Good morning, and welcome to the Local Bounti's First Quarter 2023 Earnings Conference Call. Please go ahead.

Thank you, and good morning. Today's presentation will be hosted by Local Bounti's Co-CEOs, Craig Hurlbert and Travis Joyner; President, Brian Cook; and Chief Financial Officer, Kathleen Valiasek. 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.localbounti.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 Craig Hurlbert, Co-CEO. Craig?

Thank you, Jeff, and good morning, everyone. We started 2023 on a strong note with the first quarter performance that was consistent with our plan. As we move into the second quarter, our growing operations are progressing nicely. Most recently, with the completion of our Georgia 6-acre greenhouse facility in April and the advancement of our new facilities in Texas and Washington. But perhaps most importantly, we put the financial resources in place to support our business for the long term. This was no small feat given the current economic environment. As we communicated on our last earnings call, we expanded our credit facilities with Cargill by up to $110 million while simultaneously relieving cash needs to fund our operations. Just last week, we built upon that support with the closing of a $35 million sale-leaseback transaction. This cash, combined with the cash available from our Cargill amendment, provides us approximately $58 million of accessible cash to run our operations and scale up our business with the intent to reach breakeven adjusted EBITDA by the end of 2024 or early 2025. Our entire team continues to push our national platform ahead into the future, constantly learning from our own trials and the mistakes of others to become the most capital-efficient CEA platform in the industry. Travis will speak to some of the operational gains that we are realizing with our Stack & Flow Technology in Georgia today and also speak to some additional productivity levers that we will be implementing in the future. These are extremely exciting advancements that demonstrate our unique ability to squeeze the most out of our assets to maximize revenue and cash flow while delivering long-lasting, delicious and sustainably grown products to over 10,000 locations nationwide. Our Stack & Flow Technology continues to underpin our business model as the optimal capital-efficient tool to enhance crop turns and maximize return on investment across a variety of CEA approaches. Beyond our greenfield expansions, the inherent flexibility of our approach also affords us opportunities to achieve greater scale quickly through strategic acquisitions. We are proving that we can continue to drive top-line growth and simultaneously generate healthy margins as we scale the business responsibly and in a capital-efficient manner. This is due, in large part, to the continued gains we are making with our Stack & Flow Technology to drive improving unit economics, which our Co-CEO Travis Joyner will speak to. And then our President, Brian Cook, will provide some further commentary around progress on our various construction projects before our CFO, Kathy, concludes with her financial review and financing update. I am so grateful to work with such a committed and talented team here at Local Bounti. Our success is a direct result of their collective efforts, and I'm honored to help lead this business on behalf of our employees and our stakeholders. With that, I'll pass it over to my friend Travis.

As Craig noted, maximizing our Stack & Flow Technology is foundational to our strategy and will demonstrate the economic advantages of our CEA approach and help us achieve our long-term financial goals. The Stack & Flow is immensely productive and our relentless focus on optimizing the technology continues to deliver impactful results that will cascade through our facility network. Today, our Stack & Flow-enabled production at our Georgia facility, which at this stage is limited to a single stack zone, is online and achieving trial production yields that are 40% to 70% higher than the rest of the greenhouse. As we complete the full stack integration in Georgia, yields will increase over time as we solve to optimize facility output. Our successful integration of Stack with the dynamically indexed gutter system in the Georgia greenhouse will drive enhanced yields with significant automation and labor savings compared to our first facility in Montana. At scale, we believe these enhancements allow us to outcompete the best greenhouse growers by approximately 50%, and the average greenhouse grower by 75% to 100%. Our production statistics are the proof that Stack & Flow generates 1.5 to 2 times the yield of traditional greenhouse growing methods. But we aren't stopping there. While we feel great about the productivity enhancements within the greenhouse, we have similar initiatives in place for our vertical stack production. Through additional optimization of the vertical growing environment, we see an ability to increase output at the early stage of our system by another 20% beyond what we are currently achieving. This is of critical importance for our business and is foundational to our capital efficiency ethos at Local Bounti. Not only do we realize the operational benefits of the higher rates of production on our fixed cost base, but these gains create direct proportionate savings on future capital expenditures. This relationship is highly advantageous and demonstrates our rigorous approach. We do the math on every decision, including the vetting and implementation of technology to improve unit economics. I'll pass it over to Brian for his remarks.

