Kalera Public Limited Company (KAL) Earnings Call Transcript & Summary

Good morning, and thank you for joining us today to discuss Kalera's financial results for the third quarter of 2022. Yesterday evening, we issued our earnings release, which is available in the Investor Relations section of our website at investors.kalera.com. With me on today's call are Jim Leighton, President and Chief Executive Officer; and Fernando Cornejo, Chief Financial Officer. We will begin with prepared remarks and then take your questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements as defined under federal securities laws. Forward-looking statements are identified by words such as believe, expect, intend, estimate, project, anticipate, will, plan, design, may, should or other comparable words and phrases. Statements other than statements related to historical facts such as statements regarding future results of operations and financial position, our business strategy and plans, and our objectives for operations are also forward-looking statements. Our actual results or performance could differ materially from those contemplated by such forward-looking statements. A discussion of the risk factors that could cause a material difference in our results compared to these forward-looking statements are contained in our SEC filings, including our report on Form 10-Q. Kalera assumes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after today. With that, I will now turn the call over to Jim Leighton.

Thank you, Julie, and good morning, everyone. We appreciate you joining us today on our third quarter 2020 earnings call and for your interest in Kalera. The last several months have been transitional for Kalera. The long-term outlook for regenerative food systems, controlled environmental agriculture, vertical farming and Kalera remains extremely bright. And my optimism for the future of these new forms of agriculture has never been stronger. However, what has undeniably changed over the past 6 months are the capital markets and the availability of capital for micro-cap companies like Kalera. The volatility in markets and interest rates this year have been, at times, unprecedented and require us to remain flexible and maintain optionality. As I shared with you last quarter and at our analyst event in September, my #1 priority since taking the helm as CEO earlier this year is to achieve profitability in our working U.S. farms and in the company as a whole as quickly as possible. We're making great progress on this goal, and I'll provide more details in a moment. Let me first share with you what we must do to achieve our #1 priority. There are 3, and I repeat 3 imperatives to achieving our profitability goals. Number one, materially reducing our cash burn in operating expenses, capital expenditures and general and administrative expenses. Two, complete the necessary enhancements to our U.S. farms to expand capabilities to produce a wide range of products, allowing us to sell more volume and thus increase the utilization of our farms. And three, solve our capital needs and liquidity challenges. Now let me turn to how we're going to achieve these 3 imperatives. As we outlined last quarter, we halted capital investments in our international farms and nonoperating U.S. farms with the exception of St. Paul. We made the decision to divest our international assets, thereby eliminating capital and operating and G&A expenses from our monthly cash burn. We are also well into the process of seeking a buyer for Vindara. This will both reduce our cash burn and potentially bring in necessary capital under the business. In both of these cases, we believe that we will still benefit from the technology and the market potential of these businesses while not carrying the burden of monthly cash outflows of businesses in their start-up and cash burning phases. We intend to retain upside in the international business if we want to reengage at a later date. Kalera and many of our customers will still benefit from our great relationship with Vindara in areas of efficiency, quality and innovation. The sale of these businesses will result in a significant reduction in capital, operational and G&A expenses, allowing us to achieve cash flow breakeven much quicker than if we continued supporting these businesses financially. This is in the best interest of all of our shareholders as we reduce our monthly cash burn by approximately 50% in the areas of capital and G&A. Next, we are aligning our organizational structure to support the execution of our strategy by reducing G&A to better reflect the size of our current business. Majority of these savings will come from the divesting of our international assets. Optimizing our corporate structure to fit the new size of our business will reduce corporate G&A expenses by approximately 50% annually. These actions to reduce our G&A and capital expenditures will be fully executed and in place early in 2023. To be successful, will require continued investment in our U.S. farms. To this end, the public stock offering we completed last month allows us to continue these investments as well as provide the necessary liquidity to run our business. I want to be clear that the most recent public offering did not solve all of our investment and liquidity needs, but it did provide us some runway to continue making significant strides in achieving our financial objectives. At our analyst event in September, we told you we needed to invest $50 million in the business to reach profitability at the farm level by the end of 2023. By divesting international assets in Vindara, we estimate to reduce that need by approximately 22%. We expect to reduce the gap further through various strategic options we're investigating to properly capitalize Kalera. Fernando will discuss in more detail the potential sources and use of these funds. Our vision and new strategy for Kalera is already realizing its benefits and is on track to deliver profitability at the farm level in 2023. To demonstrate the improvements we're seeing in our business, I want to take just a few moments to highlight some of our third quarter results before Fernando reviews those results in more detail. Our revenue more than doubled compared to Q3 last year as we benefited from growing customer relationships, higher volume and improved product mix as we executed our strategy to better balance our mix of volume between foodservice and retail channels. In fact, we added 165 additional retail stores in the quarter for a total of nearly 1,500 at the end of Q3. Kalera products are in demand and the value proposition for our customers and consumers is clear. On the bottom line, we saw a real and sustainable progress in our operational metrics. We are consistently hitting our yield targets. On both the top and bottom line, we are meeting or exceeding our goals, and we continue to push forward to reach profitability in 2023. I'll now turn the call over to Fernando for the financials.

