Good afternoon. Thank you for attending today's Laird Superfood, Inc. Third Quarter 2022 Financial Results Call. My name is Hana, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for question and answers at the end. I would now like to pass the conference over to our host Reed Anderson of ICR. Please go ahead.

Thank you. Good afternoon and welcome to Laird Superfood’s third quarter 2022 earnings conference call and webcast. On today’s call are Jason Vieth, Chief Executive Officer; Anya Hamil, Chief Financial Officer; and Andy Judd, Chief Commercial Officer. By now, everyone should have access to the company’s third quarter earnings press release filed today after market close. This is available on the Investor Relations section of Laird Superfood’s website. Before we begin, please note that all the financial information presented on today’s call is unaudited and during the course of this call, management may make forward-looking statements within the meaning of federal securities laws. These statements are based on management’s current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today’s press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. And now, I’d like to turn the call over to Jason Vieth, Chief Executive Officer of Laird Superfood.

Thanks, Reed. Welcome, everyone, and thank you for joining us today. As usual, I will start today with an overview of our third quarter results and an update on our key strategic initiatives, and then I'll turn it over to Andy Judd, our Chief Commercial Officer, for a deeper dive into sales, products, and channels. This is now my third time providing you with a quarterly update on our business. On my first call as CEO, I was still coming to understand the Laird Superfood brand and business. At that time, I was intently listening to our analysts and investor communities in assessing various options for our path forward. On my second call, I reaffirmed our focus on getting our costs under control and fixing the middle of our P&L. This was the period in which it became clear to me that we were giving away our cash through inefficient marketing spend and weak gross margin and that we were not on a path to achieve scale benefits before we would run out of cash. During that call, I reiterated that a key area of focus for us going forward would be to improve our gross margin. Since that time, our leadership team has been focused on making the pivotal and strategic changes required to stabilize operations and put us on a path to profitability. The scope of the actions necessary to transform Laird Superfood has turned out to be much broader than expected, touching nearly every aspect of the business. Today, I'm pleased to report that we've been making significant progress and I want to take a few minutes to recap and talk about the positive changes underway in this business and why our team is so energized as we look to next year and beyond. On the commercial side, we have been actively reshaping our portfolio, aligning core focus by channel and discontinuing items that do not fit. We took a nearly 10% price increase across all channels, which recently rippled into the wholesale channel. Our DTC marketing engine and ecosystem has been completely overhauled, reducing our tax by more than $20 versus the last three quarters' run rate and on pace for further reduction going forward. In our DTC business, we removed free shipping and have, in fact, increased the price of our shipping to pass through holiday costs imposed by our carriers. We are actively shifting our business to our most profitable channels and addressing the cost challenges of particular parts of our business, such as our liquid creamers. We have completed our brand redesign, reformulating nearly 25% of our portfolio to improve taste and increase functional benefits. On the supply chain side, we recently announced the decision to close our Sisters, Oregon manufacturing facility. While this was not an easy decision, it will provide a significant lift to our gross margin once we have worked through the transition. We've entered into a partnership with a co-manufacturer to produce the entire line of powder products, replacing everything that was previously made in our own facility. In doing so, we have added new capabilities and flexibility to our business, including the ability to produce single-serve products for the first time. I am also excited to announce that we have just completed an agreement with a third-party logistics provider that will handle all of our distribution and logistics for Laird Superfood. This was the final step in enabling our variable cost supply chain model, which, as a small CPG business, will allow us to scale up and down without being burdened by high levels