SEC Filing | AppHarvest

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apph-20220930

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 September 30, 2022


☐			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/59f1c630cb6f09ffaf52dcc33cc9b7c0-apph-20220930_g1.jpg

AppHarvest, Inc.

_____________________________________________

(Exact name of registrant as specified in its charter)


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:


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.


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 October 28, 2022, were 107,904,176.

Table of Contents

APPHARVEST, INC

TABLE OF CONTENTS


			Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			1
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations and Comprehensive Loss			2
Condensed Consolidated Statements of Stockholders’ Equity			3
Condensed Consolidated Statements of Cash Flows			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			29

PART II - OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			56
Item 3. Defaults Upon Senior Securities			57
Item 4. Mine Safety Disclosures			57
Item 5. Other Information			57
Item 6. Exhibits			58

Table of Contents

Part I - Financial Information

Item 1. Financial Statements

APPHARVEST, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands except per share amounts)


	September 30, 2022		December 31, 2021
Assets
Current Assets
Cash and cash equivalents	$	36,231	$	150,755
Restricted cash	22,464		25,556
Accounts receivable, net	4		1,575
Inventories, net	12,409		4,998

Prepaid expenses and other current assets	4,850		5,613
Total current assets	75,958		188,497
Operating lease right-of-use assets, net	1,677		5,010
Property and equipment, net	458,744		343,913



Other assets, net	27,079		16,644
Total non-current assets	487,500		365,567
Total assets	$	563,458	$	554,064
Liabilities and stockholders’ equity
Current Liabilities
Accounts payable	$	10,500	$	8,553
Accrued expenses	17,648		15,794

Current portion of lease liabilities	472		751

Current portion of long-term debt	3,685		28,020


Other current liabilities	106		119
Total current liabilities	32,411		53,237
Long-term debt, net of current portion	181,619		102,637
Lease liabilities, net of current portion	1,898		4,938
Deferred income tax liabilities	3,594		2,418
Private Warrant liabilities	514		1,385
Other liabilities	107		1,809
Total non-current liabilities	187,732		113,187
Total liabilities	220,143		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 September 30, 2022 and December 31, 2021	—		—



Common stock, par value $0.0001, 750,000 shares authorized, 107,278 and 101,136 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	11		10
Additional paid-in capital	605,222		576,895
Accumulated deficit	(270,638)		(187,314)
Accumulated other comprehensive income (loss)	8,720		(1,951)
Total stockholders’ equity	343,315		387,640
Total liabilities and stockholders’ equity	$	563,458	$	554,064

See accompanying notes to the unaudited condensed consolidated financial statements.

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APPHARVEST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS (Unaudited)

(In thousands except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net sales	$	524	$	543	$	10,046	$	5,980
Cost of goods sold	5,874		7,482		33,549		30,001
	(5,350)		(6,939)		(23,503)		(24,021)
Operating expenses:
Selling, general and administrative expenses	17,514		25,401		58,778		84,357


Total operating expenses	17,514		25,401		58,778		84,357
Loss from operations	(22,864)		(32,340)		(82,281)		(108,378)
Other income (expense):


Interest expense from related parties	—		—		—		(658)
Interest expense	—		(805)		—		(893)
Change in fair value of Private Warrants	27		15,781		(233)		32,095
Other	297		113		366		574
Loss before income taxes	(22,540)		(17,251)		(82,148)		(77,260)
Income tax expense	(1,444)		(17)		(1,176)		(539)
Net loss	(23,984)		(17,268)		(83,324)		(77,799)

Other comprehensive income (loss):
Net unrealized gains (losses) on derivatives contracts, net of tax	3,551		(66)		10,671		(2,578)
Comprehensive loss	$	(20,433)	$	(17,334)	$	(72,653)	$	(80,377)

Net loss per common share:
Basic and diluted	$	(0.23)	$	(0.17)	$	(0.80)	$	(0.83)

Weighted average common shares outstanding:
Basic and diluted	106,453		100,437		103,643		93,823

See accompanying notes to the unaudited condensed consolidated financial statements.

