software for the purpose of making derivative works, or allow reverse assembly, disassembly, or reverse engineering. We monitor our use of open source software to avoid subjecting our technology platform to conditions we do not intend. However, if our technology platform becomes subject to such unintended conditions, it could have an adverse effect on our business, financial condition, and results of operations.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop the infringement or the misappropriation of our intellectual property rights. The loss of the Laird Superfood brand or logo or other registered or common law trade names or a diminution in the perceived quality of products or services associated with the Company would harm our business. Our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.
Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
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 our business.
The sale of products for human use and consumption involves the risk of injury or illness to consumers. Such injuries may result from inadvertent mislabeling, tampering by unauthorized third parties or product contamination or spoilage. Under certain circumstances, we may be required to recall or withdraw products, suspend production of our products or cease operations, which may lead to a material adverse effect on our
business. For example, in 2019 we recalled certain volumes of our Performance Mushroom supplement due to an overstatement of iron content on the product’s packaging. In addition, customers may stop placing or cancel orders for such products as a result of such events.
Even if a situation does not necessitate a recall or market withdrawal, product liability claims might be asserted against us. While we are subject to governmental inspection and regulations and believe our facilities and those of our co-packers and suppliers comply in all material respects with all applicable laws and regulations, if the consumption of any of our products causes, or is alleged to have caused, a health-related illness (such as listeria) or death to a consumer, we may become subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or physical harm could cause consumers to lose confidence in the safety and quality of our products. Moreover, claims or liabilities of this type might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. Although we maintain product liability and product recall insurance in an amount that we believe to be consistent with market practice, we cannot be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage. A product liability judgment against us or a product recall could have a material adverse effect on our business, financial condition, results of operations or liquidity.
We may be subject to significant liability that is not covered by insurance.
Although we believe that the extent of our insurance coverage is consistent with industry practice, any claim under our insurance policies may be subject to certain exceptions, may not be honored fully, in a timely manner, or at all, and we may not have purchased sufficient insurance to cover all losses incurred. If we were to incur substantial liabilities or if our business operations were interrupted for a substantial period, we could incur costs and suffer losses. Inventory, equipment, and business interruption losses may not be covered by our insurance policies. Additionally, in the future, insurance coverage may not be available to us at commercially acceptable premiums, or at all.
We rely on independent certification for a number of our products.
We rely on independent third-party certification, such as certifications of our products as “organic” or “Non-GMO” (non-genetically modified organisms), to differentiate our products from others. We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified organic. For example, we can lose our “organic” certification if a manufacturing plant becomes contaminated with non-organic materials, or if it is not properly cleaned after a production run. In addition, all raw materials must be certified organic. The loss of any independent certifications could adversely affect our market position as an organic and natural products company, which could harm our business.
Our future results of operations may be adversely affected by the availability of Non-GMO and organic ingredients.
Our ability to ensure a continuing supply of Non-GMO and organic ingredients at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow organic crops, climate conditions, changes in national and world economic conditions, currency fluctuations and forecasting adequate need of seasonal ingredients.
The organic ingredients that we use in the production of our products (including, among others, coffee, coconut sugar, coconut milk powder, and extra virgin coconut oil) are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, water scarcity, temperature extremes, frosts, earthquakes and pestilences. Natural disasters and adverse weather conditions (including the potential effects of climate change) can lower crop yields and reduce crop size and crop quality, which in turn could reduce our supplies of Non-GMO and organic ingredients or increase the prices of Non-GMO and organic ingredients. If our supplies of
Non-GMO and organic ingredients are reduced, we may not be able to find enough supplemental supply sources on favorable terms, if at all, which could impact our ability to supply product to our customers and adversely affect our business, financial condition and results of operations.
We also compete with other manufacturers in the procurement of Non-GMO and organic product ingredients, which may be less plentiful in the open market than conventional product ingredients. This competition may increase in the future if consumer demand for Non-GMO and organic products increases. This could cause our expenses to increase or could limit the amount of product that we can manufacture and sell.
Adverse weather conditions, fires, natural disasters, crop disease, pests and other natural conditions can impose significant costs and losses on our business.
Agricultural products are vulnerable to adverse weather conditions, including severe rains, drought and temperature extremes, floods and windstorms, which are quite common but difficult to predict. Agricultural products also are vulnerable to crop disease and to pests, which may vary in severity and effect, depending on the stage of production at the time of infection or infestation, the type of treatment applied and climatic conditions. Unfavorable growing conditions caused by these factors can reduce both crop size and crop quality and, in extreme cases, entire harvests may be lost. Additionally, adverse weather or natural disasters, including fires, earthquakes, winter storms, droughts, or volcanic events, could impact our manufacturing and business facilities in Sisters, Oregon, which could result in significant costs and meaningfully reduce our capacity to fulfill orders and maintain normal business operations. Sisters, Oregon is located in an area subject to seasonal forest fires and fire risk. These factors may result in lower sales volume and increased costs due increased costs of products. Incremental costs, including transportation, may also be incurred if we need to find alternate short-term supplies of products from alternative areas. These factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.
Climate change may negatively affect our business and operations.
There is concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. In the event that such climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for our products, such as coconut milk powder, organic coconut sugar, organic extra virgin coconut oil and freeze dried coconut water. As a result of climate change, we may also be subjected to decreased availability of water, deteriorated quality of water or less favorable pricing for water, which could adversely impact our manufacturing and distribution operations, as well as the agricultural businesses of our suppliers, which rely on the availability and quality of water.
Our production equipment may be damaged, adversely affecting our ability to meet consumer and wholesale demand.
A significant proportion of our products are produced at our manufacturing facility in Sisters, Oregon. A significant disruption at that facility or to any of our key production equipment, even on a short-term basis, could impair our ability to timely produce and ship products, which could have a material adverse effect on our business, financial position and results of operations. In the past, we have had manufacturing delays due to damaged and malfunctioning equipment and cannot fully insure against the effects of such delays on our business. Our manufacturing operations are vulnerable to interruption and damage from natural and other types of disasters, including earthquake, fire, floods, volcanic events, droughts, environmental accidents, winter storms, power loss, disease outbreaks or pandemics such as the recent coronavirus (COVID-19) pandemic, communication failures and similar events. If any disaster were to occur at our facility, our ability to operate our business at our facilities would be seriously impaired.
We rely on a small number of suppliers to provide our raw materials, and our supply chain may be interrupted and prevent us from obtaining the necessary materials we need to operate.
We rely on suppliers and vendors to meet our high-quality standards and supply products in a timely and efficient manner. There is, however, no assurance that quality natural and organic products will continue to be available to meet our specific and growing needs. This may be due to, among other reasons, problems with our suppliers’ and vendors’ businesses, finances, labor relations, ability to export materials, product quality issues, costs, production, insurance and reputation, as well as disease outbreaks or pandemics such as the recent coronavirus (COVID-19) pandemic, acts of war, terrorism, natural disasters, fires, earthquakes, flooding or other catastrophic occurrences. If for any reason our suppliers or vendors became unable or unwilling to continue to provide services to us, this would likely lead to a temporary interruption in our ability to import our products until we found another entity that could provide these services. Failure to find a suitable replacement, even on a temporary basis, would have a material adverse effect on our ability to meet our current production targets, make it difficult to grow and would have an adverse effect on our results of operations.
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, Indonesia, China, and Sri Lanka geographically accounted for approximately 69% of our total raw materials and packaging purchases for the year ended December 31, 2020. Vietnam and the Philippines geographically accounted for approximately 51% of our total raw material and packaging purchases for the year ended December 31, 2019. In the event that our supply from our current suppliers is interrupted, our operations may be interrupted resulting in lost revenue, added costs and distribution delays that could harm our business and customer relationships until we are able to identify and enter into an agreement with one or more alternative suppliers.
As a result of this concentration in our supply chain, our business and operations would be negatively affected if any of our key suppliers were to experience significant disruption affecting the price, quality, availability or timely delivery of their products. Additionally, our top suppliers are in a similar geographic area, which increases the risk of significant supply disruptions from local and regional events. In the event that our supply from our current suppliers is interrupted, our operations may be interrupted resulting in lost revenue, added costs such as, without limitation, shipping costs, and distribution delays that could harm our business and customer relationships until we are able to identify and enter into an agreement with one or more alternative suppliers.
Our future results of operations may be adversely affected by volatile commodity costs.
Many aspects of our business could be directly affected by volatile commodity costs. Agricultural commodities and raw materials, including coconut milk powder, organic coconut sugar, organic extra virgin coconut oil, freeze dried coconut water and Aquamin, are the principal inputs used in our products. These items, as well as a growing list of new ingredients as we expand our product portfolio, are subject to price volatility which can be caused by commodity market fluctuations, inflation, crop yields, seasonal cycles, weather conditions (including the potential effects of climate change), temperature extremes and natural disasters (including floods, droughts, water scarcity, frosts, earthquakes and hurricanes), pest and disease problems, changes in currency exchange rates, imbalances between supply and demand, natural disasters and government programs and policies among other factors. Volatile fuel costs translate into unpredictable costs for the products and services we receive from our third-party providers including, but not limited to, distribution costs for our products and packaging costs. While we may seek to offset the volatility of such costs with a combination of cost savings initiatives, operating efficiencies and price increases to our customers, we may be unable to manage cost volatility. If we are unable to fully offset the volatility of such costs, our financial results could be adversely affected.
We are reliant on Laird Hamilton and Gabrielle Reece to develop new products and market our brand.
Many of the Company’s current products and planned future products are based on the lifestyle of Mr. Hamilton and Ms. Reece. Pursuant to the License and Preservation Agreement, dated May 26, 2020, by and
among Mr. Hamilton, Ms. Reece and the Company, Mr. Hamilton and Ms. Reece granted us a limited, exclusive license to use 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. Any use of the licensed property that is in accordance with the historical standard of use and is not objected to by Mr. Hamilton or Ms. Reece within 30 days of the first intra-company disclosure of a bona-fide intent to make such use is deemed approved. Any new use of the licensed property shall satisfy the historical standard of use and shall be primarily directed to the advertising, promotion or marketing of the Company’s products and services. If Mr. Hamilton or Ms. Reece object to a proposed use of the licensed property, the Company may be prevented from implementing our business plan in a timely manner, or at all, outside of previously approved usages or usages consistent with certain pre-approved product guidelines. Also, the Company depends on the positive image and public popularity of Mr. Hamilton and Ms. Reece to maintain and increase brand recognition. Customers may be drawn to our products because of their involvement in our Company as celebrities. If Mr. Hamilton or Ms. Reece’s image, reputation or popularity is materially and adversely affected, this could negatively affect the marketability and sales of our products and the Company.
Laird Hamilton’s and Gabrielle Reece’s involvement with other business and personal ventures might interfere with their ability to fully engage with their Company obligations.
Mr. Hamilton and Ms. Reece may engage in outside business activities from time to time, including the XPT Extreme Performance Training brand, Laird Apparel and various endorsement opportunities. These activities may interfere with the respective time and attention Mr. Hamilton and Ms. Reece can devote to the Company’s business and affairs, which could have a material and adverse effect on the business. Also, we have entered only limited noncompetition and nonsolicitation agreements with Mr. Hamilton and Ms. Reece, which makes us vulnerable to competition from them. These conflicts of interest may result in the loss of business opportunities, which may materially and adversely affect our prospects, business advantage, financial condition and results of operations.
We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner, or at all.
Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Paul Hodge, Laird Hamilton, Valerie Ells, Scott McGuire, and Andrew McCormick. Our executive officers or key personnel could terminate their employment with us at any time without penalty. Mr. Hamilton, Mr. Hodge, and certain other of our executive officers frequently participate in a wide variety of activities, including extreme mountain, desert, snow and ocean sports, motorsports, flying private aircraft (including experimental aircraft), and attempting small aircraft time and distance records, which have in the past resulted in serious injuries to members of our management team, and subject them to a significant risk of serious injury or death. In addition, we do not maintain key person life insurance policies on any of our employees. The loss of one or more of these executive officers or key personnel could seriously harm our business and may prevent us from implementing our business plan in a timely manner, or at all.
If the reputation of our brand erodes significantly, it could have a material impact on our results of operations.
Our financial success is directly dependent on the consumer perception of our brand. The success of our brand may suffer if our marketing plans or product initiatives do not have the desired impact on our brand’s image or its ability to attract consumers. Further, our results could be negatively affected if our brand suffers substantial damage to its reputation due to real or perceived quality issues, adverse publicity about our products, packaging or ingredients, our failure to maintain the quality of our products, the failure of our products to deliver consistently positive consumer experiences, the products becoming unavailable to consumers, or perception that the Company or any of its executives or Mr. Hamilton or Ms. Reece is perceived to act in an irresponsible or objectionable manner. In addition, it is possible for such information, misperceptions and opinions to be shared
quickly and disseminated widely due to the continued growing use of social and digital media. Negative posts or comments about the Company or any of its executives or Mr. Hamilton or Ms. Reece, or our products or packaging on social or digital media could seriously damage our brands and reputation.
We rely on retailers and distributors for a substantial portion of our sales, and our failure to maintain and further develop our sales channels could harm our business.
We sell a substantial portion of our products through retailers such as Costco, Natural Grocers, CVS, Kroger and REI, distributors such as United Natural Foods, Inc. and KeHE Distributors, and online through Amazon.com, and we depend on these third parties to sell our products to consumers. The largest retailer of our products for the years ended December 31, 2020 and 2019 was Costco, which accounted for 23% and 11% of our total net sales, respectively. In addition, net sales through Amazon.com accounted for 21% and 30% of our total net sales for the years ended December 31, 2020 and 2019, respectively. No other retailer or distributor represented more than 10% of our total net sales in 2020 or 2019.
The loss of, or business disruption at, one or more of these retailers or distributors or a negative change in our relationship with Costco or Amazon.com or a disruption to Amazon.com as a sales channel could have a material adverse effect on our business. If we do not maintain our relationship with existing retailers and distributors or develop relationships with new retailers and distributors, the growth of our business may be adversely affected, and our business may be harmed.
We are not the exclusive seller of our products into online channels, such as Amazon.com, and face competition in that channel from resellers of our products. Further, the terms of our agreements with these distributors allow us to plan for the future, maintain growth and strengthen our relationships with key customers. If we are required to obtain additional or alternative distribution agreements or arrangements in the future, we cannot be certain that we will be able to do so on satisfactory terms or in a timely manner. Our inability to enter into satisfactory distribution agreements may inhibit our ability to implement our business plan or to establish markets necessary to expand the distribution of our products successfully.
We depend upon internet search engines and other providers of digital advertising to attract a significant portion of our potential customers to our website, and any change in the prominence of our website in either paid or algorithmic search result listings or an increase in purchasing digital ads could cause the number of visitors to our website and our revenue to decline.
