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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
_____________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to
Commission file number 001-39288
https://cdn.kscope.io/5b2da0e3bdc98310f45167f72c52efe3-apph-20220331_g1.jpg
AppHarvest, Inc.
_____________________________________________
(Exact name of registrant as specified in its charter)
Delaware84-5042965
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
500 Appalachian Way
Morehead, KY 40351
(606) 653-6100
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.0001 par value per shareAPPHThe Nasdaq Stock Market LLC
Warrants, each whole warrant exercisable for one share of Common Stock at an exercise price of $11.50 per shareAPPHWThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-2 of the Exchange Act)
Yes No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.0001, outstanding at April 29, 2022, were 101,735,238.


Table of Contents
APPHARVEST, INC
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations and Comprehensive Loss
Condensed Consolidated Statements of Stockholders’ Equity
Condensed Consolidated Statements of Cash Flows
PART II - OTHER INFORMATION


Table of Contents
Part I - Financial Information
Item 1. Financial Statements
APPHARVEST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands except per share amounts)
March 31,
2022
December 31,
2021
Assets
Current Assets
Cash and cash equivalents$97,645 $150,755 
Restricted cash37,130 25,556 
Accounts receivable, net1,882 1,575 
Inventories, net5,076 4,998 
Prepaid expenses and other current assets4,000 5,613 
Total current assets145,733 188,497 
Operating lease right-of-use assets, net4,425 5,010 
Property and equipment, net387,603 343,913 
Other assets, net25,819 16,644 
Total non-current assets417,847 365,567 
Total assets$563,580 $554,064 
Liabilities and stockholders’ equity
Current Liabilities:
Accounts payable$14,126 $8,553 
Accrued expenses15,876 15,794 
Current portion of lease liabilities724 751 
Current portion of long-term debt39,032 28,020 
Other current liabilities56 119 
Total current liabilities69,814 53,237 
Long-term debt, net of current portion117,542 102,637 
Lease liabilities, net of current portion4,579 4,938 
Deferred income tax liabilities2,309 2,418 
Private Warrant liabilities1,610 1,385 
Other liabilities139 1,809 
Total non-current liabilities126,179 113,187 
Total liabilities195,993 166,424 
Commitments and contingencies (Note 11)
Stockholders’ equity
Preferred stock, par value $0.0001, 10,000 shares authorized, 0 issued and outstanding, as of March 31, 2022 and December 31, 2021
  
Common stock, par value $0.0001, 750,000 shares authorized, 101,550 and 101,136 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively
10 10 
Additional paid-in capital583,117 576,895 
Accumulated deficit(217,949)(187,314)
Accumulated other comprehensive income (loss)2,409 (1,951)
Total stockholders’ equity367,587 387,640 
Total liabilities and stockholders’ equity$563,580 $554,064 
See accompanying notes to the unaudited condensed consolidated financial statements.
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Table of Contents
APPHARVEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (Unaudited)
(In thousands except per share amounts)
Three Months Ended
March 31,
20222021
Net sales$5,164 $2,299 
Cost of goods sold13,554 6,836 
(8,390)(4,537)
Operating expenses:
Selling, general and administrative expenses21,039 31,489 
Total operating expenses21,039 31,489 
Loss from operations(29,429)(36,026)
Other income (expense):
Interest expense from related parties (658)
Change in fair value of Private Warrants(1,329)9,826 
Other14 356 
Loss before income taxes(30,744)(26,502)
Income tax benefit (expense)109 (2,013)
Net loss(30,635)(28,515)
Other comprehensive income (loss):
Net unrealized gains (losses) on derivatives contracts, net of tax4,360 (669)
Comprehensive loss$(26,275)$(29,184)
Net loss per common share:
Basic and diluted$(0.30)$(0.35)
Weighted average common shares outstanding:
Basic and diluted101,321 80,729 

See accompanying notes to the unaudited condensed consolidated financial statements.

2

Table of Contents
APPHARVEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands)


Additional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive LossTotal Stockholders’ Equity
Common Stock
SharesAmount
December 31, 20209,750 $1 $686 $(21,128) (20,441)
Retroactive application of recapitalization34,711 3 45,204   45,207 
Adjusted balance, December 31, 2020
44,461 4 45,890 (21,128) 24,766 
Business Combination and PIPE financing53,361 6 433,521 — — 433,527 
Conversion of Private Warrants— — 5,819 — — 5,819 
Stock option exercise103 — 35 — — 35 
Stock-based compensation— — 6,287 — — 6,287 
Net loss— — — (28,515)— (28,515)
Other comprehensive income (loss)— — — — (669)(669)
March 31, 202197,925 $10 $491,552 $(49,643)$(669)$441,250 



Additional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total Stockholders’ Equity
Common Stock
SharesAmount
December 31, 2021101,136 $10 $576,895 $(187,314)$(1,951)$387,640 
Conversion of Private Warrants— — 1,104 — — 1,104 
Stock option exercise— — 36 — — 36 
Vesting of restricted stock units414 — (953)— — (953)
Stock-based compensation— — 6,035 — — 6,035 
Net loss— — — (30,635)— (30,635)
Other comprehensive income (loss)— — — — 4,360 4,360 
March 31, 2022101,550 $10 $583,117 $(217,949)$2,409 $367,587 
See accompanying notes to the unaudited condensed consolidated financial statements.
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APPHARVEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended
March 31,
20222021
Operating Activities
Net loss$(30,635)$(28,515)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of Private Warrants1,329 (9,826)
Deferred income tax (benefit) expense(109)2,013 
Depreciation and amortization3,112 1,802 
Stock-based compensation expense6,035 6,287 
Rent expense in excess of payments26 19 
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable(307)(1,182)
Inventories, net(78)(1,516)
Prepaid expenses and other current assets1,613 (3,133)
Other assets, net(9,230)(5,993)
Accounts payable301 8 
Accrued expenses(2,124)3,694 
Other current liabilities (42)
Other non-current liabilities2,564 227 
Net cash used in operating activities(27,503)(36,157)
Investing Activities
Purchases of property and equipment(39,018)(11,183)
Purchases of property and equipment from a related party (122,911)
Advances on equipment (444)
Net cash used in investing activities(39,018)(134,538)
Financing Activities
Proceeds from Business Combination and PIPE shares, net 448,500 
Proceeds from debt25,902  
Payments on financing obligation to a related party (2,089)
Proceeds from stock options exercised36 35 
Payments of withholding taxes on restricted stock unit conversions(953) 
Net cash provided by financing activities24,985 446,446 
Change in cash and cash equivalents(41,536)275,751 
Cash, cash equivalents and restricted cash at the beginning of period176,311 21,909 
Cash, cash equivalents and restricted cash at the end of period134,775 297,660 
Less restricted cash at the end of the period37,130  
Cash and cash equivalents at the end of the period$97,645 $297,660 
Non-cash Activities:
Fixed assets purchases in accounts payable$5,272 $20,313 
Fixed assets purchases in accrued liabilities$2,207 $1,408 
Operating lease right-of-use assets and liabilities$237 $735 
See accompanying notes to the unaudited condensed consolidated financial statements.
4

Table of Contents
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)

1. Description of Business

AppHarvest, Inc. (the “Company”, or “AppHarvest”) was founded on January 19, 2018. Together with its subsidiaries, AppHarvest is an applied agricultural technology company in Appalachia developing and operating some of the world’s largest high-tech indoor farms, which are designed to grow non-GMO produce, use primarily rainwater, and produce significantly higher yields than those achieved by traditional agriculture on the same amount of land. AppHarvest combines conventional agricultural techniques with cutting-edge technology, including artificial intelligence and robotics, to improve access to nutritious food, farming more sustainably, building a domestic food supply, and increasing investment in Appalachia.

Prior to October 2020, AppHarvest’s operations were limited to the start-up concerns of organizing and staffing, business planning, raising capital, and acquiring and developing properties for Controlled Environment Agriculture (“CEA”). In October 2020, AppHarvest partially opened its first CEA facility in Morehead, Kentucky (the “Morehead CEA facility”). AppHarvest harvested its first crop of beefsteak tomatoes and tomatoes on the vine in January 2021 and March 2021, respectively. In May 2021, AppHarvest opened production of the full 60 acres at the Morehead CEA facility and, in August 2021, concluded the first harvest. The Company completed planting of its second crop at the Morehead CEA facility in September 2021, and began harvest of the crop in the fourth quarter of 2021.

AppHarvest has started construction on four more CEA facilities. Two of the facilities under construction are located in Berea, Kentucky (the “Berea salad greens facility”) and Richmond, Kentucky (the “Richmond tomato facility”). Groundbreakings for two more CEA facilities occurred in June 2021 in Somerset, Kentucky (the “Somerset facility”) and Morehead, Kentucky (the “Morehead salad greens facility”). The Somerset facility is intended to grow berries and the Morehead salad greens facility, which is adjacent to the Morehead CEA facility, is intended to grow salad greens. During 2021, the Company temporarily paused the development of the 10-acre Morehead salad greens facility, with resumption of construction contingent upon financing.

AppHarvest is organized as a single operating segment. Substantially all of the assets and operations of AppHarvest are located in the United States (“U.S.”).

Nature of Operations

The high-tech greenhouse agriculture business is extremely capital-intensive and the Company expects to expend significant resources to complete the build-out of facilities under construction, continue harvesting existing crops and plant and harvest new crops in the existing and future CEA facilities. These expenditures are expected to include working capital, costs of acquiring and building out new facilities, costs associated with planting and harvesting, such as the purchase of seeds and growing supplies, and the cost of attracting, developing and retaining a skilled labor force, including local labor. In addition, other unanticipated costs may arise due to the unique nature of these CEA facilities and increased production in the Company’s single operating facility at full capacity. The Company also expects to expend significant resources as it invests in CEA technologies and pursues other strategic investments in the CEA industry.