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APPHARVEST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)


				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
Conversion of Private Warrants	—	—		201		—		—		201
Vesting of restricted stock units	391	—		(2,233)		—		—		(2,233)
Warrants exercised	8	—		96		—		—		96
Stock-based compensation	—	—		11,571		—		—		11,571
Net loss	—	—		—		(17,268)		—		(17,268)
Other comprehensive loss	—	—		—		—		(66)		(66)
September 30, 2021	100,674	$	10	$	566,935	$	(98,927)	$	(2,578)	$	465,440

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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

Conversion of Private Warrants	—	—		1,104		—		—		1,104
Stock option exercise	—	—		36		—		—		36

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
Issuance of common stock under the Purchase Agreement	360	—		1,298		—		—		1,298
Issuance of common stock, net	542	—		1,347		—		—		1,347
Vesting of restricted stock units	301	—		(175)		—		—		(175)
Stock option exercise	338	—		80		—		—		80
Stock-based compensation	—	—		5,467		—		—		5,467
Net loss	—	—		—		(23,984)		—		(23,984)
Other comprehensive income	—	—		—		—		3,551		3,551
September 30, 2022	107,278	$	11	$	605,222	$	(270,638)	$	8,720	$	343,315

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)


	Nine Months Ended September 30,
	2022		2021
Operating Activities
Net loss	$	(83,324)	$	(77,799)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of Private Warrants	233		(32,095)
Deferred income tax expense	1,176		539
Depreciation and amortization	9,941		7,791
Fixed asset impairment	1,070		—

Stock-based compensation expense	17,495		31,248
Rent payments in excess of expense	(158)		(72)



Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net	1,571		259
Inventories, net	(7,411)		(800)
Prepaid expenses and other current assets	762		(2,752)
Other assets, net	(1,722)		(10,486)
Accounts payable	888		811
Accrued expenses	(1,577)		1,575

Other current liabilities	50		(178)
Other non-current liabilities	(46)		617
Net cash used in operating activities	(61,052)		(81,342)
Investing Activities
Purchases of property and equipment	(121,613)		(112,903)
Purchases of property and equipment from a related party	—		(122,911)
Cost of acquisition, net of cash acquired	—		(9,756)
Investment in unconsolidated entity	—		(5,000)

Net cash used in investing activities	(121,613)		(250,570)
Financing Activities

Proceeds from Business Combination and PIPE shares, net	—		448,500
Proceeds from debt	105,759		95,709
Repayments of debt	(48,597)		—
Debt issuance costs	(2,430)		(1,046)
Payments on financing obligation to a related party	—		(2,088)
Proceeds from stock options exercised	137		35
Proceeds from exercise of warrants	—		95
Proceeds from Employee Stock Purchase Plan	211		—
Payments of withholding taxes on restricted stock units	(1,497)		(2,341)
Proceeds from issuance of common stock	11,466		—



Other financing activities	—		(37)


Net cash provided by financing activities	65,049		538,827
Change in cash and cash equivalents	(117,616)		206,915
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	58,695		228,824
Less restricted cash at the end of the period	22,464		—
Cash and cash equivalents at the end of the period	$	36,231	$	228,824
Non-cash Activities:
Fixed assets purchases in accounts payable	$	1,059	$	14,170
Fixed assets purchases in accrued liabilities	$	3,431	$	8,331
Termination of operating leases which decrease operating lease liabilities	$	3,031	$	—
Operating lease assets obtained in exchange for new operating lease liabilities	$	169	$	1,055

See accompanying notes to the unaudited condensed consolidated financial statements.

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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, while 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.

Subsequent to the construction of the Morehead CEA facility, AppHarvest started construction on four more CEA facilities. Two of the facilities became operational in October 2022, one located in Berea, Kentucky (the “Berea salad greens facility”) and the other located Somerset, Kentucky (the “Somerset facility”). The Berea salad greens facility will harvest salad greens and the Somerset facility will primarily grow strawberries, but is also expected to seasonally grow cucumbers. The CEA facility in Richmond, Kentucky (the “Richmond tomato facility”), which is still under construction, is intended to grow tomatoes. A second Morehead, Kentucky facility (the “Morehead salad greens facility”), which is adjacent to the Morehead CEA facility, commenced construction in June 2021 and is intended to grow salad greens. The Company has indefinitely 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 new operating facilities at full capacity.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and payments of liabilities in the ordinary course of business. Accordingly, the condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Company be unable to continue as a going concern. The Company has incurred losses from operations and generated negative cash flows from operating activities since inception. During the nine months ended September 30, 2022, the Company incurred net losses of $83,324 and generated negative cash flows from operations of $61,052. The Company’s current operating plan, which includes its planting and harvesting activities, indicates that it will continue to incur losses from operations and generate negative cash flows from operating activities. In addition, debt service requirements and the Company’s plans to continue to invest in the build-out and start-up of its new and future CEA facilities, including the Berea salad greens facility, Richmond tomato facility and Somerset facility, will have an adverse impact on its liquidity. As of September 30, 2022, the Company had $36,231 of cash on hand, and an accumulated deficit of $270,638. Management believes there is substantial doubt about the Company’s ability to continue as a going concern.

