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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 March 31, 2023
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 May 5, 2023, were 155,108,773.
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)
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| March 31, 2023 | | December 31, 2022 |
Assets | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 50,017 | | | $ | 54,334 | |
Restricted cash | 23,450 | | | 24,198 | |
Accounts receivable, net | 3,669 | | | 2,786 | |
Inventories, net | 16,105 | | | 18,078 | |
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Prepaid expenses and other current assets | 17,341 | | | 14,716 | |
Total current assets | 110,582 | | | 114,112 | |
Operating lease right-of-use assets, net | 2,503 | | | 2,626 | |
Property and equipment, net | 476,334 | | | 456,178 | |
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Other assets, net | 20,385 | | | 22,412 | |
Total non-current assets | 499,222 | | | 481,216 | |
Total assets | $ | 609,804 | | | $ | 595,328 | |
Liabilities and stockholders’ equity | | | |
Current Liabilities | | | |
Accounts payable | $ | 30,445 | | | $ | 16,571 | |
Accrued expenses | 14,517 | | | 21,996 | |
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Current portion of lease liabilities | 505 | | | 514 | |
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Current portion of long-term debt | 3,685 | | | 3,685 | |
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Other current liabilities | 45 | | | 202 | |
Total current liabilities | 49,197 | | | 42,968 | |
Long-term debt, net of current portion | 178,819 | | | 180,537 | |
Lease liabilities, net of current portion | 2,509 | | | 2,628 | |
Financing obligation | 105,680 | | | 103,787 | |
Deferred income tax liabilities | 4,682 | | | 4,925 | |
Private Warrant liabilities | 110 | | | 119 | |
Other liabilities | 63 | | | 73 | |
Total non-current liabilities | 291,863 | | | 292,069 | |
Total liabilities | 341,060 | | | 335,037 | |
Commitments and contingencies (Note 11) | | | |
Stockholders’ equity | | | |
Preferred stock, par value $0.0001, 10,000 shares authorized, 0 issued and outstanding, as of March 31, 2023 and December 31, 2022 | — | | | — | |
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Common stock, par value $0.0001, 750,000 shares authorized, 155,084 and 108,511 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively | 16 | | | 11 | |
Additional paid-in capital | 658,972 | | | 615,452 | |
Accumulated deficit | (397,590) | | | (363,960) | |
Accumulated other comprehensive income | 7,346 | | | 8,788 | |
Total stockholders’ equity | 268,744 | | | 260,291 | |
Total liabilities and stockholders’ equity | $ | 609,804 | | | $ | 595,328 | |
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)
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| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Net sales | | | | | $ | 13,011 | | | $ | 5,164 | |
Cost of goods sold | | | | | 34,345 | | | 13,554 | |
Gross loss | | | | | (21,334) | | | (8,390) | |
Operating expenses: | | | | | | | |
Selling, general and administrative expenses | | | | | 10,016 | | | 21,039 | |
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Total operating expenses | | | | | 10,016 | | | 21,039 | |
Loss from operations | | | | | (31,350) | | | (29,429) | |
Other income (expense): | | | | | | | |
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Interest expense | | | | | (2,698) | | | — | |
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Change in fair value of Private Warrants | | | | | 9 | | | (1,329) | |
Other | | | | | 166 | | | 14 | |
Loss before income taxes | | | | | (33,873) | | | (30,744) | |
Income tax benefit | | | | | 243 | | | 109 | |
Net loss | | | | | (33,630) | | | (30,635) | |
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Other comprehensive (loss) income : | | | | | | | |
Net unrealized (losses) gains on derivatives contracts, net of tax | | | | | (1,442) | | | 4,360 | |
Comprehensive loss | | | | | $ | (35,072) | | | $ | (26,275) | |
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Net loss per common share: | | | | | | | |
Basic and diluted | | | | | $ | (0.26) | | | $ | (0.30) | |
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Weighted average common shares outstanding: | | | | | | | |
Basic and diluted | | | | | 131,124 | | | 101,321 | |
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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 Income | | 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 options exercised | | | — | | | — | | | 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 | |
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| | | | | | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
| | | Common Stock | | | | |
| | | Shares | | Amount | | | | |
