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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022
or
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☐ | 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
AppHarvest, Inc.
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(Exact name of registrant as specified in its charter)
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Delaware | 84-5042965 |
(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:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, $0.0001 par value per share | APPH | The Nasdaq Stock Market LLC |
Warrants, each whole warrant exercisable for one share of Common Stock at an exercise price of $11.50 per share | APPHW | The 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.
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Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller 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 July 29, 2022, were 105,888,360.
APPHARVEST, INC
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION | |
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Condensed Consolidated Balance Sheets | |
Condensed Consolidated Statements of Operations and Comprehensive Loss | |
Condensed Consolidated Statements of Stockholders’ Equity | |
Condensed Consolidated Statements of Cash Flows | |
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Part I - Financial Information
Item 1. Financial Statements
APPHARVEST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands except per share amounts)
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Assets | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 50,943 | | | $ | 150,755 | |
Restricted cash | 48,354 | | | 25,556 | |
Accounts receivable, net | 1,289 | | | 1,575 | |
Inventories, net | 2,936 | | | 4,998 | |
| | | |
Prepaid expenses and other current assets | 3,565 | | | 5,613 | |
Total current assets | 107,087 | | | 188,497 | |
Operating lease right-of-use assets, net | 4,261 | | | 5,010 | |
Property and equipment, net | 429,340 | | | 343,913 | |
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Other assets, net | 23,066 | | | 16,644 | |
Total non-current assets | 456,667 | | | 365,567 | |
Total assets | $ | 563,754 | | | $ | 554,064 | |
Liabilities and stockholders’ equity | | | |
Current Liabilities | | | |
Accounts payable | $ | 10,671 | | | $ | 8,553 | |
Accrued expenses | 18,189 | | | 15,794 | |
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Current portion of lease liabilities | 777 | | | 751 | |
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Current portion of long-term debt | 49,717 | | | 28,020 | |
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Other current liabilities | 59 | | | 119 | |
Total current liabilities | 79,413 | | | 53,237 | |
Long-term debt, net of current portion | 121,409 | | | 102,637 | |
Lease liabilities, net of current portion | 4,388 | | | 4,938 | |
Deferred income tax liabilities | 2,149 | | | 2,418 | |
Private Warrant liabilities | 541 | | | 1,385 | |
Other liabilities | 123 | | | 1,809 | |
Total non-current liabilities | 128,610 | | | 113,187 | |
Total liabilities | 208,023 | | | 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 June 30, 2022 and December 31, 2021 | — | | | — | |
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Common stock, par value $0.0001, 750,000 shares authorized, 105,737 and 101,136 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | 11 | | | 10 | |
Additional paid-in capital | 597,205 | | | 576,895 | |
Accumulated deficit | (246,654) | | | (187,314) | |
Accumulated other comprehensive income (loss) | 5,169 | | | (1,951) | |
Total stockholders’ equity | 355,731 | | | 387,640 | |
Total liabilities and stockholders’ equity | $ | 563,754 | | | $ | 554,064 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
APPHARVEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (Unaudited)
(In thousands except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net sales | $ | 4,358 | | | $ | 3,138 | | | $ | 9,522 | | | $ | 5,437 | |
Cost of goods sold | 14,121 | | | 15,683 | | | 27,675 | | | 22,519 | |
| (9,763) | | | (12,545) | | | (18,153) | | | (17,082) | |
Operating expenses: | | | | | | | |
Selling, general and administrative expenses | 20,225 | | | 27,467 | | | 41,264 | | | 58,956 | |
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Total operating expenses | 20,225 | | | 27,467 | | | 41,264 | | | 58,956 | |
Loss from operations | (29,988) | | | (40,012) | | | (59,417) | | | (76,038) | |
Other income (expense): | | | | | | | |
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Interest expense from related parties | — | | | — | | | — | | | (658) | |
Interest expense | — | | | (88) | | | — | | | (88) | |
Change in fair value of Private Warrants | 1,069 | | | 6,488 | | | (260) | | | 16,314 | |
Other | 55 | | | 105 | | | 69 | | | 461 | |
Loss before income taxes | (28,864) | | | (33,507) | | | (59,608) | | | (60,009) | |
Income tax benefit (expense) | 159 | | | 1,491 | | | 268 | | | (522) | |
Net loss | (28,705) | | | (32,016) | | | (59,340) | | | (60,531) | |
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Other comprehensive income (loss): | | | | | | | |
Net unrealized gains (losses) on derivatives contracts, net of tax | 2,760 | | | (1,843) | | | 7,120 | | | (2,512) | |
Comprehensive loss | $ | (25,945) | | | $ | (33,859) | | | $ | (52,220) | | | $ | (63,043) | |
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Net loss per common share: | | | | | | | |
Basic and diluted | $ | (0.28) | | | $ | (0.32) | | | $ | (0.58) | | | $ | (0.67) | |
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Weighted average common shares outstanding: | | | | | | | |
Basic and diluted | 103,098 | | | 100,084 | | | 102,215 | | | 90,460 | |
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See accompanying notes to the unaudited condensed consolidated financial statements.
APPHARVEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands)
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| | | | | | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
| | | Common Stock | | | | |
| | | Shares | | Amount | | | | |
December 31, 2020 | | | 9,750 | | | $ | 1 | | | $ | 686 | | | $ | (21,128) | | | — | | | (20,441) | |
Retroactive application of recapitalization | | | 34,711 | | | 3 | | | 45,204 | | | — | | | — | | | 45,207 | |
Adjusted balance, December 31, 2020 | | | 44,461 | | | 4 | | | 45,890 | | | (21,128) | | | — | | | 24,766 | |
Business Combination and PIPE shares, net | | | 53,361 | | | 6 | | | 433,521 | | | — | | | — | | | 433,527 | |
Conversion of Private Warrants | | | — | | | — | | | 5,819 | | | — | | | — | | | 5,819 | |
Stock options exercised | | | 103 | | | — | | | 35 | | | — | | | — | | | 35 | |
Stock-based compensation | | | — | | | — | | | 6,287 | | | — | | | — | | | 6,287 | |
Net loss | | | — | | | — | | | — | | | (28,515) | | | — | | | (28,515) | |
Other comprehensive loss | | | — | | | — | | | — | | | — | | | (669) | | | (669) | |
March 31, 2021 | | | 97,925 | | | $ | 10 | | | $ | 491,552 | | | $ | (49,643) | | | $ | (669) | | | $ | 441,250 | |
Conversion of Private Warrants | | | — | | | — | | | 3,114 | | | — | | | — | | | 3,114 | |
Issuance of common stock for acquisition of Root AI | | | 2,329 | | | — | | | 48,991 | | | — | | | — | | | 48,991 | |
Issuance of stock options for business combination | | | — | | | — | | | 361 | | | — | | | — | | | 361 | |
Vesting of restricted stock units | | | 21 | | | — | | | (108) | | | — | | | — | | | (108) | |
Stock-based compensation | | | — | | | — | | | 13,390 | | | — | | | — | | | 13,390 | |
Net loss | | | — | | | — | | | — | | | (32,016) | | | — | | | (32,016) | |
Other comprehensive loss | | | — | | | — | | | — | | | — | | | (1,843) | | | (1,843) | |
June 30, 2021 | | | 100,275 | | | $ | 10 | | | $ | 557,300 | | | $ | (81,659) | | | $ | (2,512) | | | $ | 473,139 | |
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| | | | | | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| | | Common Stock | | | | |
| | | Shares | | Amount | | | | |
December 31, 2021 | | | 101,136 | | | $ | 10 | | | $ | 576,895 | | | $ | (187,314) | | | $ | (1,951) | | | $ | 387,640 | |
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Conversion of Private Warrants | | | — | | | — | | | 1,104 | | | — | | | — | | | 1,104 | |
Stock option exercise | | | — | | | — | | | 36 | | | — | | | — | | | 36 | |
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Vesting of restricted stock units | | | 414 | | | — | | | (953) | | | — | | | — | | | (953) | |
Stock-based compensation | | | — | | | — | | | 6,035 | | | — | | | — | | | 6,035 | |
Net loss | | | — | | | — | | | — | | | (30,635) | | | — | | | (30,635) | |
Other comprehensive income | | | — | | | — | | | — | | | — | | | 4,360 | | | 4,360 | |
March 31, 2022 | | | 101,550 | | | $ | 10 | | | $ | 583,117 | | | $ | (217,949) | | | $ | 2,409 | | | $ | 367,587 | |
Stock option exercise | | | 762 | | | — | | | 21 | | | — | | | — | | | 22 | |
Issuance of common stock under the Purchase Agreement | | | 3,150 | | | — | | | 8,232 | | | — | | | — | | | 8,232 | |
Issuance of common stock for Employee Stock Purchase Plan | | | 78 | | | — | | | 211 | | | — | | | — | | | 211 | |
Vesting of restricted stock units | | | 197 | | | — | | | (369) | | | — | | | — | | | (369) | |
Stock-based compensation | | | — | | | — | | | 5,993 | | | — | | | — | | | 5,993 | |
Net loss | | | — | | | — | | | — | | | (28,705) | | | — | | | (28,705) | |
Other comprehensive income | | | — | | | — | | | — | | | — | | | 2,760 | | | 2,760 | |
June 30, 2022 | | | 105,737 | | | $ | 11 | | | $ | 597,205 | | | $ | (246,654) | | | $ | 5,169 | | | $ | 355,731 | |
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See accompanying notes to the unaudited condensed consolidated financial statements.
APPHARVEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Operating Activities | | | |
Net loss | $ | (59,340) | | | $ | (60,531) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Change in fair value of Private Warrants | 260 | | | (16,314) | |
Deferred income tax (benefit) expense | (268) | | | 522 | |
Depreciation and amortization | 6,176 | | | 4,602 | |
Fixed asset impairment | 1,070 | | | — | |
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Stock-based compensation expense | 12,028 | | | 19,677 | |
Rent expense in excess of payments | 52 | | | 6 | |
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Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | 286 | | | (725) | |
Inventories, net | 2,062 | | | 2,045 | |
Prepaid expenses and other current assets | 2,048 | | | (3,744) | |
Other assets, net | (569) | | | (12,444) | |
Accounts payable | 708 | | | 998 | |
Accrued expenses | (2,121) | | | 1,983 | |
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Other current liabilities | 3 | | | (24) | |
Other non-current liabilities | (29) | | | 469 | |
Net cash used in operating activities | (37,634) | | | (63,480) | |
Investing Activities | | | |
Purchases of property and equipment | (87,585) | | | (73,373) | |
Purchases of property and equipment from a related party | — | | | (122,911) | |
Cost of acquisition, net of cash acquired | — | | | (9,756) | |
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Net cash used in investing activities | (87,585) | | | (206,040) | |
Financing Activities | | | |
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Proceeds from Business Combination and PIPE shares, net | — | | | 448,500 | |
Proceeds from debt | 42,315 | | | 75,000 | |
Payments on long-term debt | (1,875) | | | — | |
Debt issuance costs | — | | | (656) | |
Payments on financing obligation to a related party | — | | | (2,089) | |
Proceeds from stock options exercised | 57 | | | 35 | |
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Proceeds from Employee Stock Purchase Plan | 211 | | | — | |
Payments of withholding taxes on restricted stock unit conversions | (1,322) | | | (108) | |
Proceeds from issuance of common stock | 8,819 | | | — | |
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Net cash provided by financing activities | 48,205 | | | 520,682 | |
Change in cash and cash equivalents | (77,014) | | | 251,162 | |
Cash, cash equivalents and restricted cash at the beginning of period | 176,311 | | | 21,909 | |
Cash, cash equivalents and restricted cash at the end of period | 99,297 | | | 273,071 | |
Less restricted cash at the end of the period | 48,354 | | | — | |
Cash and cash equivalents at the end of the period | $ | 50,943 | | | $ | 273,071 | |
Non-cash Activities: | | | |
Fixed assets purchases in accounts payable | $ | 1,410 | | | $ | 2,058 | |
Fixed assets purchases in accrued liabilities | $ | 4,516 | | | $ | 8,201 | |
Operating lease right-of-use assets and liabilities | $ | 237 | | | $ | 1,055 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
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 a sustainable food company in Appalachia developing and operating some of the world’s largest high-tech indoor farms with robotics and artificial intelligence to build a reliable, climate-resilient food system. AppHarvest’s farms are designed to grow produce using sunshine, rainwater and up to 90% less water than open-field growing, all while producing yields up to 30 times that of traditional agriculture and preventing pollution from agricultural runoff. 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.