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APPHARVEST, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(amounts in thousands except per share amounts)

On October 24, 2022, AppHarvest Berea Farm, LLC (the “Borrower Subsidiary”), a wholly-owned indirect subsidiary of the Company, entered into a note and loan agreement (the “Note and Loan Agreement”) in the principal amount of $30,000 (the “Note”) with Mastronardi Produce-USA, Inc. (“Mastronardi USA”). Pursuant to the Note and Loan Agreement, Mastronardi USA agreed to advance $15,000 upon the execution of the agreement and further amounts of up to $15,000 provided that no event of default has occurred under the Note and Loan Agreement and certain other conditions have been met. The first tranche of $15,000 was funded on October 25, 2022. Subject to any acceleration by Mastronardi USA or extension by the Borrower Subsidiary, all outstanding principal (including payment in kind amounts), together with all accrued and unpaid interest, and any other sums payable under the loan documents shall be due and payable in full on December 19, 2022 (the “Initial Maturity Date”). The Initial Maturity Date may be extended for two (2) successive terms (the “Extension Option”) of thirty (30) days each to January 18, 2023 if the first Extension Option is exercised and February 17, 2023 if the second Extension Option is exercised, in each case subject to the satisfaction of certain conditions, including that the Borrower Subsidiary shall have agreed to the material terms for a sale leaseback transaction with Mastronardi USA, its affiliate or another third party. See Note 16 - Subsequent Events - Mastronardi Note and Loan Agreement for further details regarding the terms of the financing.

The Company will need to raise additional funds in order to operate its business, meet obligations as they become due and continue the ongoing construction, build-out and start-up of its CEA facilities. The Company is pursuing a potential sale-leaseback of the Berea salad greens facility. The Company is also pursuing additional financing alternatives, which include third-party equity or debt financing, or other sources, such as strategic relationships or other transactions with third parties, that may or may not include business combination transactions. However, financing may not be available to the Company in the necessary time frame, in amounts that the Company requires, on terms that are acceptable to the Company, or at all. If the Company is unable to raise the necessary funds when needed, it may materially and adversely impact the Company’s ability to execute on its operating plans, and the operating of its current CEA facilities or the construction, build-out and start-up of its CEA facilities could be delayed, scaled back, or abandoned. If the Company becomes unable to continue as a going concern, it may have to dispose of assets and might realize significantly less than the values at which they are carried on its consolidated financial statements. These actions may cause the Company’s stockholders to lose all or part of their investment in the Company’s common stock. The condensed consolidated financial statements do not include any adjustments that might result from this uncertainty.

Basis of Presentation

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 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. Certain prior period amounts have been reclassified to conform with the current period presentation.

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.

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APPHARVEST, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(amounts in thousands except per share amounts)

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.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid, short-term investments with an original maturity date of three months or less to be cash equivalents.

The Company deposits its cash and cash equivalents in a commercial bank. From time to time, cash balances in these accounts exceed the Federal Deposit Insurance Corporation insured limits. The Company mitigates exposure to credit risk by placing cash and cash equivalents with highly rated financial institutions. To date, the Company has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk on its cash and cash equivalents.

Restricted cash as of September 30, 2022, primarily represents contributions to a project and interest reserve account for the Somerset facility pursuant to a loan agreement entered into in July 2022 with Greater Nevada Credit Union (the “GNCU Loan Agreement”) in the amount of $20,455. Restricted cash as of September 30, 2022, also includes $2,009 related to a master credit agreement with Rabo AgriFinance LLC (the “Rabo Loan”). See Note 10 - Debt for more information on these reserve accounts. Restricted cash as of December 31, 2021, represents collateral for a promissory note with JPMorgan Chase Bank, N.A. (the “JPM Loan”) which required 105% of the aggregate borrowings to be held as collateral. The JPM Loan was repaid in full in July 2022.

Warrants

At September 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 September 30, 2022 and December 31, 2021, the Company had no allowance for doubtful accounts.