Thank you, Jim. I will begin our discussion with a summary of the third quarter results. On Slide 6, total revenue increased to $1.7 million, a 109% increase over third quarter last year and a 30% increase compared to the second quarter this year. The increase in revenue reflects sales increases at all operating facilities, plus the Denver facility that opened in Q2 2022. The increase reflects overall growth from whole head products and also the launch of loose-leaf products at the end of Q3, which supports our 2023 profitability strategy. Cost of goods sold was $5.9 million compared to $2.1 million in the prior year period. This includes all operating costs for Orlando, Atlanta, Houston, Denver and Kuwait markets. SG&A expenses totaled $10.8 million compared to $7.4 million in the third quarter last year and $24.6 million in Q2 of this year. The year-over-year increase was primarily due to increases in additional resources to manage 5 farms in 2022 compared to 3 farms in 2021 as well as additional expenses associated with being a NASDAQ-listed company. Operating loss for the third quarter was $20.7 million compared to a loss of $11.1 million for the third quarter last year. The operating loss included a one-time noncash expense of $2.3 million for asset impairment related to the Hawaii and Columbus facilities. Adjusted EBITDA loss was $14 million. We recorded 2 changes in fair market value during the third quarter. These are noncash items. One was a gain of $13.3 million was recorded for the change in fair market value of the earnout liability compared to 0 last year. Also a net gain of $6.5 million was recorded for the change in fair market value of the private warrant liability compared to 0 of last year. Turning on to Slide 7. We saw sales growth in both Retail and Foodservice in the third quarter for a total of 109% growth over Q3 of last year, with more growth shifting to higher-margin retail products. For the 9 months comparison, we saw sales growth of 173% increase over last year. We had several noncash items during the third quarter, as noted on Slide 8, including a $19.8 million change in fair market value for contingent value rights in connection to the earnout of Kalera SA shareholders and change in fair market value for warrants in connection to the private placement. The total impact for all noncash items was $17 million for the quarter. Moving on to cash flow and the balance sheet on Slide 9. For the first 9 months of 2022, cash used in operating activities was $49.4 million compared to $10.3 million for the same period last year. The use of cash was mainly driven by expenses from new facilities that opened in the second half of 2021 and during 2022 and the expenses related to the closing of the Agrico business combination in June this year. Cash used in investing activities during the first 9 months of 2022 was $23.4 million and was primarily concentrated on investments in the Denver, Seattle and St. Paul farming production facilities. That compared to $110.1 million that was invested in Atlanta, Houston, Denver and Seattle farming production facilities in addition to the acquisition of Vindara in the same period last year. Cash from financing activities was $157.4 million in the first 9 months of 2022. We compared to $63.2 million in the same period of last year. This resulted in cash and cash equivalents of $2.3 million as of September 30, 2022. Turning on to Slide 10. We took important steps to increase our liquidity and strengthen our balance sheet. First, we added approximately $6 million from farm credit, and we also added up to $4 million in financing from the convertible loan. Also, and as mentioned on our last quarter's call, we executed a private placement in the amount of $10 million during the third quarter. Subsequent to the close of the quarter, we also raised $8.8 million before fees and expenses through a public offering. In short-term liquidity, we have up to $6 million under the existing $20 million convertible loan program. In addition, on October 18, we announced our plans to divest our subsidiary, Vindara and the assets of our international business. We expect these divestitures will address our strategy to bring our farms to cash flow positive much faster than anticipated while reducing capital requirements for all Kalera Holdings. And now I will turn the call back to Jim.

Thank you, Fernando. I know we've given you a lot of information to take in, and I understand investors' frustrations with a rapid pace of change at the company. but sometimes meaningful rapid change is necessary to achieve long-term objectives. What I want investors to know is that the transformation to cleaner, sustainable agriculture is here, and it's happening now, and I believe Kalera is better positioned than anyone in vertical farming to be successful with the support of our investors, the financial community, our customers and our many, many stakeholders. Our products are fresh, local, nutrient-rich leafy greens are in demand, and our national footprint and CPG positioning provide us a concrete competitive advantage. The consumer has already moved up the adoption curve for our produce, which means the demand is there. We just need to fill it. Our current valuation does not reflect our long-term growth prospects or our approximate $270 million in assets or our improved operational performance or our road map to profitability. We are operating in a leading and a new industry, and that comes with a certain level of uncertainty, and the recent market volatility has added an extra layer of challenge out to our business. But I can tell you that I believe in this company, our people, our customers and our ability to provide transformative product to the market, and we will continue to work every day to create value for all of our stakeholders. That concludes our prepared remarks. We'll now begin the Q&A portion of our call.

Thank you. We will be joining for Q&A. Our first question, can you provide an update on your sales process for international?

Yes. I believe that question comes from Brian Wright at ROTH Capital. So Brian, thank you for the question. Yes, let me go over both the sale and divestitures of both Vindara as well as international because although they are somewhat related, the outcome of each is a little bit different. As I stated earlier on the call, we're well into the process of selling Vindara. We engage top capital to lead this effort to ensure we maximize shareholder value. And internally, Dr. Jade Stinson, who is with us today, is really leading that effort for us with ROTH. So maybe, Jade, if I could ask you to give a brief update relative to where we are.

Yes, we're deep into the process, and we anticipate a firm offer some time in December to close the deal by year-end.

Great. And as it relates to international, international is not as far into the process, but we have initiated a formal process to sell the assets, as we indicated in international and have a number of parties who are looking at those various assets, which includes our facility in Singapore, facility in Kuwait and [ Endeavor ] in Germany. Thanks for the question.

Next question. Can you give us an update on your progress with US Food relationship?

Yes, I'd be happy to. Joining us on the call today as the President North America, Austin, Martin Austin, could you take that one?