Description

Local Bounti is an indoor farming SPAC with a $550M EV that sold $282k of leafy greens in Q1. The company is riddled with related party transactions and used 100% of their SPAC cash to acquire Pete’s, a 50-year old leafy greens producer, so that it appears they are growing when they are clearly not. Management is already publicly touting how they will beat their own SPAC projections, though that only is because of M&A and their core business will miss 2022 revenue targets by >80%. 

The lock-up expired on May 18th, so a thin-float SPAC with limited borrow should quickly become a more liquid security that is maybe worth $1 / share (currently ~$5). You can express the short in small size today or via options, though this should become more actionable in the coming weeks.

I’m going to cover three topics:

1. Overview of original Local Bounti business

2. Related party transactions

3. Pete’s acquisition and financial outlook

Local Bounti

Local Bounti is an indoor farming business founded in 2018 by a former oil and gas CEO. The company operates a single facility in Hamilton, MT. They sold $678k of leafy greens in grocery stores across the Mountain West in 2021. In Q1 ‘22, they sold $282k at a 17% gross margin, down sequentially from ~$315k in Q4. 

Their (heavily) adjusted EBITDA loss in ‘21 was $18M followed by a loss of $8.5M in Q1. Leo Holdings (Lion Capital) brought them public via a SPAC in December 2021. Leo’s previous SPAC (Digital Media Solutions, DMS) currently trades for $1.66. 

Local Bounti claims their product is price competitive with organic leafy greens today, and that their patented “Stack and Flow” technology will help them more efficiently grow leafy greens. 

This is obviously still, at best, an idea and at worst, a typical SPAC grift. It’s similar to AppHarvest, though AppHarvest is likely to do >$25M in revenue in 2022. Local Bounti’s original SPAC presentation guided to $13M for 2022, but it’s clear that they’ll do well under $2M. 

Their original SPAC presentation is here. They are already behind on expansion timelines and not yet operational at their Pasco, WA facility. 

The company touts its relationship with Cargill as evidence of its commercial viability. In reality, Cargill is making out like a bandit. The relationship with Cargill includes:

• $200M total in a credit facility at a rate of roughly 10% (depends on tranche)

• A 1.25% unused revolving line commitment fee, which in this case is $1.5M / year

• In March, they revised the agreement. For that revision, Cargill received ~2M shares (~$10M), $2M cash, and a 2% higher interest rat

This is a classic SPAC - a futuristic company touting its technology with minimal adoption, huge targets (~$500M in ‘25 revenue), and a promotional management team. 

Related Party transactions

Additionally, management appears clearly out to enrich themselves.

• The company paid out $4M in bonuses for completing the SPAC. At the time of the deal announcement (~June 2021), they had 37 employees and <$400k in cumulative historical revenue. 

• Their main facility is owned by the Opportunity Zone Fund of the co-CEOs and leased to the company. The company also rents office space from the co-CEO’s wife

• The controlling person of the co-CEO’s Opportunity Zone Fund, Rick Leggott, is a former Board Member and father to the current Chief of Staff

Pete’s Acquisition

The original SPAC deal saw >90% redemption, so all of the financing came from a PIPE that added a little north of $100M in net proceeds. 

Local Bounti then used $92.5M of cash and $30M of equity to acquire Pete’s, a California based grower that did $23M in ‘21 sales (3% growth) and $10M in gross profit. They went in to a net debt position to get this deal done - they have approximately $17M in net debt owed to Cargill, on which they are paying 10.5%. 

Management claims they will use their technology to improve the operations of Pete’s and leverage their existing grocery relationships to expand distribution. It’s hard to see significant synergies with a 50 year-old, family-owned leafy greens grower. 

Pro forma, Local Bounti has approximately 103M fully-diluted shares outstanding at a current price of ~$5.20 (~$550M EV). 

Summary

So in summary, you have 3 assets:

1. Core Local Bounti doing $1M - $2M in leafy greens sales out of Hamilton, MT with a >$25M annual burn rate and some more facilities eventually coming online

2. Pete’s, a 50-year old, no-growth producer doing ~$10M in annual gross profit

3. A balance sheet in a net debt position paying >10% in interest 

All for just $550M. 

Even if you value Pete’s at cost - though I’m not sure why they paid 12x gross profit for a no-growth produce manufacturer - core Local Bounti is implicitly valued at $400M. This should be trading for between $1 and $2 / share, down <60% from current prices. 

The lock-up expired on May 18th, so liquidity and borrow should increase significantly in the coming weeks and expressing the short position will become even more actionable. 

Catalyst

Increased liquidity

Insider selling