Greetings, and welcome to Local Bounti's Third Quarter 2023 Earnings Conference Call. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Jeff Sonnek, Investor Relations at ICR. Please go ahead.

Thank you, and good afternoon. Today's presentation will be hosted by Local Bounti's Chief Executive Officer, Anna Fabrega; 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 Anna. Go ahead.

Thank you, Jeff, and welcome to everyone on the call. I'd like to start today's call by highlighting some of our recent accomplishments, and then I'll share some insights on the operational improvements that we are integrating into our business. Kathy will round out the call with her financial discussion before opening the call for your questions. I continue to see incredible opportunity ahead for Local Bounti. We believe our patent-pending Stack & Flow Technology, which combines the best aspects of traditional greenhouse approaches with vertical growing technology, is an efficient solution that can help solve food shortages globally. In early October, we completed the build-out of our Georgia facility with the finalization of Phase 1-C. This represents the final phase of construction and was focused on the integration of our vertical plant incubators, which we call Stack. This is a huge milestone for us as it creates, for the first time, a large-scaled growing facility that brings together all the technological advancements that our team has developed at our Hamilton, Montana facility. It is also a model for our facilities in Texas and Washington that are expected to open in the coming months. And perhaps most importantly, this greater capacity at Georgia will allow us to double our shipment volume to our large club customer under our offtake agreement, and we expect to see increased deliveries in the coming weeks. Given the significance of the planned increase in shipments, we took the time to thoughtfully calibrate our workflows and optimize our operations as Georgia's Phase 1-C Stack integration process was underway to account for the larger footprint and 40% greater capacity generated by the Stack system. This involved taking an intentional look in the mirror and scrutinizing every level of operations to identify points of friction and how best to resolve them. This is the natural next step for Local Bounti following the development and integration of our patent-pending Stack Technology. We are now focused on leveraging the opportunity we have with Stack & Flow by implementing a production system that is focused on eliminating waste. Some of the key elements that we have put in place as part of our production system are hiring facility level leadership with operational background at all levels, hitting benchmarked productivity goals, implementing standardized workflows for all processes, providing transparency to all associates so there's a clear view of performance, and advancing our ability to execute just-in-time production. I'd like to emphasize the focus that we are bringing to the organization with respect to operational execution. We've made large commitments with these build-outs to support retail partners that are key to leaning into this category of fresh, local and sustainably grown produce. It is absolutely imperative that we identify and implement replicable operating standards across our growing facilities to create the efficiency that underpins our long-term goals. After all, it is because of our unique ability to combine sustainability, efficiency, and quality at scale that we are able to attract leading global retailers like Sam's Club to Local Bounti. In order to achieve our goals of 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 Bounti for success. As part of this process, we have optimized our organizational structure and continued to add key talent to help accelerate our strategy. Most recently, we've appointed Bimal Patel as our Chief Operating Officer. Bimal brings to our team over 30 years of progressive experience in operational leadership at several global blue-chip companies, including Amazon, Whirlpool, Ford, and UPS. Prior to joining us, Bimal worked at Amazon for 11 years as its Regional Director of Operations, and most recently served as the Worldwide Director of Amazon Logistics, Planning, and Engineering. We are leveraging Bimal's deep expertise across operations, process engineering, and logistics to ensure that our organization is optimized to drive efficiencies across all facets of our business, providing us with an opportunity to demonstrate how Local Bounti is redefining agriculture. The third quarter marked a transition period for Local Bounti. We continue to work hard to perfect the art and science of our technology, and the result is a standardized and hyper-efficient manufacturing process, which we can replicate across our growing footprint. Beginning in the fourth quarter, we entered a new upward trajectory, and with the focus we are putting on our operations, 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. I look forward to demonstrating our progress in the quarters and years to come. With that, I will turn the call over to Kathy.

