Thank you for standing by, and welcome to the Fiscal Third Quarter 2020 Conference Call and webcast for Laird Superfood, Inc. I would now like to turn the call over to Ms. Ashley DeSimone, Managing Director at ICR to begin.

Thank you. Good afternoon, everyone, and welcome to Laird Super Foods Third Quarter 2020 Earnings Conference Call and Webcast. On today's call are Paul Hodge, Chief Executive Officer; and Valerie Ells, Chief Financial 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's Superfoods' website at www.lairdsuperfood.com. 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 the 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, the company's quarterly report on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC 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 Paul Hodge, Chief Executive Officer of Laird Superfood. Paul?

Thank you, Ashley, and aloha, everyone. It's a pleasure to be speaking with you on our first earnings call as a public company. On today's call, I'll briefly provide an overview of who we are and our business model and review some highlights from our third quarter and discuss the reasons why we believe Laird Superfood is well positioned for long-term growth. Valerie Ells, our Chief Financial Officer, will then review our third quarter financial results in more detail before we open the call to Q&A. Laird Superfood is a high growth, plant-based natural food manufacturer with an open-ended growth opportunity in the $695 billion grocery industry. At Laird Superfood, we believe better food leads to a better world, because when people are healthier and feel good, they make better decisions. Our products provide daily, sustained energy, nutrition and hydration that we need to excel throughout our days from sun up to sun down as part of our daily ritual, starting with our Superfood creamer and coffee. Our mission is simple. We make products that deliver great taste and great quality. We want our products to be convenient, easy to use, affordable and available to all. We are proud to have to be known as an investor, been known as a global leader in the food industry, who shares our vision of a world of healthy and sustainable foods and provides us incredible expertise. Our flagship product line is our line of functional cheaper food coffee creamers, where, in a short amount of time, we established the #1 natural powder creamer in the United States. Our products are designed around daily use, and we're building a broad-based natural food platform, reflecting the authenticity of our founders. And that authenticity and trust in our brand is a critical differentiator driving our…

Thank you, Paul, and good afternoon, everyone. It's great to be speaking with you on our first earnings call as a public company. As Paul noted, we are very pleased with our third quarter financial results. Our net sales increased 118% to $7.6 million relative to the third quarter of 2019, reflecting a combination of growth in online and wholesale channels, where online grew 67% year-over-year with our direct website sales up 122%, and wholesale grew 223%, reflecting continued success with key partners as well as our strong liquid creamer performance and ongoing success of our shelf-stable business. We saw 135% growth in our coffee creamers platform. 278% growth in coffee, tea and hot chocolate products and 63% growth in hydration and beverage enhancing supplements. Gross margins were 24.7% during the third quarter. Although a slight increase over Q2, the sequential decline in margin from the last year were a result of the following: spoilage and waste related to our liquid creamer launch and process refinement; elevated co-packing fees related to our liquid creamer line as that product launch continues to grow, but also from outsourcing some of our shelf-stable business, while we awaited our recently installed second in-house production line to become fully operational; and the combination of elevated shipping expenses and reduced shipping income for our direct online business, where we have continued the free shipping initiatives; and on an absolute basis, outbound shipping costs also increased approximately 10% during the quarter. Regarding liquid creamers spoilage, as Paul alluded to, we have 2 key steps to create a clear and realistic path to a more optimized operation where quarter-to-quarter spoilage should be less of a concern. We are planning a new package design that will dramatically increase the shelf life of our products, extending out from 45 days…

Thanks, Val. So before we go to questions, I just want to let you know our #1 priority today is to optimize the fast-growing business we have immediately before us. We feel confident about the plans in place to optimize the liquid creamer business, and we feel this effort is worth the time and resources because the consumers are there, the brand has traction. Our customers love the Laird products, and we know we can take a meaningful share of the multibillion-dollar creamer opportunity in front of us. All in all, this quarter was huge for us and for the brand, and we are hyper-focused on the market opportunities in front of us. We are so delighted with the expanded team we have in place, and now let's go to questions.

[Operator Instructions] And your first question comes from the line of Bobby Burleson from Canaccord.

So I think my first one is just on the spoilage impact on gross margin. Just curious if you guys can kind of zero in on what that was in terms of basis points?

Yes. Sure, of course. So the overall liquid creamer spoilage, I mean, over the past 2 quarters. I mean, each quarter has been between 100 to 300 basis points in margin. But again, like we've mentioned on the call, we're pretty excited and confident about this solution we have in place and comes with a lot of upside potential and potential e-com option down the road.

Okay. Great. And so just the kind of incremental spoilage, I guess, versus expectations, because I don't think we've talked much about this before. Is there a way to kind of isolate what that was in terms of how it would probably weigh on margins?