Thank you, Travis. In terms of our scale-up, our workflows are focused on completing projects that generate near-term returns. With that in mind, we are working on completing our Georgia build-out, finishing 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 Phase 1-B was completed and seeding began in April. As a reminder, Phase 1-A and 1-B reflects the site's completed 6-acre automated greenhouse footprint. The completion of the 6 acres will effectively drive distribution of Local Bounti products across the Southeast by the end of Q2 through multiple selling channels. While we have a single stack zone on or vertical nursery operating within the facility, it is largely a horizontal greenhouse at the moment. That will all change once we integrate the rest of the complementary stack zones that comprise Phase 1-C. With the additional capacity brought on with the Stack technology, we will have the ability to open up our product suite to new offerings, strengthening our position as the premier partner in the CEA space. We continue to expect this work will be completed and online early in the fourth quarter of 2023, allowing Local Bounti to deepen our roots in the Southeast. Our new 6-acre facility in Texas is advancing nicely with recent completion of the pad and foundation. 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 the production of our packaged leafy green varieties as well as locally grown living lattices and fortify our national distribution network with localized facilities coast to coast across the southern U.S. We continue to expect operations at Texas to commence in the fourth quarter. The pad and foundation work are also complete at our Pasco facility. True to Local Bounti's mission to deliver superior unit economics, this facility will be comprised of 3 acres of greenhouse that will be supported by multiple stack 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, which continues to reflect our strategy of staggering construction to accommodate the commissioning of our Texas facility in the fourth quarter of 2023. Commercially, I'm excited to see a 13% increased velocity improvement in our current portfolio from 2022 levels as Local Bounti continues to resonate with consumers over quality and freshness. Our mature regions continue to grow, and timing scale velocities in new markets has shortened with successful market strategies. On that note, we are thrilled to confirm we have started shipping to two new distribution centers recently from our Georgia facility, with two additional distribution centers set to come online by the end of the second quarter as mentioned on our last earnings call. These are great wins for Local Bounti and reflect our increasing scale and ability to service large retail customers. Now, I'll turn the call over to Kathy for her review of the financials.

Thank you, Brian. I'll cover our first quarter results and provide a review of our recent financing activities. First quarter 2023 sales were $6.7 million as compared to $0.3 million in the prior year period. Our first quarter results largely reflect production from our California facility and to a lesser extent, our Montana and Georgia Phase 1-A facilities. As previously discussed, we expect improved revenue run rates in the second quarter from Georgia with the recent completion of Georgia Phase 1-B's additional 3 acres of growing space. With this work now complete, we are beginning to fulfill demand and make preparations for the four additional distribution centers that will fold into our network during the second quarter. And of course, later in the year, our Phase 1-C will be complete and come online, further increasing the revenue out of that facility. First quarter 2023 adjusted gross margin, excluding depreciation, stock-based compensation and other non-recurring items was approximately 33%. Adjusted gross margin was impacted by persistent heavy rains, which shut down roads at our California facilities and caused temporary production and delivery interruptions. We also saw reduced customer demand in the Western markets we served as customers made fewer shopping trips during this time due to the inclement weather. First quarter 2023 net loss was $23.5 million as compared to a net loss of $25.8 million in the prior year period and includes $6 million in stock-based compensation, $4.3 million in interest expense, $3.5 million of depreciation and amortization, $1.7 million of business combination and integration costs, and $0.7 million of increased utility costs related to inclement weather. Adjusting for these and other discrete items, the adjusted EBITDA loss was $7.4 million as compared to an adjusted EBITDA loss of $8.5 million in the prior year period. From a capital structure perspective, we ended the first quarter on March 31, 2023, with cash and cash equivalents of $7.5 million. However, this doesn't reflect the incremental financing transactions that we put in place, which provided approximately $58 million of accessible cash to our balance sheet to fund our operations. As we previously announced on our last call, at the end of March, we amended our agreement with Cargill to expand our existing credit facility by up to $110 million to a total of up to $280 million. This expansion provides capital to fund construction at our facilities in Georgia, Texas, and Washington. Just last week, we closed on the second component of the financing via a sale leaseback of our two facilities located in California for $35 million. This cash, combined with the cash available from our Cargill amendment, provides us with approximately $58 million of available cash to support our operations. With this cash in place and access to construction financing via our agreement with Cargill, our focus is shifting to optimizing our capital structure, the results of which would reflect our efforts to lower our total cost of capital. We may pursue additional sale leasebacks for our other facilities in addition to utilizing approximately $90 million of debt funding from a licensed USDA lender to reduce our use of construction financing and replace it with lower-cost debt. I'd note that we added $10 million from this funding source as compared to our last update with you. We anticipate closing on the first $35 million of this funding in the second quarter, with the remaining $55 million closing to be completed at a future date. Naturally, we are very excited about these developments. They provide us with the necessary capital to reach breakeven cash flow by the end of 2024 or early 2025, which is a very important milestone that we've been working hard to achieve. As of March 31, 2023, we had approximately 104.2 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 197.4 million shares. With respect to our outlook, we are reiterating full year 2023 revenue guidance of between $34 million and $40 million, representing growth of at least 74% as compared to the end of 2022. In terms of our quarterly cadence, as I mentioned, we expect revenues to build sequentially through the balance of the year as our Georgia production steps up with the completion of Phase 1-B in April and the four additional distribution centers we are beginning to serve this quarter. Following this, the next lever will be the impact of stack Phase 1-C's completion in the fourth quarter, which will 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, building from the low point we established in the first quarter we reported today. Once again, we believe we have line of sight to positive adjusted EBITDA, and finally, I'd also note that the impact of any potential acquisitions as part of our build and/or bid strategy for growth could potentially change this expectation. We believe this demonstrates the flexibility of our model and the advantages of our approach, which revolves around capital efficiency. That concludes our prepared remarks. Operator, please open the call for questions.

