Local Bounti Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated financial statements; amounts below are in U.S. dollars unless stated otherwise.
Business context
Local Bounti produces controlled-environment-grown leafy greens and herbs. Its April 4, 2022 acquisition of Pete’s added three greenhouse facilities and distribution to approximately 10,000 retail locations. Pete’s results are included from the acquisition date, so reported year-over-year revenue growth is not a like-for-like comparison.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $6.285 million | $0.159 million | $12.836 million | $0.324 million |
| Gross profit | $1.270 million | $0.004 million | $1.301 million | $0.043 million |
| Gross margin | 20.2% | 2.5% | 10.1% | 13.3% |
| Operating expenses | $23.258 million | $5.687 million | $73.674 million | $18.098 million |
| Net loss | $(27.104) million | $(10.834) million | $(84.539) million | $(27.822) million |
| Net loss per share, basic and diluted | $(0.30) | $(0.22) | $(0.98) | $(0.57) |
Q3 sales rose by $6.126 million year over year, primarily from the Pete’s acquisition. Nine-month gross margin was affected by a $1.042 million acquired-inventory fair-value step-up and temporary California supply-chain issues, which management said had been resolved. Q3 selling, general and administrative expense included $10.459 million of stock-based compensation; nine-month stock-based compensation totaled $33.616 million.
Cash flow: For the first nine months, operating cash use was $37.210 million, investing cash use was $157.228 million, and financing provided $117.342 million. Investing outflows included $90.552 million for the Pete’s acquisition, $25.813 million for the property acquisition, and $40.863 million of property and equipment purchases.
Liquidity and debt: At September 30, cash and cash equivalents were $4.227 million and restricted cash was $19.754 million; the restricted balance supports debt reserves. Current assets were $33.282 million and current liabilities were $14.874 million. Long-term debt was reported at a carrying value of $113.584 million; principal outstanding under the Cargill facilities was $135.6 million. The facilities mature September 3, 2028, with interest rates of 12.5% on the subordinated facility and SOFR plus 7.5%–8.5% on the senior facility. The company reported compliance with applicable covenants at quarter-end.
Material changes and outlook
- Pete’s acquisition materially expanded revenue, assets, debt, customer reach, and operating costs. The company reported $38.476 million of acquisition goodwill and $48.949 million of net intangible assets at quarter-end.
- Management said contractually permitted price increases were expected to benefit results beginning in Q4 2022. It expects cost of goods sold to decline as a percentage of sales over time with scale, and R&D and SG&A to decline as percentages of sales over the long term; these are expectations, not guarantees.
- The company signed a five-year Sam’s Club offtake agreement in October 2022 for Georgia production. It planned to expand the Georgia facility, expected the Pasco, Washington facility to be completed in Q3 2023, and anticipated its planned Mount Pleasant, Texas facility to become operational in Q4 2023.
- Management stated that cash on hand, operating cash flows, $34.4 million of available Cargill borrowing capacity, and the subsequent equity financing were expected to fund requirements for the next 12 months. It also said future capital-market access would likely be needed, with no assurance of timely or favorable financing.
- On October 21, 2022, the company agreed to sell 9.32 million shares at $2.50 per share, for approximately $23.3 million of gross proceeds before expenses. The company expected to use net proceeds for general corporate purposes.
Risks, contingencies, and controls
The company has incurred continuing losses and negative operating cash flows. Key disclosed risks include acquisition integration, substantial leverage and debt restrictions, refinancing or raising additional capital, facility construction and execution, supply-chain and input-cost exposure, customer commitments, crop disease and pests, and achieving profitable scale. Management reported a continuing material weakness in internal control over financial reporting related to inadequate finance and accounting personnel; disclosure controls and procedures were not effective as of September 30, 2022. Management was pursuing remediation, which would not be complete until tested and determined effective. The filing disclosed no legal matters expected by management to have a material adverse effect and no material updates to previously reported risk factors.
Important facts for investors to verify
- How much of revenue and gross-profit improvement reflects Pete’s acquisition versus organic growth, pricing, and changes in product mix.
- Progress on Georgia, Pasco, and Texas construction, commissioning, production capacity, and the ability to meet the Sam’s Club agreement and other customer demand.
- Cash burn, restricted-cash requirements, actual remaining borrowing capacity, debt interest costs, and compliance with Cargill covenants.
- Whether the October 2022 private placement proceeds and available liquidity are sufficient for the stated 12-month needs and planned expansion.
- Trends in gross margin and stock-based compensation, and whether the material weakness in financial reporting controls is remediated.