The Company has incurred losses from operations and generated negative cash flows from operating activities since inception. The Company expects that its existing cash and cash equivalents and credit available under its loan agreements will be sufficient to fund its current payroll and working capital requirements for at least 12 months from the date of this Quarterly Report, as well as our debt service requirements and currently planned capital expenditure requirements as we continue to build out the Berea salad greens facility, Richmond tomato facility and Somerset facility this year. However, the Company’s operating plan may change because of factors currently unknown, and the Company may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. There can be no assurance that financing will be available to the Company on favorable terms, or at all. The inability to obtain financing when needed may make it more difficult for the Company to operate the business or implement its growth plans.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial reporting and Securities and Exchange Commission (“SEC”) regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, 2022. These unaudited condensed consolidated financial statement should be used in conjunction
5

Table of Contents
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
with the Company’s audited consolidated financial statements, as of and for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 1, 2022.
The unaudited condensed consolidated financial statements include the accounts of the Company and its controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated.
All dollar and share amounts are in thousands, except per share amounts, unless otherwise noted.

2. Summary of Significant Accounting Policies

Use of Estimates in Condensed Consolidated Financial Statements

In preparing the condensed consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Although these estimates are based on the Company’s knowledge of current events and actions the Company may undertake in the future, actual results could differ from those estimates and assumptions. Significant items subject to such estimates and assumptions include the valuation of inventory, stock-based compensation, and private warrants.

The Company’s results can also be affected by economic, political, legislative, regulatory, legal actions, and the global volatility and general market disruption resulting from the global COVID-19 pandemic and geopolitical tensions, such as Russia’s recent incursion into Ukraine. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, and government fiscal policies, can have a significant effect on operations. While the Company maintains reserves for anticipated liabilities and carries various levels of insurance, the Company could be affected by civil, criminal, environmental, regulatory or administrative actions, claims, or proceedings.

Warrants

At March 31, 2022, there were 13,242 warrants to purchase Common Stock outstanding, consisting of 11,920 public warrants (“Public Warrants”) and 1,322 private warrants (“Private Warrants” and together with Public Warrants, “Warrants”). The Private Warrants are held by the initial stockholders of the special purpose acquisition company. Each warrant entitles the registered holder to purchase one share of Common Stock at a price of $11.50 per share. The warrants expire on January 29, 2026, or earlier upon redemption or liquidation.

The fair value of the Private Warrants is estimated at each measurement date using a Black-Scholes option pricing model. See Note 5 - Fair Value Measurements for inputs used in calculating the estimated fair value.

Accounts Receivable

The Company’s trade accounts receivable are non-interest bearing and are recorded at the net realizable value. The allowance for doubtful accounts represents the Company’s best estimate of the amount of expected credit losses in existing accounts receivable. As of March 31, 2022 and December 31, 2021, the Company had no allowance for doubtful accounts.

Capitalization of Interest

During the three months ended March 31, 2022, $1,648 of interest expense has been capitalized. No interest was capitalized during the three months ended March 31, 2021.

New Accounting Pronouncements

No new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on the condensed consolidated financial statements.
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APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
3. Restructuring
During the first quarter of 2022, the Company initiated and completed a restructuring plan to reduce operating costs. The Company anticipates the cost savings from the restructuring plan will support growth-related initiatives and help meet the long-term goals and liquidity needs. During the three months ended March 31, 2022, the Company incurred total costs of $1,990 related to the restructuring initiative, of which $1,185 was for severance and other benefits, and $805 was for legal and other costs. These costs are included in sales, general and administrative (“SG&A”) in the consolidated statements of operations and comprehensive loss. The Company does not expect any further costs associated with the restructuring initiative.

4. Revenue Recognition

Substantially all of the Company’s revenues are generated from the sale of tomatoes under an agreement with one customer, Mastronardi Produce Limited (“Mastronardi”). The Company recognizes revenue at a point in time and at the amount it expects to be entitled to be paid when its performance obligation is complete, which is generally when control of the products is transferred to its customers upon pick-up by the customer or the customer’s agent from the Company’s facilities. Prices for the Company’s products are based on agreed upon rates with customers and do not include financing components or noncash consideration. Revenue is recorded net of variable consideration, such as commissions and other shipping, handling and marketing costs incurred as defined in the customer agreements. Revenue is also recorded net of rejections for products that do not meet quality specifications and net of sales and other taxes collected on behalf of governmental authorities. Payment terms are generally 30 days.
5. Fair Value Measurements
The company categorizes its assets and liabilities into one of three levels based on the assumptions (inputs) used in determining their values, as defined below:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs reflecting management’s assumptions about the inputs used in pricing the asset or liability.

The table below presents the Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used for each measurement:

Fair Value as of:
March 31, 2022
December 31, 2021
Balance Sheet AccountLevel 1Level 2Level 3Total Level 1Level 2Level 3Total
Assets:
Interest rate swapOther assets, net$ $2,578 $2,578 $ $ $ $ 
Foreign currency contractsOther assets, net 7  7  14  14 
Total assets$ $2,585 $ $2,585 $ $14 $ $14 
Liabilities:
Foreign currency contractsOther current liabilities$ $ $ $ $ $63 $ $63 
Interest rate swapOther liabilities     1,657  1,657 
Private WarrantsPrivate Warrant liabilities 1,610  1,610  1,385  1,385 
Total liabilities$ $1,610 $ $1,610 $ $3,105 $ $3,105 

The Company’s derivative contracts, including foreign currency forward and option contracts and an interest rate swap, are measured at fair value using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for terms specific to the contracts. As of March 31, 2022, the carrying value of the Company’s debt approximated fair value due to the short term nature of the debt or that such borrowings bear variable interest rates that correspond to current market rates. See Note 12 - Derivative Financial Instruments and Note 10 - Debt for more information on the Company’s use of financial instruments.
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APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)

The Private Warrant liabilities are determined using a Black-Scholes option pricing model, a Level 2 valuation. The significant inputs to the Private Warrant valuation are as follows:
March 31, 2022December 31, 2021
Exercise price$11.50 $11.50 
Stock price$5.38 $3.89 
Volatility55.0 %54.0 %
Remaining term in years3.83 4.08 
Risk-free rate2.44 %1.12 %
Dividend yield  
The following table summarizes the private warrant activity for the three months ended March 31, 2022:

Fair value of Private Warrants on December 31, 2021
$1,385 
Fair value of Private Warrants converted to Public Warrants(1,104)
Change in fair value of Private Warrants1,329 
Fair value of Private Warrants outstanding as of March 31, 2022
$1,610 

The Warrants are deemed equity instruments for income tax purposes, and accordingly, there is no tax accounting relating to changes in the fair value of the Private Warrants recognized. The changes in the fair value of the Private Warrants may be material to our future operating results.

Carrying values of cash and cash equivalents, restricted cash, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, accrued expenses, and other current liabilities approximate fair values because of their short-term nature.

6. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or net realizable value. Finished goods inventories represent costs associated with boxed produce not yet sold. Growing crop inventories primarily represent the costs associated with growing produce within the Company’s CEA facilities. Materials and supplies primarily represent growing and packaging supplies. Inventory costs are comprised of the purchase and transportation cost plus production labor and overhead.     

March 31, 2022December 31, 2021
Raw materials$1,376 $1,314 
Growing crops3,548 3,684 
Finished goods152  
Total inventories, net$5,076 $4,998 

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APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
7. Property and Equipment
March 31, 2022December 31, 2021
Land$32,206 $32,395 
Buildings80,866 79,450 
Machinery and equipment51,179 49,418 
Construction in progress230,570 186,848 
Leasehold improvements4,758 4,740 
Less: accumulated depreciation(11,976)(8,938)
Total property and equipment, net$387,603 $343,913 
Depreciation expense was $3,039 for the three months ended March 31, 2022, compared to $1,772 for the three months ended March 31, 2021.

8. Other Assets

March 31, 2022December 31, 2021
Utility deposits$7,976 $7,479 
Investment in unconsolidated entity5,000 5,000 
Prepayments for fixed assets8,950 2,888 
Interest rate swap2,578  
Other assets1,315 1,277 
Total other assets$25,819 $16,644 

9. Accrued Expenses
March 31, 2022December 31, 2021
Construction costs$10,674 $8,467 
Payroll and related1,859 2,768 
Professional service fees1,364 1,944 
Other accrued liabilities1,310 1,154 
Utilities669 1,461 
Total accrued expenses$15,876 $15,794 

10. Debt

March 31, 2022December 31, 2021
Rabo Loan$74,063 $75,000 
Construction Loan47,771 31,944 
JPM Loan35,347 24,335 
Unamortized debt issuance costs(607)(622)
Debt, net of issuance costs156,574 130,657 
Less current portion(39,032)(28,020)
Long term, net$117,542 $102,637 

On January 10, 2022, the Company entered into an amended and restated promissory note (the “Amended Note” or “JPM Loan”) with JPMorgan Chase Bank, N.A. This amendment increased the existing line of credit from $25,000 to $50,000 and implemented the secured overnight financing rate (“SOFR”) as the replacement of LIBOR as a benchmark interest rate for U.S. dollar borrowings. Restricted cash on the condensed consolidated balance sheet represents collateral for a promissory note with the JPM Loan which requires 105% of the aggregate borrowings to be held as collateral.

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APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
11. Commitments and Contingencies
(a)Leases
For the three months ended March 31, 2022 and March 31, 2021, the Company recognized $239 and $97, respectively, of operating lease expense in SG&A within the unaudited condensed consolidated statement of operations and comprehensive loss.
The future minimum rental payments required under the leases for each year of the next five years and in the aggregate thereafter are as follows:
Operating leases
Remainder of 2022
$795 
20231,085 
20241,027 
20251,030 
20261,048 
2026 and thereafter1,612 
Total minimum payments required6,597 
Less: imputed interest costs(1)
(1,294)
Present value of net minimum lease payments(2)
$5,303 
Weighted-average imputed interest rate7.22 %
Weighted-average remaining lease term6.1
____________________________
(1)Represents the amount necessary to reduce net minimum lease payments to present value using actual rate in the lease agreement or the Company’s incremental borrowing rate at lease inception.
(2)Included in the unaudited condensed consolidated balance sheet as of March 31, 2022 as current and non-current lease liability of $724 and $4,579, respectively.
Supplemental cash flow information related to leases is as follows:
Period Ended March 31,
20222021
Cash paid for amounts included in the measurement of operating lease liabilities$231 $54 
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities$— $735 
Operating lease right-of-use assets surrendered with the early termination of lease liabilities$(237)$ 

(b)     Litigation
The Company is involved in various lawsuits, claims and other legal matters from time to time that arise in the ordinary course of business. The Company records a liability when a particular contingency is probable and estimable.