Yes. So historically, when we talked on the Road Show and in those conversations, really, we initially attributed it really to a mismatch in supply and demand. If you recall, we had a minimum run quantity with our co-packers and as we were initially launching in the second quarter. I mean that was the main driver. And Paul, actually, I'll let you speak to the subsequent.

Yes. I mean what we've realized just in the past, really, over the past month is as that sort of mismatch was corrected for the most part, is that we're still having spoilage. So as we dug in with the distributors to see what's going on, what we've really learned was just that the distributors themselves were not able to really handle the product in an efficient enough manner with the 45-day shelf life to get it from where we co-pack to the stores, say, East Coast to West Coast, and get on the shelves with enough shelf life to do any good. In some cases, for example, the distributors might pick up the shipment late as much as like a week late from our factory after we produce it, and then by the time it gets to their warehouses on the West Coast, they can't accept it, because it has less than a 75% shelf life capability. So it was kind of a surprise when we dug in to really look at what was going on there. So with the help of Danone, we found a great solution for this extended shelf life. And it's going to completely pretty much eliminate that problem. We're taking it from 45 days to 4 to 6 months. We're pretty comfortable in those ranges. And that just basically eliminates this sort of logistics issue, so to speak, that with the distributors. And it was a bit of a surprise. So this spoilage was continuing to happen even after we kind of correct that mismatch, and we are making some strides in the meantime to reduce that in some ways, but it's never really going to be completely fixed until we go to this new solution. So we are in trial runs already with the new packaging. And we're basically driving this as quick as we possibly can without sacrificing quality.

Okay. Great. Great. And then just a quick follow-up here. You guys mentioned the extremely high turns for your vanilla-flavored liquid creamer. And I noticed that my local stores that the vanilla stuff is like almost sold out, but the unflavored wasn't. I'm just wondering, are you guys making adjustments in real-time in terms of your inventory planning? Because it seemed like it was incredibly lopsided towards lots of demand for vanilla.

Yes. Yes, absolutely. We're currently analyzing that and producing the products as it needs. But don't underestimate the -- actually, the unsweetened and the original are also turning very well. There's some great turn on that product. Yes, vanilla is the highest, but the others are -- all 3 of those flavors are performing well by kind of standards. And especially being that it's brand-new in the marketplace. And the good sign that I look at is the weekly turns are actually increasing still, which is a really good sign. It basically means that people are getting -- using the product and coming back for more, and we're building a customer base in the stores. So we're still seeing those rates ramp-up, which is really exciting. And so I think we're really on to -- and we get the feedback from consumers through our customer service portal. People just love the product.

Yes. It seems like I had some conversations with the checkout people at the stores that I shop at. And they were saying -- they were aware of the product, and there was kind of a buzz building, it seems like. Good. And then I just guess, the last one, just on online. Curious, you tried to shut off free shipping a little bit. I thought you guys were always kind of planning on keeping that turned on a little bit longer. Was that -- was there a change in strategy there? Or was this an experiment that you've been planning all along?

We're going to constantly be testing the free shipping initiative. And it's hard to measure the effectiveness of it unless you do have those times where you can measure the opposite. So we want to turn it off to really get -- kind of get a new measurement of returns. And then there's also a lot of different new creative ideas that we're implementing to test various different versions of it that -- to really look at ways that we can reduce our shipping costs but also provide that really solid customer experience and be able to, in essence, compete with Amazon, with the free shipping initiatives. And so we're really excited about a whole number of tests that we're actually going to be running over the next, say, 3 to 4 months to look at how we fully optimize that initiative. So it is important to continue to play with it and to be able to measure the data, I think.

And you said that shipping costs were up 15% in October. Is that correct?

Yes. We received notice from actually a couple of our primary carriers that there is a rate increase. And so we are going to be hyper-focused on this area of the business because we feel that there's a lot of room here to really find some improvements. And by the way, Scott McGuire, our new COO, is highly experienced in the supply chain fulfillment logistics area. He's, what I consider, a global expert in this arena. And he starts on Monday. So we're really excited to get him on board. And one of his first initiatives is going to be to dig deep into this area of the business.

Sounds like a great hire. Congratulations on the upside in the quarter.

Your next question comes from the line of Alex Fuhrman from Craig-Hallum Capital.

Congratulations on a really nice quarter here. I wanted to ask about the subscriptions that you have on lairdsuperfood.com. I know that's been a pretty meaningful contributor of revenue for you historically. Can you share how much of the third quarter online sales were generated by subscriptions? Or any color you can give us on how your number of subscriptions has been trending throughout the year would be really helpful.

Yes. Of course. So subscription and repeat business continues to make up about 2/3 of our direct online business despite that strong new customer growth in the third quarter. That was still around 31%. Repeat was still slightly north of that, 32%, 33%. And then in terms of just subscription accounts, I mean, that continues to grow overall as well. So we believe we were up about 24% over the second quarter. But when you look back a year, we're up 277% over Q3 of last year. So continued strength in that part of the business and subscriptions is always going to be a focus for us because, again, that the LTV of a subscriber is dramatically improved and enhanced over a onetime purchaser or repeat purchaser. And we're going to put a lot of attention there.