of overhead that have clouded our financial visibility and decision-making in the past. We have also created and tested a new liquid creamer formulation that can be run at scale, allowing us to transform that from a significantly unprofitable piece of business to a product that we can beneficially expand in the future. On the people and organization side, we have completely rebuilt our teams, including nearly the entire Executive team, adding decades of experience and expertise in consumer goods and food across all disciplines. As you can see, we have made a lot of progress over the past quarters and expect to complete this turnaround in the middle of 2023, after which Laird Superfood will look like a completely different business. Meanwhile, the demand for healthy and nutritious whole food products like Laird Superfood has never been greater, and we are excited to be putting ourselves in a position to capitalize on these trends. Now, let's talk about some specifics from our third quarter. During prior calls, we outlined margin improvement as the top initiative for this team, and I'm happy to report that we continue to make headway on cost reduction initiatives during the third quarter, particularly as it relates to consumers in the macro environment. In our online business, we reduced our Q3 DTC marketing spend by nearly 60% versus last year, and these changes are driving lower and more efficient marketing spend and lower customer acquisition costs. We repurposed a portion of that spend to the Amazon platform, driving 27% growth in that business during the quarter. As I mentioned earlier, we also raised our shipping costs during Q3, and we did so without seeing a significant loss of consumer acquisition or conversion. This means that during 2022, we have been able to increase the price of most of our online portfolio by around 10% and to pass on many of the shipping costs that previously burdened us. The decline in wholesale revenue during the third quarter was largely attributable to the club channel, where we did not repeat a regional rotational program from the prior year. As Andy will share in a moment, we also experienced some unexpected challenges in the grocery channel during Q3, stemming from product moving from distributor warehouses to the retailer shelf. We have largely fixed these issues and are working with our customers to ensure a smoother path from distributor warehouses to their shelves, including examining order patterns and auditing to ensure that the product makes it to the shelf. In the third quarter, gross margin showed solid sequential improvement, reaching 23.4%, a 520 basis point increase versus the second quarter, driven by lower discounts and labor costs. However, on a year-over-year basis, gross margin was down 5.9 points as our highlighted focus on drawing down inventories continued to deleverage our fixed manufacturing costs. But as I mentioned a moment ago, subsequent to the end of Q3, we announced a co-packing partnership that will quickly alleviate these pressures during 2023. This strategic pivot to an outsourced manufacturing model will significantly improve our financial profile by reducing fixed overhead and simplifying our business, enabling us to focus on maximizing our commercial growth potential. The new co-packing partnership covers all of our powdered creamers and hydration products, representing nearly half of our overall product sales mix today. We expect that moving these products to a co-packing model will add between six and eight points to our gross margins, which we expect to realize over the next several quarters as the transition is fully implemented. It is worth noting that we expect to see certain one-time charges in Q4 related to the co-packer transition, specifically impairment of fixed assets, leasehold improvements, inventories, as well as cash charges for the Sisters lease exit and restructuring costs. I'm pleased to share that we have agreed in principle to our exit from the Sisters facility, and we're working through those estimates now. The shift to third-party manufacturing will also enable us to be more responsive to customer demand while fully aligning our cost structure with the current state of the business. While the operating environment remains very challenging, the changes we are making to our business model are significantly improving the underlying economics and strengthening our competitive position, creating a more experienced and nimble organization focused on maximizing our most profitable commercial growth opportunities. As we go forward, we will maintain a strict focus on improving our profitability and maintaining our cash position to support our future operations and other opportunities that may emerge.

