Local Bounti Corporation

Good morning and welcome to Local Bounty's second quarter 2023 earnings conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's events being recorded. At this time, I'd like to turn the conference call over to Jeff Sonick, Investor Relations at ICR. Please go ahead, sir.

Thank you and good morning. Today's presentation will be hosted by Local Bounties Chief Executive Officer Anna Fabrega and Chief Financial Officer Kathleen Balasek. The comments made during today's call contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs, as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain non-GAAP financial measures today. Please refer to the press release, which can be found on our investor relations website. investors.localbounty.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. With that, I'd now like to turn the call over to Anna. Go ahead.

Thank you, Jeff, and welcome to everyone on the call today. This is a pivotal time in Local Bounty's journey, and I'm thrilled to join you today for my first earnings call as the company's CEO. I'm proud to be part of this organization, and I'm excited to address the opportunities we have ahead of us. I believe that our stack and flow technology represents the most innovative and economically viable CEA approach for sustainable agriculture. I was attracted to Local Bounty because of its mission and the amazing people behind it. Agriculture has been a part of my entire life. In fact, my dad still runs a farm in Panama where he grows tea and coffee. I have a deep appreciation for the hard work and limitations that conventional farming methods require. which traditionally have limited producers to specific geographies and approaches. I believe food should be as local and sustainable as possible. Local Bounty represents a long overdue evolution and growing techniques that not only address environmental and sustainability goals by using a fraction of the water, land, and food miles traveled, but it is also a system to bring fresher, higher quality, and better tasting products closer to consumers across the country and eventually the world. I love that we are feeding families while helping the environment. I've been fortunate to be able to learn from highly regarded business leaders in organizations such as Amazon and apply those skills in young organizations that are in the midst of growing quickly and scaling up. I believe we are the future of food production. In order to be successful, we need to grow and scale the business in the most efficient way possible, optimizing our resources and leveraging our collective talent. I have deep knowledge of the retail sector and direct experience channeling efficient operational expansion, and I am excited to work with this talented team to do just that. We are still operating in a nascent industry ripe with innovation and fresh thinking. Although the challenges are real, the opportunity is immense. We are simultaneously ramping up our growing capacity at new and existing facilities, establishing consistent and replicable operational protocols, expanding our distribution network of approximately 13,000 doors, and enhancing penetration through a customer-focused, value-added program expansion. Individually, each of these represent an opportunity to materially advance our business. And collectively, our ability to accomplish these goals in a highly disciplined fashion represents a massive opportunity to generate significant economic value for our employees and shareholders alike. In order to achieve these goals, scaling the business, and delivering the financial returns we believe are inherent in our model, we need to adapt to ensure that we have the right infrastructure and people in place to position Local Bounty for success. As part of this process, we have optimized our organizational structure and added key talent in the areas of operations, sales, and human resources that will accelerate our strategy. I'm excited to be able to apply my experiences as CEO of Freshly and as a longtime executive at Amazon to drive significant company growth. The team has solidified an attractive model and continues to press forward, unlocking exciting advancements in yield to improve the potential of our unit economics. Equally important are the financing vehicles that we have in place today, enabling us to scale up in a capital efficient manner. We continue to have line of sight to break even adjusted EBITDA at the end of 2024 or early 2025, when we will be operating a broad footprint of facilities to serve as an ever-growing roster of blue-chip customers that spans the country. With the focus I am putting on our operation, I am confident that we have an organization that is up to the task of generating financial returns in the quickest and most efficient way possible, and I look forward to demonstrating our progress in the quarters and years to come. With that, I will now turn the call over to Kathy to provide an update on our facility build-out review our second quarter performance, and provide some comments on our expectations for the remainder of the year.

