Good afternoon. Thank you for joining today's Laird Superfood Third Quarter 2023 Financial Results Conference Call. My name is Cole, and I will be the moderator for the call. I would now like to hand it over to our host, Trevor Rousseau. Please proceed.

Thank you, and good afternoon. Welcome to Laird Superfood Third Quarter 2023 Earnings Conference Call and Webcast. On today's call are Jason Vieth, Laird Superfood's President and Chief Executive Officer, and Anya Hamil, our Chief Financial Officer. By now, everyone should have access to the company's third quarter 2023 earnings release filed today after market close. It is available on the Investor Relations section of Laird Superfood website at www.lairdsuperfood.com. Before we begin, please note that during the course of this call, management may make forward-looking statements within the context 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 these risks and uncertainties. With that, I'll turn it over to Jason.

Thanks, Trevor. Hello to everyone, and thank you all for joining us today. I am proud to report that our Q3 results represent a fundamental step change in the performance of our business. For the first time since Q3 of 2021, we are reporting net sales growth against both the prior period and the prior year same quarter. At the same time, we achieved our 2023 goal to exceed 30% gross margin by the back half of the year, an improvement of more than 750 basis points versus this time just one year ago. We executed these improvements with just a fraction of the marketing and SG&A costs that we utilized in the business during the last years, which we will discuss shortly. First, let's dive into net sales. During 2022, I shared that we would need to reshape our sales algorithm to create a growing profitable business. I'm pleased to announce that our Q3 results were the result of this effort as the wholesale channel grew by more than 42% year-over-year to become nearly half of our total business during this quarter. Natural channel consumption data as reported by Spin for the last 12 weeks ending October 8, 2023, showed a 61% growth for the Laird Superfood brand with positive sales growth in every category in which we compete. This growth is being driven by a healthy combination of unit velocity growth, price increases taken in previous quarters, and distribution expansion. As expected, our online business, which is comprised of the DTC and Amazon channels, contracted by 16.6% as we continued to scale back media spend in support of our profitability goals. For the past 18 months, we have been managing this business towards profitability through significant reductions in media spend and by actively converting existing customers to subscriptions. The result is that we have moved from an inefficient, unproductive, and unprofitable paid social media marketing model to top-of-funnel awareness driving marketing activations that employ podcasts, PR, and organic media. In Q3 alone, we garnered more than 1.1 billion media impressions, and we are just getting started. I am also pleased to report that our Amazon inventory challenges are now behind us, as we were able to restock our products across their platform during Q3. While this channel has been constrained during 2023 due to the lack of inventory stemming from our Q1 quality event, we are looking at a significant opportunity and expect to have a tailwind from that channel over the next year. Next, I want to acknowledge our supply chain organization, which achieved the aggressive cost-saving target that we set out for them in 2023. Remember that it was only a year ago that we determined we would shut down our manufacturing and distribution facilities in Sisters, Oregon, and transition to an asset-light model to improve our efficiencies, increase our flexibility, and lower our costs. Our results in Q3 were the realization of that vision as we decreased our landed product costs as a percent of gross sales from 74.6% to 54.8% in this most recent quarter. During this time, we have developed strong and mutually beneficial relationships with our co-manufacturer and logistics partners and are proud to have both of them in our supply chain. At the same time, our G&A expense was 50% lower than during Q3 of last year, as the organization has continued to do more with less. While other companies are just announcing cost savings programs to match the current state of the economy and its impact on the business, I'm proud to report that we have largely and successfully completed that work, including headcount downsizing and discretionary expense reduction. We also recently closed all outstanding litigation against us and successfully renegotiated our insurance to save more than $500,000 versus last year's policy, which will begin to be fully recognized during Q4. While these savings have begun to flow into our earnings results, a solid amount of reduction will materialize in Q4 of this year and during 2024, which will help us drive towards our short to midterm goal of breakeven profitability and becoming cash flow positive. I am extremely proud of how far we have come during the past two years, and I am grateful to our leadership team and our entire LSF organization for what they have accomplished, but I am even more excited about where we'll go from here. Now that our cost structure reflects best-in-class CPG companies, we can turn our focus to restoring LSF topline growth through wholesale expansion in 2024 and beyond. As we continue to chip away at our least effective marketing activities to further reduce our G&A expenses, we believe we can now achieve a cash flow positive run rate in the next 12 to 18 months. Now let me turn the call over to Anya to discuss the second quarter results.