We depend in significant part on various internet search engines, such as Google, and other providers of digital advertising to direct a significant number of potential customers to our website. Search websites typically provide two types of search results, algorithmic and paid listings. Algorithmic, or organic, listings are determined and displayed solely by a set of formulas designed by search companies. Paid listings can be purchased and then are displayed if particular words are included in a user’s internet search. Placement in paid listings is generally not determined solely on the bid price, but also takes into account the search engines’ assessment of the quality of the website featured in the paid listing and other factors. We rely on both algorithmic and paid search results, as well as digital advertising on other websites and through other providers, to direct a substantial share of the visitors to our website.
Our ability to maintain the number of visitors to our website from internet search websites and other websites is not entirely within our control. For example, internet search websites frequently revise their algorithms in an attempt to optimize their search result listings or to implement their internal standards and strategies. Changes in the algorithms could cause our website to receive less favorable placements, which could reduce the number of users who visit our website. We have experienced and continue to experience fluctuations in the search result rankings for our website.
In addition, the prominence of the placement of our advertisements is in part determined by the amount we are willing to pay for the advertisement. We bid against our competitors for the display of paid search engine
advertisements and some of our competitors have greater resources with which to bid and better brand recognition than we have. Additionally, as we increase the number of third-party distributors of our products, they have occasionally targeted similar individuals or use similar key words. If competition for the display of paid advertisements in response to search terms related to our online services increases, our online advertising expenses could rise significantly, and we may be required to reduce the number of our paid search advertisements. If we reduce our advertising with search engines, our consumer traffic may significantly decline, or we may be unable to maintain a cost-effective search engine marketing program.
On October 20, 2020, the United States Department of Justice brought an antitrust lawsuit against Google claiming that Google improperly uses its monopoly over internet search to impede competition and harm consumers. Our cost of advertising on Google may remain high if Google’s monopoly over internet searches is not prevented and competitive search engines are not allowed to compete. Alternatively, if Google is required because of this lawsuit to split up the company or sell assets, there is no assurance this will decrease advertising costs and it may lead to increased costs due to an increased number of service providers who obtain oligopoly power to control advertising costs. Although this lawsuit may lower our advertising costs, there is risk that it may not and would lead to increased costs which would reduce our profitability and harm our business.
Other factors, such as search engine technical difficulties, search engine technical changes and technical or presentation changes we make to our website, could also cause our website to be listed less prominently in algorithmic search results. Any adverse effect on the placement of our website in search engine results could reduce the number of users who visit our website and drive up the cost of customer acquisition. If visits to our website decrease, our revenue may decline, and we may need to resort to more costly sources to acquire new customers and such decreased revenue and/or increased expense could materially and adversely affect our business and profitability.
Our customers generally are not obligated to continue purchasing products from us.
Many of our customers are individuals that buy from us under purchase orders, and we generally do not have long-term agreements with or commitments from these customers for the purchase of products. We cannot provide assurance that our customers, including customers that participate in our subscription programs, will maintain or increase their sales volumes or orders for the products supplied by us or that we will be able to maintain or add to our existing customer base. Decreases in our customers’ sales volumes or orders for products supplied by us may have a material adverse effect on our business, financial condition or results of operations.
Failure to maintain sufficient internal production capacity, source appropriate external production capacity, or to enter into third-party agreements on terms that are beneficial for us may result in our inability to meet customer demand and/or may increase our operating costs and capital expenditures.
We intend to rely on internal production capacity and, to a lesser extent, third-party co-packers to fulfill our growing production needs. We have plans to expand our own production facilities, but in the short-term may need to increase our reliance on third parties to provide production and supply certain services, commonly referred to as “co-packing” agreements, for a number of our products, including our liquid products. A failure by us or our co-packers to comply with food safety, environmental, or other laws and regulations, or to produce products of the quality and taste-profile we expect, or with efficiency and at costs we expect, may also disrupt our supply of products. In addition, we may experience increased distribution and warehousing costs due to capacity constraints resulting from our growth. We anticipate needing to enter additional co-packing, warehousing or distribution agreements in the future, and we can provide no assurance that we would be able to find acceptable third-party providers or enter into agreements on satisfactory terms or at all. In addition, we may need to expand our internal capacity, which could increase our operating costs and could require significant capital expenditures. If we cannot maintain sufficient and satisfactory production, warehousing and distribution capacity, either internally or through third party agreements, we may be unable to meet customer demand and/or our manufacturing, distribution and warehousing costs may increase, which could negatively affect our business.
If we face labor shortages or increased labor costs, our results of operations and our growth could be adversely affected.
Labor is a significant component of the cost of operating our business. Our ability to meet our labor needs while controlling labor costs is subject to external factors, such as employment levels, prevailing wage rates, minimum wage legislation, changing demographics, health and other insurance costs and governmental labor and employment requirements. In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, and we would experience significant turnover, while increasing our wages could cause our earnings to decrease. Our business is also located in a small metropolitan area that has limited access to skilled and unskilled labor. If we face labor shortages or increased labor costs because of increased competition for employees from our competitors and other industries, higher employee-turnover rates, or increases in the federal- or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), our operating expenses could increase and our business, financial condition and results of operations could be materially and adversely affected.
Our financial success depends on our ability to successfully predict changes in consumer preferences and develop successful new products and marketing strategies in response.
Consumer preferences evolve over time and the success of our products depends on our ability to identify the tastes and dietary habits of consumers and to offer products that appeal to their preferences and address their concerns. We must also adapt our marketing strategies to these fluid consumer preferences as they develop. Recent trends in consumer preferences that may impact us include:
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dietary trends and increased attention to nutritional values, such as sugar, fat, protein, fiber, carbohydrate, or calorie content;
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concerns about obesity and the health effects of specific ingredients and nutrients, such as sugar and other sweeteners, ingredients derived from genetically modified organisms (GMOs), gluten, grains, dairy, soybeans, nuts, oils, vitamins, fiber, and minerals; and
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increasing awareness of the environmental and social effects of product production, including agricultural production by food manufacturers and their suppliers.
The development and introduction of new products could require substantial research and development and other expenditures, including capital investment and marketing and warehouse slotting investments. In addition, the success of our innovation and product development efforts depends upon our ability to anticipate changes in consumers’ preferences, the technical capability of our research and development staff in developing, formulating and testing new products, and our ability to introduce the resulting products in a timely manner. If our products fail to meet consumer preferences, or we fail to introduce new and improved products on a timely basis, then the return on that investment will be less than anticipated and our strategy to grow sales and profits through product innovations and extensions will be less successful.
Consumer preferences for natural and organic food products are difficult to predict and may change.
Our business is primarily focused on sales of non-GMO, organic and natural products, and our success depends, in part, on our ability to offer products that anticipate the tastes and dietary habits of consumers and appeal to their preferences on a timely and affordable basis. A significant shift in consumer demand away from our products or our failure to maintain our current market position, could reduce our sales and harm our business. Consumer trends change based on a number of possible factors, including nutritional values, a change in consumer preferences or general economic conditions. Additionally, there is a growing focus among some consumers to buy local food products in an attempt to reduce the carbon footprint associated with transporting food products from longer distances, which could result in a decrease in the demand for food products and ingredients that we import from other countries or transport from remote processing locations or growing
regions. Further, failures by us or our competitors to deliver quality products could erode consumer trust in the organic certification of foods. A significant shift in consumer demand away from our products would reduce our market share, harming our business.
Technology failures or security breaches could disrupt our operations and negatively impact our business.
In the normal course of business, we rely on information technology systems to process, transmit, and store electronic information. For example, our production and distribution facilities and inventory management utilize information technology to increase efficiencies and limit costs. Information technology systems are also integral to the reporting of our results of operations. Furthermore, a significant portion of the communications between, and storage of personal data of, our personnel, customers, and suppliers depends on information technology, including social media platforms.
Our information technology systems may be vulnerable to a variety of interruptions, as a result of updating our enterprise platform or due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers, and other security issues. These events could compromise our confidential information, impede or interrupt our business operations, and may result in other negative consequences, including remediation costs, loss of revenue, litigation and reputational damage. Furthermore, if a breach or other breakdown results in disclosure of confidential or personal information, we may suffer reputational, competitive and/or business harm.
To date, we have experienced a break-in against one of our social media accounts which was quickly remediated, and a third party that processes payments for our website experienced a data breach in which certain customer data (but not credit card numbers, Social Security numbers or similar sensitive personal information) may have been compromised, but we have not experienced a material breach of cyber security, either directly or indirectly. While we have implemented administrative and technical controls and taken other preventive actions to reduce the risk of cyber incidents and protect our information technology, they may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems, which could have a material adverse effect on our business, financial condition or results of operations.
Economic downturns could limit consumer demand for our products and negatively affect our sales and profitability.
The premium organic and natural food industry is sensitive to national and regional economic conditions and the demand for the products that we distribute may be adversely affected from time to time by economic downturns that impact consumer spending, including discretionary spending. Future economic conditions such as employment levels, business conditions, housing starts, interest rates, inflation rates, energy and fuel costs and tax rates could reduce consumer spending or change consumer purchasing habits. Among these changes could be a reduction in the number of natural and organic products that consumers purchase where there are non-organic alternatives, given that many premium natural and organic products, and particularly premium natural and organic foods, often have higher retail prices than do their non-organic counterparts.
The failure to successfully integrate newly acquired products or businesses could negatively impact our profitability.
From time to time, we may consider opportunities to acquire other products or businesses that may expand the breadth of our markets or customer base. The success of future acquisitions will be dependent upon our ability to effectively integrate the acquired products and operations into our business. Integration can be complex, expensive and time-consuming. The failure to successfully integrate acquired products or businesses in a timely and cost-effective manner could materially adversely affect our business, prospects, results of operations and financial condition. The diversion of our management’s attention and any difficulties encountered in any integration process could also have a material adverse effect on our ability to manage our business. In addition,
the integration process could result in the loss of key employees, the disruption of ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, any of which could adversely affect our ability to maintain the appeal of our brand and our relationships with customers, employees or other third parties or our ability to achieve the anticipated benefits of such acquisitions and could harm our financial performance. We do not know if we will be able to identify acquisitions we deem suitable, whether we will be able to successfully complete any such acquisitions on favorable terms or at all, or whether we will be able to successfully integrate any acquired products or businesses. Additionally, an additional risk inherent in any acquisition is that we fail to realize a positive return on our investment.
Regulatory Risks
Our products and operations are subject to government regulation and oversight both in the United States and abroad, and our failure to comply with applicable requirements could adversely affect our business and results of operations.
We are affected by a wide range of governmental laws and regulations. Examples of regulatory agencies influencing our operations include the United States Department of Agriculture (the “USDA”), the Food and Drug Administration (the “FDA”), the Federal Trade Commission (the “FTC”), and the Environmental Protection Agency, among others. These agencies regulate, among other things, with respect to our products and operations:
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design, development and manufacturing;
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testing, labeling, content and language of instructions for use and storage;
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product safety;
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marketing, sales and distribution;
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record keeping procedures;
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advertising and promotion;
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recalls and corrective actions; and
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product import and export.
These laws and regulations affect various aspects of our business. For example, certain food ingredient products manufactured by Laird Superfood are regulated under the United States Federal Food, Drug, and Cosmetic Act (“FDCA”), as administered by the FDA. Under the FDCA, pre-marketing approval by the FDA is required for the sale of a food ingredient which is a food additive unless the substance is generally recognized as safe, under the conditions of its intended use by qualified experts in food safety. We believe that most food ingredients in our products are generally recognized as safe. However, this status cannot be determined until actual formulations and uses are finalized. As a result, we may be adversely affected if the FDA determines that our food ingredient products do not meet the criteria for generally recognized as safe.
The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales. The failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions and third-party lawsuits such as:
•
warning letters;
•
fines;
•
injunctions;
•
civil penalties and civil lawsuits;
•
termination of distribution;
•
recalls or seizures of products;
•
delays in the introduction of products into the market; and
•
total or partial suspension of production.
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and harm our reputation, business, financial condition and results of operations. We may also be required to take corrective actions, such as installing additional equipment or taking other actions, each of which could require us to make substantial capital expenditures. In addition, we could be required to indemnify our employees in connection with any expenses or liabilities that they may incur individually in connection with regulatory action against them. As a result, our future business prospects could deteriorate due to regulatory constraints, and our profitability could be impaired by our obligation to provide such indemnification to our employees.
The FDA may also take issue with the name “Laird Superfood” or any derivative name, as “superfood” is, to our knowledge, still undefined by regulatory agencies. In addition to any regulatory costs, if the Company were required to change its name, there would likely be, or could be, among other results, a negative effect on the Company’s branding and customer perception.
Our reputation could suffer from real or perceived issues involving the labeling or marketing of our products.
Products that we sell carry claims as to their origin, ingredients or health benefits, including, by way of example, the use of the term “natural”, “functional”, or “healthy”, or similar synonyms or implied statements relating to such benefits. Although the FDA and the USDA each has issued statements regarding the appropriate use of the word “natural,” there is no single, United States government regulated definition of the term “natural” for use in the food industry, which is true for many other adjectives common in the better-for-you and functionally-focused food industry. The resulting uncertainty has led to consumer confusion, distrust and legal challenges. Plaintiffs have commenced legal actions against several food companies that market “natural” products, asserting false, misleading and deceptive advertising and labeling claims, including claims related to genetically modified ingredients. In limited circumstances, the FDA has taken regulatory action against products labeled “natural” but that nonetheless contain synthetic ingredients or components. Should we become subject to similar claims, consumers may avoid purchasing products from us or seek alternatives, even if the basis for the claim is unfounded. Adverse publicity about these matters may discourage consumers from buying our products. The cost of defending against any such claims could be significant. Any loss of confidence on the part of consumers in the truthfulness of our labeling or ingredient claims would be difficult and costly to overcome and may significantly reduce our brand value. Any of these events could adversely affect our reputation and brand and decrease our sales, which would have a material adverse effect on our business, financial condition and results of operations.
Similarly, certain USDA regulations set forth the minimum standards producers must meet in order to have their products labeled as “certified organic,” and we currently manufacture several organic products that are covered by these regulations. While we believe our products and our supply chain are in compliance with these regulations, changes to food regulations may increase our costs to remain in compliance. We could lose our “organic” certification if a facility becomes contaminated with non-organic ingredients, if we do not use raw materials that are certified organic, or if key ingredients used in our products are no longer allowed to be used in food certified as “organic.” The loss of our “organic” certifications could materially and adversely affect our business, financial condition or results of operations.