Thank you, Anna. I would like to echo many of the themes that Anna spoke to. This is a pivotal time for our business, and we are fortunate to have the resources in place to fuel our growth ambitions. This includes capital for growth, which we've worked extremely hard to put in place, and of course, our people. I'd really like to recognize the resolve that our team has displayed over the past few years, which included a transformative acquisition, a huge scale-up, a public offering, leadership changes, and a multitude of daily challenges that have all come together to advance the business and make us stronger. I take great pride in working with such a committed group of professionals and am thrilled to embark on our next phase of growth under Anna's leadership. With that, I'm pleased to share that our facility scale-up is on track. We are focused on completing projects that generate near-term returns. With that in mind, we are working on completing our Georgia build-out, and we are set to complete our Texas facility in the fourth quarter of this year and our Washington facility early in the first quarter of 2024. With respect to Georgia, construction of both Phase 1A and 1B are complete, and our focus has shifted to Phase 1C. As a reminder, Phase 1A and 1B reflect the site's completed six-acre automated greenhouse footprint, while Phase 1C is focused on the integration of the complementary vertical stack zone. The structure that houses those stack zones is approximately 90% enclosed, and we are in great shape for the project to reach completion early in the fourth quarter of 2023. The completion of the vertical nursery is a critical development in terms of the additional capacity it will add. We estimate that once fully commissioned and at today's run rates, this will add approximately 40% to the site's current revenue generating capacity. This will allow us to open up our product suite to new offerings, strengthening our position as a premier partner in the CEA space, and deepening our roots in the southeast. Our new six-acre facility in Texas is advancing rapidly and the greenhouse structure is largely complete. Similar to Georgia, we are shifting focus to the stack installation, and we continue to expect operations at Texas to commence in the fourth quarter this year. The similar design of this facility to that of Georgia will allow for synergistic operations and management of the two facilities. As mentioned, Texas will support production of our packaged leafy green varieties, as well as locally grown living lettuces and fortify our national distribution network with localized facilities spanning coast to coast across the southern U.S. At our Pasco, Washington facility, the structural steel work for the greenhouses is now complete and glass installation is progressing. When complete, the facility will be comprised of three acres of greenhouses that will be supported by multiple stacked zones. The location will help bolster the company's distribution capabilities in the Pacific Northwest and is expected to commence operations in the first quarter of 2024. As a reminder, we've been consciously staggering construction to accommodate the commissioning of our Texas facility in the fourth quarter of 2023 to maximize the efficiency of our team. I'll now cover our second quarter results. Second quarter 2023 sales were $7.2 million as compared to $6.3 million in the prior year period. Our second quarter results largely reflected production from our California facilities and to a lesser extent our Montana and Georgia Phase 1A and 1B facilities. With the Phase 1B expansion now complete in second quarter, we are ramping up service and improving our fill rates to our customers' distribution centers that we added to our network during the quarter. We expect momentum to continue improving in the second half of this year as our operational protocols drive enhanced productivity and look forward to the completion of phase one C's stack implementation later this year, which we anticipate will further increase the revenue run rate out of the Georgia facility. Second quarter 2023 adjusted growth margin excluding depreciation stock-based compensation and other non-recurring items was approximately 28%. Our adjusted gross margin continued to be constrained in the quarter by weather-related variables at our California facilities. As you may recall, we experienced excessive precipitation and abnormally cool temperatures this spring, which continued through June. The extreme weather created some unique growing challenges that were exacerbated by facility damage that required repairs and maintenance. This resulted in lower production, which led to a temporary decrease in fixed cost absorption. We are pleased with the team's response and ability to navigate the complex environment and have since resolved these issues. This experience demonstrates the value of a diversified facility footprint and gives us greater conviction in our local approach with current and future build out. Further, I'd remind you of the differences in the legacy PEATS facilities in California versus the new greenfield facilities that we are building. The completion of each of our new facilities in Georgia, Texas, and Washington, the mix of our production with shift towards sites with significantly higher environmental controls, which will insulate us from the weather anomalies that we have been dealing with this year in California. SG&A was 16.7 million in the second quarter, which was down 6.4 million from the prior year period, with the difference largely due to lower stock-based compensation expense. Adjusted SG&A was 7.8 million versus 8 million in the prior year period. Second quarter 2023 net loss was 10.7 million as compared to a net loss of 31.7 million in the prior year period, and includes $6.5 million in interest expense, $4.4 million in stock-based comp, $3.3 million of depreciation and amortization, and a gain on a change of fair value of a warrant liability of $15.2 million. Adjusting for these and other non-recurring items, adjusted EBITDA loss was $8.3 million. From a capital structure perspective, for the second quarter ended June 30th, 2023, We had cash, cash equivalents and restricted cash in the amount of $40.4 million and approximately $67 million of undrawn capacity on our credit facility with Cargill. We continue to believe that we have the necessary capital to reach breakeven adjusted EBITDA by the end of 2024 or early 2025, which is a very important milestone that our entire organization has been working hard to achieve. As previously announced, at the end of the first quarter, We expanded our construction financing agreement with Cargill by up to $110 million for a total of up to $280 million. Then in April, we executed a sale-leaseback transaction for $35 million. We continue to advance our work with a licensed USDA lender to reduce our cost of construction financing and lower our cost of DASH. Taken together, we are on sound financial footing with resources and agreements in place to execute our near-term plan. However, I also want to emphasize that we continue to work on additional strategies to lower our cost of capital while preserving the flexibility that our current agreements allow for. While we remain cognizant of our near-term capital requirements, Our strategic philosophy is longer term in nature, and we are constantly preparing for future growth opportunities. As of June 30th, 2023, we had approximately 8.2 million shares outstanding. On a pro forma basis, including warrants and our employees' restricted stock units outstanding, we have a fully diluted share count of approximately 15.5 million shares. With respect to our outlook, we are reiterating full year 2023 revenue guidance of between 34 and 40 million, representing growth of at least 74% as compared to full year 2022. In terms of our quarterly cadence, we continue to expect revenues to build sequentially through the back half of the year due to our Georgia production expansion with the completion of Phase 1B and our improved service to the distribution centers that we brought online in second quarter. We've only just realized the higher throughput of the Georgia facility, which tempers our anticipated sequential growth for the third quarter. However, we continue to expect a more pronounced lift in fourth quarter, which will benefit from the improved underlying production and the positive impact from Phase 1c's SPAC implementation, which is expected to increase production by 40%. This is expected to have a commensurate positive influence on our adjusted EBITDA as well, which should gradually improve through the balance of the year. And also in fourth quarter, our Texas facility will be coming online. That concludes our prepared remarks. Operator, please open the call for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Kristen Owen with Oppenheimer. Please go ahead.