On September 24, 2021, a federal securities class action lawsuit (captioned Ragan v. AppHarvest, Inc.) was filed by a purported stockholder of the Company in the United States District Court for the Southern District of New York on behalf of a proposed class consisting of those who acquired the Company’s securities between May 17, 2021 and August 10, 2021. On December 13, 2021, the court consolidated the cases, and appointed a lead plaintiff. An amended complaint was filed on March 2, 2022. The amended complaint was brought as a purported class action on behalf of purchasers of the Common Stock between February 1, 2021 to August 10, 2021. The amended complaint names the Company and certain of its current officers as defendants, and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, by making materially false and misleading statements regarding the Company’s operations at the Morehead CEA Facility in the first half of 2021. In particular, plaintiffs allege that defendants’ public statements during the class period were false and misleading because defendants failed to disclose issues related to the Company’s tomato harvest and employee training and retention. The amended complaint seeks unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including reasonable attorneys’ fees. Additionally, on March 11, 2022, a derivative complaint
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APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
(captioned Michael Ross v. Kiran Bhatraju, et al.) was filed in the U.S. District Court for the Southern District of New York against certain of AppHarvest’s officers and directors. The derivative complaint restyles the federal securities class action allegations as a purported derivative claim on behalf of the Company against its officers and Board members for their alleged breaches of fiduciary duties in allowing the purported disclosure violations to occur. The derivative complaint seeks unspecified monetary restitution and disgorgement of profits, benefits, or compensation obtained by the defendants, an award of costs and expenses, including reasonable attorneys’ fees, and that the Court direct the Company to reform its corporate governance procedures.

The Company does not believe the claims have merit, intend to defend against them vigorously, and have not recorded a liability related to these lawsuits because, at this time, the Company is unable to estimate reasonably possible losses or determine whether unfavorable outcomes are probable.

(c)     Purchase commitments
There were no material changes to the Company’s purchase commitments, outside the ordinary course of business, from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
12. Derivative Financial Instruments
The Company has entered into foreign currency forward and option contracts to hedge certain cash flows related to anticipated expenditures related to the construction of its Berea, Kentucky and Richmond, Kentucky CEA facilities. These contracts, which have maturities ranging through December 2022, qualify as cash flow hedges and are used to hedge the Company’s foreign currency risk associated with the Euro denominated payments due upon the completion of established project milestones under the applicable CEA facility construction contracts. As of March 31, 2022, the total notional amount outstanding of foreign currency contracts designated as cash flow hedging instruments was 10,730. As of March 31, 2022 and December 31, 2021, the Company maintained collateral of $193 and $3,710, respectively, for the hedge program which is included in prepaid expenses and other current assets in the respective unaudited condensed consolidated balance sheet.
The Company has elected to measure hedge effectiveness using the “spot method” under which the hedging relationship is considered perfectly effective and changes in the fair value of the forward and options contracts attributable to changes in the spot rate are recorded as a component of accumulated other comprehensive income (“AOCI”). As the hedged items are ultimately capitalized as part of the CEA facility fixed assets, the AOCI amounts will be reclassified into earnings over the same periods as the future depreciation expense related to those assets. Consistent with the allocation of CEA facility fixed asset depreciation, the AOCI reclassification will also be allocated between cost of goods sold (“COGS”) and SG&A within the unaudited condensed consolidated statement of operations and comprehensive loss.
Under the “spot method”, changes in the fair value of forward contracts attributable to changes in the difference between the forward rate and the spot rate (forward points) and the fair value of option contracts attributable to time and volatility values (up-front premium) will be excluded from the measure of hedge effectiveness and amortized as COGS and SG&A on a straight-line basis over the terms of the underlying contracts. During the three months ended March 31, 2022 and March 31, 2021 the Company recognized amortization expense of $69 and $30, respectively, related to its foreign currency hedge contracts within its unaudited condensed consolidated statement of operations and comprehensive loss.

As of March 31, 2022 and December 31, 2021, the Company had a net asset of $7 and a net liability of $49 in foreign currency contracts designated as cash flow hedging instruments, respectively, which is included in other current assets and other current liabilities in the unaudited balance sheets.

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APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
The following table summarizes the before and after tax amounts for the various components of other comprehensive loss for the periods presented:

Three Months Ended March 31, 2022Three Months Ended March 31, 2021
Before TaxTax (Expense)
Benefit
After TaxBefore TaxTax
Benefit
After Tax
Foreign currency $125 $ $125 $(913)$244 $(669)
Interest rate swap4,235  4,235    
   Total Accumulated comprehensive income/(loss)$4,360 $ $4,360 $(913)$244 $(669)

During the three months ended March 31, 2022 and March 31, 2021, an income tax (expense) benefit of $(1,165) and $244 was recognized within other comprehensive income (loss), respectively. The income tax (expense) benefit of $(644) and $521 related to the $2,409 and $(1,951) balance in AOCI at March 31, 2022 and December 31, 2021, respectively, is fully offset by a valuation allowance. The Company will release the AOCI amounts, net of any tax impact, from the foreign currency contracts and the interest rate swap in the periods that the underlying transactions impact earnings as described above.
13. Stock-based Compensation
Total stock-based compensation expense was $6,035 for the three months ended March 31, 2022, compared to $6,287 for the three months ended March 31, 2021. Of these amounts, $5,894 and $6,027, respectively, were included in SG&A and $141 and $260 in COGS for the three months ended March 31, 2022 and March 31, 2021, respectively.
14. Income Taxes
The Company’s effective income tax rate was 0.4% and (7.6)% for the three months ended March 31, 2022 and March 31, 2021, respectively. The variance from the U.S. federal statutory rate of 21% for the three months ended March 31, 2022 and March 31, 2021, was primarily attributable to increases in the Company’s valuation allowance largely driven by increases in the Company’s net operating loss carryforwards.
The Company’s income tax provision is impacted by a valuation allowance on the Company’s net deferred tax assets, net of reversing taxable temporary differences and considering future annual limitations on net operating loss carryforward utilization enacted by U.S. tax reform legislation. The Company maintains a valuation allowance on its net deferred tax assets for all periods presented as the Company cannot be certain that future taxable income will be sufficient to realize its deferred tax assets. Valuation allowances are provided against deferred tax assets when, based on all available evidence, it is considered more likely than not that some portion or all the recorded deferred tax assets will not be realized in future periods.
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APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
15. Net Loss Per Common Share
Diluted net loss per common share is the same as basic net loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss. The following common share equivalent securities have been excluded from the calculation of weighted-average common shares outstanding because the effect is anti-dilutive:
Anti-dilutive common share equivalentsMarch 31, 2022March 31, 2021
Stock options2,727 2,866 
Restricted stock units5,683 2,561 
Warrants13,242 13,250 
Total anti-dilutive common share equivalents21,652 18,677 
Three Months Ended March 31,
20222021
Numerator:
Net loss$(30,635)$(28,515)
Denominator:
Weighted-average common shares outstanding, basic and diluted101,321 80,729 
Net loss per common share, basic and diluted$(0.30)$(0.35)
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APPHARVEST MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believes,” “expects,” “intends,” “estimates,” “projects,” “anticipates,” “will,” “plan,” “design,” “may,” “should,” or similar language are intended to identify forward-looking statements.
It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Quarterly Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified under “Risk Factors” in Item 1A herein and in our other filings with the Securities and Exchange Commission (the “SEC”). The impact of COVID-19 and its variants, as well as geopolitical tensions, such as Russia’s recent incursion into Ukraine, may also exacerbate these risks, any of which could have a material effect on us. All forward-looking statements included herein are made only as of the date hereof. Unless otherwise required by law, we do not undertake, and specifically disclaim, any obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise after the date of such statement.
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q, and our audited consolidated financial statements and related notes for the year ended December 31, 2021, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2022 (“Form 10-K”). As used in this section, unless the context suggests otherwise, “we,” “us,” “our,” “Company,” and “AppHarvest” refer to AppHarvest, Inc. and its consolidated subsidiaries.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview

We were founded on January 19, 2018. Together with our subsidiaries, we are an applied agricultural technology company in Appalachia developing and operating some of the world’s largest high-tech indoor farms, designed to grow non-GMO, produce, free of or with minimal chemical pesticide residues, use primarily rainwater and produce significantly higher yields than those of traditional agriculture on the same amount of land. We combine conventional agricultural techniques with cutting-edge technology including artificial intelligence and robotics, to improve access to nutritious food, farming more sustainably, building a domestic food supply, and increasing investment in Appalachia.
Prior to October 2020, our operations were limited to the “start-up” concerns of organizing and staffing, business planning, raising capital, and acquiring and developing properties for CEA. In October 2020, we partially opened our first CEA facility in Morehead, Kentucky (the “Morehead CEA facility”), which we estimate can cultivate approximately 720,000 tomato plants with an approximate yield of 40 million pounds per year. We harvested our first crop of beefsteak tomatoes and tomatoes on the vine in January 2021 and March 2021, respectively. In May 2021, we opened production of the full 60 acres at the Morehead CEA facility and, in August 2021, concluded the first harvest. We completed planting of our second crop at the Morehead CEA facility in September 2021, and began harvest of the crop in the fourth quarter of 2021.