Thanks Jason. Laird Superfood's mission to help the consumer optimize their everyday performance by harvesting the natural and functional benefits of plants is building momentum. We are making significant progress towards building a sustainable, long-term and profitable growth agenda across multiple platforms from our own direct-to-consumer model to Amazon to all channels of retail trade. While overall online business in Q3 was down 8%, we did see quarter-over-quarter improvement of five points sequentially for the channel, and a composition of the improvement is consistent with our strategic plan. We saw significant growth in Amazon, up 27% year-over-year as we brought on a fantastic new partner to help us manage and deploy media. Since that transition, we have already seen an 11% sequential increase in return on ad spend for the platform, and we achieved our most successful Prime Day results to date. We expect this performance on the Amazon platform to continue to improve as we see additional opportunities to turn continued consumer acquisition into more subscribe and save purchases where we are significantly underdeveloped versus our peer set, have room for further investment in upper funnel awareness media, and are implementing new replenishment and inventory management approaches. For our direct-to-consumer business, we continue to reset our platform for long-term profitability. In order to do this, we have to ensure our investment levels and returns are sustainable. While it continues to be a tough marketplace for consumer acquisition and our acquisition cost was still up 32% year-over-year, we reduced media by 60% versus a year ago with only a 19% reduction in sessions, reflecting both the loyal organic traffic we have and previous inefficiency in our media. As a result, we realized an 80% increase in return on ad spend on the remaining investment in the quarter. The price increase we took in June has had minimal effect on volume, and website conversion still runs well in excess of 6%, which is an increase of 13% year-over-year and well above industry benchmarks. Despite the challenges of acquiring new consumers in DTC, we continue to see consumer loyalty to Laird Superfood at all-time highs with a 4% increase in subscriptions and 5% growth in our lifetime value, which grew two points sequentially versus Q2. Additionally, we saw 25% growth in average order value year-over-year, and we are seeing growth in on-trend portions of our portfolio as we expand our leadership in functional plant-based coffees and creamers with items like our coffees with functional mushrooms, our superfood coconut creamer with functional mushrooms, and our Instafuel Instant Latte. We are excited about the formation of a new go-to-market approach that includes a combination of a more focused and profitable spending profile with better utilization of our CRM tools to acquire new and lapsed consumers. When combined with the high level of loyalty against on-trend products, we believe that our DTC business is on a solid path forward. Overall, our retail sales in Q3 had mixed results. The largest driver of change year-over-year is the loss of a regional rotation in our club business compared to a year ago, which accounts for 70% of the decline in our wholesale net sales for the quarter. We have modified our full offering to the club channel and will be launching new packaging to improve performance in the channel in Q1 of 2023. We have also brought on new channel sales leadership to better execute these opportunities. We are seeing positive trends in our core coffee and creamer categories as consumers continue to increase in-home consumption. In our liquid creamers business, we saw our retail dollar velocities increase plus 11% and plus 21% in Natural Mulo, respectively, for the 12 weeks ending 10/2/2022. Our dollar sales growth is outpacing the overall category and the plant-based creamer segment. In the natural channel, we rank as a top five dollar and unit share brand in plant-based creamers, improving unit share by nearly three points, while still having a significant opportunity to match the distribution levels of our plant-based peers. We have reached our share position with 15 less points of ACV versus the other top plant-based share leaders. We are excited about this continued growth in liquid creamers and have plans to further enhance our productivity behind new packaging in Q1 and a new aseptic format in Q2. This success in refrigerated creamers was offset by challenges in our shelf-stable powdered creamer business, where we experienced distribution losses due to retailer in-store assortment changes on lower-performing items, as well as replenishment challenges between distributors and retail customers. We have initiated efforts to improve replenishment through better collaboration with key wholesale partners and increased support in Q4 through key digital platforms to improve the velocity trend. Despite the headwinds in the quarter, our consumer loyalty metrics reached an all-time high with a Net Promoter Score of 82 in Q3, and our customer satisfaction was at 4.9 on a five-point scale. In the quarter, we completed new research indicating that over 43% of the US is actively using functional food and beverages, a clear indicator that the addressable market is reaching significant scale as consumers continue to seek cleaner and more functional foods. In Q4, we will start to see our redesigned packaging rollout, which will significantly improve our shopability and breakthrough at the first moment of truth at shelf and further highlight our functional benefits that make our value proposition truly unique. Our new protein bars are now in retail, and we are readying more exciting innovation that we'll be launching in Q4 and into 2023.