Capitalization of Interest

During the three and nine months ended September 30, 2022, $2,848 and $6,609 of interest expense has been capitalized, respectively, compared to $114 during the three and nine months ended September 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.

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APPHARVEST, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(amounts in thousands except per share amounts)

3. Restructuring

During the nine months ended September 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 nine months ended September 30, 2022, the Company incurred costs of $246 and $3,467 related to the restructuring initiative, of which $246 and $2,335 was for severance and other benefits and $0 and $1,132 was for legal and other costs for the three and nine-months ended September 30, 2022, respectively.

In addition to the restructuring actions noted above, during the nine months ended September 30, 2022, the Company recognized a $1,070 impairment charge 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. The Company did not recognize any such impairment charge during the three months ended September 30, 2022.

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. As of September 30, 2022, the Company had no further liabilities remaining associated with the restructuring events which occurred during the nine months ended September 30, 2022.

In November 2022, the Company began a third restructuring plan to further reduce operating costs (the “November 2022 Restructuring”). See Note 16 - Subsequent Events - November 2022 Restructuring for more information on the Company’s November 2022 restructuring plan.

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.

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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:


		Fair Value as of:
		September 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	$	—	$	8,807	$	—	$	8,807	$	—	$	—	$	—	$	—
Foreign currency contracts	Other assets, net	—		—		—		—		—		14		—		14
Total assets		$	—	$	8,807	$	—	$	8,807	$	—	$	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	—		514		—		514		—		1,385		—		1,385
Total liabilities		$	—	$	514	$	—	$	514	$	—	$	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 September 30, 2022, the carrying value of the Company’s debt, other than the GNCU Loan, 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. The fair value of the GNCU Loan was estimated using discounted cash flow analyses based on current estimated incremental borrowing rates for similar types of borrowing arrangements (Level 2). If our GNCU Loan was measured at fair value, it would have been $41,833 as of September 30, 2022.

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:


	September 30, 2022			December 31, 2021
Exercise price	$	11.50		$	11.50
Stock price	$	1.97		$	3.89
Volatility	82.0		%	54.0		%
Remaining term in years	3.33			4.08
Risk-free rate	4.10		%	1.12		%
Dividend yield	—			—

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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 private warrant activity for the three and nine months ended September 30, 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 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
Fair value of Private Warrants converted to Public Warrants	—
Change in fair value of Private Warrants	(27)
Fair value of Private Warrants outstanding as of September 30, 2022	$	514

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.

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.



	September 30, 2022		December 31, 2021
Raw materials	$	5,606	$	1,314
Growing crops	6,803		3,684

Total inventories, net	$	12,409	$	4,998

7. Property and Equipment



	September 30, 2022		December 31, 2021
Land	$	32,309	$	32,395
Buildings	124,172		79,450
Machinery and equipment	88,010		49,418
Construction in progress	228,206		186,848
Leasehold improvements	4,705		4,740
Less: accumulated depreciation	(18,658)		(8,938)
Total property and equipment, net	$	458,744	$	343,913

Depreciation expense was $3,728 and $9,784 for the three and nine months ended September 30, 2022, compared to $2,752 and $6,887 for the three and nine months ended September 30, 2021.

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APPHARVEST, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(amounts in thousands except per share amounts)

8. Other Assets


	September 30, 2022		December 31, 2021
Utility deposits	$	9,115	$	7,479
Investment in unconsolidated entity	5,000		5,000
Prepayments for fixed assets	3,635		2,888

Interest rate swap	8,807		—
Other assets	522		1,277
Total other assets	$	27,079	$	16,644

9. Accrued Expenses


	September 30, 2022		December 31, 2021
Construction costs	$	11,898	$	8,467
Other accrued liabilities	2,892		2,615
Payroll and related	1,834		2,768
Professional service fees	1,024		1,944

Total accrued expenses	$	17,648	$	15,794

10. Debt


	September 30, 2022		December 31, 2021
Rabo Loan	$	72,188	$	75,000
Construction Loan	66,252		31,944
GNCU Loan	50,000		—
JPM Loan	—		24,335
Unamortized debt issuance costs	(3,136)		(622)
Debt, net of issuance costs	185,304		130,657
Less current portion	(3,685)		(28,020)
Long term, net	$	181,619	$	102,637