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 it continues 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. generally accepted accounting principles (“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 with the Company’s audited consolidated financial statements, as of and for
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
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 incursion into Ukraine. Economic conditions, such as recessionary trends, inflation, supply chain disruptions, 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 June 30, 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 June 30, 2022 and December 31, 2021, the Company had no allowance for doubtful accounts.
Capitalization of Interest
During the three and six months ended June 30, 2022, $2,112 and $3,761 of interest expense has been capitalized, respectively. No interest was capitalized during the three and six months ended June 30, 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.
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
3. Restructuring
During the three and six months ended June 30, 2022, the Company initiated and completed a restructuring plan to reduce operating costs, prioritize core farm operations and align technical resources to support farm production and quality improvements. 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 and six months ended June 30, 2022, the Company incurred costs of $1,231 and $3,221, respectively, related to the restructuring initiative, of which $904 and $2,089, respectively, was for severance and other benefits, and $327 and $1,132, respectively, was for legal and other costs.
In addition to the restructuring actions noted above, the Company recognized a $1,070 impairment charge during the three and six months ended June 30, 2022, for certain technology property and equipment that will no longer be utilized following the Company’s alignment of its technology initiatives with core farm operations.
All of the costs as disclosed above are included in sales, general and administrative (“SG&A”) in the unaudited condensed consolidated statements of operations and comprehensive loss.
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.
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
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:
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| | | | Fair Value as of: | | | | | | | | | | | | |
| | | | June 30, 2022 | | December 31, 2021 | | | | | |
| | Balance Sheet Account | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap | | Other assets, net | | $ | — | | | $ | 5,293 | | | $ | — | | | $ | 5,293 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | | | |
Foreign currency contracts | | Other assets, net | | — | | | 10 | | | — | | | 10 | | | — | | | 14 | | | — | | | 14 | | | | | | | | | | | | | |
Total assets | | | | $ | — | | | $ | 5,303 | | | $ | — | | | $ | 5,303 | | | $ | — | | | $ | 14 | | | $ | — | | | $ | 14 | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency contracts | | Other current liabilities | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 63 | | | $ | — | | | $ | 63 | | | | | | | | | | | | | |
Interest rate swap | | Other liabilities | | — | | | — | | | — | | | — | | | — | | | 1,657 | | | — | | | 1,657 | | | | | | | | | | | | | |
Private Warrants | | Private Warrant liabilities | | — | | | 541 | | | — | | | 541 | | | — | | | 1,385 | | | — | | | 1,385 | | | | | | | | | | | | | |
Total liabilities | | | | $ | — | | | $ | 541 | | | $ | — | | | $ | 541 | | | $ | — | | | $ | 3,105 | | | $ | — | | | $ | 3,105 | | | | | | | | | | | | | |
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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 June 30, 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.
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:
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| | June 30, 2022 | | December 31, 2021 | | |
Exercise price | | $ | 11.50 | | | $ | 11.50 | | | |
Stock price | | $ | 3.49 | | | $ | 3.89 | | | |
Volatility | | 53.0 | % | | 54.0 | % | | |
Remaining term in years | | 3.58 | | | 4.08 | | | |
Risk-free rate | | 3.00 | % | | 1.12 | % | | |
Dividend yield | | — | | | — | | | |
The following table summarizes the private warrant activity for the three and six months ended June 30, 2022:
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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 Warrants | | 1,329 | |
Fair value of Private Warrants outstanding as of March 31, 2022 | | $ | 1,610 | |
Fair value of Private Warrants converted to Public Warrants | | — | |
Change in fair value of Private Warrants | | (1,069) | |
Fair value of Private Warrants outstanding as of June 30, 2022 | | $ | 541 | |
The Warrants are deemed equity instruments for income tax purposes, and accordingly, there is no tax impact relating to changes in the fair value of the Private Warrants. The changes in the fair value of the Private Warrants may be material to our future operating results.
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
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.