Thank you, Jason. Net sales of $9.2 million in the third quarter of 2023 increased 3.7% as compared to $8.8 million in the prior year period and increased 19% as compared to $7.7 million in the second quarter of 2023. The year-over-year growth was driven by distribution gains in the natural and conventional channels, seasonal program expansion in clubs, pricing actions, and velocity improvements behind new packaging and the rebranding campaign launched earlier this year. This was partially offset by lower sales in e-commerce channels. Given the level of pullback in our marketing spend, which was a 19% year-over-year reduction across Amazon and DTC media, this decline was expected. These marketing costs were strategic in nature to cut inefficient spending and reduce our customer acquisition cost to build a sustainable e-commerce business and improve profitability in these channels. Additionally, our Amazon sales continue to be negatively impacted by residual inventory out-of-stocks related to the previously discussed product quality issue experienced in Q1. I'm happy to say this issue was resolved at the end of the third quarter and is now fully behind us. In the third quarter, we built on the success we achieved in the first half of the year from strategic actions implemented last year. Every quarter this year, we saw consistent margin expansion versus the prior year, with Q3 margin reaching 31%, which is a 670 basis points improvement sequentially over Q2 and a 750 basis points improvement versus the same period last year. Q3 gross margin of 31% is a milestone that puts us firmly on the way to achieving our long-term goal of gross margins in the high 30s. This year-over-year margin expansion was driven by a cost of sales improvement of 21% versus the same quarter last year due to our supply chain shift to a third-party co-packing model. It would have been even stronger except for the investment we made in trade promotions to drive incremental awareness and trial in our wholesale channel. Starting in Q4, I expect to begin pulling back the elevated trade spend, which will allow margin expansion to ramp up even more as we see the full benefit of the supply chain transformation as well as other margin-driving initiatives take hold. Operating expenses for the third quarter of 2023 totaled $5.6 million, a decrease of $2.2 million compared to $7.9 million in the year-ago period. This reduction was driven by lower marketing costs resulting from strategic cuts of inefficient spending, lower people costs, and other general and administrative expenses following restructuring activities in 2022. The net loss, as reported, was $2.7 million for the third quarter of 2023, a decrease of $3.1 million versus the prior year period. Q3 net loss was the lowest in the company's post-IPO history, driven by gross margin expansion and strategic pullbacks in spending across the board. Our Q3 SG&A was $1.8 million lower than the same quarter last year, demonstrating the strong progress we have made in managing costs and pushing the business towards breakeven and profitability in future quarters. Turning to our balance sheet and cash flow, we ended the quarter with $7.4 million in cash and no debt as we continue to conservatively manage our balance sheet. Cash burn in the third quarter of $3.5 million was elevated compared to $1.4 million in Q2 due to planned inventory build to meet stepped up demand, as we communicated on this call last quarter. Our year-end cash forecast is on track with our operating plans. Moving on to our outlook. With one more quarter left in the year, we expect fourth quarter net sales to be in the range of $8.5 million to $9 million and gross margins in the mid- to high 30s, excluding any one-time extraordinary charges. This concludes our prepared remarks. Operator, we are ready to open the call to questions.

Thank you. We will now begin the Q&A session. Our first question is from Bobby Burleson with Canaccord Genuity. Your line is now open.

Sorry, can you hear me? I'm sorry, can you guys hear me?

Yeah, we can hear you, Bobby.

Okay. Great. I thought I disconnected for a moment. First of all, congratulations on your significant progress and turning things around. I'd like to understand the comment about media impressions. What kind of delay is there between such activities and an increase in growth for your DTC? Additionally, how long do you anticipate the positive impact from Amazon will last into 2024?

Yeah. Hey, Bob, good to hear your voice and to be back here again, and thanks. We certainly appreciate the recognition of all the progress that's been made by the team; it has been a nice long run here for two years to get to this point, and it's really great to see the culmination of a lot of those efforts. The two points you’re hitting on here are really important. One, on the DTC impressions, yes, media impressions will benefit all of our business, of course. In the case of DTC, as you're asking, I think it's important to understand we are shifting our marketing strategy right now, and certainly as we move into 2024 as well, it's more top-of-funnel awareness. That really started to take place through this year, but I would say it heightened in Q3 and will again in Q4. We're spending more of our marketing dollars on podcasts that we are supporting and a partnership we have already established with the Shawn Ryan show. We're also working on another one that we're excited about closing soon. We're collaborating with our PR agency to generate these impressions, both paid and unpaid. They’re doing phenomenal work for us right now. Some of this, as you're alluding to, will have a longer-term benefit, and we may not see the immediate impact. That's why we're excited about these results; we got back to growth in Q3, and we did it without the same level of that pay-to-play, one-to-one social media type of marketing that we have been doing in the past, which has become very inefficient after a certain spending level. So we're flipping the model, and we're seeing better results than we anticipated right out of the gate. We do believe, just as you're alluding to, that over time, as that awareness builds, we start to get to a more conventional marketing model that yields results for multiple quarters and years. Regarding Amazon, while we managed to get inventory back into position approximately two-thirds of the way through the quarter, we still faced headwinds with Amazon this quarter. We continue to have challenges winning back buy boxes and other execution issues due to the out-of-stock problems we've faced throughout the year. We are addressing these issues thoroughly one at a time. We’re starting to spend back into the channel. Although we pulled back spending significantly, we’ve still been able to report growth this quarter, which is why it feels so good to be in that position because as we start putting spend back in efficiently, we can supercharge some of the growth in these channels right now.