In addition, the USDA has proposed a rule requiring disclosure of the use of genetic engineering in manufacturing a product or an ingredient used in a product. The rule has not been finalized, and we are unable to predict with certainty what the final requirements will be. If the USDA issues bioengineering disclosure regulations inconsistent with our practices, the resulting changes in labeling could adversely affect customer acceptance of our product and materially and adversely affect our business.
Litigation and regulatory enforcement concerning marketing and labeling of food products could adversely affect our business and reputation.
The marketing and labeling of any food product in recent years has brought increased risk that consumers will bring class action lawsuits and that the FTC and/or state attorneys general will bring legal action concerning the truth and accuracy of the marketing and labeling of the product. Examples of causes of action that may be asserted in a consumer class action lawsuit include fraud, unfair trade practices and breach of state consumer protection statutes. The FTC and/or state attorneys general may bring legal action that seeks removal of a product from the marketplace and impose fines and penalties. Even when unmerited, class claims, action by the FTC or state attorneys general enforcement actions can be expensive to defend and adversely affect our reputation with existing and potential customers and consumers and our corporate and brand image, which could have a material and adverse effect on our business, financial condition or results of operations.
We may be subject to specific FTC endorsement and/or testimonial regulations that would interfere with our advertising, marketing and labeling strategies.
The FTC revised its Guides Concerning the Use of Endorsements and Testimonials in Advertising (the “Guides”), which became effective on December 1, 2009. Although the Guides are not binding, they explain how the FTC interprets Section 5 of the FTC Act’s prohibition on unfair or deceptive acts or practices. Consequently, the FTC could bring a Section 5 enforcement action based on practices that are inconsistent with the Guides. Under the revised Guides, advertisements that feature a consumer and convey his or her atypical experience with a product or service are required to clearly disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides, which allowed advertisers to describe atypical results in a testimonial as long as they included a disclaimer such as “results not typical,” the revised Guides no longer contain such a safe harbor. The revised Guides also add new examples to illustrate the long-standing principle that “material connections” between advertisers and endorsers (such as payments or free products), connections that consumers might not expect, must be disclosed. While we do request that public persons who we engage as paid advertisers, or provide samples of product to, disclose their relationship with us prior to sharing on social media or other endorsement, we cannot ensure all recipients comply with this request and we do not regularly monitor what they post on social media. If we were held responsible for the content of their posts on social media or other endorsements, we could be forced to alter our practices. We have continually adapted our marketing efforts to be compliant with the revised Guides. However, it is possible that our use, and that of our employees, of testimonials in the advertising and promotion of our products will be significantly impacted and therefore might negatively affect our sales.
We may face scrutiny from evolving state regulations concerning health, safety, our supply chain and marketing.
In addition to the federal regulatory issues listed above, there are a growing number of state regulations that might impair our ability to operate and avoid interruption. For example, California currently enforces legislation commonly referred to as “Proposition 65” that requires that “clear and reasonable” warnings be given to consumers who are exposed to chemicals known to the State of California to cause cancer or reproductive toxicity. Although we seek to comply with the requirements of Proposition 65, as well as to educate our customers regarding the substance of Proposition 65 and the relative metals contents in various natural foods, there can be no assurance that we will not be adversely affected by litigation or other actions relating to Proposition 65 or future legislation that is similar or related thereto. Also, the Transparency in Supply Chains Act of 2010 in California requires us to audit our vendors with respect to risks of human trafficking and slavery and mitigate these risks in our operations. Any failure to disclose issues or other non-compliance could subject us to action by the California Attorney General or other regulatory authorities. Increased compliance costs associated with operating in California and other states could adversely affect our business, financial condition and results of operations.
Risks Relating to the Ownership of Our Common Stock
The market price of our common stock may be highly volatile, and you may not be able to resell your shares at or above the price you purchased them.
The market price of our common stock has fluctuated and may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•
overall performance of the equity markets;
•
the development and sustainability of an active trading market for our common stock;
•
our ability maintain our listing on the NYSE American;
•
our operating performance and the performance of other similar companies, or companies in the premium organic and natural food industry;
•
changes in recommendations by securities analysts that elect to follow the Company;
•
press releases or other public announcements by us or others, including our filings with the SEC;
•
changes in expectations related to consumer preferences in the premium organic and natural food industry;
•
recruitment or departure of key personnel;
•
changes in our capital structure, such as future issuances of debt or equity securities;
•
regulatory developments in the United States or foreign countries;
•
the economy as a whole, market conditions in our industry, and the industries of our customers;
•
the expiration of market standoff or contractual lock-up agreements; and
•
the size of our market float.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many small-cap companies. Stock prices of many small-cap companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, shareholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
We will incur increased costs in connection with operating as a public company and our management will be required to devote substantial time to compliance initiatives and corporate governance practices.
As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NYSE American and other applicable securities rules and regulations impose various requirements on public companies. Our management and other personnel will need to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, these rules and regulations have made it more expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs, however such costs may be material to our business.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us and our business. If analysts cease coverage of us, the trading price for our common stock would be negatively affected. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, the price for our common stock would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause the price and trading volume for our common stock to decline.
The concentration of our stock ownership limits our shareholders’ ability to influence corporate matters.
Our officers and directors continue to have significant influence over us through their ownership of shares of our common stock. As of the date of this Form 10-K, our directors and officers beneficially own shares of our common stock which represent approximately 25.5% of the voting power of our outstanding capital stock. As a consequence, our directors and officers will have the power to affect our management and affairs and overall matters requiring shareholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our Company or our assets, for the foreseeable future. This concentrated control limits or restricts our shareholders’ ability to influence corporate matters and, as a result, we may take actions that our shareholders do not view as beneficial. As a result, the market price of our common stock could be adversely affected.
Provisions in our governing documents and under Delaware law could discourage a takeover that shareholders may consider favorable.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
•
authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to defend against a takeover attempt;
•
providing that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office rather than by shareholders;
•
advance notice procedures, which apply for shareholders to nominate candidates for election as directors or to bring matters before an annual meeting of shareholders;
•
no authorization of cumulative voting, which limits the ability of minority shareholders to elect director candidates;
•
certain amendments to our amended and restated certificate of incorporation require the approval of two-thirds of the then outstanding voting power of our capital stock;
•
our amended and restated certificate of incorporation requires the approval of two-thirds of the then outstanding voting power of our capital stock for shareholders to adopt, amend, alter or repeal our bylaws, or adopt any provision inconsistent with our bylaws;
•
a prohibition on shareholder action by written consent, which means that our shareholders will only be able to take action at a meeting of shareholders; and
•
preventing shareholders from calling special meetings.
In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in a broad range of business combinations with any “interested” shareholder for a period of three years following the date on which the shareholder becomes an “interested” shareholder.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:
•
being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
•
not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting of Section 404(b) of the Sarbanes-Oxley Act;
•
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
•
reduced disclosure obligations regarding executive compensation; and
•
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We have taken advantage of reduced reporting burdens in our filings with the SEC. 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 allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards.
We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30, (ii) the end of the fiscal year in which we have total annual gross revenue of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (iv) the end of the fifth fiscal year after the date of Company’s final prospectus for its initial public offering of its common stock.
Since we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, stock price appreciation, if any, will be your sole source of gain.
We currently intend to retain all our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, appreciation, if any, in the market price of our common stock will be your sole source of gain for the foreseeable future.
Our certificate 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 us and our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for:
•
any derivative action or proceeding brought on our behalf;
•
any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or our shareholders;
•
any action asserting a claim against us or our directors, officers or employees arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws; and
•
any action asserting a claim against us or our directors, officers or employees governed by the internal affairs doctrine.
This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction.
In addition, our certificate of incorporation provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, unless we consent in writing to the selection of an alternative forum. This exclusive forum provision does not apply to claims under the Exchange Act.
These exclusive forum provisions may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage these types of lawsuits. Furthermore, the enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. If a court were to find the exclusive forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES.
We currently lease approximately 6,888 square feet of commercial space for manufacturing, distribution and related office use in one building, and a second lease provides us approximately 13,600 square feet of further commercial space for manufacturing, distribution and related office use. On March 15, 2019, we purchased lots adjacent to our current manufacturing facility in Sisters, Oregon. We believe that our existing facilities, our facilities under construction and other available properties will be sufficient for our needs for the foreseeable future.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS.
We are not subject to any material legal proceedings.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock began trading on the NYSE American Market under the symbol “LSF” on September 23, 2020. Prior to that date, there was no public trading market for our common stock.
Holders
As of March 15, 2021, there were 124 holders of record of our common stock. This number does not include beneficial owners whose shares are held by nominees in street name.
Use of Proceeds from IPO
On September 22, 2020, our registration statement on Form S-1 (File No. 333-248513) was declared effective by the SEC for our IPO. At the closing of the offering on September 25, 2020, we sold 3,047,500 shares of our common stock at a public offering price of $22 per share, including 397,500 shares of common stock upon the exercise of the underwriter’s option to purchase additional shares and received gross proceeds of $67,045,000. After underwriting discounts and commissions and other offering costs, net proceeds from the IPO were approximately $61,966,237. Canaccord Genuity LLC, Craig-Hallum Capital Group LLC and Roth Capital Partners, LLC acted as underwriters for our IPO.
Danone Manifesto Ventures, PBC (“DMV”) purchased 90,910 shares of our common stock in a private placement immediately subsequent to the consummation of the IPO for a total purchase price of $2,000,020, at a price per share of $22.
We intend to use the net proceeds from our IPO for working capital and general corporate purposes, including operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire businesses or products. However, we do not have agreements or commitments for any acquisitions at this time. We cannot specify with certainty the particular uses of the net proceeds that we received from our IPO. Pending the use of proceeds from our IPO as described above, we may invest the net proceeds that we received in our IPO in short-term, investment grade, interest-bearing instruments.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA.
Omitted.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K.
Overview
Laird Superfood is an emerging consumer products platform focused on manufacturing and marketing highly differentiated plant-based and functional foods. The core pillars of the Laird Superfood platform are currently Superfood Creamer coffee creamers, Hydrate hydration products and beverage enhancing supplements, 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 $26 million for the year ended December 31, 2020, from $13 million for the year ended December 31, 2019, representing net sales growth of 98%. The growth in the year ended December 31, 2020 was primarily driven by a significant expansion of our customer base in both online and traditional wholesale channels.
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 years ended December 31, 2020 and 2019, the online business made up 56% 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 almost two-thirds of lairdsuperfood.com sales for the year ended December 31, 2020.
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 years ended December 31, 2020 and 2019, wholesale made up 42% and 40% 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. We currently estimate our products are in over 7,100 retail door locations across the United States and we believe the long-term potential store base exceeds 20,000 retail locations in the United States. 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.
Recent Developments
Initial Public Offering
On September 23, 2020, the Company completed its initial public offering (“IPO”), in which the Company issued and sold 3,047,500 shares of its common stock at a public offering price of $22 per share, including 397,500 shares of common stock upon the exercise of the underwriter’s option to purchase additional shares. After underwriting discounts and commissions and other offering costs, net proceeds from the IPO were approximately $61,966,237. Offering costs of approximately $1,268,765 were recognized as a reduction of additional-paid-in capital.
Upon the closing of the IPO, all outstanding shares of the Company’s preferred stock converted into shares of common stock, consisting of (i) 162,340 outstanding shares of Series A-1 convertible preferred stock converting into 324,680 aggregate shares of common stock, (ii) 152,253 outstanding shares of Series A-2 convertible preferred stock converting into 304,506 aggregate shares of common stock, and (iii) 383,142 outstanding shares of Series B-1 convertible preferred stock converting into 766,284 aggregate shares of common stock.
Concurrent Private Placement
Danone Manifesto Ventures, PBC (“DMV”) purchased $2,000,020 of our common stock in a private placement immediately subsequent to the consummation of the IPO, at a price per share of $22.
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 provisions 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 reported the balance as restricted cash on the Balance Sheet as of December 31, 2020.
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 Annual 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.
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 rate 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.
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.
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.
Interest Expense
Interest expense for the year ended December 31, 2019 consisted primarily of interest related to our additional rent owed to our landlord for landlord improvements. There was no interest expense incurred for the year ended December 31, 2020.
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 years ended December 31, 2020 (“FY2020”) and December 31, 2019 (“FY2019”)
The following table summarizes our results of operations for the periods indicated:
For the years ended
December 31,
$
%
Change
Change
Sales, net
$ 26,006,398
$ 13,103,728
$ 12,902,670
%
Cost of goods sold
(19,204,642 )
(8,019,094 )
(11,185,548 )
%
Gross profit
6,801,756
5,084,634
1,717,122
%
Gross margin
26.2 %
38.8 %
General and administrative
8,828,279
5,201,184
3,627,095
%
Research and product development
508,170
324,284
183,886
%
Sales and marketing
10,394,478
8,311,137
2,083,341
%
Total expenses
19,730,927
13,836,605
5,894,322
%
Operating loss
(12,929,171 )
(8,751,971 )
(4,177,200 )
%
Other income(expense)
78,870
248,023
(169,153 )
(68 %)
Loss before income taxes
(12,850,301 )
(8,503,948 )
(4,346,353 )
(51 %)
Benefit from income taxes
-
-
-
%
Net loss
(12,850,301 )
(8,503,948 )
(4,346,353 )
(51 %)
Deemed contribution from the redemption of preferred stock
-
7,448,879
(7,448,879 )
%
Less deemed dividend of beneficial conversion feature
(825,366 )
-
(825,366 )
(100 %)
Less deemed dividend of warrants
(825,366 )
-
(825,366 )
(100 %)
Net loss attributable to Laird Superfood, Inc. common stockholders
$ (14,501,033 )
$ (1,055,069 )
$ (12,620,598 )
(1183 %)
Sales, Net
Years ended December 31,
2020 v. 2019 Change
$
%
Sales, net
$ 26,006,398
$ 13,103,728
$ 12,902,670
%
Net sales increased by $13 million to $26 million in FY2020, compared to $13 million in FY2019. This increase was due to a combination of growth in our online and wholesale channels, primarily caused by an increase in sales volume. Products introduced after FY2019, including Liquid Creamers, Chai InstaFuel, Orange Guava Hydrate, Activate Daily Greens, Renew Protein, Mushroom Coffee, and four flavors of Pili Nuts, accounted for $4 million of gross sales in FY2020. Year-over-year gross sales growth in existing products accounted for $9 million of the increase in gross sales in FY2020 compared to FY2019. During FY2020, 36% of all online orders were repeat orders, compared to 34% in FY2019, and 30% of our direct website net sales in FY2020 came from subscription programs, compared to 32% in FY2019.