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| June 30, 2022 | | December 31, 2021 |
Raw materials | $ | 2,486 | | | $ | 1,314 | |
Growing crops | 237 | | | 3,684 | |
Finished goods | 213 | | | — | |
Total inventories, net | $ | 2,936 | | | $ | 4,998 | |
7. Property and Equipment
| | | | | | | | | | | |
| |
| June 30, 2022 | | December 31, 2021 |
Land | $ | 32,250 | | | $ | 32,395 | |
Buildings | 80,927 | | | 79,450 | |
Machinery and equipment | 51,201 | | | 49,418 | |
Construction in progress | 275,041 | | | 186,848 | |
Leasehold improvements | 4,688 | | | 4,740 | |
Less: accumulated depreciation | (14,767) | | | (8,938) | |
Total property and equipment, net | $ | 429,340 | | | $ | 343,913 | |
Depreciation expense was $3,014 and $6,056 for the three and six months ended June 30, 2022, compared to $2,363 and $4,135 for the three and six months ended June 30, 2021.
8. Other Assets
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Utility deposits | $ | 7,923 | | | $ | 7,479 | |
Investment in unconsolidated entity | 5,000 | | | 5,000 | |
Prepayments for fixed assets | 4,120 | | | 2,888 | |
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Interest rate swap | 5,293 | | | — | |
Other assets | 730 | | | 1,277 | |
Total other assets | $ | 23,066 | | | $ | 16,644 | |
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
9. Accrued Expenses
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Construction costs | $ | 12,983 | | | $ | 8,467 | |
Payroll and related | 2,911 | | | 2,768 | |
Professional service fees | 564 | | | 1,944 | |
Other accrued liabilities | 1,440 | | | 1,154 | |
Utilities | 291 | | | 1,461 | |
| | | |
Total accrued expenses | $ | 18,189 | | | $ | 15,794 | |
10. Debt
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Rabo Loan | $ | 73,125 | | | $ | 75,000 | |
Construction Loan | 52,559 | | | 31,944 | |
JPM Loan | 46,032 | | | 24,335 | |
Unamortized debt issuance costs | (590) | | | (622) | |
Debt, net of issuance costs | 171,126 | | | 130,657 | |
Less current portion | (49,717) | | | (28,020) | |
Long term, net | $ | 121,409 | | | $ | 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.
On June 15, 2021, the Company entered into a master credit agreement with Rabo AgriFinance LLC (the “Lender”) for a real estate term loan in the original principal amount of $75,000 (the “Rabo Loan”). The Rabo Loan matures on April 1, 2031, with quarterly interest payments commencing on July 1, 2021 and quarterly principal payments, commencing on January 1, 2022, with the remaining balance of principal and interest due upon maturity. Payments are based on one month LIBOR plus 2.500% per annum. The Rabo Loan is collateralized by the business assets of the first Morehead CEA facility and requires compliance with financial covenants. The financial covenants generally begin to be measured on December 31, 2022, except for the working capital ratio. On July 29, 2022, the Company obtained a waiver from the Lender whereby the Company is no longer required to measure or report the current ratio for the June 30, 2022, reporting period but will begin to report the current ratio covenant compliance for the December 31, 2022 reporting period. The change aligns all measurements of material financial covenants to begin with the December 31, 2022 measurement date. In exchange, the Company agreed to fund an additional $2,000 to a reserve account. At June 30, 2022, the Company would not have met the current ratio requirement for the Morehead CEA subsidiary. The Company’s liability under the Rabo Loan was $73,125 at June 30, 2022.
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 and six months ended June 30, 2022 the Company recognized $257 and $496, respectively, of operating lease expense in SG&A within the unaudited condensed consolidated statement of operations and comprehensive loss compared to $118 and $215, for the three and six months ended June 30, 2021, respectively.
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 | $ | 564 | |
2023 | 1,085 | |
2024 | 1,027 | |
2025 | 1,030 | |
2026 | 1,048 | |
2026 and thereafter | 1,612 | |
Total minimum payments required | 6,366 | |
Less: imputed interest costs(1) | (1,201) | |
Present value of net minimum lease payments(2) | $ | 5,165 | |
Weighted-average imputed interest rate | 7.24 | % |
Weighted-average remaining lease term (in years) | 5.9 |
____________________________
(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 June 30, 2022 as current and non-current lease liability of $777 and $4,388, respectively.