Thanks, Andy. Net sales decreased 19% to $8.8 million in the third quarter of 2022 compared to $10.9 million in the third quarter of 2021, driven by lower volumes in the wholesale business and DTC channels, partially offset by strong growth at Amazon.com. The decline in wholesale was mostly driven by reduced volumes in club, where we did not repeat original rotation from the prior year. Additionally, the continued pressure on consumer spending due to inflationary concerns led to the decline in DTC, which was driven by lower new customer orders resulting from planned initiatives to improve our gross margins, including reductions in marketing spend, a price increase implemented at the end of the second quarter, and changes to our free shipping threshold. The decline in D2C was partially offset by double-digit growth in our Amazon.com channel, driven by continued adoption and momentum built from optimized marketing strategy. Gross margin declined 590 basis points to 23.4% versus Q3 of 2021, but improved 520 basis points sequentially versus Q2. The margin compression versus the prior year period was driven primarily by fixed manufacturing cost deleverage as we strategically drew down inventory balances by writing lower production volumes. Gross margin was also negatively impacted by higher freight costs, partially offset by lower labor costs stemming from cost reduction initiatives. Operating expenses totaled $7.8 million, a decrease of $0.7 million compared to $8.5 million in the year ago period. The decline was driven by lower sales and marketing expenses as well as lower research and development costs, while general and administrative expenses were consistent with the prior year period. Sales and marketing expenses decreased approximately 16% to $3.4 million due to lower advertising expenses and personnel costs. The net loss reported was $5.7 million, an increase of 7% versus the prior year period. On an adjusted basis, the net loss was also $5.7 million, an approximately 6% increase from the year ago period, but improving sequentially about 10% compared to our results in Q2, demonstrating continued progress in our cost savings initiatives. A detailed reconciliation of non-GAAP adjusted net loss is included in our earnings release. Now turning to our balance sheet and cash flow. We ended the quarter with just over $21 million of cash and no debt as we continued to conservatively manage our balance sheet. Cash yields in operations was $3.6 million, an improvement of over $300,000 from Q2. Moving to our outlook, despite the fact that we anticipate a challenging economic environment to continue in the fourth quarter, we reaffirm our guidance and estimate of net sales for 2022 will be at the lower end of the board-stated range of $36 million to $38 million, and that gross margin is forecasted to be approximately 20% for the full year. Note that the gross margin guidance excludes any one-time charges associated with the closure of our manufacturing operations in Sisters, Oregon and other one-time actions.

Thanks, Anya. Let me start by taking a moment to share a hearty congratulations to Anya for her promotion to Chief Financial Officer of Laird Superfood. While the US economic outlook and its impact on the consumer remains uncertain, if not outright challenging, we remain optimistic about the opportunity for health and wellness brands like ours to continue to grow and take a larger share of the market. In the first three quarters of this year, we managed to significantly improve the fundamentals of the Laird Superfood branded business and are now poised to expand in the next year and beyond behind a new brand platform with improved products and stronger retail placement across the country. And while we still have work to do to complete this turnaround, we are optimistic about the flexible variable cost manufacturing and distribution model that we will put in place during Q4 and excited to close this year on a strong note and carry that momentum into 2023. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

The first question is from Bobby Burleson with Canaccord. Please proceed.

Thank you for taking my question. Jason and team, I'm curious about the liquid streamer aseptic version that was delayed without Co-Man support. It seems like that was an issue before you took over, and I know you're transitioning to a completely outsourced model. What are you sacrificing for the benefits of this shift? It appears that you might be able to improve margins, but does this also limit your potential margins? Are you losing some control over the process? I'm interested in understanding the benefits and drawbacks of this transition.