Cost of Goods Sold
Years ended December 31,
2020 v. 2019 Change
$
%
Cost of Goods Sold
$ (19,204,642 )
$ (8,019,094 )
$ (11,185,548 )
%
Cost of goods sold increased by $11 million in FY2020 to $19 million from $8 million in FY2019, primarily due to sales growth in the 2020 period, elevated labor costs, increased co-packing costs primarily associated with our liquid creamer product line, elevated air shipping costs for additional raw materials in response to an unanticipated increase in demand associated with COVID-19, disposal costs related to the initial production and distribution of our liquid creamer product line and elevated outbound shipping costs combined with the launch of a free shipping initiative for direct online purchases made on lairdsuperfood.com.
Gross Profit
Years ended December 31,
2020 v. 2019 Change
$
%
Gross Profit
$ 6,801,756
$ 5,084,634
$ 1,717,122
%
Gross profit increased by $2 million in FY2020 to $7 million from $5 million in FY2019, primarily due to sales growth in FY2020, partially offset by a decrease in gross margins. Gross margin decreased to 26.2% in FY2020 compared to 38.8% in FY2019, due to elevated labor costs, increased co-packing costs primarily associated with our liquid creamer product line, elevated air shipping costs for additional raw materials in response to an unanticipated increase in demand associated with COVID-19, disposal costs related to the initial production and distribution of our liquid creamer product line and elevated outbound shipping costs combined with the launch of a free shipping initiative for direct online purchases made on lairdsuperfood.com.
Operating Expenses
Years ended December 31,
2020 v. 2019 Change
$
%
Operating Expenses
General and Administrative
$ 8,828,279
$ 5,201,184
$ 3,627,095
%
Research and Product Development
508,170
324,284
183,886
%
Sales and Marketing
10,394,478
8,311,137
2,083,341
%
Total Operating Expenses
$ 19,730,927
$ 13,836,605
$ 5,894,322
%
General and administrative expense increased by $4 million in FY2020 to $9 million from $5 million in FY2019, primarily due to IPO related expenses for accelerated stock option vesting, discretionary bonuses, professional fees, as well as an asset impairment recorded during the second quarter.
Research and product development expense increased by $184 thousand to $508 thousand in FY2020 from $324 thousand in FY2019, primarily due to increased product development efforts and payroll expenses.
Sales and marketing expense increased by $2 million in FY2020 to $10 million from $8 million in FY2019, primarily due to increased advertising and payroll, as well as a stock option modification expense.
Other Income
Years ended December 31,
2020 v. 2019 Change
$
%
Other income (expense)
$ 9,100
$ 48,878
$ (39,778 )
%
Other income is composed of interest income, gain on sale of available-for-sale securities, dividend income, and grant income. Interest income, primarily related to interest income on investment securities available-for-sale, decreased to $65 thousand in FY2020 compared to $229 thousand in FY2019 due to lower interest rate on invested balances. Gain on the sale of available-for-sale securities was $14 thousand in FY2020 compared to $8 thousand in FY2019. There was no grant income in FY2020 compared to $50 thousand in FY2019.
Benefit from Income Taxes
Years ended December 31,
2020 v. 2019 Change
$
%
Benefit from Income Taxes
$ -
$ -
$ -
%
Benefit from income taxes remained at $0 in FY2020 and FY2019, as we maintain a full valuation allowance related to our net deferred tax assets, primarily due to our historical net loss position. Due to our history of operating losses and expectation of future operating losses, we do not expect any significant income tax expenses or benefits for the foreseeable future.
Liquidity and Capital Resources
As of December 31, 2020, we had incurred accumulated net losses of $32 million, including operating losses of $13 million and $9 million for FY2020 and FY2019, 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 December 31, 2020, we had $66 million of cash-on-hand and investments and $11 million of available borrowings under our lines of credit. As of December 31, 2019, we had $6 million of cash-on-hand and investments and $8 million of available borrowings under our lines of credit. As of December 31, 2020, and December 31, 2019, 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 while 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.
Comparison of the years ended December 31, 2020 and December 31, 2019
Cash Flows
The following table shows a summary of our cash flows for the periods presented:
For the Years ended
December 31,
Cash flows used in operating activities
$ (14,746,390 )
$ (9,433,231 )
Cash flows used in investing activities
(4,280,987 )
(7,931,763 )
Cash flows from financing activities
75,231,348
1,029,080
Net change in cash
$ 56,203,971
$ (16,335,914 )
Cash Flows used in Operating Activities
Cash used in operating activities was $15 million for FY2020 as compared to $9 million in FY2019. In FY2020, there were increases in operational costs such as co-packing costs associated with our liquid creamer product line, elevated air shipping costs for additional raw materials in response to an unanticipated increase in demand associated with COVID-19, disposal costs related to the initial production and distribution of our liquid creamer product line, and elevated outbound shipping costs combined with the launch of a free shipping initiative for direct online purchases made on lairdsuperfood.com. In addition, to ensure we are able to keep up with growing customer demand with limited disruptions in distributions, we also made substantial increases to our inventory.
Cash Flows used in Investing Activities
Cash used in investing activities was $4 million in FY2020 as compared to $8 million in FY2019. These changes were primarily due to investment in securities available-for-sale, and capital investments in a new manufacturing line to continue to meet increasing consumer demand.
Cash Flows from Financing Activities
Cash provided by financing activities was $75 million in FY2020 compared to $1 million in FY2019. In FY2020 we completed our IPO, generating net proceeds of approximately $64 million from the IPO and concurrent private placement made by DMV. Offering costs of approximately $1 million were recognized as a reduction of additional-paid-in capital.
Contractual Obligations and Commitments
The following table sets forth the amounts of our significant contractual obligations and commitments with definitive payment terms as of December 31, 2020:
Payments Due by Period
Operating
Leases(1)
Note Payable
Total
$ 237,737
$ 51,000
$ 288,737
244,869
-
244,869
252,216
-
252,216
259,782
-
259,782
267,575
-
267,575
Thereafter
864,546
-
864,546
$ 2,126,725
$ 51,000
$ 2,177,725
(1) Operating lease obligations related to our manufacturing facility leases dated March 1, 2018 and December 17, 2018.
Segment Information
We have one operating segment and one reportable segment, as our Chief Executive Officer reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance.
Critical Accounting Policies and Estimates
This management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 1 to our audited financial statements included elsewhere in this Form 10-K, we believe the following accounting policies are the most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), which we adopted January 1, 2019. Under ASC 606, we recognize revenue in accordance with a five-step model in which we evaluate the transfer of promised goods or services and recognize revenue when our customer obtains control of promised goods or services in an amount that reflects the consideration which we expect to be entitled to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that we determine are within the scope of ASC 606, we perform 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 entity satisfies a performance obligation. We have elected, as a practical expedient, to account for the shipping and handling as fulfillment costs, rather than as a separate performance obligation. Revenue is reported net of applicable provisions for discounts, returns and allowances. Methodologies for determining these provisions are dependent on customer pricing and promotional practices. We will record reductions to revenue for estimated product returns and pricing adjustments in the same period that the related revenue is recorded. These estimates will be based on industry-based historical data, historical sales returns, if any, analysis of credit memo data, and other factors known at the time.
Stock Incentive Plan
The compensation cost relating to share-based payment transactions is recognized in the 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 awards, recipients are issued shares of common stock.
Income Taxes
Income taxes provide for the tax effects of transactions reported in the financial statements and consist of income taxes currently due and deferred tax assets and liabilities. We 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) 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, we recorded a full deferred tax valuation allowance as of December 31, 2020 and December 31, 2019.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Recent Accounting Pronouncements
See Recently Issued Accounting Pronouncements in Note 1 to our audited financial statements included elsewhere in this Form 10-K for additional information.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Comprehensive Loss
Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Laird Superfood, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Laird Superfood, Inc (the “Company”) as of December 31, 2020 and 2019, the related statements of operations, comprehensive loss, convertible preferred stock and stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Moss Adams LLP
Portland, Oregon
March 16, 2021
We have served as the Company’s auditor since 2018.
LAIRD SUPERFOOD, INC.
BALANCE SHEETS
As of
December 31, 2020
December 31, 2019
Assets
Current assets
Cash and cash equivalents
$ 57,208,080
$ 1,004,109
Accounts receivable, net
839,659
384,806
Investment securities available-for-sale
8,706,844
5,485,209
Inventory
6,295,898
2,435,965
Prepaid expenses and other current assets
2,847,319
590,808
Deposits
97,674
143,327
Total current assets
75,995,474
10,044,224
Noncurrent assets
Property and equipment, net
3,263,488
3,153,286
Fixed assets held for sale
250,000
-
Licensing agreement - intangible
132,100
132,100
Deferred rent
2,696,646
3,057,432
Other assets
4,992
15,143
Total noncurrent assets
6,347,226
6,357,961
Total assets
$ 82,342,700
$ 16,402,185
Liabilities, Convertible Preferred Stock and Stockholders’ Equity
Current liabilities
Accounts payable
$ 1,315,964
$ 724,751
Payroll liabilities
722,915
491,092
Accrued expenses
704,543
301,046
Total current liabilities
2,743,422
1,516,889
Long-term liabilities
Note payable
51,000
51,000
Total long-term liabilities
51,000
51,000
Total liabilities
2,794,422
1,567,889
Commitments and contingencies (Note 9)
Convertible preferred stock
Preferred stock, $0.001 par value, 5,000,000 and 1,329,680 shares authorized as of December 31, 2020 and December 31, 2019, respectively; Series A-1 Preferred Stock, 0 shares issued, and outstanding as of December 31, 2020; 1,177,426 shares authorized, 162,340 issued and outstanding, and 609,078 undesignated as of December 31, 2019; Series A-2 Preferred Stock 0 shares issued, and outstanding as of December 31, 2020; 152,253 shares authorized, issued, and outstanding as of December 31, 2019
-
6,722,951
Total convertible preferred stock
-
6,722,951
Stockholders’ equity
Common stock, $0.001 par value, 100,000,000 and 9,600,000 shares authorized as of December 31, 2020 and December 31, 2019; 9,247,758 and 8,892,886 issued and outstanding at December 31, 2020, respectively; 4,551,950 and 4,188,558 issued and outstanding at December 31, 2019, respectively
8,893
4,188
Additional paid-in capital
111,452,346
27,184,250
Accumulated other comprehensive income (loss)
14,207
(226 )
Accumulated deficit
(31,927,168 )
(19,076,867 )
Total stockholders’ equity
79,548,278
8,111,345
Total liabilities, convertible preferred stock and stockholders’ equity
$ 82,342,700
$ 16,402,185
The accompanying notes are an integral part of these financial statements.
LAIRD SUPERFOOD, INC.
STATEMENTS OF OPERATIONS
For the Years Ended
December,
Sales, net
$ 26,006,398
$ 13,103,728
Cost of goods sold
(19,204,642 )
(8,019,094 )
Gross profit
6,801,756
5,084,634
General and administrative
Salaries, wages and benefits
3,533,478
2,423,005
Stock-based compensation
1,424,803
700,384
Professional fees
963,791
491,465
Insurance expense
666,045
132,637
Office expense
503,817
416,160
Occupancy
229,303
157,697
Merchant service fees
375,792
157,737
Netsuite subscription expense
125,916
157,752
Impairment on asset held for sale
239,734
-
Other expense
765,600
564,347
Total general and administrative expenses
8,828,279
5,201,184
Research and product development
Salaries, wages and benefits
272,605
216,657
Product development expense
209,275
80,724
Stock-based compensation
10,261
7,741
Other expense
16,029
19,162
Total research and product development expenses
508,170
324,284
Sales and marketing
Salaries, wages and benefits
2,669,384
2,609,825
Stock-based compensation
661,026
207,686
Advertising
4,457,213
3,131,332
General marketing
1,592,180
1,157,920
Amazon selling fee
743,981
541,009
Travel expense
84,148
330,121
Other expense
186,546
333,244
Total sales and marketing expenses
10,394,478
8,311,137
Total expenses
19,730,927
13,836,605
Operating loss
(12,929,171 )
(8,751,971 )
Other income (expense)
Interest and dividend income
64,943
239,175
Gain on sale of available-for-sale securities
13,927
7,664
Interest expense
-
(48,816 )
Grant income
-
50,000
Total other income
78,870
248,023
Loss before income taxes
(12,850,301 )
(8,503,948 )
Benefit from income taxes
-
-
Net loss
$ (12,850,301 )
$ (8,503,948 )
Add deemed contribution from the redemption of preferred stock
-
7,448,879
Less deemed dividend of beneficial conversion feature
(825,366 )
-
Less deemed dividend on warrant discount
(825,366 )
-
Net loss attributable to Laird Superfood, Inc. common stockholders
$ (14,501,033 )
$ (1,055,069 )
Net loss per share attributable to Laird Superfood, Inc common stockholders:
Basic
$ (2.61 )
$ (0.29 )
Diluted
$ (2.61 )
$ (0.29 )
Weighted-average shares of common stock outstanding used in computing net loss per share of common stock
5,546,078
3,668,050
The accompanying notes are an integral part of these financial statements.
LAIRD SUPERFOOD, INC.
STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended
December 31,
Net loss
$ (12,850,301 )
$ (8,503,948 )
Other comprehensive income (loss), net of tax
Change in unrealized gains (losses) on investment securities available-for-sale, net of tax(1)
14,433
(226 )
Total other comprehensive income (loss)
14,433
(226 )
Comprehensive loss
$ (12,835,868 )
$ (8,504,174 )
(1) The Company maintains a full valuation allowance related to our net deferred tax assets, primarily due to our historical net loss position. See note 10 for the estimated tax benefit deferred.
The accompanying notes are an integral part of these financial statements.
LAIRD SUPERFOOD, INC.
STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Convertible Preferred Stock
Stockholders’ Equity
Total
Preferred Stock
Common Stock
Additional
Paid-in Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Shares
Amount
Shares
Amount
Balances, January 1, 2019
923,670
$ 21,727,098
3,590,692
$ 3,591
$ 10,300,282
$ -
$ (10,572,919 )
$ (269,046 )
Stock-based compensation
-
-
-
-
851,338
-
-
851,338
Preferred stock issuance costs
-
(52,073 )
-
-
-
-
-
-
Preferred share conversion
(64 )
(280 )
-
-
-
Stock option exercises
-
-
21,140
50,749
-
-
50,769
Common stock issuances
-
-
668,844
9,697,628
-
-
9,698,296
Less: repurchased common stock
-
-
(92,246 )
(91 )
(1,145,877 )
-
-
(1,145,968 )
Common stock issuance costs
-
-
-
-
(19,029 )
-
-
(19,029 )
Other comprehensive income, net of tax
-
-
-
-
-
(226 )
-
(226 )
Less: repurchased preferred stock
(609,013 )
(7,500,000 )
-
-
-
-
-
-
Deemed contribution from the redemption of preferred stock
-
(7,448,879 )
-
-
7,448,879
-
-
7,448,879
Preferred stock redemption costs
-
(2,915 )
-
-
-
-
-
-
Net loss
-
-
-
-
-
-
(8,503,948 )
(8,503,948 )
Balances, December 31, 2019
314,593
$ 6,722,951
4,188,558
$ 4,188
$ 27,184,250
$ (226)
$ (19,076,867 )
$ 8,111,345
Stock-based compensation
-
-
14,660
2,318,487
-
-
2,318,502
Stock option exercises
-
-
19,434
259,728
-
-
259,747
Less: repurchased common stock
-
-
(1,416 )
(1 )
(20,531 )
-
-
(20,532 )
Preferred stock issuances
383,142
10,000,006
-
-
-
-
-
-
Beneficial conversion feature on Preferred Series B-1
-
(825,366 )
-
-
825,366
-
-
825,366
Deemed dividend of beneficial conversion feature
-
825,366
-
-
(825,366 )
-
-
(825,366 )
Allocation of preferred series B-1 proceeds to warrant
-
(825,366 )
-
-
825,366
-
-
825,366
Deemed dividend on warrant discount
-
825,366
-
-
(825,366 )
-
-
(825,366 )
Preferred stock issuance costs
-
(147,721 )
-
-
-
-
-
-
Preferred stock conversion
(697,735 )
(16,575,236 )
1,395,470
1,396
16,573,840
-
-
16,575,236
Common stock issuances
-
-
3,276,180
3,276
66,107,241
-
-
66,110,517
Common stock issuance costs
-
-
-
-
(1,268,772 )
-
-
(1,268,772 )
Other comprehensive income, net of tax
-
-
-
-
-
14,433
-
14,433
Capital contribution
-
-
-
-
298,103
-
-
298,103
Net loss
-
-
-
-
-
-
(12,850,301 )
(12,850,301 )
Balances, December 31, 2020
-
$ -
8,892,886
$ 8,893
$ 111,452,346
$ 14,207
$ (31,927,168 )
$ 79,548,278
The accompanying notes are an integral part of these financial statements.
LAIRD SUPERFOOD, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
Cash flows used in operating activities
Net loss
$ (12,850,301 )
$ (8,503,948 )
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation
474,621
300,561
Loss on disposal of equipment
-
Stock-based compensation
2,318,502
851,338
Noncash conversion of note payable to grant income
-
(50,000 )
Impairment on asset held for sale
239,734
-
Gain on sale of investment securities available-for-sale
13,927
7,664
Changes in operating assets and liabilities:
Accounts receivable
(454,853 )
(9,934 )
Inventory
(3,859,933 )
(1,253,732 )
Prepaid expenses and other current assets
(2,256,511 )
(136,669 )
Deferred rent
360,786
(1,131,393 )
Deposits
30,954
80,750
Other assets
10,151
2,598
Accounts payable
591,213
(60,741 )
Payroll liabilities
231,823
307,911
Accrued expenses
403,497
161,881
Net cash from operating activities
(14,746,390 )
(9,433,231 )
Cash flows used in investing activities
Purchase of property, equipment, and software
(1,059,858 )
(2,423,965 )
Deposits on equipment to be acquired
-
(14,699 )
Purchase of investment securities available-for-sale
(8,171,129 )
(12,493,099 )
Proceeds from maturities of investment securities available-for-sale
4,950,000
7,000,000
Net cash from investing activities
(4,280,987 )
(7,931,763 )
Cash flows from financing activities
Payments on line of credit
-
(5,000,000 )
Draw on line of credit
-
5,000,000
Issuance of common stock
66,110,517
9,698,296
Redemption of preferred stock
-
(7,503,195 )
Issuance of preferred stock
10,000,006
-
Common stock issuance costs
(1,268,772 )
(71,102 )
Preferred stock issuance costs
(147,721 )
-
Capital contribution
298,103
-
Repurchased common stock
(20,532 )
(1,145,968 )
Stock options exercised
259,747
51,049
Net cash from financing activities
75,231,348
1,029,080
Net change in cash and cash equivalents
56,203,971
(16,335,914 )
Cash and cash equivalents beginning of period
1,004,109
17,340,023
Cash and cash equivalents end of period
$ 57,208,080
$ 1,004,109
Supplemental disclosures of cash flow information
Interest paid
$ -
$ 48,816
Supplemental disclosures of non-cash information
Deemed contribution from redemption of preferred stock
$ -
$ 7,448,879
Unrealized gain (loss) on available-for-sale securities
$ 14,433
$ (226 )
Conversion of preferred stock to common stock
$ 16,575,236
$ -
Purchases of equipment included in deposits at the beginning of the period
$ 14,699
$ 4,577
Purchases of land included in prepaids and other current assets at the beginning of the period
$ -
$ 40,000
The accompanying notes are an integral part of these financial statements.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
The accompanying audited financial statements include the accounts of Laird Superfood, Inc. (the “Company” or “Laird Superfood”), a Delaware corporation. On July 3, 2018, the Company entered into a plan of conversion and was converted from a corporation under the laws of the State of Oregon to a corporation under the laws of the State of Delaware with an updated par value of $0.001 per share of common stock.
Nature of Operations
Laird Superfood, Inc. is an emerging consumer products platform focused on manufacturing and marketing highly differentiated, plant-based and functional foods from its headquarters in Sisters, Oregon. The core pillars of the Laird Superfood platform are currently Superfood Creamer coffee creamers, Hydrate hydration products and beverage enhancing supplements, and roasted and instant coffees, teas and hot chocolate. The Company was founded in 2015.
Initial Public Offering
On September 25, 2020, the Company completed its initial public offering (“IPO”), in which the Company issued and sold 3,047,500 shares of its common stock at a public offering price of $22 per share, including 397,500 shares of common stock upon the exercise of the underwriter’s option to purchase additional shares. After underwriting discounts and commissions and other offering costs, net proceeds from the IPO were approximately $61,966,237. Offering costs of approximately $1,268,772 were recognized as a reduction of additional-paid-in capital.
Upon the closing of the IPO, all outstanding shares of the Company’s preferred stock converted into shares of common stock, consisting of (i) 162,340 outstanding shares of Series A-1 convertible preferred stock converting into 324,680 aggregate shares of common stock, (ii) 152,253 outstanding shares of Series A-2 convertible preferred stock converting into 304,506 aggregate shares of common stock, and (iii) 383,142 outstanding shares of Series B-1 convertible preferred stock converting into 766,284 aggregate shares of common stock.
Concurrent Private Placement
Danone Manifesto Ventures, PBC (“DMV”) purchased 90,910 shares of our common stock in a private placement immediately subsequent to the consummation of the IPO for a total purchase price of $2,000,020, at a price per share of $22.
Basis of Accounting
The financial statements include the accounts of the Company. 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 years ended December 31, 2020 and 2019.
Use of Estimates
The preparation of 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
LAIRD SUPERFOOD, INC
Notes to Financial Statements
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 impact allowances for doubtful accounts and returns, inventory obsolescence, valuation allowance for deferred taxes, fair value of stock-based compensation, beneficial conversion feature, and discount on warrants.
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 allocation of 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 16 for additional information regarding sales by platform within the Company’s single segment.
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 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 balance sheet that sum to the total of the same such amounts shown in the statement of cash flows.
December 31,
December 31,
Cash and cash equivalents
$ 56,909,977
$ 1,004,109
Restricted cash
298,103
-
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
$ 57,208,080
$ 1,004,109
Amounts in restricted cash represent those that are required to be set aside by contractual agreement. On December 3, 2020, the Company entered into an agreement with DMV, which provided the Company $298,103 in funds for the purpose of supporting three COVID-19 relief projects. The restriction will be released upon the completion of the projects.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash on deposit and cash equivalents. At times, cash and cash equivalents balances may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurable limits. The Company’s investment account (recognized as cash and cash equivalents) is with what the Company believes to be a high-quality issuer. The Company has never experienced any losses related to these balances. Non-interest-bearing amounts on deposit in excess of FDIC insurable limits as of December 31, 2020 and 2019 approximated $6,639,821 and $456,104, respectively.
Accounts Receivable, net
Accounts receivable, net consists principally of trade receivables, which are recorded at the invoiced amount, net of allowances for doubtful accounts. 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 Company provides for estimated losses on accounts receivable based on prior bad debt experience and a review of existing receivables. Based on these factors, management determined no allowance for doubtful accounts was required as of December 31, 2020. As of December 31, 2019, management established a $14,786 allowance for doubtful accounts.
Investments
Investment securities that are not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as other comprehensive income or loss, net of income taxes. Management determines the appropriate classification of securities at the time of purchase. Investment securities are valued utilizing quoted prices in active markets. Gains and losses on the sales of available-for-sale securities are determined using the specific-identification method.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or net realizable value and consists primarily of raw materials and packaging and finished goods. As of December 31, 2020 and 2019, inventory was comprised of the following:
December 31,
December 31,
Raw materials and packaging
$ 4,109,706
$ 1,187,513
Finished goods
2,186,192
1,248,452
Total
$ 6,295,898
$ 2,435,965
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 year ended December 31, 2020, the Company recorded $421,565 in inventory obsolescence primarily related to the Company’s liquid creamer product line. For the year ended December 31, 2019, the Company did not have a charge related to inventory obsolescence, as the majority of products manufactured consisted of powder-based products which have an extensive shelf life.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
As of December 31, 2020 and 2019, the Company had a total of $958,166 and $100,387, respectively, of prepayments for future raw materials inventory, which is included in prepaid expenses on the balance sheets.
Property and Equipment
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 10 years. The useful life for leasehold improvements is the lesser of the lease term or the useful life. Depreciation expense is allocated to general and administrative expenses and cost of goods sold upon the sale of inventory. For the years ended December 31, 2020 and 2019, depreciation expense was $474,621 and $300,561, respectively.
As of December 31, 2020 and 2019, the Company had a total of $0 and $14,699, respectively, of deposits for future equipment purchases, which is included in deposits on the balance sheets.
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 balance sheet. 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. Fixed assets held for sale as of December 31, 2020 include the Company’s intermittent motion form (“IMF”) production line. The Company had no fixed assets held for sale as of December 31, 2019. The Company determined a fair value less costs to sell of $250,000 for all assets associated with the IMF production line. As the determined fair value is less than the net carrying value of the assets, the Company recorded an impairment loss of $239,734 and $0 during the years ended December 31, 2020 and 2019, respectively.
Deferred Rent
Deferred rent includes tenant improvement costs that were incurred by the landlord, RII Lundgren Mill, LLC, in the build-out of the Company’s leased space and were reimbursed by the Company. These amounts are treated as additional rents and are expensed straight-line over the life of the lease.
Revenue Recognition
The Company’s significant accounting policy for revenue was updated as a result of the adoption of Accounting Standards Update (“ASU”) 2014-09. The Company recognizes revenue in accordance with the five-step model as prescribed by ASU 2014-09 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 ASU 2014-09, 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 entity satisfies a performance obligation. See Note 16 for additional information regarding revenue recognition. 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
LAIRD SUPERFOOD, INC
Notes to Financial Statements
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 will be based on industry-based historical data, historical sales returns, if any, analysis of credit memo data, and other factors known at the time.
Cost of Goods Sold
Cost of goods sold includes material, labor, and overhead costs incurred in the storage and distribution of products sold in the period. Material costs include the cost of products purchased. Labor and overhead costs consist of indirect product costs, including wages and benefits for manufacturing, planning, and logistics personnel, depreciation, facility costs and freight.
Shipping and Handling
Costs of shipping and handling related to sales revenue are included in cost of goods sold. Shipping and handling costs totaled $4,074,802 and $1,751,142 for the years ended December 31, 2020 and 2019, respectively. Income generated from shipping costs billed through to customers was included in Sales, net in the statements of operations. Shipping income totaled $248,865 and $464,551 for the years ended December 31, 2020 and 2019, respectively.
Research and Product Development
Amounts spent on research and development activities are expensed as incurred as research and product development expense on the statements of operations. Research and product development expense was $508,170 and $324,284 for the years ended December 31, 2020 and 2019, respectively.
Advertising
Advertising and marketing costs are expensed when incurred. Advertising and marketing expenses for the years ended December 31, 2020 and 2019 was $6,049,393 and $4,289,252, respectively.
Income Taxes
Income taxes provide for the tax effects of transactions reported in the 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) 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 full deferred tax valuation allowance of $7,563,110 and $4,584,174 as of December 31, 2020 and 2019, respectively.
Repurchased Stock
Management presents repurchased stock (at cost) as a reduction in stockholders’ equity to more clearly reflect the historical stock repurchase transactions. There were two common stock repurchase transactions during
LAIRD SUPERFOOD, INC
Notes to Financial Statements
the year ended December 31, 2020, totaling 1,416 shares of common stock and $20,532. There were eight common stock repurchase transactions during the year ended December 31, 2019, totaling 92,246 shares of common stock and $1,145,968. Repurchases were valued at a price consistent with or less than the most recent private equity offering by the Company.
Stock Incentive Plan
The compensation cost relating to share-based payment transactions is recognized in the 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, 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 and preferred stock had been issued and are calculated under the treasury stock method. Due to the Company’s net loss, all stock options, unvested restricted stock, and convertible preferred stock are anti-dilutive and excluded.
Stock Split
The Company’s board of directors and stockholders approved a 2-for-1 split of the Company’s common stock, which was effected on August 19, 2020. The split divided each share of the Company’s issued and outstanding common stock into two shares of common stock and correspondingly adjusted the conversion prices of its convertible preferred stock. No fractional shares were issued in connection with the split. The split was effective upon filing of the Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation on August 19, 2020. The Company has reflected the effect of the 2-for-1 split of its common stock (and the corresponding adjustment of the conversion prices of its preferred stock) in these financial statements as if it had occurred at the beginning of the earliest period presented.
Warrants
Issued and detachable stock warrants are classified as equity or liability instruments based on the specific terms of the underlying warrant agreement. In circumstances where debt or equity is issued with detachable warrants, the proceeds from issuance are allocated to each instrument based on an acceptable method, which generally involves determining the fair value of one or more of the instruments. In conjunction with the Company’s initial public offering, the warrant outstanding was cancelled. See additional information in Note 12.
License Agreement-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 Laird Hamilton’s contribution to the Company was in the
LAIRD SUPERFOOD, INC
Notes to Financial Statements
form of intellectual property, granting the Company the right to use Laird Hamilton’s name and likeness. This contribution, which was reported on the balance sheets as of December 31, 2020 and 2019, 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. Please see Note 15 for more information on the Company’s related party transaction with Mr. Hamilton.
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 balance sheets as of December 31, 2020 and 2019, 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. Please see Note 15 for more information on the Company’s related party transaction with Ms. Reece.
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 noncompetition 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.
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 values of the 2020 License were not less than the carrying amounts; therefore, the Company recognized no impairment for the years ended December 31, 2020 and 2019.