Thank you, Anna. I'll begin by providing an update on our facility scale-up before covering our third quarter financial results and full year 2023 guidance. At our Georgia facility, we successfully completed the integration of the Stack's zones that comprise Phase I-C in early October and immediately commenced operations, beginning the seeding of the vertical nursery. This is a significant milestone for Local Bounti. It is a model that we are working to replicate at our Texas and Washington facilities. We continue to make great progress on our 6-acre facility in Texas. In the third quarter, we shifted our focus to the installation of the Stack zones and greenhouse growing systems. We continue to expect operations at Texas to commence in the fourth quarter of this year. The similar design of this facility to that of Georgia will allow for synergistic operations and management of the two facilities. 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. Construction at our Pasco, Washington facility remains on track, and we continue to expect operations to commence early in the first quarter of 2024. When complete, the facility will be comprised of 3 acres of greenhouse, which will be supported by multiple Stack zones. This location will help bolster the company's distribution capabilities in the Pacific Northwest. 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 third quarter results. Third quarter 2023 sales were $6.8 million as compared to $6.3 million in the prior year period. Our third quarter results largely reflected production from our California facilities and, to a lesser extent, our Georgia and Montana facilities. Our sales growth in the quarter was limited by two primary factors: first, the temporary closure of a section of one of our California facilities in order to make necessary repairs following weather-related damage from Q1, which impacted sales by $500,000, and has since been repaired and resumed normal operations in early October; and second, our operations in Georgia experienced some periods of lower utilization during the Phase 1-C integration, as we took the opportunity to thoughtfully redesign our workflows and optimize our operations to account for the larger footprint and 40% greater capacity generated by the Stack system. This shifted revenue from Georgia into the fourth quarter as we work with our key customer accounts on preparing for a ramp and expanded distribution ahead of the holidays. With the Phase 1-C Stack integration complete and the facility fully functioning in October, we expect to increase the revenue run rate out of the Georgia facility in the fourth quarter of 2023. Third quarter 2023 adjusted gross margin, excluding depreciation, stock-based compensation, and other nonrecurring items, was approximately 25%. Our adjusted gross margin was constrained in the quarter primarily by the lower utilization that I mentioned at both California and Georgia facilities. SG&A was $14.4 million in the third quarter, which was down $5.8 million from the prior year period, with the difference largely due to lower stock-based compensation. Adjusted SG&A was $7.5 million versus $7.1 million in the prior year period. Third quarter 2023 net loss was $24.3 million as compared to a net loss of $27.1 million in the prior year period, and includes $7.1 million in interest expense, $3.3 million in stock-based compensation, $3.4 million of depreciation and amortization, and a gain on a change of fair value of a warrant liability of $1.8 million. Adjusting for these and other nonrecurring items, adjusted EBITDA loss was $9 million. From a capital structure perspective, for the third quarter ended September 30, 2023, we had cash, cash equivalents, and restricted cash in the amount of $18.3 million and approximately $38 million of undrawn capacity on our credit facility with Cargill. Additionally, Cargill has agreed to provide Local Bounti $10 million in additional working capital, subject to certain terms and conditions precedent. We anticipate closing on this transaction in November. I also wanted to provide some further context around how we are using our various capital facilities and the timing impact it has on our cash. For example, as we spend cash on CapEx, traditionally, there was a 30-day period before we got reimbursed through our Cargill line. We were successful and accelerated this reimbursement rolling forward to 15 days, which will improve the cash level to operate the business. 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, or a total of up to $280 million. In April, we executed a sale-leaseback transaction for $35 million. We continued to advance our work with a licensed USDA lender to reduce our use of construction financing and replace it with lower-cost debt. Local Bounti has executed a Conditional Commitment Letter and expects to enter into additional Commitment Letters from a commercial finance lender for total financing of up to approximately $228 million to fund its 2024 greenfield build and facility expansions. We expect to close on the financings within 60 to 75 days. With all of these pieces taking shape, we believe we are on track to have the resources and agreements in place to execute our near-term plan. However, I also want to emphasize that we are continuing 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 September 30, 2023, we have approximately 8.3 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 15.6 million shares. With respect to our outlook and in consideration of our year-to-date performance, we are revising our full-year 2023 revenue guidance to a range of $30 million to $34 million. As we've mentioned previously, we continue to anticipate a more significant revenue acceleration in the fourth quarter of this year, which will benefit from the improved underlying production and the positive impact from Phase 1-C's Stack implementation, which is expected to increase production by 40%, as well as our Texas facility coming online in the fourth quarter. With respect to our Georgia production, we are preparing to double our shipment volume to our large club customer under our offtake agreement and expect to see increased deliveries in the coming weeks. The timing of this ramp, coupled with our decision to implement some operational improvements during our Stack implementation, accounts for the change in our guidance. In summary, we are working hard to scale up the business and have reached a significant milestone with the completion of the Georgia facility. So despite our ability to secure the funding for our currently planned projects, which we believe will take us to breakeven cash flow, the market is not currently trading on the fundamentals of the business as we work on our operational execution, and we believe that our market cap is not reflective of the value of our company. As such, a number of executives intend to look at making open market purchases in the near term to demonstrate our belief in the company's long-term strategy and future success. Further, we are also implementing a measured stock repurchase authorization of up to $1 million to support shares and take advantage of the market dislocation. That concludes our prepared remarks.

Ladies and gentlemen, we will now be conducting a question-and-answer session. And our first question comes from the line of Kristen Owen with Oppenheimer.