Okay. Great. And then just a quick follow-on. It sounds like you're pulling back on the elevated trade spend in Q4, which should help with gross margins and the burn is going to slow, I guess, from what it did in Q3. But you talked about a cash flow positive goal of 12 to 18 months from, I guess, is that from October? And then what swings you to either end of that range? Are there particular things you're watching that could really affect how soon that outcome is reached?

Yeah. Good question. I tell you, Bobby, our gross margin exceeded 30% as we planned at the beginning of the year. We have to add on 5-plus points over the course of the next year, and as we do that, we'll start to close in towards the breakeven point that we mentioned. The big drivers for us moving forward will be twofold. One is the continued scaling of our G&A; we've made a number of moves that are only just beginning to be reflected in the G&A line, which we'll see the full benefit of over the course of the next year. Secondly, regarding marketing, we’re implementing a strategy that compresses marketing expenses towards a more traditional CPG model. So you’ll see marketing costs decrease next year while still making targeted investments. So it's really the combination of increased gross margin along with lower G&A and marketing costs, coupled with what we believe will be an increasingly positive story on topline growth. For the last two years, we’ve faced a larger online business in decline faster than our smaller wholesale business was able to grow. That's about to flip; it’s roughly a 50-50 business now, wholesale to online, and our wholesale business is currently growing faster than our online business is declining. That essentially creates a flywheel that starts working in our favor. We’re really excited about what that can mean for us next year.

And I just want to add one more thing to that. Hi, Bobby, this is Anya, CFO. Our working capital is another driver, and we continue optimizing our working capital as we grow and expand our business. We think we still have room to improve in terms of our inventory efficiencies, and that's another area where we're looking to free up our cash.

Okay. Great. Thank you for that additional point and congratulations.

Thank you.

Our next question is from Alex Fuhrman with Craig-Hallum. Your line is now open.

Hey guys, thanks very much for taking my question. Wondering if you can talk about what you're seeing here in Q4 from Amazon? When would you really expect your business through that important channel to be more or less at full strength following the coconut milk powder issue that you had?

Yes. I'll start that and Anya can jump in if she has anything to add afterwards. The way we're looking at Amazon right now is we're about a year behind where we had planned to be. You may recall from Q3 and Q4 last year; we had ramped up our spending and built cohorts, feeling confident that Amazon was positioned to drive growth for the next year. Unfortunately, the quality issues in Q1 and Q2 set us back to where we were a year ago. We're now getting back to that point. While rebuilding our cohorts, we are marketing much more efficiently than before, so our advertising spend is significantly reduced, and yet we’re seeing really strong estimates from our existing sales. We have a tremendous opportunity to convert many current consumers into subscribers, and we're actively working on that, along with competitor conquesting now that we have full inventory in place. We’re excited about that channel for next year; if you recall for this year, it was to be one of our big growth drivers that didn’t materialize due to the quality event, which forced us to pause for about 7 to 8 months as we replenished stock and got our buybacks sorted out. From here, we should see it become a significant growth driver for us.

Okay. That's really helpful. And then just on the gross margin, I think you touched on this a bit with Bobby's question, but mid to high 30s gross margin in Q4 is quite a bit more than you've done in any quarter so far this year or the last couple of years. Now that you've got your core shelf-stable creamer manufacturing being outsourced, is that a run rate we could expect to see throughout next year? Or is there a reason why Q4 might be a step-up and maybe should expect it to be a little lower in the first half of next year?

Great question, Alex. You're right about where we are regarding our margins through Q4. We actually see more opportunity than risk as we move forward. There may always be commodity movements against us, but based on the commodities we have purchased and our cost-saving initiatives, we see potential for further improvement from here. However, we are also looking at investments that can gain market share online and at retail, which we’ll balance going forward. We don’t anticipate a spike in Q4 that we can't maintain; we genuinely believe this marks the beginning of a long-term trend sitting in that 35-plus range moving forward.

And I'll just add that quarterly, our margins are expected to fluctuate; for example, Q1 is expected to be a bit heavier because it's a back-to-school season for consumers. We will align our promotions with that season to drive the top line. Then, margins may decrease in Q2 and Q3, with the Black Friday events influencing Q4, which will fluctuate somewhat due to seasonal factors; however, as far as our cost of sales, that’s expected to remain stable throughout next year at Q4 levels or better.

That’s terrific. Thank you both very much, and congratulations on the really improved results here in the third quarter.

Thanks, Alex.

Thank you.

There are no additional questions at this time. So I'll pass the conference back to the management team for any closing remarks.

I want to say thanks everyone for joining us today. It’s extremely exciting and gratifying to report on our continued progress during this turnaround. With gross margin now in line with many of the top CPG companies in the industry, we can focus on growing our business, which is where it really gets fun for us and hopefully exciting for our investors as well. The future has not looked this bright for Laird Superfood for quite some time, and frankly, not since I’ve been here. I hope you all leave this meeting as excited for our future as our entire team is. Thank you very much.

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.