Great. Thank you for taking the question and congratulations on the nice results. Anna, welcome. You've been in the seat now for a few weeks, so just curious as my first question, what first impressions are, where you see the opportunities? just in the context of the scale of what you all are trying to accomplish over the next 12 to 18 months, how you and Travis and Craig are spending your time to maximize those efforts?

Sure, and thank you for the question, Kristen. You know, I would say at a high level, my focus with the team has been on driving revenue growth, but at the same time, making sure that we have an efficient cost structure Because I don't think it's ever too early in a company's life cycle to be focused on cost out and maximizing efficiencies. So part of that has been making sure that we have the right skill sets in the right places and putting a really, really strong focus on our operational production and processes. Because if you think about these facilities, Georgia, the new facilities coming up, they're far more efficient. similar to a manufacturing operation than to a standard art of grow agricultural facility. We really need to be focused on operational efficiencies, putting the right processes in place, and making sure that we have the right mechanisms to be driving our yield efficiencies as quickly as possible. We're really focused on ramping up Georgia. As Kathy mentioned, 1A and 1B are now online, and we're focused on transitioning to 1C and ramping those up, and then on completing our Texas and Pasco locations and getting those ramped as well.

Great. Thank you so much. So then on some of those cost initiatives, you really describe them as optimization initiatives. And it seems to me that the OPEX level that you guys have been running at, about $60 million on a cash basis run rate annually, based on some of the moves or realignment that you made, how should we be thinking about that cash cost going forward, given the optimization efforts that you're making?

Yeah, I mean, I would say with any bring-up operation, there are tweaks and there are adjustments that are constantly being made that will continue to lower our cost structure at a facility level. I would also say that with kind of some of the organizational changes that we've been making, we don't expect there to be an impact on G&A because we're making moves and making sure that we have the team focused on the right initiatives, I think, That's one of the keys is making sure that across the board we are focused on operating, on driving higher yields, and on controlling our cost structure. So I don't expect there to be any negative impact there.

Great. Thank you so much. I'll take the rest offline.

Our next question comes from Ben Kiley with Lake Street Capital Market. Please go ahead.

All right, thanks for taking my questions, and I echo Kristen's sentiment. Anna, welcome aboard. I have a couple of questions on the quarter specifically. First of all, on the gross margins, you know, Kathy, you talked about the pressure out of the California locations from weather-related issues. I'm wondering if you can elaborate on that a bit, you know, talk about the magnitude of that pressure on gross margins, and then also the degree to which those were between kind of the two buckets that you So it sounds like there was some damage to the facility and also just a facility that was unprepared for adverse weather for growing conditions. So can you talk about how much of the margin pressure was driven by either of those two variables?

Kathy, do you want to take that? Oh, yeah, sure. Thanks, Anna. And good morning, Ben. Thanks for the question. So we talked about it even when we gave our Q1 results, right? Severe rains like March, the greater rains, you know, first time in 40 years that California had seen rains at that level. And what it did for our facility is just heavy wind and rain, right, and lack of sun. And so what that does is it impacts the grow, slows up the production a little bit, and there were instances where, you know, the product was out of spec and incredibly important to us. to provide our customers with, you know, a standard of product that they love, right? Especially out of the Californias because they've been buying the product for 10 to 15 years, right? So lack of sun, slows up production, out of spec, and the level of damage to the facilities was not catastrophic at all. It was small. I mean, but, you know, over the level of years, PEATS historically didn't do a lot of repairs and maintenance. And so now... Once we saw what happened, again, nothing catastrophic, we've put in place protocols for repairs and maintenance. So I'd say the top line revenue was we fell short by $500,000 because of the out-of-spec product.

Okay. Very helpful. Thank you, Kathy. And then my other question, Kathy, you commented.