I wanted to ask about some of the learnings in the Georgia facility. You mentioned this in the prepared remarks, and it seems as though you took some opportunity in the quarter to implement some of those learnings. Can you walk us through or just expand on some examples there and particularly with Texas being more of a greenfield facility versus Georgia, which was more of an existing facility? Just how we should think about the ramp of Texas as compared with Georgia?

Kristen, thanks for the question. So recall that Georgia initially started as a 3-acre facility, and we later added 1-B as an expansion. As we ramped up growth capacity and now with Stack as well, we had to really take a hard look at the process flow throughout the facility, looking at everything from how to move product through equipment like a harvester and a pack layer more efficiently, how to ensure that you have minimal downtime, and how to reduce complexity. So even looking at how much conveyor should be used for product to pass before being packaged, or how to minimize changeover time when we change pack size, for example. Each one of those points has been evaluated and we have created what is typical of manufacturing industry standard work, so that it's really people can be very flexible within the operation. We can operate with minimal shifts but still support that 40% increase in yield. And you asked about Texas. Texas will ramp up significantly faster because, one, we have the standardized processes in place. But, two, we also designed for the Stack & Flow process from the onset. Therefore, there won't be as much retrofitting and redesign that we have to manage as we try to optimize that flow for the greatest amount of efficiency.

Okay. That makes sense. So when I think about the guidance and fourth quarter sales implied about $11 million, how should we think about that in terms of the run rate going into 2024, understanding that Texas will be commissioning and so probably not a big contributor in the fourth quarter?

Yes. So I think we talked about Georgia as we ramp up Phase 1-C, which will double our shipments to our Club customer and increase production by about 40%. Texas will be ramping up in December. And typically, it takes some time just to fully run the operation, but we expect to be seeding by the beginning of the year.

And then, go ahead, Kathy.

Yes. I was just going to throw in, in terms of a revenue perspective, Texas is less than we might have thought earlier in the year.

Okay. That's helpful. And then, Kathy, actually a follow-up, last one for me. To the extent that you're able, just anything you can say about the USDA bank construction facility, any early indications from those discussions impact to total cost of capital, just how to think about that over the next 60 to 75 days?

Yes, sure. So as we've said earlier, a couple of quarters ago, we restructured our agreement with Cargill such that they are allowing lower cost of capital to come into the capital stack, and we are considering and looking at term sheets actually on each of the facilities for long-term takeout of Cargill for long-term at much lower USDA rates.

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

First, I want to ask a question about the Conditional Commitment Letters that you noted in your prepared remarks. I want to make sure I understand this correctly. So the $228 million of capital that you're referring to here, this is incremental capital above and beyond the existing facilities through Cargill, and this is for 2024 greenfield build and expansion beyond what we already know is in the works in Texas, Georgia, and Washington. Are those both correct statements?

Yes. Exactly.

Yes. Okay. Okay. Great. And the USDA-backed loan is a part of that $228 million or is that separate as well?

It is separate. It's above and beyond.

With the fourth quarter outlook, I would think at this point, you've got a pretty good sense of where you're going to come in on the quarter. So can you talk about the big drivers between the high and the low end of your range? What you're not sure if it's going to come through or not in the period?

Do you want to take that, Kathy?

Yes, sure. Are you referring to our reset of $30 million to $34 million?

Well, yes, I mean what needs to happen to hit $34 million versus $30 million.

Yes. So great question. Just the speed with which we get Stack up and running is a piece of it. We did say that we seeded early in October, but it's a large number of Stacks, right, in the facility. And so it's just the ramp and the speed with which we can get that up and running, so to speak. And as we did mention, that California, we had an issue in Q3, but that one section is back up and running. So we should be great there. And then also just any timing for Texas coming online.

And then last one for me, and I'll get back in line. Regarding California, for several periods in a row now, there's been some challenges that you guys have thought through there. Can you talk about your view on the long-term outlook for those facilities? Are these two facilities ones that you think are going to be in your business for the foreseeable future? Or are you considering any kind of strategic initiatives around these given the challenges that you've had here for several periods in a row?

Yes, I think...

Go ahead, Kathy. Go ahead.

It is still so much about the crazy weather that we saw in Q1 in California. And one of the things that I'll say right next to the facility for literally 20 years was a dry lakebed. And the rains were so strong in Q1 that there's now actually a lake there. The level of rain was so significant that it had all sorts of implications for both facilities, actually. But we definitely feel that both of those facilities are humming along, and we consider them very, very important in our outlook moving forward. But of course, we are also looking to expand possibly on the land of one or either of those facilities. So although we have had issues this year, it's really just temporary.