We have begun construction of four more CEA facilities, including those located in Berea, Kentucky (the “Berea salad greens facility”) and Richmond, Kentucky (the “Richmond tomato facility”). As of the date hereof, construction on the Berea salad greens facility is approximately 79% complete; the Richmond tomato facility is approximately 75% complete. Both CEA facilities are expected to be operational by the end of 2022. Groundbreakings for two more CEA facilities occurred in June 2021 in Somerset, Kentucky (the “Somerset facility”) and Morehead, Kentucky (the “Morehead salad green facility”). The Somerset facility is intended to grow berries, and the Morehead salad green facility, which is located adjacent to the Morehead CEA facility, is intended to grow salad greens. The Somerset facility is approximately 65% complete and expected to be operational by the end of 2022. To incorporate design and other insights we gained from construction of the Berea salad greens facility, and to maintain flexibility in the allocation of capital resources, we have temporarily paused development of the Morehead salad green facility, with resumption of construction contingent upon financing. We expect to have four CEA facilities operational by the end of 2022, with approximately 165 acres under production. We expect to develop additional CEA facilities only after obtaining the necessary capital, assuming, among other things, that we are able to obtain necessary capital when needed and on acceptable terms.
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For a discussion of our future funding requirements, please refer to Part II, Item 1A. Risk Factors, “We will require significant additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to delay, limit, reduce or terminate our operations and future growth.”
The Company is organized as a single operating segment. Substantially all of the assets and operations of the Company are located in the United States (“U.S.”).
Basis of Presentation
Currently, we conduct business through one operating segment. Prior to the three months ended March 31, 2021 we were a pre-revenue company with no commercial sales. We began generating sales during the three months ended March 31, 2021 and conduct our operations solely in the U.S.
For more information about our basis of presentation, refer to Note 1 - Description of Business of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.
Environmental, Social and Governance (“ESG”)
AppHarvest is both a public benefit corporation (“PBC”) and a certified B Corporation because we believe in collective benefit over individual gain. We believe growing healthy fruits and vegetables are good business, and new technologies can deliver cleaner produce with safer growing methods, which we believe benefits all stakeholders. We are all in this together, for good.

Public benefit corporations are for-profit corporations and, under Delaware law, our directors have a duty to balance the financial interests of stockholders, the best interests of those materially affected by our conduct (including our stockholders, employees, communities, customers and suppliers), and the specific public benefits identified in our second amended and restated certificate of incorporation (the “amended and restated certificate of incorporation”) when making decisions. Our amended and restated certificate of incorporation includes three specific public benefit goals:

Goal 1 Drive positive environmental change in agriculture
Goal 2 Empower individuals in Appalachia
Goal 3 Improve the lives of our employees and the communities in which we operate

In early 2021, we launched our first Materiality Assessment with Business for Social Responsibility (“BSR”) to further assess which ESG issues are most important to AppHarvest’s stakeholders and our business success. Our stakeholders include farmers, employees, regional economic development organizations, retailers, sustainability experts at BSR, suppliers, local communities, and our internal senior management and board members.

More information on our key ESG programs, goals and commitments, and key metrics can be found in our sustainability report, which is available on our website https://www.appharvest.com/. Website references throughout this document are provided for convenience only, and the content on the referenced websites is not incorporated by reference into this Quarterly Report.

While we believe all of our ESG goals align with our long-term growth strategy and financial and operational priorities, they are aspirational and may change, and there is no guarantee or promise that they will be met or that they will not hinder financial or operational performance.
Factors Affecting Our Financial Condition and Results of Operations
We have expended, and expect to continue to expend, substantial resources as we:
continue the build-out of the four CEA facilities currently under construction in Richmond, Berea, Somerset and Morehead, Kentucky and invest in additional CEA facilities in the future;
continue our current growing season, which began in August 2021, and plant and harvest new crops in our future growing seasons;
implement the Purchase and Marketing Agreement with Mastronardi Produce Limited (“Mastronardi”) and fulfill our obligations under that agreement;
identify and invest in future growth opportunities, including new or expanded facilities and new product lines;
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invest in sales and marketing efforts to increase brand awareness, engage customers and drive sales of our products;
invest in product innovation and development; and
incur additional general and administrative expenses, including increased finance, legal and accounting expenses, associated with being a public company and expanding operations.
Business Combination and Public Company Costs
On January 29, 2021, we consummated a business combination and plan of reorganization with a special purpose acquisition company (“Business Combination”). Upon consummation of the Business Combination and the closing of the concurrent private placement of the 37,500 shares of the Company’s Common Stock (the “PIPE”), the most significant change in our reported financial position and results of operations was an increase in cash and cash equivalents of approximately $435.2 million, including $375.0 million in gross proceeds from the PIPE.
As a consequence of the Business Combination, we became the successor to an SEC-registered and Nasdaq-listed company, which requires us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.

Key Components of Statement of Operations

Non-GAAP Financial Measures

To supplement our unaudited condensed consolidated financial statements, which are prepared and presented in accordance with United States generally accepted accounting principles (“GAAP”), we use certain non-GAAP measures, such as Adjusted EBITDA, to understand and evaluate our core operating performance. We define and calculate Adjusted EBITDA as net loss before the impact of interest income or expense, income tax expense or benefit, depreciation and amortization, adjusted to exclude: stock-based compensation expense, Business Combination transaction-related costs, restructuring costs, remeasurement of warrant liabilities, start-up costs for new CEA facilities, Root AI acquisition related costs and certain other non-core items. We believe this non-GAAP measure of financial results provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses this non-GAAP measure for trend analyses and for budgeting and planning purposes.

We believe that the use of this non-GAAP financial measure provides an additional tool for investors to use in evaluating operating results and trends. Other similar companies may present different non-GAAP measures or calculate similar non-GAAP measures differently. Management does not consider this non-GAAP measure in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of this non-GAAP financial measure is that it excludes significant expenses that are required to be presented in our GAAP financial statements. Because of this limitation, you should consider Adjusted EBITDA alongside other financial performance measures, including net loss and our other financial results presented in accordance with GAAP.
Net sales
Substantially all of our net sales for the three months ended March 31, 2022 and 2021 were generated from the sale of tomatoes under an agreement with one customer, Mastronardi. Net sales include revenues earned from the sale of our products, less commissions, shipping, distribution and other costs incurred as defined in our customer agreements.
Cost of Goods Sold
Cost of goods sold for the three months ended March 31, 2022 and 2021 consisted of expenses incurred related to the production of inventory sold to customers.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2022 and 2021 consisted of payroll and payroll related expenses, stock-based compensation, professional services and legal fees, licenses and registration fees, insurance, depreciation, rent and various other personnel and office related costs. SG&A also included start-up expenses related to pre-commencement commercial activities for tomatoes on the vine at the Morehead CEA facility in 2021 and new CEA facilities under construction in 2022.
Interest Expense
Interest expense for the three months ended March 31, 2022 primarily related to long-term debt to help finance the construction of our CEA facilities. Interest expense from related parties for the three months ended March 31, 2021 primarily related to the finance lease and financing obligation for the Morehead CEA facility which were settled upon purchase of Morehead Farm, LLC on March 1, 2021 and the convertible note that was converted to Common Stock upon completion of the Business Combination on January 29, 2021.
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Results of Operations
Comparison of the Three Months Ended March 31, 2022 and March 31, 2021
The following table sets forth our historical operating results for the periods indicated:
Three Months Ended
(Dollars in thousands)March 31, 2022March 31, 2021$ Change
Net sales$5,164 $2,299 $2,865 
Cost of goods sold13,554 6,836 6,718 
(8,390)— (4,537)(3,853)
Operating expenses:
Selling, general and administrative expenses21,039 31,489 (10,450)
Total operating expenses21,039 31,489 (10,450)
Operating loss(29,429)(36,026)6,597 
Interest expense from related parties— (658)658 
Change in fair value of Private Warrants(1,329)9,826 (11,155)
Other14 356 (342)
Loss before income taxes(30,744)(26,502)(4,242)
Income tax benefit (expense)109 (2,013)2,122 
Net loss$(30,635)$(28,515)$(2,120)
Reconciliation of GAAP to Non-GAAP
The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA:
Three Months Ended
(Dollars in thousands)March 31, 2022March 31, 2021
Net loss$(30,635)$(28,515)
Interest expense from related parties— 658 
Interest income(101)(23)
Income tax (benefit) expense(109)2,013 
Depreciation and amortization expense3,112 1,802 
EBITDA(27,733)(24,065)
Change in fair value of Private Warrants1,329 (9,826)
Stock-based compensation expense6,035 6,286 
Transaction success bonus on completion of Business Combination— 1,500 
Restructuring costs1,990— 
Start-up costs for new CEA facilities(1)
355 — 
Business Combination transaction costs— 13,261 
Root AI acquisition costs(2)
— 407 
Adjusted EBITDA$(18,024)$(12,437)
(1) Start-up costs are related to the pre-commencement commercial activities for tomatoes and berries at the Richmond, Berea and Somerset CEA facilities
(2) The acquisition of Root AI occurred on April 7, 2021
The following sections discuss and analyze the changes in the significant line items in our unaudited condensed consolidated statements of operations for the comparison periods identified.
Net Sales