December 31, 2022 | | | 108,511 | | | $ | 11 | | | $ | 615,452 | | | $ | (363,960) | | | $ | 8,788 | | | $ | 260,291 | |
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Issuance of common stock, net | | | 46,000 | | | 5 | | | 43,033 | | | — | | | — | | | 43,038 | |
Stock options exercised | | | 391 | | | — | | | 63 | | | — | | | — | | | 63 | |
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Vesting of restricted stock units | | | 182 | | | | | (79) | | | — | | | — | | | (79) | |
Stock-based compensation | | | — | | | — | | | 503 | | | — | | | — | | | 503 | |
Net loss | | | — | | | — | | | — | | | (33,630) | | | — | | | (33,630) | |
Other comprehensive loss | | | — | | | — | | | — | | | — | | | (1,442) | | | (1,442) | |
March 31, 2023 | | | 155,084 | | | $ | 16 | | | $ | 658,972 | | | $ | (397,590) | | | $ | 7,346 | | | $ | 268,744 | |
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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)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Operating Activities | | | |
Net loss | $ | (33,630) | | | $ | (30,635) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Change in fair value of Private Warrants | (9) | | | 1,329 | |
Deferred income tax benefit | (243) | | | (109) | |
Depreciation and amortization | 7,641 | | | 3,112 | |
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Interest expense from financing obligation | 1,974 | | | — | |
Stock-based compensation expense | 503 | | | 6,035 | |
Rent expense (less than) in excess of payments | (5) | | | 26 | |
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Changes in operating assets and liabilities: | | | |
Accounts receivable, net | (883) | | | (307) | |
Inventories, net | 1,973 | | | (78) | |
Prepaid expenses and other current assets | (2,625) | | | 1,613 | |
Other assets, net | 51 | | | (9,230) | |
Accounts payable | 2,804 | | | 301 | |
Accrued expenses | (2,386) | | | (2,124) | |
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Other current liabilities | (157) | | | — | |
Other non-current liabilities | (10) | | | 2,564 | |
Net cash used in operating activities | (25,002) | | | (27,503) | |
Investing Activities | | | |
Purchases of property and equipment | (21,171) | | | (39,018) | |
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Net cash used in investing activities | (21,171) | | | (39,018) | |
Financing Activities | | | |
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Proceeds from debt | — | | | 25,902 | |
Repayments of debt | (937) | | | — | |
Debt issuance costs | (895) | | | — | |
Payments on financing obligation | (82) | | | — | |
Proceeds from stock options exercised | 63 | | | 36 | |
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Payments of withholding taxes on restricted stock units | (79) | | | (953) | |
Proceeds from issuance of common stock | 46,000 | | | — | |
Payments for common stock issuance | (2,962) | | | — | |
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Net cash provided by financing activities | 41,108 | | | 24,985 | |
Change in cash and cash equivalents | (5,065) | | | (41,536) | |
Cash, cash equivalents and restricted cash at the beginning of period | 78,532 | | | 176,311 | |
Cash, cash equivalents and restricted cash at the end of period | 73,467 | | | 134,775 | |
Less restricted cash at the end of the period | 23,450 | | | 37,130 | |
Cash and cash equivalents at the end of the period | $ | 50,017 | | | $ | 97,645 | |
Non-cash Activities: | | | |
Fixed assets purchases in accounts payable | $ | 24,056 | | | $ | 5,272 | |
Fixed assets purchases in accrued liabilities | $ | 4,108 | | | $ | 2,207 | |
Termination of operating leases which decrease operating lease liabilities | $ | — | | | $ | 237 | |
| | | |
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 currently operates its 60-acre flagship farm in Morehead, Kentucky (“AppHarvest Morehead”), producing tomatoes, a 15-acre indoor farm for salad greens in Berea, Kentucky (“AppHarvest Berea”), a 30-acre farm for strawberries and cucumbers in Somerset, Kentucky (“AppHarvest Somerset”), and a 60-acre farm in Richmond, Kentucky (“AppHarvest Richmond”), for tomatoes. The four-farm network consists of 165 acres under glass.
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 controlled environment agriculture (“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 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 three-months ended March 31, 2023, the Company incurred net losses of $33,630 and generated negative cash flows from operations of $25,002. 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 AppHarvest Berea, AppHarvest Richmond and AppHarvest Somerset, will have an adverse impact on its liquidity. As of March 31, 2023, the Company had $50,017 cash on hand, and an accumulated deficit of $397,590. Management believes there is substantial doubt about the Company’s ability to continue as a going concern.