Yes. I'll just add in regarding the question that we closed for repairs. We've been investing quite a bit in the infrastructure of these facilities. And we made the decision that rather than trying to make repairs and operate in that particular section, it would be better for our employees and safety to close it down so that we could really get in there and make the repairs as quickly as possible. So Kathy said, they are still really important facilities for us, and we're evaluating right now how we can fortify against other events like that going forward.

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

I wanted to follow up on the Georgia facility with 1-C being completed and the impact on the yields that occurred. There was more than just typical seeding at 1-A and 1-B that may have taken place, regardless of whether the Stack was operational. For planning purposes, I seem to be struggling logistically, and while I'm sure there’s a simple answer, I'm having difficulty visualizing it since I’m not there.

Visualizing the situation is challenging for me.

On what happened with the lack of ramp in the Georgia.

Yes. So we operationalized 1-B, and we had to adapt and adjust to having those 6 acres and production plan to incremental volume than what we had at the 3 acres. 1-C was originally planned to go up earlier in the year, and it was delayed. As part of bringing up 1-C and starting the seeding process, we also took a step back to ensure that we had the workflow in place to support that incremental volume that would now be coming through as Stack was brought on board. So as Kathy mentioned, we started seeding in the beginning of October, we are now working that product through the system and feel really good about the process and efficiency we have going through there, but that's not reflected in Q3, clearly.

Sorry, I just wanted to follow up. The seeding beginning in October, are you referring to seeding at the Stacks or...

Yes. I mean it was honestly with the advent of our COO, Bimal Patel, coming on, Brian, it was a very, very conscious effort and decision regarding the processes he put in place, workflows, and optimization of operations. We realized we made a conscious decision here to go slow in order to go fast.

I'll give you an example. In that facility, we have one harvester. To ensure that we can operate that harvester at maximum speed to run all of those products through, plus the incrementals, requires some process engineering work that we've had our engineering team engaged on. If we're mixing salad greens, those greens go to a mixing belt: how can we reduce the amount of time that it takes to get those greens from the harvester to the packaging machine? Is there a different way we can mix it that doesn’t require it to go to the belt? So it's every single point in the process, we're looking at in minutes and seconds, and trying to optimize that flow so that at 40% greater capacity, we're not creating any bottlenecks at the end of the process.

Okay. I just wanted to confirm if you're still selling everything you're producing, as you mentioned last quarter.

Yes.

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

I guess, I just wanted to ask on gross margins. The 25% this quarter was quite noticeably weaker than the 2Q last quarter. I know you've cited the weather challenges in California and start-up costs in Georgia. But, I guess, I'm just trying to understand, like, last quarter, you said the weather issues were resolved and in this quarter, they came back. So what really is driving the weaker margin? And then like just going forward, as revenue scales up at Georgia, in Texas, and in Washington, do you have a line of sight to getting back to like a mid-30s gross margin? Or is it going to be structurally lower than because just year-to-date, it's come in quite a bit and just continues to do so? Just so I'd love your thoughts there.

Yes. Chris, thanks so much for the question, and I hear you. It is very frustrating for us. But yes, we absolutely have line of sight to get back to where we were. In California, it was so much of getting through the food safety audit, the shutting down of one section of the facility, and we had to surge headcount. It was essentially a one-off, and even this quarter, we will be back up and running at our normal gross margins. I know it was definitely disappointing for us also, but we will be back on track this quarter.

I guess, just what's your confidence level around that? Obviously, there are things that have come in out of your control. So, I just want a little bit more color around it.

Yes, I hear you. My confidence level is very, very high. We had to bring in a bunch of temp labor at both facilities. Just in Georgia, we were surging headcount to be sure that we could get Stack up and running. In California to get through the food safety audit and certain repairs and maintenance around shutting down this one section. Because just the utilization was lower. But for both facilities, the headcount is already back to normal.

I appreciate that insight. I have a follow-up regarding capital allocation. You've mentioned that management is selectively repurchasing shares and introduced a $1 million repurchase program. Considering the current debt levels on the balance sheet and plans to support growth with additional debt, is buying back shares truly the most effective use of capital? I understand your points about valuation and the program's size, but is that $1 million for repurchasing really the best option for your capital at this time?

Sure. I'll go ahead and take that one, and Anna, and then you can add any comments. Chris, I hear you. So there's two things going on. We sped up the earnings release so that we could get information out into the market, and also there are certain executives that want to buy shares. There are executives that are buying shares, and then there's the share repurchase program. Part of it is, as you see, the trading every day, the volume is only 20,000 shares. It's obviously not any institutional activity or insider activity, and I hear you on the $1 million. It is over a 12-month period, and it's something that we will use if we feel that it's needed.

Ladies and gentlemen, there are no further questions at this time. I would like to hand the call back over to management for any closing remarks.

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

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