That's really helpful. And then just trying to kind of put it all together. I mean, it seems like you're seeing really nice continued momentum on the online sale. Wholesale, obviously, is going to be a little bit choppier, and you had the big sell in with the liquid launch here in the third quarter. It looks like you guys have grown revenue quarter-over-quarter pretty consistently for a long time here. Is it reasonable to think that given the magnitude of the liquid creamer sell into retail in Q3, that Q4 is probably going to take a step back before resuming growth next year?

Yes. I'll just say that this business at this stage that we're at, it's very hard to predict quarter-to-quarter, which is why we're guiding annually. And it's -- we -- obviously, we've got some great programs in place. We're hoping to make an impact on Black Friday. But we don't know how to forecast that exactly. There's a big wholesale order to come in or it could get pushed into Q1. And those are hugely impactful in those numbers. So what we would just say is just we gave the annual guidance, and we just -- we'd stick to that. And the end of the next quarter, we'll provide our guidance for next year. And we're definitely not trying to hide anything from anybody. This is just a very high-growth dynamic business, and it's very, very hard to predict quarter-to-quarter right now. Once the company matures down the road in a couple of years, I'm sure that will change, and we can change that sort of process. But in the meantime, I would just stick with that. And we're happy to talk through every little business issue in great detail with -- and share everything that we know in the meantime. And happy to keep those discussions going.

I appreciate that, Paul. That's really helpful. And then lastly, if I could just ask on the pili nuts that you mentioned sold out quickly in the trial. It seems like that's an exciting new area, just the category snacking in general. I'm curious, was that mostly your existing customers that quickly reacted to that product? Just curious who is buying it and what the time line is to get that product back out there?

Yes. We -- well, assuming shipments are all happening as they should be, because there can be delays. We should hopefully have those back in stock in -- by the end of next week. I will say yes, we -- our existing customers really responded well to that, but they were also some of our biggest customer acquisition days we've had in a long time for new customers with our marketing programs getting out there. So it was really quite the eye opener for us, honestly. It far exceeded our expectations as far as how quickly those -- the product would move. And we got incredible response from our customers that did receive the product, that are lucky enough to get it in the meantime. And we've got a huge waiting list for people wanting more. So we're excited about the snack category. It was our first jump into that field. We've got some other snacking, healthy snacking products coming out in the near future. And it just kind of shows the power of the brand platform that we have here. So we're building this trusted customer base and building this company based on this authenticity. The customers that get it, they're going to be here. And it just shows the power of this brand platform, in my opinion.

And your next question comes from the line of George Kelly from ROTH Capital Partners.

So I just have a few for you. I guess to start sort of continuing the dialogue you were just having on pili nuts, what -- can you maybe more broadly talk about your new products pipeline? And I'm curious if there's more still coming this year. And then I guess just not sure sort of what you want to tell us or what you can't tell us, but what's next year? Like, what should we kind of expect as far as new products for next year?

I mean I will frame it in just saying that we are probably more excited about our new product pipeline for 2021 than we've ever been. We've got a really solid line of what we consider really exciting and really innovative products. For the rest of this year, these product launches kind of move because some of the things are out of our control for printing, packaging time lines, kind of a busy time year for printers and things like that. But we do and we talked on the road show having some additional functional coffee products coming out that we're really excited about. Once again, I'm personally very excited about this category. I think the future of the coffee space is functional. And I think we've got some products that are going to resonate really well. And we saw how well our first functional product coffee did as a Performance Mushrooms product. And I would say Performance Mushrooms are a little interesting. It's like some people are concerned maybe it taste like mushrooms or what exactly do Performance Mushrooms do for me. But some of these other functional coffee launches are a little bit more clear as to what those functions are. We're excited about that. That should be in Q4 here. We do have our daily essential greens planned, which is for sometime in the next 30 days to go to -- down to the marketplace. And, do we have the schedule for this year for sure? Yes. I -- there may be one other -- I can't say exactly, but it's going to hit this year or next year. But there's some continued product launches that are happening this year, of course, with the pili nuts coming back as well.

Okay. That's great. And then maybe back to liquid creamer. I just want to try to understand your commentary from your prepared remarks. So if -- are there any changes or will that -- will the existing form continue being sold through mid-2021? And then secondly, can you talk more about the solutions? Just is it sort of ingredients or just packaging or anything else you can tell us about the fix?