Supplemental cash flow information related to leases is as follows:
| | | | | | | | | | | |
| Period Ended June 30, |
| 2022 | | 2021 |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 489 | | | $ | 205 | |
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | $ | — | | | $ | 1,055 | |
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, the first of two federal securities class action lawsuits (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 two 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
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
and an award of costs and expenses, including reasonable attorneys’ fees. On May 2, 2022, defendants filed a motion to dismiss the amended complaint. On July 25, 2022, the lead plantiff filed a second amended complaint.
Additionally, on March 11, 2022, a derivative complaint (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. On June 15, 2022, another derivative complaint (captioned Zach Wester 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 Wester derivative complaint is substantially similar to the Ross derivative complaint. On July 22, 2022, the Ross and Wester derivative cases were consolidated, and are stayed until (1) the securities class action is dismissed with prejudice and all appeals related thereto are exhausted; (2) defendants file an answer in the securities class action; or (3) any party in the derivative cases no longer consents to the stay.
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 June 30, 2022, the total notional amount outstanding of foreign currency contracts designated as cash flow hedging instruments was €8,230 compared to €19,149 at December 31, 2021. As of June 30, 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 and six months ended June 30, 2022 and June 30, 2021 the Company recognized amortization expense of $50 and $120, and $226 and $256, respectively, related to its foreign currency hedge contracts within its unaudited condensed consolidated statement of operations and comprehensive loss.
As of June 30, 2022 and December 31, 2021, the Company had a net asset of $10 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.
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 income(loss) for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 |
| | Before Tax | | Tax (Expense) Benefit | | After Tax | | Before Tax | | Tax Benefit | | After Tax |
Foreign currency | | $ | 44 | | | $ | — | | | $ | 44 | | | $ | 822 | | | $ | (244) | | | $ | 578 | |
Interest rate swap | | 2,716 | | | — | | | 2,716 | | | (2,421) | | | — | | | (2,421) | |
Total Accumulated comprehensive income/(loss) | | $ | 2,760 | | | $ | — | | | $ | 2,760 | | | $ | (1,599) | | | $ | (244) | | | $ | (1,843) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
| | Before Tax | | Tax (Expense) Benefit | | After Tax | | Before Tax | | Tax Benefit | | After Tax |
Foreign currency | | $ | 169 | | | $ | — | | | $ | 169 | | | $ | (91) | | | $ | — | | | $ | (91) | |
Interest rate swap | | 6,951 | | | — | | | 6,951 | | | (2,421) | | | — | | | (2,421) | |
Total Accumulated comprehensive income/(loss) | | $ | 7,120 | | | $ | — | | | $ | 7,120 | | | $ | (2,512) | | | $ | — | | | $ | (2,512) | |
During the three and six months ended June 30, 2022 an income tax (expense) benefit of $(738) and $(1,903) was recognized within other comprehensive income (loss), respectively, compared to $428 and $672 for the three and six months ended June 30, 2021, respectively.
The income tax (expense) benefit of $(1,381) and $521 related to the $5,169 and $(1,951) balance in AOCI at June 30, 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 $5,993 and $12,028 for the three and six months ended June 30, 2022, of which $5,780 and $11,674, respectively, were included in SG&A and $213 and $354 were included in COGS for the three and six months ended June 30, 2022. This is compared to $13,390 and $19,677 for the three and six months ended June 30, 2021, of which $12,345 and $18,372 were included in SG&A and $1,045 and $1,305 were included in COGS for the three and six months ended June 30, 2021, respectively.
14. Income Taxes
The Company’s effective income tax rate was 0.6% and 0.4% for the three and six months ended June 30, 2022, respectively. The variance from the U.S. federal statutory rate of 21% for the three and six months ended June 30, 2022 and June 30, 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.
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
15. Shareholders' Equity
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 equivalents | June 30, 2022 | | June 30, 2021 |
Stock options | 2,186 | | | 2,889 | |
Restricted stock units | 5,360 | | | 8,429 | |
| | | |
Warrants | 13,242 | | | 13,250 | |
Total anti-dilutive common share equivalents | 20,788 | | | 24,568 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net loss | $ | (28,705) | | | $ | (32,016) | | | $ | (59,340) | | | $ | (60,531) | |
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