On July 29, 2022, the Company entered into the GNCU Loan Agreement for an original principal amount of $50,000 (the “GNCU Loan”), to be used, in part, for the development of a commercial scale greenhouse facility upon thirty acres of the Company’s real property in Pulaski County, Kentucky (the “Project”). The GNCU Loan is guaranteed in favor of the GNCU Lender by the U.S. Department of Agriculture (“USDA”) through the USDA’s Business and Industry Loan Guarantee and Rural Energy for America Programs. The GNCU Loan has a maturity of 23 years with interest-only monthly payments on the aggregate unpaid principal balance of the GNCU Loan for the first 36 months. Thereafter, the Company will make 239 monthly installments of principal and interest based on a 20-year amortization, with the remaining balance of principal and interest due upon maturity. The initial interest rate is fixed at 6.45% per annum for the first five years of the GNCU Loan term. Thereafter, the interest rate is subject to change every five years during the term of the GNCU Loan, based on the Federal Home Loan Bank of Des Moines 5-Year Advance Rate as of such dates, plus a 3.40% spread, with an interest rate floor of 4.75%. The collateral securing the payment and performance of the obligations under the GNCU Loan consists of: (i) a Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing (the “Mortgage”) granting a first priority lien on all real property, and a security interest in all personal property, owned by the Borrower Subsidiary, including the Project; and (ii) a Security Agreement pursuant to which the Borrower Subsidiary has granted Lender a security interest in and to all the Borrower Subsidiary’s machinery and equipment, and other personal property collateral. The proceeds of the GNCU Loan were used at closing to, in part, pay off the JPM Loan and accrued interest, of approximately $45,700, and to pay the closing costs, loan fees, and other costs of entering into the GNCU Loan. The GNCU Loan is recorded at cost, net of debt issuance costs of $2,561.

The GNCU Loan required the Company to contribute $3,250 to be held in an interest reserve account and $19,084 in a project account, to be used to pay interest and the balance of Project cost for the Somerset facility in excess of the loan,

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APPHARVEST, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

(amounts in thousands except per share amounts)

respectively. The balance of these amounts is reflected in restricted cash in the consolidated balance sheet as of September 30, 2022.

The GNCU Loan Agreement includes customary representations and covenants for financing transactions of this nature, including, among others, a maximum debt to net worth covenant and a debt service coverage ratio covenant, as well as operating covenants with respect to the completion and operation of the Project, in each case as set forth in the GNCU Loan Agreement.

On July 23, 2021, the Company entered into a credit agreement with CEFF II AppHarvest Holdings, LLC, an affiliate of Equilibrium Controlled Environment Foods Fund, LLC (“Equilibrium”) for a construction loan in the original principal amount of $91,000 (the “Construction Loan”) for the development of a CEA facility at the property in Richmond, Kentucky (the “Project”). The Construction Loan provides monthly disbursements to fund capital costs of the Project in excess of the Company’s required equity contribution of 34.5% of the capital costs of the Project. The Construction Loan requires monthly interest payments based on drawn capital at an initial interest rate of 8.000% per annum, which will increase by 0.2% per annum, beginning two years after closing of the Construction Loan through maturity, which is expected to be July 23, 2024, with no required principal payments until maturity. On July 29, 2022, the Company amended the credit agreement with Equilibrium to require that the Company decrease the balance of the Construction Loan to $81,000 on or prior to December 31, 2022 and further decrease the balance to $76,000 on or prior to March 31, 2023. As of September 30, 2022, the Company had $66,252 outstanding on the Construction Loan.

On January 10, 2022, the Company entered into an amended and restated promissory note 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 as the replacement of LIBOR as a benchmark interest rate for U.S. dollar borrowings. Restricted cash on the December 31, 2021, 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. As of July 29, 2022, the JPM Loan was repaid in full.

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 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 was 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 $72,188 at September 30, 2022.

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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 and nine months ended September 30, 2022 the Company recognized $247 and $743, respectively, of operating lease expense in SG&A within the unaudited condensed consolidated statement of operations and comprehensive loss compared to $109 and $324, for the three and nine months ended September 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	$	164
2023	591
2024	525
2025	515
2026	520
2026 and thereafter	467
Total minimum payments required	2,782
Less: imputed interest costs(1)	(412)
Present value of net minimum lease payments(2)	$	2,370
Weighted-average imputed interest rate	6.71		%
Weighted-average remaining lease term (in years)	4.9

____________________________

(1)Represents the amount necessa