Business context and reporting period
Local Bounti Corporation is a controlled-environment agriculture producer of leafy greens, herbs and related produce. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022. The company acquired Pete’s Produce on April 4, 2022; reported 2022 results include Pete’s only from the acquisition date, so comparisons with 2021 are not like-for-like.
Pete’s brought three greenhouse facilities and distribution to approximately 10,000 retail locations across 35 U.S. states and Canadian provinces. Its Georgia facility began commercial operations in July 2022.
Financial results and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Sales | $6.269 | $0.108 | $6.551 | $0.165 |
| Gross profit (loss) | $(0.012) | $0.027 | $0.031 | $0.039 |
| Gross margin | (0.2)% | 25.0% | 0.5% | 23.6% |
| Operating loss | $(26.226) | $(3.658) | $(50.385) | $(12.372) |
| Net loss | $(31.663) | $(7.590) | $(57.435) | $(16.988) |
| Net loss per share, basic and diluted | $(0.36) | $(0.15) | $(0.68) | $(0.35) |
For the six months, operating cash use was $26.939 million, investing cash use was $142.673 million, and financing cash provided was $109.821 million. Cash and restricted cash totaled $41.286 million at June 30, comprising $22.703 million of cash and $18.583 million of restricted cash. Working capital was $40.685 million.
At June 30, long-term debt had a $105.182 million carrying amount after unamortized financing discounts; principal outstanding under the Cargill facilities was $128.174 million. None was classified as current. The facilities mature September 3, 2028; interest is 12.5% on the subordinated facility and SOFR plus 7.5%–8.5% on the senior facility. The company reported covenant compliance at quarter-end.
Material changes and unusual items
- Sales rose sharply year over year, primarily because of Pete’s. Pete’s contributed $5.839 million of revenue and a $2.429 million net loss from acquisition through June 30.
- Q2 gross margin was pressured by a $1.042 million noncash acquired-inventory fair-value step-up and temporary supplier issues that reduced yields at California facilities and raised order-fulfillment costs. Management said the supply issues had been resolved.
- H1 selling, general and administrative expense rose to $44.502 million, including $20.951 million of RSU expense, $4.245 million of Pete’s acquisition costs, and $2.096 million of acquired-intangible amortization. Total H1 stock-based compensation was $22.709 million.
- Interest expense increased to $7.108 million for H1, reflecting higher Cargill borrowings, debt-cost amortization and a $0.735 million write-off related to the credit amendment.
- Property and equipment purchases were $25.467 million in H1; investing cash use also included $91.393 million for Pete’s and $25.813 million for the related property acquisition.
Outlook, risks and contingencies
Management said cash on hand, operating cash flows and Cargill borrowing capacity were expected to fund requirements for the next 12 months. It also expects to need capital-market access for future needs; financing may not be available on acceptable terms, and failure to raise capital could require curtailing operations. Construction-cost reimbursement under the credit facility is limited to 75%, with the company funding the remaining 25%.
Management expected to benefit from produce price increases in Q3 or Q4 2022 and expects cost of goods sold to decline as a percentage of sales as the business scales. These are expectations, not quantified earnings guidance. The Pasco, Washington project was expected to resume construction in September 2022 after redesign; the company was evaluating a potential eastern Texas site. A potential national-retailer offtake agreement was under negotiation and not finalized.
An August 11, 2022 Cargill amendment, effective as of June 30, reduced the minimum interest reserve requirement from eight quarters to four under specified conditions and reduced restricted cash by approximately $7.2 million. It applies until the earliest of an event of default, a qualified equity financing, or March 31, 2024.
Key risks include acquisition integration, continued losses and negative operating cash flow, substantial capital needs, debt service and restrictive covenants, interest-rate exposure without hedging, construction and supply-chain execution, cost inflation, crop damage from pests or disease, and the ability to improve gross margins. Disclosure controls were not effective at June 30 because of a continuing material weakness related to insufficient finance and accounting personnel; remediation was ongoing. The company reported no legal matters expected to have a material adverse effect.
Important facts for investors to verify
- Whether Pete’s integration, facility utilization and Georgia operations deliver expected growth and operating benefits.
- Whether pricing, resolved supplier issues and production scaling improve gross margins after the acquired-inventory step-up.
- Actual unrestricted liquidity, reserve requirements, covenant headroom and borrowing availability under the Cargill facilities.
- Funding and timing for planned facility construction, and whether additional capital can be raised without unfavorable terms or significant dilution.
- Progress in remediating the material weakness in financial reporting controls and the potential continuing effect of stock-based compensation.