Yes. Happy to. The ingredients won't change at all. Same ingredients, same formula, where it's going to taste exactly as it does. It's really just a packaging change. The package is still the same size, but it's just the way the packaging itself is designed to better protect the product. And it is what gives it this sort of extended shelf life sort of process. And there is a small tweak to this solution that uses, again, a slightly different version of the packaging. But through the same production line process, that will then also give us the ability to have a fully shelf-stable aseptic product, which would give us a 12-month shelf life with -- at room temperature storage conditions. And that's really exciting for us as we can then move the product on Amazon. We can sell it B2C for online business and feel like we do with the rest of our products, where we get this then blended margin approach. So we are excited about that. As far as timing, it's a little bit tough to say. As I mentioned, we're doing trial runs now. Everything is looking really strong. We're going to move it into the market as quick as we can. I would say definitely by the middle of the year, we'll have it on the shelf and then start to see the margin impacts and the improvements on that front.

Yes. And George, to round that out, we definitely will keep the existing version on shelf until that solution is in place, and then we'll swap it out. Because when it is on shelf, it's selling really well. As Paul mentioned earlier, the sell-through data is fantastic, especially for being as early on in the launch. So we're not going to impact that at all. And we hope we continue to see that trend of weekly improvements in those terms. But ultimately, we think we found the right solution here. And we're looking forward to having it in place in 2021.

Okay. Great. And then last question for me. Just a modeling question. Can you break down the online revenue between lairdsuperfood.com and then -- and everything else?

Yes. So overall channel mix for the quarter, I mean, online sales was about 49% of that. It was about a 60-40 split this quarter between lairdsuperfood.com and Amazon. And then, of course, with wholesale making up about 50% of the total sales, and foodservice rounding it out with the remaining 1% to 2%.

Congrats on the strong first quarter out of the gate.

And your next question comes from the line of Bobby Burleson from Canaccord.

So I was just wondering, on the new products you guys are talking about that are happening here in Q4 and over the next 30 days, are those all capable of being shipped direct? Or are some of them wholesale only at this point?

Actually, these products will initially be direct only. And then we will gauge the performance and then look at the wholesale channels. I will say, we do fully expect the functional copy of blends that are coming. To go into wholesale early next year just because we do -- we've seen some really strong wholesale demand for these products and performance and would like to make sure we get those out. But our typical playbook, just to kind of reiterate with our products is we like to start the products online, and we're building this online sort of daily ritual products. And we're going to want to run those online for some amount of time and just really understand the performance, customer feedback, understand if maybe we need a packaging change or some tweaks and sizes or flavors before we make the big investment in going to the wholesale. The functional coffee will sort of be the one exception that we're going to accelerate that process just because we already know it's going to do well. We don't need to do the testing. It's going to perform in our minds. And we're willing to go ahead and make that investment to get that in the wholesale channels as soon as possible.

And any feedback on how that is going with Costco?

Yes. So it's been going good. Even with the Performance Mushroom blend, which we feel, of the 3 flavors, probably wouldn't have as strong of a resonance with the mass market consumer. But with that, Costco is continuing to reorder and keep it in their age stores. And so we're supporting them in that. And it -- it started out. And one reason I think we're selling in 3 regions now with the coffee. So there's been some region expansion as well.

Great. I mean it sounds like you guys have a good pipeline of new products slated for 2021. I'm wondering, if we think about the cadence of introductions this year versus 2021, is there a deceleration in the number of SKUs coming out? And then are you also culling the portfolio of some stuff that's underperforming? How is that going to -- what are the trade-offs like there?

Absolutely. We're going to be constantly looking for underperforming SKUS. There have been a few that we're looking to replace. And that's just part of the process. It's a little bit hard to talk about the future pipeline because it's quite the process. There's -- I would say, for every 10 product ideas that come to mind, one of them makes it to this stage to where we're actually planning to launch it and schedule it. But there's still a lot of variables that can really affect the timing of when those go out. But I will say when we look at the number of products that we have next year, it's -- there's probably -- there's more products that we're insisting to launch next year than in any year prior.

Great. And then just in terms of retail distribution with your wholesale customers, there's opportunities, obviously, at Target and others like that. I'm wondering how about someone like a 7 Eleven. It seems like they're building out there, better for you, sections of their food aisle. Is that a company that's on your radar?

So part of that product development pipeline, there are some products that we have slated for next year, which are really kind of designed and engineered to be more in that sort of c-store environment. So that -- it is something we're thinking about. And our new VP of Sales -- or not, I guess, new in Q3, has some great experience in that area. And so we're -- we are anticipating eventually looking into those sales channels and having some products that fit, that are built from the ground up for that.

There are no further questions at this time. Mr. Paul Hodge, I turn the call over to you for some closing remarks.

Okay. Well, thank you, everybody, and have a great holiday season. Be safe. And we're excited for the future. We're excited to talk to you during our next call. And I guess we'll see you then. We'll be giving 2021 guidance and kind of summarizing 2020. So really appreciate everybody in the support and going on this growth journey with Laird Superfood.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.