The Company will need to raise additional funds in order to operate its business, meet obligations as they become due and continue the ongoing operation, construction, and build-out and start-up of its CEA facilities. In December 2022, the Company completed a sale-leaseback of its salad greens facility and property in Berea, Kentucky. The Company raised additional capital in February 2023 through an underwritten public offering, as further discussed in Note 15 – Shareholders’ Equity. The Company is exploring additional financing alternatives, including, but not limited to additional sale-leaseback transactions related to other CEA facilities, 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, the operation of the Company’s current CEA facilities and the construction, build-out and start-up of the 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 condensed consolidated financial statements. These actions may cause the Company’s
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
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, 2023. 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, 2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 15, 2023.
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 primarily include the valuation of inventory.
The Company’s results can also be affected by economic, political, legislative, regulatory, legal actions, and the global volatility and general market disruption and geopolitical tensions. 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.
Restricted Cash
At March 31, 2023, restricted cash includes $14,386 related to a master credit agreement with Rabo AgriFinance LLC (“Rabo”) for a real estate term loan (the “Rabo Loan”), $6,656 in contributions to a project and interest reserve account for AppHarvest Somerset for the loan agreement with Greater Nevada Credit Union (the “GNCU Loan”), and $2,408 for construction related to AppHarvest Berea. At December 31, 2022, restricted cash included $12,007 related to the Rabo Loan, $9,791 in contributions to the aforementioned project and interest reserve account, and $2,400 for construction related to AppHarvest Berea.
Capitalization of Interest
During the three months ended March 31, 2023 and March 31, 2022, $2,226 and $1,648 of interest expense has been capitalized, respectively.
Warrants
At March 31, 2023, there were 13,242 warrants to purchase Common Stock outstanding, consisting of 12,191 public warrants (“Public Warrants”) and 1,051 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.
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
The fair value of the Private Warrants is estimated at each measurement date using a Black-Scholes option pricing model. See Note 5 - Fair Value Measurements for inputs used in calculating the estimated fair value.
Accounts Receivable
The Company’s trade accounts receivable are non-interest bearing and are recorded at the net realizable value. The allowance for doubtful accounts represents the Company’s best estimate of the amount of expected credit losses in existing accounts receivable. As of March 31, 2023 and December 31, 2022, the Company had no allowance for doubtful accounts.
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.
3. Restructuring
In an effort to continue to reduce operating expenses, during the three months ended March 31, 2023, the Company incurred restructuring costs of $355 for severance. As of March 31, 2023, there is no remaining liability associated with these restructuring charges.
During the first quarter of 2022, the Company initiated and completed a restructuring plan to reduce operating costs. During the three months ended March 31, 2022, the Company incurred total costs of $1,990 related to the restructuring initiative, of which $1,185 was for severance and other benefits, and $805 was for legal and other costs.
All of the costs discussed above are included in selling, general and administrative (“SG&A”) in the consolidated statements of operations and comprehensive loss in their respective periods.
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.
Disaggregation of Revenue
Net sales consists of revenue from the sale of tomatoes, cucumbers, strawberries and salad greens produced at the Company’s CEA facilities (collectively, the “Products”) and primarily sold to Mastronardi Produce Limited (“Mastronardi”) under the Purchase and Marketing Agreement (the “Mastronardi Agreement”). The following table presents the Company’s total revenue disaggregated by product type:
| | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2023 | | March 31, 2022 |
Tomatoes | | $ | 10,966 | | | $ | 5,164 | |
Strawberries | | 1,008 | | | — | |
Salad greens | | 846 | | | — | |
Cucumbers | | 191 | | | — | |
| | $ | 13,011 | | | $ | 5,164 | |
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
5. Fair Value Measurements
The company categorizes its assets and liabilities into one of three levels based on the assumptions (inputs) used in determining their values, as defined below:
•Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs reflecting management’s assumptions about the inputs used in pricing the asset or liability.