Net sales for the three months ended March 31, 2022 were $5.2 million compared to $2.3 million for the comparable prior year period. The increase of $2.9 million was primarily due to higher production during the three months ended March 31, 2022, including expanded product variety at higher average net sales prices, as the Morehead CEA facility was not fully harvesting during the three months ended March 31, 2021 due to the phased initial opening. Continued operational ramp-up at the facility, including enhanced training and productivity improvements, resulted in a more favorable mix of premium and non-
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premium tomatoes, which also drove higher net sales during the current quarter. While the net sales impact of mitigation efforts related to the occurrence of plant disease was not significant during the three months ended March 31, 2022, we expect the impact of plant disease to be toward the higher end but still within the range of our original forecast of 10% to 15% of 2022 yield, as we have removed some extra rows in the affected area out of an abundance of caution and re-planted with new seedlings. We expect our mitigation efforts to shift a portion of our second quarter sales and production into the third quarter.
Cost of Goods Sold
Cost of goods sold for the three months ended March 31, 2022 was $13.6 million compared to $6.8 million for the comparable prior year period. The increase of $6.7 million was primarily due to the Morehead CEA facility being fully operational for the full three months ended March 31, 2022 versus the phased launch of production in the comparable prior year quarter. Cost of goods sold for the three months ended March 31, 2022 was negatively impacted by the higher costs of contract labor incurred due to a challenging local labor market and higher natural gas and electricity costs.
Selling, General, and Administrative Expenses
SG&A for the three months ended March 31, 2022 was $21.0 million compared to $31.5 million for the comparable prior year period. The $10.5 million decrease was primarily due to $13.3 million of transaction costs related to the Business Combination in the prior year slightly offset by increased legal and consulting fees related to the restructuring initiative of $0.8 million during the three months ended March 31, 2022. SG&A also included $0.4 million and $1.0 million of start-up costs related to the pre-commencement commercial activities for the new CEA facilities for the three months ended March 31, 2022 and March 31, 2021, respectively. We continue to anticipate a decrease in our annualized SG&A of approximately $16 million due to the restructuring initiative, and have realized savings of approximately $1.4 million for the three months ended March 31, 2022. We do not expect any further costs associated with the restructuring initiative.
Interest Expense
Interest expense during the three months ended March 31, 2022 was incurred on debt used to finance the construction of our CEA facilities and was capitalized as a component of the cost of those facilities. Interest expense from related parties for the three months ended March 31, 2021 primarily related to the finance lease and financing obligation for the Morehead CEA facility which were settled upon purchase of Morehead Farm, LLC on March 1, 2021, and the convertible note that was converted to Common Stock upon completion of the Business Combination on January 29, 2021.
Income Taxes
Our effective income tax rate was 0.4% for the three months ended March 31, 2022 compared to (7.6)% for the prior year period. The variance from the U.S. federal statutory rate of 21% for the three months ended March 31, 2022 and March 31, 2021 was primarily attributable to increases in the Company’s valuation allowance largely driven by increases in our net operating loss carryforwards.
Liquidity and Capital Resources
Cash and cash equivalents totaled $97.6 million and $150.8 million as of March 31, 2022 and December 31, 2021, respectively. Currently, our primary sources of liquidity are cash flows generated from the successful completion of the Business Combination, the proceeds from debt and equity financings and revenues from the sale of our tomatoes. We have incurred losses and generated negative cash flows from operations since our inception in 2018. We expect to continue to incur losses and negative cash flows from operating expenses for the foreseeable future as we ramp up operations and production at our new CEA facilities. At March 31, 2022, we had an accumulated deficit of $217.9 million.
We continue to expect that the restructuring initiatives, which were implemented in the first quarter of 2022, will increase our liquidity by reducing our annualized SG&A expenses.
Material Cash Requirements
As of March 31, 2022, there were no material changes in our cash requirements from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Form 10-K.

Cash requirements for the remainder of the fiscal year are expected to consist primarily of our current payroll, working capital requirements, planned capital expenditure and debt service requirements. During the three months ended March 31, 2022, we spent $39.0 million on capital expenditures. We expect to incur approximately $100 million to $110 million more in capital expenditures during the remainder of the fiscal year based on the continued availability of financing on acceptable terms.
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We believe that our cash and cash equivalents on hand and available under our loan agreements at March 31, 2022 are sufficient to meet our current payroll and working capital requirements for a period of at least 12 months from the date of this Quarterly Report, as well as our debt service requirements and currently planned capital expenditure requirements as we continue to build out the Berea salad greens facility, Richmond tomato facility and the Somerset facility this year. We have the ability to defer and adjust our capital expenditures based on our ability to secure additional funding. The amount and timing of our future funding requirements, if any, will depend on many factors, including the timing and costs of completion of our large-scale high-tech CEA facilities. We will plan the timing of completion of our CEA facilities around available funding.
We could potentially use our available financial resources sooner than we currently expect and may incur additional indebtedness to meet future financing needs. Adequate additional funding may not be available to us on acceptable terms or at all. In addition, although we anticipate being able to obtain additional financing through non-dilutive means, we may be unable to do so. Our failure to raise capital as and when needed could have significant negative consequences for our business, financial condition and results of consolidated operations. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors”.
Summary of Cash Flows
A summary of our cash flows from operating, investing and financing activities is presented in the following table:
(Dollars in thousands)Three Months Ended March 31,
20222021
Net cash used in operating activities
$(27,503)$(36,157)
Net cash used in investing activities
(39,018)(134,538)
Net cash provided by financing activities
24,985 446,446 
Cash and cash equivalents (including restricted cash) beginning of year176,311 21,909 
Cash and cash equivalents (including restricted cash) end of period$134,775 $297,660 
Net Cash Used In Operating Activities
Net cash used in operating activities was $27.5 million for the three months ended March 31, 2022, compared to $36.2 million for the three months ended March 31, 2021. The change of $8.7 million was primarily due to $13.8 million for transaction costs related to the Business Combination that were incurred in 2021 partially offset by increased operating expenses related to full production at the Morehead CEA facility during the three months ended March 31, 2022.
Net Cash Used In Investing Activities
Net cash used in investing activities was $39.0 million for the three months ended March 31, 2022, compared to $134.5 million for the three months ended March 31, 2021. The change of $95.5 million was primarily due to $123.0 million for the purchase of the Morehead CEA facility from Equilibrium that we completed on March 1, 2021, partially offset by an increase in capital expenditures for purchases of property and equipment primarily related to construction of our Richmond, Berea, and Somerset CEA facilities during the three months ended March 31, 2022.
Net Cash Provided By Financing Activities
Net cash provided by financing activities was $25.0 million for the three months ended March 31, 2022, compared to $446.4 million for the three months ended March 31, 2021. The change of $421.5 million was primarily due to approximately $448.5 of proceeds from the Business Combination during the three months ended March 31, 2021 partially offset by $25.9 million in net proceeds from short and long-term debt issuance during the three months ended March 31, 2022.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results could differ from those estimates and assumptions.
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Certain accounting estimates involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. Management considers these accounting policies to be critical accounting estimates. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. The significant accounting estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the critical accounting estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K. There have been no material changes to the critical accounting estimates disclosed in the Form 10-K.
Recent Accounting Guidance
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that we adopt as of the specified effective date.
See Note 2 - Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for a discussion of recent accounting pronouncements and their effect on us.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

Interest Rate Risk

Our exposure to interest rate risk as of March 31, 2022 was related to the borrowings under the JPM Loan (as described in Note 10 - Debt in this Quarterly Report and the credit agreement with CEFF II AppHarvest Holdings, LLC, the (“Construction Loan”).

The JPM Loan had borrowings of $35.3 million as of March 31, 2022 and an interest rate of the secured overnight financing rate (“SOFR”) plus 2.25%, which combined was 2.63% as of March 31, 2022. The Construction Loan had borrowings of $47.8 million and an initial interest rate of 8.00% as of March 31, 2022. The interest rate for the Construction Loan will increase monthly beginning July 23, 2023 by 0.2% per annum.

Taking into account the initial fixed interest rate on the Construction Loan, as discussed above, a hypothetical 100 basis point, or 1.00%, increase in interest rates as of March 31, 2022 would result in additional annualized interest expense of approximately $0.4 million at the current borrowed amounts, or $0.3 million for the remainder of 2022 and would not have a material effect on our liquidity. Due to the nature of our debt, all of our interest expense is being capitalized with the asset the debt was used to finance.

Refer to Note 10 - Debt in our Form 10-K for more information regarding our portfolio of debt.

Foreign Currency Risk

We are exposed to fluctuations of the Euro (“EUR”) relative to the U.S. Dollar (“USD”) due to the agreements with Dalsem Greenhouse Technology, B.V. (“Dalsem”) for the construction of the Richmond tomato facility and Berea salad greens facility, which requires a portion of each payment due in EUR and a portion due in USD. We currently have foreign currency contracts with total notional amount outstanding of €11 million to hedge certain of these cash flows, and therefore do not anticipate a material risk from fluctuations in foreign currency. See Note 12 - Derivative Financial Instruments in this Quarterly Report for more information regarding our use of these foreign currency contracts.
Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the fiscal quarter ended March 31, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer and accounting officer have concluded that as of March 31, 2022, our disclosure controls and procedures were effective at a reasonable assurance level and, accordingly, provided reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2)
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accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Limitations on Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II - Other Information
Item 1. Legal Proceedings
From time to time, we may be subject to litigation and claims arising in the ordinary course of business. We do not currently; however, expect such claims to have a material adverse effect on our business, operating results, cash flows or financial condition. However, depending on the nature and timing of a given dispute, an unfavorable resolution could materially affect our current or future results of operations or cash flows. For a description of our legal proceedings, see Part I, Item 1, Note 11. Commitments and Contingencies for more information.
Item 1A. Risk Factors

Investing in our securities involves a high degree of risk. Before you make a decision to buy our securities, you should carefully consider the risks and uncertainties described below together with all of the other information contained in this Quarterly Report. If any of the events or developments described below were to occur, our business, prospects, operating results and financial condition could suffer materially, the trading price of our securities could decline, and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

Summary of Risks Affecting Our Business

Our business is subject to a number of risks of which you should be aware before making a decision to invest in our securities. These risks include, among others, the following:

We have a history of losses and expect to incur significant expenses and continuing losses for the foreseeable future. Our business could be adversely affected if we fail to effectively manage our future growth and liquidity.
We will require significant additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to delay, limit, reduce or terminate our operations and future growth, including with respect to technology.
We have an evolving business model, which increases the complexity of our business and makes it difficult to evaluate our future business prospects.
We face risks inherent in the greenhouse agriculture business, including the risks of diseases and pests.
We currently rely on a single facility for all of our operations.
Any damage to or problems with our CEA facilities, or delays in land acquisition or construction, could severely impact our operations and financial condition.
Mastronardi is currently our sole, exclusive marketing and distribution partner. We are highly dependent on this relationship, and impairment to or termination of this relationship could adversely affect our results of operations and financial condition.
We depend on employing a skilled local labor force, and failure to attract, develop, and retain qualified employees could negatively impact our business, results of operations and financial condition.
We could be adversely affected by a change in consumer preferences, perception and spending habits in the food industry, and failure to develop and expand our product offerings or gain market acceptance of our products could have a negative effect on our business.
We may be unable to successfully execute on our growth strategy. Failure to adequately manage our planned growth strategy may harm our business or increase our risk of failure.
We have agreed not to compete with Mastronardi outside of Kentucky and West Virginia, which may limit our business opportunities.
We build CEA facilities which may be subject to unexpected costs and delays due to reliance on third parties for construction, material delivery, supply-chains and fluctuating material prices.
We may not be able to compete successfully in the highly competitive natural food market.
We are only in our second harvest, which makes it difficult to forecast future results of operations.
Demand for our current and expected future products, which include tomatoes, salad greens, berries, and other produce, is subject to seasonal fluctuations and may adversely impact our results of operations in certain quarters.
Food safety and foodborne illness incidents or advertising or product mislabeling may materially adversely affect our business by exposing us to lawsuits, product recalls, regulatory enforcement actions, or changes in consumer demand increasing our operating costs and reducing demand for our product offerings.
As a public benefit corporation, our duty to balance a variety of interests may result in actions that do not maximize stockholder value.
If we are unable to apply technology effectively in driving value for our clients through our technology-based platforms, our results of operations, client relationships and growth could be adversely affected.
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Risks Related to Our Business and Industry

We have a history of losses, and expect to incur significant expenses and continuing losses for the foreseeable future. Our business could be adversely affected if we fail to effectively manage our future growth.

