Business Context and Reporting Period
Local Bounti Corporation filed this Form 8-K on November 24, 2021, reporting events occurring primarily on November 19, 2021. The former Leo Holdings III Corp completed its domestication from the Cayman Islands to Delaware and consummated its business combination with Legacy Local Bounti. Local Bounti is a controlled-environment agriculture company producing living lettuce, herbs and leafy greens from its Montana facility.
The transaction was accounted for as a reverse recapitalization, with Legacy Local Bounti treated as the accounting acquirer. The filing includes historical financial information for the nine months ended September 30, 2021 and 2020, together with pro forma information incorporated by reference.
Key Financial Metrics
| Metric | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 |
|---|---|---|
| Sales | $0.324 million | $0.039 million |
| Gross profit | $0.075 million | $0.031 million |
| Gross margin | Approximately 23% | Approximately 79% |
| Operating loss | $(18.055) million | $(4.732) million |
| Net loss | $(27.822) million | $(5.028) million |
| Net cash used in operating activities | $(15.280) million | $(3.647) million |
| Net cash used in investing activities | $(14.193) million | $(3.723) million |
| Net cash provided by financing activities | $44.220 million | $5.315 million |
Cash and cash equivalents were $10.4 million at September 30, 2021, while cash and cash equivalents plus restricted cash totaled $14.792 million at that date. The company reported an accumulated deficit of $40.0 million and stated that it has incurred losses and negative operating cash flow since inception.
At September 30, 2021, $16.3 million was outstanding under the Cargill subordinated loan, which bears interest at 10.5%. Convertible notes had approximately $26.1 million of principal outstanding and bore interest at 8%; those notes converted into New Local Bounti common stock in connection with the business combination. The Montana facility financing obligation was $12.7 million.
Material Changes Versus the Prior Comparable Period
- Sales increased by $285,000, primarily because commercial production at the Montana facility began in the second half of 2020.
- Cost of goods sold increased by $241,000, while gross profit increased by $44,000.
- Research and development expense increased by $1.887 million to $2.245 million.
- Selling, general and administrative expense increased by $11.270 million to $15.493 million, reflecting higher headcount and compensation, $2.5 million of stock-based compensation related to a one-time termination of a share restriction agreement, increased legal and accounting costs, recruiting expenses and sales activity.
- The net loss increased by $22.794 million, driven by higher operating expenses, a $5.067 million convertible-note fair-value adjustment, $1.485 million of debt-extinguishment expense and higher interest expense.
- Operating cash use increased by $11.633 million. Investing cash use increased substantially because of Montana facility expansion and the purchase of land in Washington for a planned second facility.
Transaction, Liquidity and Capital Structure
- Public shareholders redeemed 25,798,719 shares for approximately $258.0 million, leaving approximately $17.0 million in the trust account immediately before closing.
- The PIPE financing closed concurrently and issued 15.0 million common shares for $150.0 million of gross proceeds.
- Management estimated approximately $100.0 million of cash would be transferred to New Local Bounti after redemptions, including the remaining trust proceeds and PIPE financing, before transaction costs and other adjustments.
- Total direct and incremental transaction costs were estimated at approximately $35.7 million, with $30.4 million recorded as a reduction of additional paid-in capital and $5.3 million recognized as an expense.
- Immediately after closing, 86,299,495 common shares were outstanding and warrants to purchase 11,539,216 shares were outstanding.
- Common stock and public warrants began trading on the NYSE under LOCL and LOCL WS. The company ceased being a shell company.
Outlook, Commentary, Risks and Unusual Items
Management expects continued net losses and substantial capital needs as the company expands facilities, develops products, increases sales and marketing, and incurs public-company compliance costs. The filing does not provide a specific revenue, earnings or cash-flow forecast.
- Planned growth includes expansion of the Montana facility, construction of additional controlled-environment agriculture facilities, including a Washington location, and expansion into new products and geographies.
- Management expects selling, general and administrative expenses to increase for the foreseeable future and expects cost of goods sold and research and development to decline as percentages of sales over time if the business scales successfully.
- Key risks include construction cost overruns and delays, energy cost increases, competition, demand and seasonality, dependence on retail relationships, COVID-19 effects, regulatory changes, difficulty scaling operations, financing needs and internal-control deficiencies.
- Public warrants have an $11.50 exercise price and generally expire five years after the business combination. They may be redeemed for $0.01 per warrant if specified market-price conditions are met.
- Legacy Local Bounti securityholders generally agreed to 180-day lock-ups. Sponsor shares are subject to additional transfer restrictions, generally ending after one year or earlier upon specified market-price or change-of-control events.
- The company adopted registration rights, indemnification arrangements, a 2021 equity incentive plan and an employee stock purchase plan. A $4.0 million pool of transaction bonuses was approved, including a $750,000 cash bonus for one named executive.
- The Montana facility sale-and-finance-leaseback with a related party did not qualify for sale accounting and remains reflected as a financing obligation.
Important Facts for Investors to Verify
- Reconcile the reported $10.4 million of cash and cash equivalents with the $14.792 million of cash, cash equivalents and restricted cash at September 30, 2021, and confirm the post-closing cash balance after transaction costs.
- Review the unaudited pro forma financial information and subsequent filings for the final accounting of the reverse recapitalization, PIPE proceeds, redemptions and transaction expenses.
- Assess the company’s cash runway against its continuing operating losses, negative operating cash flow, facility expansion plans and debt obligations.
- Verify the terms, outstanding balances and conversion or warrant features of the Cargill financing, convertible notes and Montana facility financing obligation.
- Monitor execution of the Washington facility and other expansion projects, including construction timing, capital requirements and operating performance.
- Review dilution from the 15.0 million PIPE shares, 11.539 million outstanding warrant shares, earnout shares of up to 2.5 million and equity-based compensation.
- Confirm the effectiveness of resale and warrant registration statements and the continuing impact of lock-up provisions on potential selling pressure.