Hey, Bobby, thanks for that question. That's a great question and one that we really kicked around a lot as we were working our way through what we wanted to do here. The reality is, for a food business of our size, it's really challenging to operate your own manufacturing facility, especially considering how many different types of packages and products we produce. The result of us having done that is that we had a facility running under 30% utilization with no specific line that was running really over 10% utilization. We have a great team in that Sisters facility. They operationalized it as far as we could. We spent this year really trying to see how far we could push down costs. In the end, what we found is we really couldn't be competitive with the market. So that's a little bit of the background to how we ended up where we did. As we make this pivot into a co-packer, we gain a lot of flexibility. We pick up the ability to make different sizes, including single serves. We pick up the ability to make different packages, including canisters, if we choose to do that within retail in particular. Beyond cost, there are a lot of flexibility benefits. On the cost side, to your point, it immediately gets us back to our high watermark on margins, at least our recent high watermark, which we expect conservatively will push more than six points of margin back to the P&L. I suspect there will be a stronger benefit than that as we really operationalize it. We have a good partner who's willing to share back costs aggressively and leverage our volume against other volumes within their network. So I don't think that it caps us. If we were running a facility at 80% utilization, had everything perfectly operationalized, we'd probably be in a better position, but we don't see that coming for the next number of years. So the reality is, for us, gaining the flexibility and the cost benefit advantage that we can get from a co-packer makes a ton of sense. Regarding the liquid side, since you asked about that as well, I'll just mention that the liquid will not be going into this packer. That is a co-packed product today, and we're excited to announce that we've reworked our formulation. We weren't able to get to an aseptic producer in the past, which really limited the availability of co-packers to us. As we go forward, we now have an aseptic product that we can choose to implement at the right time. It creates new opportunities that we don't have today by virtue of not having to be in a cold chain all the time. So we see a lot of cost benefit from that as well as a lot of commercial flexibility.

Okay. Great. And then just maybe a couple more, I don't know how many people are asking questions here, but let me just ask on the guidance. It was a narrow range to begin with for revenue this year, and we've got not that long left to the year, but we still have kind of a big holiday season to push. So, I'm wondering what you might be seeing that prompts you to guide to the low end of such a narrow range?

Yes. For us, for the rest of the year, Bobby, what we're seeing is that we believe we have a very strong online program in place as we head into Black Friday and the holidays. Our team has been focused against this time of the year, and we feel like we have the product portfolio in a great place, with the right marketing programs to be able to deliver against those objectives. For us, the biggest challenge, particularly in the business of our size, is the lumpiness of retail. We're selling primarily through a couple of distributors and one club partner in particular. The result is that, if a single order doesn't come in, it creates challenges or fills you if it does. So, we're still guiding to that range, looking at the lower end at this point. We're watching that lumpiness of retail very closely.

Sure. I have one more question that’s a bit more general. At a food tech Expo in New York a few months ago, I noticed many small digital brands voicing concerns about customer acquisition costs and the various challenges everyone is discussing. How do you articulate the added value in a landscape with many small, intriguing brands? What sets your business apart and makes it appealing as part of a brand portfolio, if that’s something we might consider in the future?

Yes. Great question, Bobby. I'm going to lead this off and then hand it to Andy as well because as the Head of Marketing and Commercial for us, I'd be remiss if I didn't give him a chance to answer this too. It's a great question, and we get excited about this. The reality is, what you're asking is exactly why I joined this company, and what Laird represents is a halo of health, wellness, and whole food nutrition that stands alone. You can see that in our NPS scores, which are consistently hovering in that 80-plus mark at this point. Consumers really value what we bring, and our differentiation versus other superfoods and health foods is recognized very strongly.

I am associating a shameless plug, but I saw a pretty interesting influencer discarding all the other creamers they were looking at in a pretty popular store and just focusing on yours as the only one they would recommend. So, you guys have won some mindshare out there. It seems like there's still an opportunity to capitalize on that.

Yes, Bobby, I 100% agree with your comments there. As I mentioned in the prepared remarks, there is a growing sentiment and affinity towards the clean and functional value proposition that we have. To your direct question regarding the challenges with consumer acquisition, it is a tough marketplace, and we still encounter the same challenges in consumer acquisition. I think what sets us apart is that we have been largely historically focused primarily on our DTC business, and we have not fully utilized platforms like Amazon to really drive significant consumer acquisition. We're seeing that at a significantly lower cap than what we see in our DTC business. New consumers on Amazon were up 46% year-over-year and up sequentially versus Q2. The second piece is that we have a strong database because of how we've been acting in our go-to-market approach. Now we have almost 450,000 people in our database, which is up 26% versus a year ago. So we have a lot of organic and owned tools that can help offset some of the consumer acquisition challenges. Thank you, Bobby.