We incurred net losses of $30.6 million and $28.5 million for the three months ended March 31, 2022 and 2021, respectively. We believe we will continue to incur net losses for the foreseeable future as we continue to invest in world-class technology to increase production and commercial sales of our products. There is no guarantee when, if ever, we will become profitable. We expect to expend substantial resources as we:

complete the build-out of facilities for which building has commenced and begin construction on additional facilities;
continue harvesting existing crops and plant and harvest new crops in our existing and future facilities;
fulfill our obligations under our marketing and distribution agreement with Mastronardi;
identify and invest in future growth opportunities, including the purchase or lease of land and new or expanded facilities;
invest in sales and marketing efforts to increase brand awareness, engage customers and drive sales of our products;
invest in product innovation and development; and
incur additional general administration expenses, including increased finance, legal and accounting expenses, associated with being a public company and growing operations.
    
These investments may not result in the growth of our business. Even if these investments do result in the growth of our business, if we do not effectively manage our growth, we may not be able to execute on our business plan and vision, respond to competitive pressures, take advantage of market opportunities, satisfy customer requirements or maintain high-quality product offerings, any of which could adversely affect our business, financial condition and results of operations.

We will require significant additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to delay, limit, reduce or terminate our operations and future growth.

The high-tech greenhouse agriculture business is extremely capital-intensive and we expect to expend significant resources to complete the build-out of facilities under construction, including the development of related technology, continue harvesting existing crops and plant and harvest new crops in our existing and future CEA facilities. These expenditures are expected to include working capital, costs of acquiring and building out new facilities, costs associated with planting and harvesting, such as the purchase of seeds and growing supplies, and the cost of attracting, developing and retaining a skilled labor force, including local labor. In addition, other unanticipated costs may arise due to the unique nature of these CEA facilities and increased production in our single operating facility at full capacity. We currently import many of the supplies and materials for greenhouse production and operations from abroad, including the construction materials for our CEA facilities and seeds for plants. Accordingly, we are subject to risk of fluctuation in exchange rates, which could cause unexpected increases in our costs and harm our financial position. In addition, our ability to execute on our growth strategy and CEA technology require significant additional financing.

We expect that our existing cash and credit available under our loan agreements will be sufficient to fund our planned operating expenses, capital expenditure requirements and any debt service payments through at least the next 12 months. However, our operating plan may change because of factors currently unknown, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. Such financings may result in dilution to stockholders, issuance of securities with priority as to liquidation and dividend and other rights more favorable than shares of our common stock (“Common Stock”), imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe that we have sufficient funds for current or future operating plans. There can be no assurance that financing will be available to us on favorable terms, or at all. The inability to obtain financing when needed may make it more difficult for us to operate our business or implement our growth plans.

We have an evolving business model, which increases the complexity of our business and makes it difficult to evaluate our future business prospects.

Our business model is continuing to evolve. We are primarily engaged in building a sustainable food company with a resilient and scalable ecosystem of applied technology greenhouses to serve the rapidly growing consumer demand for fresh, chemical-free, non-GMO fruits, vegetables and related value-added products in the U.S. We also intend to pursue additional
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CEA opportunities through partnerships with third parties, including opportunities outside of the U.S. With the Root AI Acquisition, we are also engaged in building an applied technology company, through our ATI subsidiary, which develops CEA technology solutions for internal use and for potential sale to customers in the global CEA industry. From time to time, we may continue to modify aspects of our business model relating to our products and services. We do not know whether these or any other modifications will be successful. The evolution of and modifications to our business model will continue to increase the complexity of our business and place significant strain on our management, personnel, operations, systems, technical performance and financial resources. Future additions to or modifications of our business model are likely to have similar effects. Further, any new products or services we offer that are not favorably received by the market could damage our reputation or our brand. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

We face risks inherent in the greenhouse agriculture business, including the risks of diseases and pests.

We are focused on building large-scale CEA facilities in Appalachia with the goal of providing quality domestic supply of fresh fruits and vegetables to nearly 70% of the U.S. population. We primarily grow two varieties of tomatoes at the Morehead CEA facility — tomatoes on the vine and beefsteak tomatoes — and expect to expand to other tomato varieties and other fruits and vegetables such as berries, peppers, cucumbers, and salad greens in the future at other facilities. As such, we are subject to the risks inherent in an agricultural business, such as insects, plant and seed diseases and similar agricultural risks, which may include crop losses, for which we are not insured; production of non-saleable products; and rejection of products for quality or other reasons, all of which may materially affect our operational and financial performance. Although our produce is grown in climate-controlled greenhouses, there can be no assurance that natural elements will not have an effect on the production of these products. In particular, plant diseases, such as root rot or tomato brown rugose fruit virus (“ToBRFV”), or pest infestations, such as whiteflies, can destroy all or a significant portion of our produce and could eliminate or significantly reduce production until we are able to disinfect the greenhouse and grow replacement tomatoes or other vegetables and fruits. ToBRFV is a virus affecting tomatoes, peppers and possibly other plants. Seed and transplant production are the most critical areas to identify the virus as contamination creates the risk of spreading to hundreds, if not thousands, of plants. ToBRFV can be transmitted mechanically and spread between plants or on contaminated tools, clothes or hands and mitigation efforts could require a complete facility clean out, including multiple sanitations with disinfectants known to be effective on the ToBRFV. ToBRFV may lead to reduced crop quality, ending a crop cycle early or clearing out a portion of a CEA facility or its entirety. In addition, delivery of tomato crops across the U.S-Mexico and U.S.-Canada borders encounters additional inspections due to ToBRFV and those crops may be denied entry.

Although we have taken, and continue to take, precautions to guard against crop diseases and pests, these efforts may not be sufficient. For example, in June 2021 and during the course of the fourth quarter of 2021, we experienced outbreaks of various pests and disease on certain of our plants. In response, we undertook several mitigation efforts, including the removal of plants, shortened growing periods of plants that were or may have been affected, and modifications to operational practices to eliminate or greatly reduce potential transmission vectors. These efforts adversely affected, and will continue to affect, yields for the 2021-2022 growing season at our Morehead facility. While the net sales impact of mitigation efforts related to the occurrence of plant disease has not been significant to date, we now expect the impact of plant disease to be toward the higher end of our forecast of 10 to 15% of 2022 yield as we removed some extra rows in the affected area out of an abundance of caution. We expect our mitigation efforts to shift a portion of our second quarter sales and production into the third quarter. In addition, diseases and pests can make their way into greenhouses from outside sources over which we have limited or no control. Diseases and pests can be inadvertently brought in by employees, from seed and propagation vendors and from the trucks that transport supplies to the greenhouse. Once a disease or pest is introduced, we will need to quickly identify the problem and take remedial action in order to preserve the growing season. Failure to identify and remediate any diseases or pests in a timely manner could cause the loss of all or a portion of our crop and result in substantial time and resources to resume operations. Crop losses as a result of these agricultural risks have and could continue to negatively and materially impact our business, prospects, financial condition, results of operations and cash flows.

We currently rely on a single facility for all of our operations.

Our first CEA facility is a 2.76 million square foot CEA facility in Morehead, Kentucky, which partially opened in October 2020 and became fully operational in March 2021. For the immediate future, we will rely solely on the operations at the Morehead CEA facility. Adverse changes or developments affecting the Morehead CEA facility could impair our ability to produce our products and our business, prospects, financial condition and results of operations. Any shutdown or period of reduced production at the Morehead CEA facility, which may be caused by regulatory noncompliance or other issues, as well as other factors beyond our control, such as severe weather conditions, natural disaster, fire, power interruption, work stoppage, disease outbreaks or pandemics (such as COVID-19), equipment failure or delay in supply delivery, would significantly disrupt
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our ability to grow and deliver our produce in a timely manner, meet our contractual obligations and operate our business. Our greenhouse equipment is costly to replace or repair, and our equipment supply chains may be disrupted in connection with pandemics, such as COVID-19, trade wars, labor shortages, or other factors. If any material amount of our machinery were damaged, we would be unable to predict when, if at all, we could replace or repair such machinery or find co-manufacturers with suitable alternative machinery, which could adversely affect our business, financial condition and operating results. Any insurance coverage we have may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

Any damage to or problems with our CEA facilities, or delays in land acquisition or construction, could severely impact our operations and financial condition.