The table below presents the Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used for each measurement:
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| | | | Fair Value as of: | | | | | | | | | | | | |
| | | | March 31, 2023 | | December 31, 2022 | | | | | |
| | Balance Sheet Account | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap | | Other assets, net | | $ | — | | | $ | 7,346 | | | $ | — | | | $ | 7,346 | | | $ | — | | | $ | 8,788 | | | $ | — | | | $ | 8,788 | | | | | | | | | | | | | |
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Total assets | | | | $ | — | | | $ | 7,346 | | | $ | — | | | $ | 7,346 | | | $ | — | | | $ | 8,788 | | | $ | — | | | $ | 8,788 | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Private Warrants | | Private Warrant liabilities | | — | | | 110 | | | — | | | 110 | | | — | | | 119 | | | — | | | 119 | | | | | | | | | | | | | |
Total liabilities | | | | $ | — | | | $ | 110 | | | $ | — | | | $ | 110 | | | $ | — | | | $ | 119 | | | $ | — | | | $ | 119 | | | | | | | | | | | | | |
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The Company’s derivative contracts are measured at fair value using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for terms specific to the contracts.
As of March 31, 2023, 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 $42,490 as of March 31, 2023.
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:
| | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | |
Exercise price | | $ | 11.50 | | | $ | 11.50 | | | |
Stock price | | $ | 0.61 | | | $ | 0.57 | | | |
Volatility | | 113.0 | % | | 114.0 | % | | |
Remaining term in years | | 2.83 | | | 3.08 | | | |
Risk-free rate | | 3.81 | % | | 4.22 | % | | |
Dividend yield | | — | | | — | | | |
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 months ended March 31, 2023:
| | | | | | | | |
| | |
| | |
Fair value of Private Warrants on December 31, 2022 | | $ | 119 | |
Fair value of Private Warrants converted to Public Warrants | | — | |
Change in fair value of Private Warrants | | (9) | |
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| | |
| | |
| | |
| | |
Fair value of Private Warrants outstanding as of March 31, 2023 | | $ | 110 | |
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 and are comprised of the purchase and transportation cost plus production labor and overhead. Raw materials primarily represent growing and packaging supplies. Growing crop inventories primarily represent the costs associated with growing produce within the Company’s CEA facilities. Finished goods inventories represent costs associated with boxed produce not yet sold.
| | | | | | | | | | | |
| |
| March 31, 2023 | | December 31, 2022 |
Raw materials | $ | 6,307 | | | $ | 6,191 | |
Growing crops | 9,220 | | | 11,546 | |
Finished goods | 578 | | | 341 | |
Total inventories, net | $ | 16,105 | | | $ | 18,078 | |
7. Property and Equipment
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Land | $ | 30,639 | | | $ | 29,877 | |
Buildings | 244,194 | | | 215,420 | |
Machinery and equipment | 116,934 | | | 114,407 | |
Construction in progress | 112,254 | | | 116,544 | |
Leasehold improvements | 4,688 | | | 4,688 | |
Less: accumulated depreciation | (32,375) | | | (24,758) | |
Total property and equipment, net | $ | 476,334 | | | $ | 456,178 | |
Depreciation expense was $7,641 for the three months ended March 31, 2023, compared to $3,039 for the three months ended March 31, 2022.
8. Other Assets
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Utility deposits | $ | 6,253 | | | $ | 6,246 | |
Investment in unconsolidated entity | 5,000 | | | 5,000 | |
Prepayments for fixed assets | 750 | | | 1,284 | |
| | | |
Interest rate swap | 7,346 | | | 8,788 | |
Other assets | 1,036 | | | 1,094 | |
Total other assets | $ | 20,385 | | | $ | 22,412 | |
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
9. Accrued Expenses
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Construction costs | $ | 4,108 | | | $ | 9,201 | |
Payroll and related | 3,042 | | | 5,314 | |
Inventory | 3,019 | | | 2,273 | |
Professional service fees | 2,161 | | | 983 | |
Utilities | 1,149 | | | 2,746 | |
Other accrued liabilities | 1,038 | | | 1,479 | |
Total accrued expenses | $ | 14,517 | | | $ | 21,996 | |
10. Debt
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Rabo Loan | $ | 70,313 | | | $ | 71,250 | |
Equilibrium Loan | 66,252 | | | 66,252 | |
GNCU Loan | 50,000 | | | 50,000 | |
| | | |
Unamortized debt issuance costs | (4,061) | | | (3,280) | |
Debt, net of issuance costs | 182,504 | | | 184,222 | |
Less current portion | (3,685) | | | (3,685) | |
Long term, net | $ | 178,819 | | | $ | 180,537 | |
On February 2, 2023, the Company amended the Rabo Loan to grant the lender a first priority security interest in the reserve deposit account with JPMorgan Chase Bank. In return, the lender waived one technical event of default existing with the Rabo Loan related to the Company’s failure to report the Company’s separation from certain of its former executive officers within the timeframe required by the Rabo Loan.