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. For the years ended December 31, 2020 and 2019, the Company did not match employee contributions.
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
LAIRD SUPERFOOD, INC
Notes to Financial Statements
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 financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, “Revenue from Contracts with Customers (“Topic 606”)” (“ASU 2014-09”). The Company adopted ASU 2014-09 and its related amendments (collectively known as ASC 606) effective on January 1, 2019 using the modified retrospective method with no material impact on the Company’s financial position, results of operations and liquidity. Please see Note 16 “Revenue Recognition” for the required disclosures related to the impact of adopting this standard and a discussion of the Company’s updated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall” (“ASU 2016-01”) to make targeted improvements to GAAP on accounting for financial instruments. The guidance in ASU 2016-01 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods within fiscal years beginning after December 15, 2019. The Company adopted ASU 2016-01 on January 1, 2019 with no material impact on the Company’s financial position, results of operations and liquidity.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (“Topic 230”): Restricted Cash” (“ASU 2016-08”). The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include cash, cash equivalents and restricted cash. ASU 2016-08 was effective for fiscal years beginning after December 15, 2017, including interim periods within those periods, using a retrospective transition method to each period presented. The Company adopted ASU 2016-18 on January 1, 2019 with no material impact on the Company’s financial position, results of operations and liquidity, or statement of cash flows in any period prior to Q4 2020. Restricted cash amounting approximately $298,103 as of December 31, 2020 is included in cash and cash equivalents when reconciling the beginning and ending balances in the Consolidated Statements of Cash Flows. Please refer to Note 1, Cash, Cash Equivalents, and Restricted Cash for additional information regarding the nature of restrictions on cash.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation- Stock Compensation (“Topic 718”): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for public entities for years beginning after December 15, 2018, including interim periods within that year. For all other entities, the amendments are effective for years beginning after December 15, 2019, and interim periods with years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption of ASU 2014-09. The Company adopted ASU 2018-07 in conjunction with ASC 606 as of January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial position, results of operations or liquidity.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“Topic 842”) (“ASU 2016-02”), whereby lessee will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s
LAIRD SUPERFOOD, INC
Notes to Financial Statements
obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements must be applied. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The new standard is effective for emerging growth companies that have elected to use private company adoption dates for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company plans to adopt the new standard effective for the year ending December 31, 2022. The Company is currently evaluating the impact of the pending adoption of the new standard on the consolidated financial statements.
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. The Company has not yet evaluated the potential impact of this pronouncement.
Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before the financial statements are available to be issued. The Company has evaluated events and transactions subsequent to December 31, 2020 for potential recognition of disclosure in the financial statements.
On March 4, 2021, the Compensation Committee of the Board of Directors of Laird Superfood, Inc. (the “Company”) approved a form of annual cash incentive plan (the “Bonus Plan”). The Company’s Chief Executive Officer, Chief Financial Officer, other full-time executives and key employees are eligible to participate in the Bonus Plan, subject to the discretion of the Compensation Committee. The Bonus Plan provides participants the opportunity to earn an annual cash payment based on the achievement of pre-established performance goals.
Also on March 4, 2021, the Compensation Committee adopted performance goals and target payment amounts relating to the 2021 fiscal year. The 2021 performance goals consist of achieving net revenue targets (weighted at 75%), gross margin targets (weighted at 15%), and the demonstration of certain Company values (weighted at 10%).
LAIRD SUPERFOOD, INC
Notes to Financial Statements
2. Prepaid Expenses and Other Current Assets
The following table presents the components of prepaid expenses and other current assets as of December 31, 2020 and 2019:
December 31,
December 31,
Prepaid insurance
$ 1,446,189
$ 37,251
Prepaid inventory
958,166
100,387
Prepaid subscriptions and license fees
225,567
193,257
Prepaid, other
152,323
71,445
Prepaid consulting
13,963
69,813
Prepaid advertising
-
74,400
Other current assets
51,111
44,255
$ 2,847,319
$ 590,808
3. Investment securities
Investment securities as of December 31, 2020 and 2019 consisted of the following:
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated
fair value
December 31, 2020
Federal agency bonds - mortgage-backed
$ 8,692,637
$ 14,207
$ -
$ 8,706,844
Total investment securities available-for-sale
$ 8,692,637
$ 14,207
$ -
$ 8,706,844
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated
fair value
December 31, 2019
U.S Treasuries
$ 5,485,435
$ -
$ (226 )
$ 5,485,209
Total investment securities available-for-sale
$ 5,485,435
$ -
$ (226 )
$ 5,485,209
The amortized cost and estimated fair value of investment securities as of December 31, 2020, by contractual maturity, are shown below:
Available-for-sale
December 31, 2020
Amortized
cost
Estimated
fair value
Due after one year through five years
$ 8,692,637
$ 8,706,844
Total investment securities available-for-sale
$ 8,692,637
$ 8,706,844
Investment securities with an estimated fair value of $8,706,844 and $5,485,209 as of December 31, 2020 and 2019, respectively, were pledged to secure our revolving line of credit. See Note 5 for additional information.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
The Company had three investments reach maturity totaling $4,950,000 during the year ended December 31, 2020. The Company also recorded two sales and recognized a gain of $13,927 during the year ended December 31, 2020. The Company had maturities of five investment securities totaling $7,000,000 during the year ended December 31, 2019 and recognized a gain of $7,664.
4. Fair Value Measurements
Factors used in determining the fair value of our assets and liabilities are summarized into three broad categories:
•
Level 1-quoted prices in active markets for identical securities as of the reporting date;
•
Level 2-other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; and
•
Level 3-significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.
The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following tables summarize assets subject to fair value measurements:
Fair Value as of December 31, 2020
Level 1
Level 2
Level 3
Federal agency bonds - mortgage-backed
$ -
$ 8,706,844
$ -
Fixed assets held for sale
$ -
$ -
$ 250,000
Fair Value as of December 31, 2019
Level 1
Level 2
Level 3
U.S Treasuries
$ 5,485,209
$ -
$ -
The Company believes the carrying amounts of Cash, cash equivalents, and restricted cash, Accounts receivable, Prepaid expenses and other current assets, Deposits, Other Assets, Accounts payable, Payroll liabilities and Accrued expenses are a reasonable approximation of the fair value of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.
The Company believes that fair values of U.S. Agency Bonds issued by the Federal Home Loan Mortgage Corporation are determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. agency bonds are included in the Level 2 fair value hierarchy.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, such as License agreements-intangibles, Inventory and Property and equipment, net, are recorded using fair value-based measurements when an impairment is recognized.
During the year ended December 31, 2020, long-lived assets were classified as held for sale, tested for impairment, and written down to their estimated fair values less costs to sell, and were included in assets held for sale as of December 31, 2020. The Level 3 fair values of the long-lived assets were determined using the income approach. The unobservable inputs to the income approach included the assets’ estimated future cash flows upon
LAIRD SUPERFOOD, INC
Notes to Financial Statements
sale, as the determined fair value is less than the net carrying value of the assets, as depicted below. The Company recorded an impairment loss of $239,734 during the year ended December 31, 2020.
December 31,
December 31,
Fair value
$ 250,000
$ -
Carrying value
$ 489,734
$ -
5. Revolving Lines of Credit
On February 5, 2019, the Company entered into a revolving line of credit with First Interstate Bank (“FIB”) in a principal amount not exceeding $5,000,000. The line of credit is secured by the Company’s investment account held at FIB. The outstanding amounts under the line of credit have an interest rate calculated as LIBOR plus 2.0% per annum until paid in full. The loan agreement was renewed by the Company on February 26, 2020 and has a maturity date of February 5, 2021. The balance on the line of credit was $0 as of December 31, 2020 and 2019. Management was in compliance with all financial covenants as of December 31, 2020 and 2019.
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. Upon the mutual agreement of the Company and East, the primary revolving line of credit may be expanded to $10,000,000, subject to an increase in the borrowing base. The borrowing base is comprised of (a) up to 90% of eligible accounts receivable aged 90 days or less from due date utilizing the average of a trailing three months of actual book value, plus (b) up to 90% of inventory and prepaid inventory book values utilizing the average of a trailing three months of actual book value. The outstanding amounts under the line of credit have a fixed interest rate of 15% per annum until paid in full and the line of credit has a maturity date of August 10, 2022. In the event of default, the interest rate would increase to 20% while such default exists. The line of credit is secured by a security interest in accounts receivable and inventory. The balance on the line of credit was $0 as of December 31, 2020 and 2019. Management was in compliance with all financial covenants as of December 31, 2020 and 2019.
A secondary line of credit with East in an amount up to $200,000 is available to the Company, which is not subject to the requirements of the borrowing base. The secondary line of credit is secured by a security interest in the Company’s accounts receivable and inventory. The secondary line is available with the same draw and payback conditions as the primary line.
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, excluding (a) shares representing, in the aggregate, not more than five percent of the Company’s issued and outstanding capital stock on a fully-diluted basis, issued to employees, consultants or directors pursuant to incentive plans; (b) shares issued for consideration other than cash pursuant to a merger, consolidation, strategic alliance, acquisition or similar business combination; (c) shares issued in connection with any distribution dividend, conversion or recapitalization; (d) shares issued pursuant to any bona fide arms’ length equipment loan or leasing agreement, real property leasing agreement, or debt financing from a financial institution; (e) shares issued in connection with strategic transactions involving the Company and other entities, such as joint ventures, manufacturing, marketing or distribution agreements (provided that in the case of clauses (d) and (e), such issuance represents ten percent or more of the Company’s issued and outstanding capital stock on a fully-diluted basis); and (f) shares issued pursuant to a registration statement filed under the Securities Act of 1933, as amended, in connection with an initial public offering.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
6. Long-term Debt
The following table presents the components of long-term debt:
December 31,
December 31,
Forgivable loan, City of Sisters
$ 51,000
$ 51,000
Long-term debt
$ 51,000
$ 51,000
City of Sisters
On May 30, 2017, the Company entered into a forgivable loan agreement with the City of Sisters in the amount of $51,000. This forgivable loan was issued to help the Company expand its business operations in the city of Sisters, Oregon through eligible jobs. The Company had until May 30, 2020 to create jobs for 30 full-time employees with an average annual salary of $40,000 per person, and, once created and filled, the Company must maintain those jobs for an additional period of three years for the loan to be converted to a grant. If the requirements are not met, the Company is required to pay the loan in full, including interest of eight percent per annum on the unpaid principal amount. The Company created the eligible jobs as of April 1, 2018.
Deschutes County
On April 11, 2018, the Company entered into a forgivable loan agreement with Deschutes County, Oregon in an amount up to $50,000. This forgivable loan was issued to help the Company expand its business operations in the city of Sisters, Oregon by increasing employment and investing in equipment and building improvements. Per the agreement, the Company had until December 31, 2019 to create jobs for 25 full-time employees with an average annual salary of $47,960 per person, and, once created and filled, must maintain those eligible jobs for an additional period of one year for the loan to be converted to a grant. If the requirements are not met, the Company would have been required to pay the loan in full, including interest of eight percent per annum on the unpaid principal amount. The Company created the eligible jobs as of March 19, 2018 and received funds from the forgivable loan on June 22, 2018. The Company met the one-year requirement, and the loan was converted to a grant effective June 12, 2019.
7. Property and Equipment, Net
Property and equipment, net is comprised of the following as of December 31, 2020 and 2019:
December 31,
December 31,
Factory equipment
$ 2,418,839
$ 2,011,297
Land
947,394
947,394
Furniture and office equipment
532,116
465,972
Leasehold improvements
259,504
194,696
4,157,853
3,619,359
Accumulated depreciation
(894,365 )
(466,073 )
Property and equipment, net
$ 3,263,488
$ 3,153,286
LAIRD SUPERFOOD, INC
Notes to Financial Statements
8. Fixed Assets Classified as Held for Sale
On June 9, 2020, management approved a plan to dispose of the Company’s intermittent motion form (“IMF”) production line for its powder-based products. The Company determined a fair value of $250,000 for all assets associated with the IMF production line. No further commissions or sales costs (including shipping costs) are anticipated with the sale of the asset. The assets attributable to the production line have been classified as assets held for sale and are presented separately on the balance sheet. As the determined fair value is less than the net carrying value of the assets, the Company recorded an impairment loss of $239,734 during year ended December 31, 2020. The Company recorded no impairment loss for the year ended December 31, 2019. The major classes of assets comprising the fixed assets classified as held for sale as of December 31, 2020 and 2019 are as follows:
December 31,
December 31,
Factory equipment
$ 250,000
$ -
Fixed assets held for sale
$ 250,000
$ -
9. Commitments and Contingencies
The Company currently leases its warehouse space under a commercial lease with RII Lundgren Mill, LLC, dated March 1, 2018. The lease commenced March 1, 2018 with monthly payments of $6,475, to escalate after 24 months by the lesser of 3% or the Consumer Price Index (“CPI”) adjustment. The initial lease term is ten years, and the Company has the option to renew the lease for two additional five-year periods. The landlord has paid for many tenant improvements and the Company has committed to reimbursing the landlord, in additional rents, for specific improvements. On November 20, 2018, the Company completed the reimbursement of $797,471. The Company also issued the landlord 2,000 stock options on April 15, 2018 with a strike price of $7.50 per share in conjunction with this lease agreement.
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 with monthly payments of $12,784, to escalate after 24 months by the lesser of 3% or the CPI adjustment. The initial lease term is ten years, and the Company has the option to renew the lease for two additional five-year periods. The landlord has paid for many tenant improvements and the Company has committed to reimbursing the landlord, in additional rents, for specific improvements. On December 20, 2018, the Company completed the initial reimbursement of $1,202,529. The Company made the final reimbursement in the amount of $1,399,001 on December 31, 2019.
On May 26, 2019, the Company executed and commenced an agricultural license agreement for the lease of agricultural land in Hanalei, Hawaii with PRW Princeville Development Company LLC (the “Hanalei Agricultural License”). Total monthly payments will be the greater of $1,000 or eight percent of total monthly gross sales of the business done and/or generated on, in, into or from the premises. The initial lease term is five years, with one option to extend the term by five years. The agreement was subsequently amended on September 19, 2019 to include a termination clause if the storefront and property in the Hanalei, Hawaii Lease, discussed below, is not executed. The amendment also expanded the permitted access to include access through other property to the public roadway. On November 3, 2020, the Company and PRW Princeville Development Company LLC entered a termination and release agreement, terminating the Hanalei Agricultural License effective as of October 30, 2020.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
On May 26, 2019, the Company executed a license agreement with PRW Princeville Development Company LLC for storefront and property in Hanalei, Hawaii (the “Hanalei Retail License”). Initially, total monthly payments will be the greater of $1,000 or eight percent of total monthly gross sales of the business done and/or generated on, in, into or from the property. The initial lease term is five years, with one option to extend the term by five years. The agreement will commence upon receipt of applicable permits, and if not obtained by January 1, 2020, the lease will terminate. The agreement was subsequently amended on September 19, 2019 to extend the initial permitting period from January 1, 2020 to July 1, 2020, and the payment terms to include the monthly minimum lease payment due the first of the month, with a reconciliation to gross sales in the subsequent month. The agreement was subsequently amended on July 23, 2020 to extend the initial permitting period from July 1, 2020 to April 15, 2021. On November 3, 2020, the Company and PRW Princeville Development Company LLC entered a termination and release agreement, terminating the Hanalei Retail License effective as of October 30, 2020.