Thank you, Mr. Burleson. The next question is from Alex Fuhrman with Craig-Hallum. Please proceed.

Hi, guys. Thanks very much for taking my question. I wanted to ask a little bit more about what the company is going to look like next year and going forward? I know you mentioned, Jason, that with the co-manufacturing partnership you anticipate a six to eight-point lift in gross margin. What other ways is the company going to look different? Are pretty much all of your manufacturing costs and headcount there, expenses COGS. It seems like a lot of your physical presence in Oregon is now going to be a lot smaller. I don't know if that creates opportunities to save on SG&A? Just from a high level, what do you think the company is going to look like one year from now as opposed to today?

Yes. Hey, Alex. Good to hear from you. The company is going to look radically different, is the reality. We call it what it is here for the first time, which is it has been a turnaround for the last few quarters. We started, I thought, in a more transformative, lighter way, thinking we needed a few tweaks more than just a few tweaks, but I didn't fully grasp how heavy the lift would have to be. Yes, we'll be completely command starting before the end of this year, but certainly moving into 2023. We'll have a variable cost margin model and it will be clear and easy to see what P&L looks like. We won't be beholden to manufacturing volumes relative to some large customers' orders and shipments. We'll have a slimmer team and a much smaller G&A. We are already in the process of reducing what was a 140-person team when I came in to under 40 people. Marketing spend is also going to go down as we continue to become more efficient. We're seeing these efficiencies now and have a lot of confidence in our ability to reduce marketing next year while still growing sales more aggressively than this year.

Yes. That's really helpful, Jason. Thank you. And then what does the co-man relationship do for new product development? I mean I imagine for most of this year, it's one thing to just walk downstairs around the corner and work with your product team. Is it going to be as easy to try out kind of new ideas? Is maybe the pace of new product development going to change a little bit more?

Yes, it's a great question. It really won't change. The same individual running our R&D process now will be running it next year. We'll just need to set up a new lab, but that lab is really disconnected from our manufacturing facility. The scale of the manufacturing equipment is such that we don't have the capability to run test pilot runs there anyhow. So, there really shouldn’t be many changes. If anything, it becomes a little bit stronger because the Co-Man does have access to various formulas and developments they've been working on that they're willing to share with us as product ideas. It really shouldn't impact us. We have a lot of work to expand our current portfolio. So I don't anticipate we'll speed up production of new products, but we’re making numerous improvements to existing products today, not only to make them taste better but to introduce better ingredients that are less expensive and to offer new pack sizes. So a lot of innovation that is more like a one-step adjacency, which is obviously much higher likelihood of success with lower development costs.

Okay. That's really helpful. Thank you very much.

You bet, Alex.

Thank you. Mr. Fuhrman. There are no additional questions sitting at this time. So I will turn the call over to Jason Vieth, CEO, for any further remarks.

Thanks. I really just want to thank everybody for your continued attention and support of our brand and company. We're extremely proud of the progress we've made in turning around the business this year, but we're even more excited to put the business improvements into place in Q4 and 2023. And while these are clearly challenging economic times, especially for the DTC channel, we've never been more confident that we're taking the right and beneficial steps to refocus our omni-channel sales platform while improving our cost position and flexibility. So at Laird, I want to wish all of you and your families a safe holiday season, and we’ll continue to stay in touch as we execute this transformation into Q4, and we look forward to talking with you all again soon. Thanks a lot.

That concludes today's Laird Superfood, Inc. third quarter 2022 financial results call. Thank you for your participation. You may now disconnect your lines.