Any damage to or problems with the Morehead CEA facility or any other CEA facilities we build or use in the future, including defective construction, repairs, or maintenance, could have an adverse impact on our operations and business. We face risks including, but not limited to:

Weather. Our operations may be adversely affected by severe weather including tornados, lightning strikes, wind, snow, hail and rain. A tornado, lightning strike, severe hailstorm or unusually large amount of precipitation could cause damage or destruction to all or part of our greenhouse or affect the ability of our workforce to get to or remain at the facility. We may be required to expend significant resources and time in mitigating damage to our crops, and such damage may not be covered by insurance. The impact of a severe weather event or natural disaster could result in significant losses and seriously disrupt our entire business.
Water Supply. We irrigate our plants with rainwater, collected in a 10-acre on-site retention pond, eliminating the need for city water or well water. The pond is designed to be constantly aerated with nanobubble technology, which combats harmful algae blooms and cyanotoxins. Once rainwater is pumped into the facility from the pond, it enters a closed-loop irrigation system. The water is processed through a sand filter and then sanitized with UV light. This destroys viruses, bacteria and protozoa without the use of chemicals and with no unwanted disinfection by-products. Despite these precautions, there remains risk of contamination to our water supply from outside sources. Any contamination of the water in the retention pond could require significant resources to correct and could result in damage or interruption to our growing season.
Energy Costs or Interruption. Although our plants primarily grow using natural sunlight, requiring less energy per plant than indoor warehouse farms, we do supplement the light our plants receive with LED lighting and high-pressure sodium lighting, which makes us vulnerable to rising energy costs. We have diesel generators to maintain energy supply in the case of an outage, but these generators would not be able to power the facility for any prolonged period of time and therefore outages could result in reduced crop yield. Rising or volatile energy costs may adversely impact our business, and our operations could be significantly affected by a prolonged power outage.

In addition, we have experienced and may continue to experience unexpected delays in building our CEA facilities for a variety of reasons, including limited financing, limited labor due to COVID-19 or other factors, unexpected construction problems or severe weather. For example, to incorporate design and other insights from construction of the 15-acre Berea salad greens facility and to maintain flexibility in the allocation of capital resources, we temporarily paused development of the 10-acre Morehead salad greens facility with resumption of construction contingent upon financing. If we experience significant unexpected delays in construction, we may have to limit or miss out on an entire growing season depending on the timing and extent of the delays, which could harm our business, financial condition and results of operations.

We depend on employing a skilled local labor force, and failure to attract, develop and retain qualified employees could negatively impact our business, results of operations and financial condition.

Agricultural operations are labor intensive, and the growing season for greenhouses is year-round. In general, each year, we plan to begin planting in August or September, grow and harvest the produce into June, July, or August and then remove plants and clean the greenhouse in August. These year-round operations depend on the skills and regular availability of labor in Appalachia.

We have rapidly hired in the region as we prepared to open our CEA facility and benefited from a strong network of employer assistance programs ready to help companies interested in locating in the region to provide jobs for its ready workforce. However, there is competition for skilled agricultural labor in the region, particularly from the cannabis, food, and distribution industries, and even if we are able to identify, hire and develop our labor force, there is no guarantee that we will be able to retain these employees. For example, we continue to observe an overall tightening and increasingly competitive local labor market. In order to forestall any potential labor shortfall, we have hired contract laborers from outside of the region to help complete our next harvest. If we are unable to hire, develop and retain a labor force capable of performing at a high-level,
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or if mitigation measures we take to respond to a deficit of adequate local labor, such as overtime and contract laborers, have unintended negative effects, our business results of operations and financial condition could be adversely affected. Further, the operation of CEA facilities requires unique skills, which may not be widely available in the regions where we operate. Any additional shortages of labor, lack of training or skills, or lack of regular availability could restrict our ability to operate our greenhouses profitably, or at all.

In addition, efforts by labor unions to organize our employees could divert management attention away from regular day-to-day operations and increase our operating expenses. Labor unions may make attempts to organize our non-unionized employees. We are not aware of any activities relating to union organizations at any of our facilities, but we cannot predict which, if any, groups of employees may seek union representation in the future or the outcome of any collective bargaining. If we are unable to negotiate acceptable collective bargaining agreements, we may have to wait through “cooling off” periods, which are often followed by union-initiated work stoppages, including strikes. Depending on the type and duration of our any work stoppage, our operating expenses could increase significantly, which could negatively impact our financial condition, results of operations and cash flows.

Our results of operations can be adversely affected by labor shortages, turnover and labor cost increases.

Labor is a primary component of operating our business. A number of factors may adversely affect the labor force available to us or increase labor costs, including high employment levels, government unemployment subsidies, including unemployment benefits offered in response to the COVID‐19 pandemic, and other government regulations. We continue to observe an overall tightening and increasingly competitive local labor market. A sustained labor shortage or increased turnover rates within our employee base, including those caused by COVID‐19, or measures taken to address COVID-19, or as a result of general macroeconomic factors, could lead to increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees, and could negatively affect our ability to efficiently operate our greenhouse equipment and overall business.

If we are unable to hire, develop and retain employees capable of performing at a high-level, or if mitigation measures we may take to respond to a decrease in labor availability, such as overtime and contract laborers, have unintended negative effects, our business could be adversely affected. An overall labor shortage, lack of skilled labor, increased turnover or labor inflation, including those caused by COVID‐19 or as a result of general macroeconomic factors, could have a material adverse impact on our operations, results of operations, liquidity or cash flows.

Our management has limited experience in operating a public company.

Our executive officers have limited experience in the management of a publicly traded company. Our management team may not successfully or effectively manage our regulatory oversight and reporting obligations as a public company under the federal securities laws of the U.S. Our management’s limited experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage in that it is likely that an increasing amount of their time may be devoted to these activities, which will result in less time being devoted to the management and growth of our company. We may not have adequate personnel with the appropriate level of knowledge, experience, and training in the accounting policies, practices or internal controls over financial reporting required of public companies in the U.S. The development and implementation of the standards and controls necessary for us to achieve the level of accounting standards required of a public company in the U.S. may require costs greater than expected. It is possible that we will be required to expand our employee base and hire additional employees to support our operations as a public company, which will increase our operating costs in future periods.

Mastronardi is currently our sole, exclusive marketing and distribution partner. We are highly dependent on our relationship with Mastronardi, and impairment to or termination of this relationship could adversely affect our results of operations and financial condition.

Mastronardi is our exclusive marketing and distribution partner for all Products pursuant to the Mastronardi Morehead Agreement. Under the terms of the Mastronardi Morehead Agreement, we are responsible for growing, producing, packing and delivering all Products to Mastronardi, and Mastronardi is responsible for marketing, branding and distributing the Products to its customers. Mastronardi will sell the Products at market prices that are consistent with the best and highest prices available during the duration of the applicable growing season for like kind USDA Grade No. 1 products. Mastronardi will set the market price for the Products and will pay over to us the gross sale price of the Products sold by Mastronardi, less a marketing fee and Mastronardi’s costs incurred in the sale and distribution of the Products, which can fluctuate.

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Mastronardi is only obligated to purchase our products that are at or above USDA Grade No. 1 standards and export quality standards within North America and of a quality required by Mastronardi’s customers, in Mastronardi’s sole determination. The Mastronardi Morehead Agreement provides for an inspection period during which Mastronardi will inspect our products to determine whether it meets the required quality standards, and Mastronardi may reject and return any of our products that do not meet these standards. Any significant or unexpected rejection of our products could negatively impact our results of operations, and we may be unable to sell the rejected products to other third parties. Further, because Mastronardi acts as an intermediary between us and the retail grocers or foodservice providers, we do not have short-term or long-term commitments or minimum purchase volumes with them that ensure future sales of our products.

If we expand our growing acreage or operations in Kentucky or West Virginia, Mastronardi has a right of first refusal to be the exclusive distributor of any produce arising as a result of such expansion for the greater of ten years from the date of first commercial production of the additional products or the remainder of the term of the Mastronardi Morehead Agreement. In the event we or our affiliates engage in the business of growing fresh produce in a greenhouse in Kentucky and West Virginia, Mastronardi has the right to deem such New Grower Facility to be under an agreement with Mastronardi on the same material terms and conditions of the Mastronardi Morehead Agreement for a period of ten years. In December 2020, Mastronardi elected to deem our Richmond tomato facility and Berea salad greens facility to be New Grower Facilities.

Due to the exclusive nature of this long-term distribution relationship, we could also be adversely affected if Mastronardi experiences impairment to its brand and reputation or to its financial condition. Mastronardi and we are each entitled to terminate the Mastronardi Morehead Agreement in the case of the other party’s uncured breach of the contract or bankruptcy or insolvency. If the Mastronardi Morehead Agreement is terminated, we may experience difficulty or delay in finding a suitable replacement distributor in a timely manner or at all, and our business, financial condition and results of operations could be harmed.

We could be adversely affected by a change in consumer preferences, perception and spending habits in the food industry, and failure to develop and expand our product offerings or gain market acceptance of our products could have a negative effect on our business.

The market in which we operate is subject to changes in consumer preference, perception and spending habits. Our performance will depend significantly on factors that may affect the level and pattern of consumer spending in the U.S. food industry market in which we operate. Such factors include consumer preference, consumer income, consumer confidence in and perception of the safety and quality of our products and shifts in the perceived value for our products relative to alternatives.

Consumer Preferences. We currently produce primarily tomatoes on the vine and beefsteak tomatoes. Although tomatoes are the second most popular fresh market vegetable per capita in the U.S., with per capita consumption increasing significantly in the past 40 years, there is no guarantee that tomatoes will continue to garner this popularity, that consumers will prefer the varieties of tomatoes grown by us, or that we will be successful in capturing a sufficient market share. If we are able to expand our product offerings to include other vegetables and fruits, such as cucumbers, peppers, salad greens, and berries, we will similarly be impacted by consumer preferences for such vegetables and fruits.
Safety and Quality Concerns. Media coverage regarding the safety or quality of, or diet or health issues relating to, our products or the processes involved in our manufacturing, may damage consumer confidence in our products. For example, manufacturers and regulatory authorities have issued recalls of tomatoes in the past due to issues such as salmonella contamination. Any widespread safety or quality issues involving tomatoes or other fresh fruits or vegetables — even if not involving us — could adversely affect consumer confidence in and demand for such tomatoes or other fresh produce.
Consumer Income. A general decline in the consumption of our products could occur at any time as a result of change in consumer spending habits, including an unwillingness to pay a premium or an inability to purchase our products due to financial hardship, inflation, or increased price sensitivity, which may be exacerbated by the effects of the COVID-19 pandemic or other events.