Our first question comes from the line of Colin Rusch with Oppenheimer.

As you get prepared for Phase I-C later this year in Georgia, can you talk about how mature the conversations are with your customers around the products and your ability to hone the growing process for those products right now and when you start to ramp?

Brian, do you want to maybe tackle that question for Colin?

Yes, definitely, Colin. I mean, we're actually really excited by the availability coming online. We do have a lot of demand that has been kind of put on hold as we continue to ramp up the construction of 1-A, 1-B, and 1-C leading into just a full-on commissioning of the product. So, we're really excited about it. We're having a lot of great conversations and we do have more demand than we have availability at this time.

Okay. I'll take the rest of that offline. Just Kathy, on the sale leaseback and the USDA loan, obviously, there's a handful of puts and takes. Can you talk us through your decision-making process and how you're going to look at what's the optimal source of capital for the company with those facilities, whether you look at a sale leaseback or one of those loans?

Yes, sure. So with the advent of the restructure of the Cargill agreement, it's fantastic in the sense that they are allowing other capital providers to come into the capital stack with the goal of long-term, reducing our cost of capital. Obviously, the USDA financing is longer-term, and a much lower interest rate is fantastic, but also the sale leaseback brings cash onto our balance sheet. As we said, we recently brought about $58 million onto our balance sheet, which we have for the sole use of operations for the coming quarters, which is fantastic. But again, the lowest cost of capital is USDA financing and also sale leasebacks, both of which we are considering for our current facilities, but also as we look to the future for the facilities that will be planning to build in the Northeast and other locations throughout the country.

And then the last one is just really around the acquisition pipeline. Obviously, with the demonstration of the efficiency of the technology, can you talk about the inbounds that you're getting from folks that may want to partner with you and the flexibility or creativity that you might be able to approach some of those deals? You mentioned it earlier in the call. I just want to get a sense of how we might think about the cadence of that sort of activity.

Yes. Colin, I think it's typically directly tied to their own capital situation. And so, the timing of these is varied a little bit, but the consistency of what's being asked for and what's being looked at is there. Our technology gives us the ability to bring on different types of technologies to help us do multiple things, one, which would be geography, the other would be talent, etc. So we're taking these on. We have a team of people that are able to quickly evaluate what each specific opportunity could mean to us. We have a robust way of looking at these. I would just say it's a very real possibility. It's something we're looking at as evidenced by obviously what we did with Pete's and something we're not going to shy away from, but it's got to be the right opportunity for us and for our shareholders, obviously.

Our next question comes from the line of Ben Klieve with Lake Street Capital.

All right. First one on the announcement today that you expect capital to be sufficient to get you to EBITDA breakeven. Can you clarify, is that expectation around production solely from the locations that we know about: California, Georgia, Texas, or Washington? Or do you include expanded production beyond those locations either organically or inorganically to get you to EBITDA breakeven?

Kathy, do you want to take that one?

Yes, sure. It's with the existing planned facilities.

Excellent. And then, I guess, one clarifying question on that. Does that include the integration of the Stack phases into California or not?

It does not.

Okay. Great. And then one other one for me, around the adjusted gross margin, the line item of a utility price spike. Can you elaborate a bit on what this is and what is now being reported a couple of quarters in a row? Is there any concern of kind of a more permanent increase in utility costs from certain locations? Or do we really think this spike is one-time in nature just over a couple of quarters?

I'll go ahead and take that one. It is just that we saw it in Q4 and Q1, and it's already way back down to even prior, more like where we were in Q3. So we definitely feel it was a one-time hit. In fact, we might even get a credit back from the state.

Okay. Very helpful. Plenty more to talk about, but I'll leave it there.

Our next question comes from the line of Chris Barnes with Deutsche Bank.