On March 31, 2023, the Company further amended the Rabo Loan. The amendment modified the first day upon which the Company must comply with the leverage ratio covenant under the Rabo Loan from March 31, 2023, to June 30, 2023. The amendment also required that the Company deposit $2,000 into a designated reserve account on March 31, 2023 and make two additional deposits, each of $500 on April 30, 2023 and May 31, 2023, to secure the Company’s obligations under the Rabo Loan. The amendment also added covenants restricting the Company’s ability to incur certain debts and allows the lender to terminate the Company’s existing interest rate swap in the lender’s discretion, and requires that the Company reimburse the lender for certain third-party financial advisory expenses.
11. Commitments and Contingencies
(a)Leases
For the three months ended March 31, 2023 the Company recognized $158 of operating lease expense in SG&A within the unaudited condensed consolidated statement of operations and comprehensive loss compared to $239 for the three months ended March 31, 2022.
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
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 2023 | $ | 494 | |
2024 | 613 | |
2025 | 701 | |
2026 | 707 | |
2027 | 591 | |
2026 and thereafter | 621 | |
Total minimum payments required | 3,727 | |
Less: imputed interest costs(1) | (713) | |
Present value of net minimum lease payments(2) | $ | 3,014 | |
Weighted-average imputed interest rate | 7.21 | % |
Weighted-average remaining lease term (in years) | 5.5 |
____________________________
(1)Represents the amount necessary to reduce net minimum lease payments to present value using actual rate in the lease agreement or the Company’s incremental borrowing rate at lease inception.
(2)Included in the unaudited condensed consolidated balance sheet as of March 31, 2023 as current and non-current lease liability of $505 and $2,509, respectively.
Supplemental cash flow information related to leases is as follows:
| | | | | | | | | | | |
| Period Ended March 31, |
| 2023 | | 2022 |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 183 | | | $ | 231 | |
| | | |
Operating lease right-of-use assets surrendered with the early termination of operating 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 named the Company and certain of its current officers as defendants, and alleged that the Company 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 AppHarvest Morehead in the first half of 2021. In particular, the lead plaintiff alleged that the Company’s public statements during the class period were false and misleading because the Company failed to disclose issues related to its tomato harvest and employee training and retention. The amended complaint sought unspecified monetary damages on behalf of the punitive class and an award of costs and expense, including reasonable attorneys’ fees. On May 2, 2022, the Company filed a motion to dismiss the amended complaint. On July 25, 2022, the lead plaintiff filed a second amended complaint with substantially similar allegations. On September 23, 2022, the Company filed a motion to dismiss the second amended complaint. The lead plaintiff filed his opposition to the Company’s motion to dismiss the second amended complaint on November 22, 2022, and the Company filed its reply in support of its motion to dismiss the second amended complaint on January 13, 2023.
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
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
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. On August 31, 2022, a third derivative complaint (captioned Kennedy v. AppHarvest, Inc., et al) was filed in the U.S. District Court for the District of Delaware against certain of AppHarvest’s officers and directors. The Kennedy derivative complaint is substantially similar to the Ross and Wester derivative complaints. On November 22, 2022, the Kennedy derivative case was 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 case no longer consents to the stay.
We intend to defend these cases vigorously, and have not recorded a liability related to these lawsuits because, at this time, we are unable to estimate reasonably possible losses or determine whether an unfavorable outcome is 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, 2022.