The success of our products will depend on a number of factors including our ability to accurately anticipate changes in market demand and consumer preferences, our ability to differentiate the quality of our products from those of our competitors, and the effectiveness of marketing and advertising campaigns for our products. We may not be successful in identifying trends in consumer preferences and growing or developing products that respond to such trends in a timely manner. We or our partners also may not be able to effectively promote our products by marketing and advertising campaigns and gain market acceptance. If our products fail to gain market acceptance, are restricted by regulatory requirements, have quality problems, or are affected by consumer perceptions of safety and quality even arising from our competitors’ products, we may not be able to fully recover
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costs and expenses incurred in our operations, and our business, financial condition or results of operations could be materially and adversely affected.

We may be unable to successfully execute on our growth strategy.

Our growth strategy includes the development of new CEA facilities and the expansion of our product line.

New Controlled Agriculture Facilities. Our first CEA facility, which spans approximately 60 acres, opened its first 30 acres of growing space in Morehead, Kentucky in October 2020, with the remainder becoming operational in March 2021 and production beginning in May 2021. We have begun construction on our next four facilities in Berea, Richmond, Somerset and Morehead. In October 2020, we announced that we had broken ground at the facility in Richmond. The facilities will include 60 acres of growing space for tomatoes on the vine at the Richmond tomato facility and 15 acres of salad greens at the Berea salad greens facility. Both new facilities are expected to be operational by the end of 2022. In the second quarter of 2021, we began construction of the 30 acre Somerset facility to grow berries and a 10 acre salad greens facility at the Morehead salad greens facility. For risks related to delays in construction of our CEA facilities, please see the risk factor “Any damage to or problems with our CEA facilities, or delays in construction, could severely impact our operations and financial condition.” From time to time, we enter into other agreements to purchase, or options to purchase, additional properties for potential development. We expect to develop additional CEA facilities only after obtaining the necessary capital, assuming, among other things, that we are able to obtain necessary capital when needed and on acceptable terms.

Identifying, planning, developing, constructing and finishing new CEA facilities in Central Appalachia has required and will continue to require substantial time, capital, and resources. Greenhouses, such as the Morehead CEA facility and other facilities, require a large amount of flat land with a maximum cut and fill area, the ability to obtain the appropriate permits and approvals, sufficient utilities and road access and adequate availability of skilled labor, among other things. We may be unsuccessful in identifying available sites in Central Appalachia that are conducive to our planned projects, and even if identified, we may ultimately be unable to lease, purchase, build or operate on the land for any number of reasons. Because of the capital-intensive nature of these projects, we will need to prioritize which sites we plan to develop, and there can be no guarantee that we will select or prioritize sites that will ultimately prove to be appropriate for construction. Further, we may spend time and resources developing sites at the expense of other appropriate sites, which may ultimately have been a better selection or more profitable location. On the other hand, if we overestimate market demand and expands into new locations too quickly, we may have significantly underutilized assets and may experience reduced profitability. If we do not accurately align capacity at our greenhouses with demand, our business, financial condition and results of operations could be adversely affected.

New Product Lines. We aspire to develop a leading fruit and vegetable brand widely known for its sustainable practices. We plan to leverage our strong mission to build an iconic brand recognized and revered by a loyal customer base that values a sustainable homegrown food supplier. We have built a direct-to-consumer e-commerce platform that we expect will power our direct-to-consumer and value-added products businesses. The platform utilizes Shopify to manage our e-commerce business and Bluegrass Integrated Communications for our logistics and storage needs. We successfully launched and sold out our first value-added product, salsa, in 2021, and we expect to leverage this platform as we continue to refine and grow our value-added products strategy in the future, depending on the availability of financing on acceptable terms. We have paused the sale and development of our salsa and other products in 2022. The three farms expected to be operational in 2022 should provide us a significantly larger volume of produce from which to derive value-added and direct-to-consumer products when expected sales and development resume. Accordingly, we plan to spend time and resources developing capacity for larger-scale production that we believe will enable us to secure financing and permit us to relaunch our value-added products at a larger scale in the future.

We may not be able to implement our growth strategy successfully. Our sales and operating results will be adversely affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful.

Failure to adequately manage our planned growth strategy may harm our business or increase our risk of failure.

For the foreseeable future, we intend to pursue a growth strategy for the expansion of our operations through increased product development and marketing. Our ability to rapidly expand our operations will depend upon many factors, including our ability to work in a regulated environment, establish and maintain strategic relationships with suppliers, and obtain adequate and necessary capital resources on acceptable terms. Any restrictions on our ability to expand may have a materially adverse
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effect on our business, results of operations, and financial condition, including with respect to our technology initiatives. Accordingly, we may be unable to achieve our targets for sales growth, and our operations may not be successful or achieve anticipated operating results.

We have agreed not to compete with Mastronardi outside of Kentucky and West Virginia, which may limit our business opportunities.

We have agreed not to compete with Mastronardi outside of Kentucky and West Virginia, which includes the businesses of growing, harvesting, packaging, distributing or selling fresh produce, subject to certain exceptions for fresh produce that is grown in Kentucky or West Virginia. Although we are currently focused on building greenhouses in Central Appalachia, if we desired in the future to build or operate facilities outside of Kentucky or West Virginia that were competitive with Mastronardi, the Mastronardi Morehead Agreement requires us to obtain Mastronardi’s consent before doing so. If Mastronardi withholds such consent for any reason, this could have the effect of restricting certain business opportunities outside of Kentucky and West Virginia during the term of the non-compete provision. The non-compete provision runs for ten years from the date of a first commercial harvest from the Morehead CEA facility and also runs for ten years measured from the date of a first commercial harvest from a facility deemed to be a New Grower Facility by Mastronardi under the terms of the Mastronardi Morehead Agreement.

We build CEA facilities, which may be subject to unexpected costs and delays due to reliance on third parties for construction, material delivery, supply-chains and fluctuating material prices.

We build CEA facilities that are dependent on a number of key inputs and their related costs including materials such as steel and glass and other supplies, as well as electricity and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact our business, financial condition and operating results. We have entered into a direct contractual relationship with Dalsem for the construction of our Richmond tomato facility and Berea salad greens facility and Dalsem also provides significant construction services for the Morehead CEA facility. We have also entered into a direct contractual relationship with Havecon for the construction of our Somerset facility. If Dalsem or Havecon encounter unexpected costs, delays or other problems in building these CEA facilities, our financial position and ability to execute on our growth strategy could be negatively affected. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on our business, financial condition and operating results.

The price of production, sale and distribution of these goods may fluctuate widely based on the impact of numerous factors beyond our control including international, economic and political trends, transportation disruptions, inflation, global or regional consumptive patterns, speculative activities and increased production due to new production and distribution developments and improved production and distribution methods. In addition, we import substantially all of the construction materials used to build the CEA facilities. The use of third-party import services can cause logistical problems, unexpected costs and delays in facility construction, which we cannot directly control. Any prolonged disruption of third-party delivery and shipping services could negatively affect our facility building schedule. Rising costs associated with third-party transportation services used to ship materials may also adversely impact our building schedule and crop season planning, and more generally our business, financial condition, results of operations and prospects.

The COVID-19 pandemic continues to impact worldwide economic activity, and the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions in response, such as closures or other restrictions on the conduct of business operations of manufacturers, suppliers and vendors, which are creating disruption in global supply chains. The increased global demand on shipping and transport services may cause us to experience delays in the future, which could impact our ability to obtain materials or build our greenhouses in a timely manner. These factors could otherwise disrupt our operations and could negatively impact our business, financial condition and results of operations.

If we experience significant unexpected delays in construction, we may have to limit or miss out on an entire growing season depending on the timing and extent of the delays, which could harm our business, financial condition and results of operations.

We may not be able to compete successfully in the highly competitive natural food market.

We operate in the highly competitive natural foods environment. With the importing of vine crops rapidly increasing, our competition includes large-scale operations in Mexico and to a lesser extent the southwestern U.S. In this market, competition is based on, among other things, product quality and taste, brand recognition and loyalty, product variety, product packaging and package design, shelf space, reputation, price, advertising, promotion and nutritional claims.
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We may not be able to compete successfully with imported goods, including from Mexico and Canada. A risk for high-tech producers in the U.S. is that lower-cost Mexican producers will be able to increasingly step up and meet emerging U.S. retail market preferences for higher quality, improved product safety, year-round availability, and product innovation. Mexican producers achieve this not by investing equivalent capital, but by leveraging climatic advantages at lower cost. Market leadership will accrue to the most efficient producers who are able to reliably meet the needs of large U.S. retailers and can demonstrate advantages in marketing strategy, geography, technology, and production learning curves sufficient to warrant the substantial long- term working capital required to fuel the expected sustained growth of this niche. Meanwhile, Canadian producers are beginning or expanding production in the U.S. The major factors driving this expansion are brand value of U.S. production and lower transportation and energy costs at U.S. facilities. The Canadian greenhouse industry is located primarily in Ontario in the east and British Columbia in the west. The Canadian greenhouse industry is supported by extensive government subsidies and financing that allows them to compete with the U.S. and Mexico on production cost.

We also face competition from traditional greenhouse operators both domestic and abroad, as well as from high-tech agricultural startups that are focused on development of farms either in or near major cities.

Each of these competitors may have substantially greater financial and other resources than us and some of whose products are well accepted in the marketplace today. We cannot be certain that we will successfully compete with larger competitors that have greater financial, sales and technical resources. They may also have lower operational costs, and as a result may be able to offer comparable or substitute products to customers at lower costs. This could put pressure on us to lower our prices, resulting in lower profitability or, in the alternative, cause us to lose market share if we fail to lower prices. Retailers may also market competitive products under their own private labels, which are generally sold at lower prices, and may change the merchandising of our products so we have less favorable placement.

The CEA agriculture business also has low barriers to entry, and we will not be able to prevent competitors from building and oper