I guess, I'll just pick up where Ben left off on the gross margin. It contracted meaningfully from what you earned in the fourth quarter. And I know you highlighted the heavy rains causing production and delivery interruptions and reduced demand. But is there any way to parse out what your gross margins might have been without these one-time items? I'm just trying to get a sense for how we should think about gross margins from here over the balance of the year and into the future, just as we try to marry that with the expectation of breakeven EBITDA by late in '24 or early '25.

Sure. And it's such an important one, right? But we feel that we will be back to between 35 and 40 consistently each quarter. We had a lot of one-off things that happened in California. But what will happen, you'll see as we continue to scale with the other facilities, the risk in that one facility that we saw in Q1 is diminished. So if you take away the one-time for California, we would have been at 38% for the quarter.

Got it. That's helpful. And then second, I just wanted to ask for an update on the consumer reception you've seen from your heat and eat meal kit products that you launched earlier this year. Like how has demand performed relative to your expectations? And what are you seeing in terms of repeat like have you expanded these products into other Sprouts stores or even into other retail banners? Or is it still too early for that?

Thanks, Chris. Brian, do you want to take that one?

Yes. Thanks, Chris. So we're actually currently looking at a package redesign right now on the heat and eat items. When we did our initial testing, they held well through the cycle. But as they've kind of gotten to the stores and are merchandised within the regular retail systems, they weren't lasting as long as we had hoped. So, we're actually taking a step back on the heat and eat items specifically to take a look at the packaging that we have it in now and looking to relaunch it in the near future.

Our next question comes from the line of Brian Wright with ROTH MKM.

I just wanted to ask a question about kind of future facility costs, given commodity pricing as it has started coming in this year, and just how to think about that going forward? Is that something that's a potential longer-term benefit if commodities kind of keep going what they've been doing in the past 6 months?

Kathy, Brian, do you two want to maybe tackle that question? It's a good one.

Yes, sure. So in terms of facility build, I mean, we're on budget for the facilities that we have coming online in '23 and '24. And we're not seeing a lot of impact one way or the other. That's my sentiment. Brian, do you have anything to add?

No, I don't have anything to add. I think that's probably what we're seeing out there right now.

Okay. You mentioned the effect of weather on the gross margin in California this quarter, but you also noted it impacted sales. Can you provide any estimates regarding that?

I don’t know if I can actually, well, go ahead, Brian, do you want to go for it?

Yes. I mean, I think just from an overall demand perspective, everything has leveled back up. We had seen some continued operational levers that we had to update in April as part of this to kind of get things and get demand or supply back up. But as far as the demand looks, everything is back on track. Customers are putting in orders and actually increasing to get volumes back to what they usually have in stock.

And I'll just add to that. I mean, just even being a consumer, I've lived in Northern California for 25 years. This Q1 of 2023, the level of rains were so strong and so prolonged. I've just never experienced anything like it in the years that I've been here. It rained, frankly, like a Northeast heavy rain for days and days straight. It was just a complete anomaly and what it drove was even myself, personally, my family, we didn't want to leave the house because the rains were so bad that it was actually dangerous to a certain degree to be out on the street. I mean, I'll sort of say it maybe I shouldn't say this, but like even Kevin Costner announced that he couldn't make it to the awards ceremony because he couldn't leave his house because the roads were shut down. It was just a complete anomaly and folks just weren't shopping as much because they weren't leaving their house.

Okay. Great. And then lastly, is there a way to assess our significant presence in the distribution centers in Georgia? How should we approach metrics going forward regarding penetration in stores, especially in urban areas? Are there any indicators we can consider to help us understand potential market share gains within those distribution centers?

Yes. Thanks, Brian. Good question. Brian Cook, maybe you want to tackle that one?

Yes, I could jump in on that one. So the big thing right now around the Georgia penetration is, we are, first and foremost, taking care of our contractual obligations with Sam's Club, which has now kind of gone out across the full Southeast. We do have customers outside of that as well. So we haven't put an official like, okay, here's how many doors we're in officially across the Southeast. But we could start looking at it and report that out as total door count for the Southeast coming out of that Georgia facility moving forward. But we haven't really looked at it too much yet because we've really been focusing on getting all the Sam's Club DCs onboarded up until the end of Q2, and then we'll be moving on with the 1-B now coming online, which, again, we said we seeded. We're not going to have product availability until late May for that product. What that will do is give us the availability to go out into multiple more doors that we have waiting in the wings here where people are excited to get our product in the stores.

Thank you. Ladies and gentlemen, there are no further questions. This concludes our Q&A session. I'll turn the floor back to Mr. Hurlbert for any final comments.

Thank you so much. I would just like to thank everybody for joining us this morning, and we sincerely look forward to speaking with you all again. In the meantime, we're back at it. Everybody, have a great day. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.