On March 26, 2020, the Company executed a commercial lease agreement for storage space with A Logistics, LLC. The initial lease term is six months and commenced on March 26, 2020. Monthly payments are $7,000. Under mutual agreement of both parties, the Company is continuing to lease the warehouse space on a month-to-month basis.
The following table sets forth the amounts of our significant contractual obligations and commitments with definitive payment terms as of December 31, 2020:
Payments Due by Period
Operating
Leases(1)
Note
Payable
Total
$ 237,737
$ 51,000
$ 288,737
244,869
-
244,869
252,216
-
252,216
259,782
-
259,782
267,575
-
267,575
Thereafter
864,546
-
864,546
$ 2,126,725
$ 51,000
$ 2,177,725
(1) Operating lease obligations related to our manufacturing facility leases dated March 1, 2018 and December 17, 2018.
Rent expense is allocated to general and administrative expenses and cost of goods sold upon the sale of inventory. Rent expense for the years ended December 31, 2020 and 2019 was $856,680 and $520,835, respectively.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
10. Deferred Tax Assets and Liabilities
The provision for income taxes results in effective tax rates which are different than the U.S. federal income tax statutory rate. A reconciliation of the differences for the years ended December 31, 2020 and 2019 was as follows:
Expected income tax benefit at federal statutory rate
$ 2,727,696
$ 1,785,829
Expected income tax benefit at state statutory rates net of federal tax benefit
792,175
364,820
Stock based compensation
(592,048 )
(231,609 )
Change in valuation allowances-net
(2,978,937 )
(2,176,799 )
Other-net
51,114
257,759
Benefit from income taxes
$ -
$ -
Effective tax rate
%
%
The Company had a tax net loss for the years ended December 31, 2020 and 2019, and therefore expects no assessment of income taxes for such periods. Additionally, the net deferred tax assets are fully allowed for. Accordingly, there was no provision for, or benefit from, income taxes reported for the years ended December 31, 2020 and 2019. The Company’s deferred tax assets and liabilities consisted of the following as of December 31, 2020 and 2019:
December 31,
December 31,
Noncurrent deferred tax assets:
Federal net operating loss carryforwards
$ 5,332,738
$ 3,470,371
State net operating loss carryforwards
2,112,119
1,285,488
Federal depreciation and amortization
458,203
53,525
State depreciation and amortization
213,359
-
Accrued-PTO
75,702
-
Other
106,526
-
Total noncurrent deferred tax assets
8,298,647
4,809,384
Noncurrent deferred tax liabilities:
Federal depreciation and amortization
$ -
$ 179,720
State depreciation and amortization
-
45,490
Deferred rent asset
735,537
-
Total noncurrent deferred tax liabilities
735,537
225,210
Net noncurrent deferred tax assets
$ 7,563,110
$ 4,584,174
Valuation allowance
(7,563,110 )
(4,584,174 )
Total net noncurrent deferred tax assets
$ -
$ -
The Company assesses its deferred tax assets and liabilities to determine if it is more likely than not they will be realized; if not, a valuation allowance is required to be recorded. Based on this guidance, the Company provided a valuation allowance for the full amount. The net increase in the valuation allowance for deferred tax assets and liabilities for the years ended December 31, 2020 and 2019 was $2,978,937 and $2,176,799, respectively. This valuation allowance included the estimated tax liability of $2,983 related to the unrealized gain
LAIRD SUPERFOOD, INC
Notes to Financial Statements
on investment securities available-for-sale as of December 31, 2020. As of December 31, 2020 and 2019, the Company had U.S. federal net operating losses (“NOLs”) totaling approximately $27,528,486 and $17,117,760, respectively. The Company had federal NOLs as of December 31, 2020 and 2019 totaling approximately $1,868,077 from 2017 and prior years that can be carried forward for 20 years, which begin to expire in 2036. As of December 31, 2020 and 2019 the Company had federal NOLs totaling approximately $25,660,409 and $15,249,683, respectively, from 2018 through 2020 that can be carried forward indefinitely.
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 three to five years.
11. 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, restricted stock units, 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, employees of the Company’s affiliates, non-employee directors and certain consultants and advisors. The Company is authorized to award 1,000,000 shares. 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. The Stock Incentive Plans were established to provide eligible individuals with an incentive to contribute to the Company’s success and to operate and manage the Company’s business in a manner that will provide for its long-term growth and profitability and that will benefit the Company’s shareholders and other stakeholders, including employees and customers. The Stock Incentive Plans are also intended to provide a means of recruiting, rewarding and retaining key personnel.
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 market 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.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
The following table summarizes the Company’s stock option activity during the years ended December 31, 2020 and 2019:
December 31, 2020
Options
Activity
Weighted Average
Exercise Price
(per share)
Weighted Average
Remaining Contractual
Term (years)
Aggregate
Intrinsic Value
Balance at January 1, 2020
788,528
$ 8.42
7.17
$ 4,799,381
Granted
174,078
16.07
Exercised/released
(23,434 )
11.34
Cancelled/forfeited
(51,532 )
11.53
Balance at December 31, 2020
887,640
$ 9.65
6.42
$ 33,433,274
Exercisable at December 31, 2020
660,890
$ 6.94
5.55
$ 26,684,957
December 31, 2019
Options
Activity
Weighted Average
Exercise Price
(per share)
Weighted Average
Remaining Contractual
Term (years)
Aggregate
Intrinsic Value
Balance at January 1, 2019
641,500
$ 5.99
7.13
$ 4,057,973
Granted
297,900
12.39
Exercised/released
(21,140 )
2.40
Cancelled/forfeited
(129,732 )
6.46
Balance at December 31, 2019
788,528
$ 8.42
7.17
$ 4,799,381
Exercisable at December 31, 2019
376,506
$ 5.83
6.20
$ 3,265,254
The stock-based compensation expense is recognized ratably over the requisite service period for all awards. As a result of applying the provisions of ASC 718, “Compensation- Stock Compensation” (“ASC 718”), the Company recognized stock compensation expense for stock options of $937,366 and $846,436 for the years ended December 31, 2020 and 2019, respectively.
At December 31, 2020 and 2019, there was $1,990,834 and $1,474,669, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements with a remaining weighted-average vesting period of 1.06 years.
During the year ended December 31, 2020, the Company granted 15,646 shares of common stock to six employees which were fully vested as of the date of issuance and were granted and valued at the observable price for similar instruments. As a result of applying the provisions of ASC 718, the Company recorded stock-based compensation expense of $576,341 for the year ended December 31, 2020.
During the year ended December 31, 2020, the Company granted 58,087 restricted stock units to 135 employees and Directors. As a result of applying the provisions of ASC 718, the Company recorded stock-based compensation expense of $287,101 for the year ended December 31, 2020. As of December 31, 2020 and 2019, there was $1,613,520 and $0, respectively, of total unrecognized compensation cost related to non-vested restricted stock units with a remaining weighted-average vesting period of 1.89 years.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
On September 23, 2020, the Company entered into an amended employment agreement with its Chief Marketing and Revenue Officer (the “Employment Agreement”), which automatically ended on December 31, 2020, the date upon which the employee retired from the Company. Among other terms of the Employment Agreement, the Company agreed to, upon retirement and entry into customary documentation at such time, extend the term of 109,024 stock options to December 31, 2025, resulting in incremental stock-based compensation expense recognized of $448,229 for the year ended December 31, 2020.
ASC 718 requires the use of the fair-value-based method for measuring the value of stock-based compensation. The Company estimates the fair value of each stock option award and modified stock award, on the date of grant or modification using a Black-Scholes option-pricing model, and each restricted stock unit is estimated using the fair value of the Company’s stock on the date of grant. The estimated fair value of each grant of stock options awarded during the year ended December 31, 2020 and 2019 was determined using the following assumptions:
•
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 IPO 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 (“SAB”) No. 107 (“SAB 107”), 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 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, dividend on its shares of common stock.
•
Expected Volatility. The expected volatility is based on the volatility of the Company’s stock price from historical private offerings and market closing price following the Company’s IPO, combined with the historical stock prices of identified peer companies. Given the limited history of both the Company and comparable publicly traded peer companies, the available historical stock prices do not cover the expected term of the option. However, the Company determined that the calculated volatility still provides an appropriate basis for a reasonable and fair estimate.
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.
For the years ended December 31, 2020 and 2019, 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:
For the Years Ended
December 31,
Weighted-average expected volatility
71.29 %
61.50 %
Weighted-average expected term (years)
6.23
6.01
Weighted-average expected risk-free interest rate
0.69 %
2.28 %
Dividend yield
0.00 %
0.00 %
Weighted-average fair value of options granted
$ 18.28
$ 7.15
LAIRD SUPERFOOD, INC
Notes to Financial Statements
12. Preferred Stock
On September 25, 2020, the Company completed its IPO in which the Company issued and sold 3,047,500 shares of its common stock at a public offering price of $22.00 per share. Upon the closing of the IPO, all outstanding shares of the Company’s preferred stock converted into shares of common stock, consisting of (i) 162,340 outstanding shares of Series A-1 convertible preferred stock converting into 324,680 aggregate shares of common stock, (ii) 152,253 outstanding shares of Series A-2 convertible preferred stock converting into 304,506 aggregate shares of common stock, and (iii) 383,142 outstanding shares of Series B-1 convertible preferred stock converting into 766,284 aggregate shares of common stock.
As of December 31, 2020, the Company is authorized to issue 5,000,000 shares of preferred stock, par value $0.001 per share, and there were no shares of preferred stock issued or outstanding.
As of December 31, 2019, the Company was authorized to issue 1,329,680 shares of preferred stock, par value $0.001 per share, including 1,177,426 shares of Series A-1 preferred stock, 609,078 of which were undesignated preferred, and 152,253 shares of Series A-2 preferred stock, and 162,340 shares of Series A-1 preferred stock and 152,253 shares of Series A-2 preferred stock were outstanding.
Series A-1 and A-2 Preferred Stock
Effective November 19, 2018, the Company executed a capital transaction of $25,000,000 with a private investor, with $15,000,000 funded at the closing date and an additional $10,000,000 to be funded one year following the execution. The additional tranche was determined to be embedded in the initial agreement and not subject to bifurcation accounting. The investing entity received Series A-1 preferred stock, carrying certain standard protective provisions.
In conjunction with this equity infusion, in November and December 2018, the Company further sold to existing stockholders an additional $7,000,000 of shares of Series A-1 and A-2 preferred stock.
All shares of Series A-1 and A-2 preferred stock issued are convertible into common stock at any time at the option of the holder, or mandatorily convertible into common stock upon the event of an initial public offering. The Series A-1 and A-2 preferred stock are redeemable upon the occurrence of a deemed liquidation event. The Company determined that this redemption feature requires classification of both Series A-1 and A-2 preferred stock as mezzanine equity in our balance sheet as of December 31, 2019.
Shares of Series A-2 preferred stock were issued at a 20% discount, based on preexisting terms in a line of credit agreement with East. As a result, the $673,133 was recorded as a reduction to additional paid-in-capital in 2018 and was considered a deemed dividend increasing the net loss attributable to common stockholders.
On November 18, 2019, the Company negotiated the repurchase of 609,013 shares of Series A-1 preferred stock from a private investor for $7,500,000, or $12.32 per share, and the termination of the private investor’s commitment to fund an additional $10,000,000 in November 2019. At the time of repurchase, the carrying value of the shares of Series A-1 preferred stock outstanding on the balance sheet was $14,999,901, or a value of $24.63 per share. The favorable rate at which the shares were able to be negotiated resulted in a deemed contribution of $7,448,879 which was included in net loss available to common stockholders.
Series B-1 and B-2 Preferred Stock
Effective April 13, 2020, the Company completed a private placement to DMV for 383,142 shares of its Series B-1 Preferred Stock for total proceeds of $10,000,006, or $26.10 per share. The shares of Series B-1
LAIRD SUPERFOOD, INC
Notes to Financial Statements
Preferred Stock issued were convertible into common stock at any time at the option of the holder, or mandatorily convertible into common stock upon the event of an initial public offering. The Series B-1 Preferred Stock were redeemable upon the occurrence of a deemed liquidation event. The Company determined that this redemption feature required classification of the Series B-1 Preferred Stock as mezzanine equity in our balance sheet.
In connection with the closing of the private placement of Series B-1 Preferred Stock on April 13, 2020, the Company entered into a Stockholder Agreement with DMV, under which the Company granted DMV (i) the right to purchase a specified percentage of the Company’s common stock in the event of an initial public offering of the Company’s common stock or in a concurrent private placement (the “Participation Right”), (ii) the right to designate one member to Laird Superfood’s board of directors, and (iii) the right to designate a representative as an observer to Laird Superfood’s board of directors, in each case for so long as DMV and its affiliates hold more than five percent of the shares of the Company’s outstanding common stock. The Participation Right terminated upon the IPO. On August 28, 2020, DMV waived its right to designate a member of the board of directors for election, contingent upon the IPO closing on or before December 31, 2020, but DMV’s right to designate an observer of the board of directors will continue for so long as DMV holds more than five percent of the outstanding common stock of the Company. The Company also issued a warrant to purchase common stock to DMV on April 13, 2020, which provided that if DMV exercised the Participation Right for $10,000,000 of shares of the Company’s common stock, DMV would have been entitled to purchase at the time of the closing of the offering, for $0.005 per share, a number of shares of the Company’s common stock equal to ten percent of the shares then held by DMV and its affiliates (including shares issuable upon conversion of the Series B-1 Preferred Stock), but excluding the amounts purchased by DMV or its affiliates in the offering or otherwise.
In accordance with ASC 480, the Company recorded the Series B-1 Preferred Stock issued with detachable warrants by allocating the proceeds to the instruments based on their relative fair values. Utilizing the Black-Scholes option pricing model, the Company calculated the fair value of the warrants on April 13, 2020 to be approximately $899,617. The fair value of the warrants was computed assuming a risk-free interest rate of 0.17%, no dividends, expected volatility of approximately 65%, which was calculated based on a combination of historical volatility and the history of comparable peer companies, and an expected warrant life of approximately 0.75 years. As a result, the relative fair value for the warrants of $825,366 was recorded as an increase to additional paid-in-capital and a preferred stock discount.