Let me just also quickly just comment. I'm so sorry, Ben. When I think about those facilities, they've been around, you know, one of them has been around for 20 years, but they just keep ticking. It's like we had our food safety audits in July, and we scored like 98%, 99% on our food safety audits. So that's good. Just wanted to add that.

Yeah, no, thank you. I appreciate that. My other question, you commented on keeping your eyes open for future growth opportunities. I'm wondering in the context of this current market environment where throughout both the vertical and the greenhouse space, there's been just so many bad outcomes here for companies with closures or bankruptcies, how your growth outlook has changed even over the last three months? Because it seems like these news items are really accelerating over the last few months. Has your growth strategy changed? You know in the context of this macro backdrop, or is it really unchanged from where you know where it was even three months ago?

You want me to grab that first in and then you can follow up? Yeah When I think about it right and and it's in every podcast that you've ever seen on local bounty right Craig and Travis did their diligence before they founded Local Bounty because they were running a PE firm and they wanted to invest in controlled environment ag. They ran around and they did their diligence and they felt that there wasn't going to, you know, there weren't a lot of companies out there in CEA that they viewed as being successful largely because they didn't have in place the discipline to develop unit economics, right? And that's actually why they founded the company, right? And so with that backdrop, when we look at what's been going on in the news, it's very difficult, of course, but we, from the very beginning, have had just a mindset of like, hey, we need to be cash flow positive. We need to have positive gross margins. We need to have the appropriate capital in place for us to get there, right? But when I think about our strategy, it's not I would say with Anna coming on board, we think more, we have a much greater focus on operational excellence. We do look at M&A situations where it's a build versus buy situation, but I would say the strategy hasn't changed too, too much other than kind of, as Anna has said, a huge focus on operational excellence. You know, like when I think about the Georgia facility, it's actually now kind of turned the corner and it's running like a manufacturing operation. So Anna, your comments?

Yeah, I mean, I'll just add, you know, we continue to have a really solid foundation in terms of cash on the balance sheet. and, you know, availability of financing. And so, you know, we're going to be really, really thoughtful about growth. We're going to drive, we're going to maximize growth out of our existing footprint. And beyond that, we're always looking at where our customers want us to go and where there's market demand.

Okay, very good. I appreciate the comments from both of you here. Plenty more to talk about, but I'll leave it there. Thanks for taking my questions and I'll get back in line.

Our next question comes from Brian Wright with Roth MKM. Please go ahead.

Thanks. Good morning. Congrats on the quarter and on the progress. Hello, Anna. I wanted to just take, you know, an approach to kind of think about the ramp. as the year progresses. And just wanted to understand, now that we're, you know, in the regional distribution centers with Sam's Club, how do we think about, like, is the focus like the number of stores that are committed through those distribution centers for orders? Or, like, how, you know, how does that process flow just for us to get a better sense of that, you know, of what's on the come as far as, you know, that ran from the back half of the year. That would be very helpful.

Yeah, I mean, so remember that we've just now brought up 1B. And so we're working through ramping up, you know, existing production in the greenhouse. And then once we bring 1C on, we'll start, we'll go through a transition period to ramp up our stack phase and integrate that into the facility. And as we're increasing our yield and as we're increasing our production, we will continue to, you know, move into more distribution centers. But the focus is really on, you know, the demand is there. We need to ramp up the production and maximize the yields that we're getting out of there as we bring up 1C. Okay.

And I just, like, you know... You all see the details, right, but for us, for the outside, it's hard to get a sense for it. So basically you're selling what you're producing out of the Georgia facility, whether it be to the SAMS distribution network or other vendors at this point. It's more of a function of production growth. Is that the way to think about it?

Yes, that is exactly the way to think about it.

Thank you so much. That was very helpful clarification. Thanks. And then just a bigger picture, and I know this might be a little early and unfair, but, you know, that's our job to be unfair sometimes. When you think about, you know, growth opportunities long term, you know, have you thought about, you know, licensing technology kind of, you know, growth through that kind of through those vehicles? Have you thought, you know, licensing the stack info with any at all, or is that something that you would consider?

Right now, we're really wholly focused on getting Georgia ramped up and on getting these new facilities online. and ramped up as well and meeting the pent-up demand that's out there. So that's really the focus for the team at the moment. And I'm excited because, you know, with PASCO and Washington coming online, we really have an opportunity to have consistent processes, consistent workflow, and I'm super excited to see what efficiencies we gain.

Great. Thank you so much.

Ladies and gentlemen, at this time, I'm showing no further questions. I'd like to end the question and answer session and turn the conference call back over to Anna Fabrega, CEO, for any closing remarks.

Thank you. I'd like to thank everyone for joining us this morning, and we look forward to updating you on our progress as we further scale and grow local bounties business in the coming quarters. Thank you.

Ladies and gentlemen, that does conclude local bounties conference call for today. We do thank you for attending. You may now disconnect your lines.