The discount was initially amortized as a deemed discount over approximately 11.5 months, which is estimated based on the expected timing of a warrant exercisability trigger and the customary lock-up agreement of six months once exercised. DMV purchased $2,000,020 of our common stock in a private placement immediately subsequent to the consummation of the IPO, which did not meet the participation minimum to exercise the warrant, rendering the warrants null, and accelerating the amortization. The Company recorded the deemed dividend on the warrants of $825,366 for the year ended December 31, 2020, increasing the net loss attributable to common stockholders.
13. Earnings per Share
Basic earnings (loss) per share is determined by dividing 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 and preferred shares that would have been outstanding if all dilutive potential common and preferred shares had been issued. Dilutive potential common and preferred shares consist of employee stock options and restricted stock units. The dilutive effect of employee stock options, restricted stock units, and
LAIRD SUPERFOOD, INC
Notes to Financial Statements
convertible preferred stock issued by the Company and are calculated using the treasury stock method. The weighted average shares outstanding included 1,000 and zero shares that are considered outstanding, but unissued as of December 31, 2020 and 2019, respectively, for unpaid equity share bonuses. Basic earnings per share is reconciled to diluted earnings per share in the following table:
Years Ended December 31,
Net loss
$ (12,850,301 )
$ (8,503,948 )
Add deemed contribution from the redemption of preferred stock
-
7,448,879
Less deemed dividend of beneficial conversion feature
(825,366 )
-
Less deemed dividend on warrant discount
(825,366 )
-
Net loss attributable to Laird Superfood, Inc. common stockholders
$ (14,501,033 )
$ (1,055,069 )
Weighted average shares outstanding- basic
5,546,078
3,668,050
Dilutive securities
-
-
Weighted average shares outstanding- diluted
5,546,078
3,668,050
Common stock options and restricted stock awards excluded due to anti-dilutive effect
945,027
2,492,375
Basic and diluted:
Net loss per share (basic)
$ (2.61 )
$ (0.29 )
Net loss per share (diluted)
$ (2.61 )
$ (0.29 )
14. Concentrations
The Company had 70% of trade accounts receivable from three customers as of December 31, 2020. The Company had 81% of trade accounts receivable from three customers as of December 31, 2019.
The Company had 43% of accounts payable due to four vendors as of December 31, 2020. The Company had 55% of accounts payable due to four vendors as of December 31, 2019.
The Company sold a substantial portion of products to one customer (23%) for the year ended December 31, 2020. As of December 31, 2020, the amount due from the customer included in accounts receivable was $290,420. The Company sold a substantial portion of products to one customer (11%) for the year ended December 31, 2019. As of December 31, 2019, the amount due from this customer included in accounts receivable was $176,957. The loss of a significant customer, or the failure to attract new customers, could have an adverse effect on the Company’s business, results of operation, cash flows and financial position.
The Company purchased a substantial portion of products from one supplier (36%) for the year ended December 31, 2020, and from three suppliers (66%) for the year ended December 31, 2019. The loss of any major supplier could have a material adverse impact on the Company’s business, results of operation, cash flows and financial position.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
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, Indonesia, China, and Sri Lanka geographically accounted for approximately 69% of our total raw materials and packaging purchases for the year ended December 31, 2020. Vietnam and the Philippines geographically accounted for approximately 51% of our total raw material and packaging purchases for the year ended December 31, 2019. In the event that our supply from our current suppliers is interrupted, our operations may be interrupted resulting in lost revenue, added costs and distribution delays that could harm our business and customer relationships until we are able to identify and enter into an agreement with one or more alternative suppliers.
15. Related Party
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 fair value of the service provided and the most recent equity offering price per share. 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 financial statements.
Concurrent Private Placement
Danone Manifesto Ventures, PBC (“DMV”) purchased 90,910 shares of our common stock in a private placement immediately subsequent to the consummation of the IPO for a total purchase price of $2,000,020, at a price per share of $22.00. Additionally, DMV provided the Company $298,103 in funds for the purpose of supporting three COVID-19 relief projects. Please see Note 1 of the financial statements for additional discussion.
16. Revenue Recognition
The Company’s primary source of revenue is sales of coffee creamers, hydration and beverage enhancing supplements, and coffee, tea and hot chocolate products. The Company recognizes revenue when control of the promised good or service 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 collection of 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.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
In accordance with ASC Topic 606, the Company disaggregates net sales from contracts with customers based on the characteristics of the products sold:
Years Ended December 31,
$
% of Total
$
% of Total
Coffee creamers
$ 18,433,345
%
$ 9,330,678
%
Hydration and beverage enhancing supplements
3,887,198
%
2,022,269
%
Coffee, tea, and hot chocolate products
5,961,254
%
1,930,434
%
Other
675,339
%
471,097
%
Gross sales
28,957,136
%
13,754,478
%
Shipping income
248,865
%
464,551
%
Returns and discounts
(3,199,603 )
(12 %)
(1,115,301 )
(9 %)
Sales, net
$ 26,006,398
%
$ 13,103,728
%
The Company generates revenue through three channels: online, wholesale, and food service:
Years Ended December 31,
$
% of Total
$
% of Total
Online
$ 14,501,706
%
$ 7,646,864
%
Wholesale
10,996,517
%
5,295,024
%
Food service
508,175
%
161,840
%
Sales, net
$ 26,006,398
%
$ 13,103,728
%
Contract assets and liabilities (rewards programs, accrued returns, and customer deposits) are recorded on the balance sheet and were considered insignificant as of December 31, 2020 and 2019. Receivables from contracts with customers are included in Accounts Receivable, net on the Company’s balance sheets. As of December 31, 2020 and 2019, Accounts receivable, net included, $839,659 and $384,806, respectively, in receivables from contracts with customers.
17. Impact of COVID-19
Since January of 2020, the coronavirus (COVID-19) outbreak, characterized as a pandemic by the World Health Organization on March 11, 2020, has caused significant disruptions in international and U.S. economies and markets. In 2020, demand for our shelf-stable powdered coffee creamers, hydration and beverage enhancing supplements, and coffee, tea and hot chocolate products has risen as consumers prepare more meals in their homes. As we work in a critical infrastructure industry as part of the nation’s food supply, we have implemented health and safety policies for all of our staff, including a transition to telework wherever possible; enacted strict sanitation protocols throughout our operations; and restricted access to visitors. Our top priority is the health and safety of our employees, and we are following published guidelines by the Centers for Disease Control and Prevention and other governmental health organizations in implementing procedures to protect our employees. The pandemic is an ever evolving and challenging situation and its impact on our business in the future is uncertain.
LAIRD SUPERFOOD, INC
Notes to Financial Statements
18. Quarterly Results of Operations (Unaudited)
The following tables present selected unaudited quarterly financial data for each full quarterly period of 2020 and 2019:
(unaudited)
December 31
September 30
June 30
March 31
Four Quarters
Statement of Operations Data:
Sales, net
$ 7,301,270
$ 7,613,073
$ 5,608,830
$ 5,483,225
$ 26,006,398
Cost of goods sold
(5,819,762 )
(5,734,144 )
(4,285,128 )
(3,365,608 )
(19,204,642 )
Gross profit
1,481,508
1,878,929
1,323,702
2,117,617
6,801,756
Operating expenses:
General and administrative
3,177,448
2,218,819
1,832,442
1,599,570
8,828,279
Research and product development
144,180
102,879
117,796
143,315
508,170
Sales and marketing
2,666,900
2,939,061
2,395,701
2,392,816
10,394,478
Total operating expenses
5,988,528
5,260,759
4,345,939
4,135,701
19,730,927
Operating loss
(4,507,020 )
(3,381,830 )
(3,022,237 )
(2,018,084 )
(12,929,171 )
Other (expense) income
13,423
26,746
15,847
22,854
78,870
Net loss
$ (4,493,597 )
$ (3,355,084 )
$ (3,006,390 )
$ (1,995,230 )
$ (12,850,301 )
Less deemed dividend of beneficial conversion feature
-
-
(825,366 )
-
(825,366 )
Less deemed dividend on warrant discount
-
(645,939 )
(179,427 )
-
(825,366 )
Net loss attributable to Laird Superfood, Inc. common stockholders
$ (4,493,597 )
$ (4,001,023 )
$ (4,011,183 )
$ (1,995,230 )
$ (14,501,033 )
Net loss per share, basic and diluted
$ (0.51 )
$ (1.32 )
$ (1.28 )
$ (0.98 )
Shares used in computing net loss per share, basic and diluted
8,876,431
4,672,041
4,325,265
4,281,346
LAIRD SUPERFOOD, INC
Notes to Financial Statements
(unaudited)
December 31
September 30
June 30
March 31
Four Quarters
Statement of Operations Data:
Sales, net
$ 4,171,086
$ 3,487,335
$ 2,954,190
$ 2,491,117
$ 13,103,728
Cost of goods sold
(2,722,605 )
(2,026,930 )
(1,804,956 )
(1,464,603 )
(8,019,094 )
Gross profit
1,448,481
1,460,405
1,149,234
1,026,514
5,084,634
Operating expenses:
General and administrative
1,491,383
1,376,302
1,426,954
906,545
5,201,184
Research and product development
137,872
109,978
42,866
33,568
324,284
Sales and marketing
2,045,841
2,385,080
2,018,646
1,861,570
8,311,137
Total operating expenses
3,675,096
3,871,360
3,488,466
2,801,683
13,836,605
Operating loss
(2,226,615 )
(2,410,955 )
(2,339,232 )
(1,775,169 )
(8,751,971 )
Other (expense) income
67,519
37,773
88,047
54,684
248,023
Net loss
$ (2,159,096 )
$ (2,373,182 )
$ (2,251,185 )
$ (1,720,485 )
$ (8,503,948 )
Deemed contribution from the redemption of preferred stock
7,448,879
7,448,879
Net income (loss) attributable to Laird Superfood, Inc. common stockholders
$ 5,289,783
$ (2,373,182 )
$ (2,251,185 )
$ (1,720,485 )
$ (1,055,069 )
Net income (loss) per share, basic
$ 1.31
$ (0.66 )
$ (0.64 )
$ (0.49 )
Shares used in computing net loss per share, basic
4,045,056
3,592,735
3,520,338
3,509,009
Net income (loss) per share, diluted
$ 0.96
$ (0.66 )
$ (0.64 )
$ (0.49 )
Shares used in computing net loss per share, diluted
5,532,032
3,592,735
3,520,338
3,509,009

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the Company’s registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this item will be set forth in our Proxy Statement for the Annual Meeting of Stockholders and is incorporated by reference. The Proxy Statement will be filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
Our board of directors has adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text of our code of business conduct and ethics is posted at https://investors.lairdsuperfood.com/governance. We will post any amendments to our code of business conduct and ethics other than technical, administrative or other non-substantive amendments, or waivers of its requirements, on our website or in a Form 8-K filed with the SEC.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days of the fiscal year ended December 31, 2020.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days of the fiscal year ended December 31, 2020.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days of the fiscal year ended December 31, 2020.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
PART IV.

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements
See Index to Financial Statements in Item 8 of this report.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable or because the information required is already included in the financial statements or the notes those financial statements.
(a)(3) 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
3.1
Amended and Restated Certificate of Incorporation of Laird Superfood, Inc.
8-K
001-39537
3.1
9/25/2020
3.2
Amended and Restated Bylaws of Laird Superfood, Inc.
8-K
001-39537
3.2
9/25/2020
4.1
Form of Stock Certificate for Common Stock.
S-1/A
333-248513
4.1
9/10/2020
4.2
Stockholder Agreement, dated April 13, 2020, between the Company and Danone Manifesto Ventures, PBC.
S-1
333-248513
4.3
8/31/2020
4.3
Description of Capital Stock
X
10.1#
Laird Superfood, Inc. 2020 Omnibus Incentive Plan.
S-8
333-248985
99.3
9/23/2020
10.2#
Form of Incentive Stock Option Agreement under the 2020 Omnibus Incentive Plan.
S-1/A
333-248513
10.2
9/10/2020
10.3#
Form of Non-Qualified Stock Option Agreement under 2020 Omnibus Incentive Plan.
S-1/A
333-248513
10.3
9/10/2020
10.4#
Form of Restricted Stock Award Agreement under the 2020 Omnibus Incentive Plan.
S-1/A
333-248513
10.4
9/10/2020
10.5#
Form of Restricted Stock Unit Agreement under the 2020 Omnibus Incentive Plan.
S-1/A
333-248513
10.5
9/10/2020
10.6#
Form of Indemnification Agreement for Directors and Officers.
S-1/A
333-248513
10.6
9/10/2020
10.7#
Laird Superfood, Inc. 2018 Equity Incentive Plan, and form of award agreement thereunder.
S-1
333-248513
10.6
8/31/2020
Incorporated by Reference
Exhibit
Number
Description
Form
File No.
Exhibit
Filing Date
Filed /
Furnished
Herewith
10.8#
Laird Superfood, Inc. 2016 Stock Incentive Plan, and form of award agreement thereunder.
S-1
333-248513
10.7
8/31/2020
10.9#
Laird Superfood 2020 Employee Stock Purchase Plan
S-8
333-248985
99.4
9/23/2020
10.10#
Employment Agreement, dated September 10, 2020, between the Company and Paul Hodge.
S-1/A
333-248513
10.10
9/10/2020
10.11#
Employment Agreement, dated September 10, 2020, between the Company and Valerie Ells.
S-1/A
333-248513
10.11
9/10/2020
10.12
License and Preservation Agreement, dated May 26, 2020, by and among the Company, Laird Hamilton, and Gabrielle Reece.
S-1
333-248513
10.12
8/31/2020
10.13
Loan Agreement, dated August 10, 2017, between the Company and East Asset Management, LLC
S-1
333-248513
10.13
8/31/2020
10.14
Commercial Pledge Agreement, dated February 5, 2019, between the Company and First Interstate Bank, as amended February 26, 2020.
S-1
333-248513
10.14
8/31/2020
23.1
Consent of Independent Registered Public Accounting Firm.
X
24.1
Power of Attorney (included in signature page)
X
31.1
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a).
X
31.2
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a).
X
32.1*
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
X
32.2*
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
X
101.INS
XBRL Instance Document
X
101.SCH
XBRL Taxonomy Extension Schema Document
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
X
Incorporated by Reference
Exhibit
Number
Description
Form
File No.
Exhibit
Filing Date
Filed /
Furnished
Herewith
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
X
* 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 Annual Report on Form 10-K, irrespective of any general incorporation language contained in such.
# Indicates management contract or compensatory plan or arrangement.