12. Derivative Financial Instruments
The following table summarizes the before and after tax amounts for the various components of other comprehensive (loss) income for the periods presented:
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| | Three Months Ended |
| | March 31, 2023 | | March 31, 2022 |
| | Before Tax | | Tax Benefit | | After Tax | | Before Tax | | Tax Expense | | After Tax |
Foreign currency | | $ | — | | | $ | — | | | $ | — | | | $ | 125 | | | $ | — | | | $ | 125 | |
Interest rate swap | | (1,442) | | | — | | | (1,442) | | | 4,235 | | | — | | | 4,235 | |
Total other comprehensive (loss) income | | $ | (1,442) | | | $ | — | | | $ | (1,442) | | | $ | 4,360 | | | $ | — | | | $ | 4,360 | |
During the three months ended March 31, 2023 and March 31, 2022, an income tax benefit (expense) of $378 and $(1,165) was recognized within other comprehensive income (loss), respectively.
The income tax expense of $1,933 and $2,822 related to the balance in accumulated other comprehensive income (“AOCI”) at March 31, 2023 and December 31, 2022, respectively, is fully offset by a valuation allowance. The Company will release the AOCI amounts, net of any tax impact, from 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 $503 and $6,035 for the three months ended March 31, 2023, and March 31, 2022, respectively, of which $346, and $5,894, were included in SG&A and $157 and $141 were included in cost of goods sold for the three months ended March 31, 2023 and March 31, 2022, respectively.
14. Income Taxes
The Company’s effective income tax rate was 0.7% and 0.4% for the three months ended March 31, 2023, and March 31, 2022, respectively. The variance from the U.S. federal statutory rate of 21% for the three months ended March 31, 2023 and
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
March 31, 2022, 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.
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:
| | | | | | | | | | | |
| Three Months Ended |
| March 31, |
| 2023 | | 2022 |
Anti-dilutive common share equivalents | | | |
Stock options | 1,279 | | | 2,727 | |
Restricted stock units | 2,576 | | | 5,683 | |
Vested/Exercised, not issued | — | | | — | |
Warrants | 13,242 | | | 13,242 | |
Total anti-dilutive common share equivalents | 17,097 | | | 21,652 | |
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended |
| | | March 31, |
| | | | | 2023 | | 2022 |
Numerator: | | | | | | | |
Net loss | | | | | $ | (33,630) | | | $ | (30,635) | |
Denominator: | | | | | | | |
Weighted-average common shares outstanding, basic and diluted | | | | | 131,124 | | | 101,321 | |
Net loss per common share, basic and diluted | | | | | $ | (0.26) | | | $ | (0.30) | |
Public Offering
In February 2023, in order to raise capital to fund the Company’s planned expenditures and meet its obligations, the Company complete an underwritten public offering (the “Public Offering”) of 46,000 shares of Common Stock at a public offering price of $1.00 per share and received approximately $43,038 in net proceeds, after deducting underwriting discounts and commissions of $2,400, and offering costs of $562.
16. Subsequent Events
On May 5, 2023, the Company received a notice of default and reservation of rights (the “Notice of Default”) from CEFF II AppHarvest Holdings, LLC (“CEFF”), an affiliate of Equilibrium Controlled Foods Fund, LLC (“Equilibrium”) related to a credit agreement for the development of the Richmond CEA facility initially entered into on July 23, 2021, and subsequently amended (the “Equilibrium Loan”). The Notice of Default alleges certain defaults relating to increases in the construction budget and delays in construction made without Equilibrium approval, the existence of a mechanic’s lien, and alleged construction deficiencies. The Company intends to assert several defenses to the claims in the Notice of Default. The Company
APPHARVEST, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(amounts in thousands except per share amounts)
believes that certain of the alleged defaults have no basis and are without merit, and that there were no events of default, as defined within the Equilibrium Loan, as of and during the three-months ended March 31, 2023.
In the event of default under the Equilibrium Loan, the Equilibrium Loan would entitle CEFF to exercise any of its rights and remedies under the Equilibrium Loan, including, inter alia, a demand for payment from the Company in its capacity of guarantor of the Equilibrium Loan, acceleration of the Equilibrium Loan and commencement for foreclosure proceedings on AppHarvest Richmond. If the Equilibrium Loan were to be accelerated, the Company would be required to repay the entire principal balance of the Equilibrium Loan on demand, plus other costs such as attorney’s fees, lender costs, and a prepayment premium. In addition, an event of default beyond applicable notice and cure periods under the Equilibrium Loan would trigger a cross-default under the Rabo Loan, which would entitle Rabo to exercise any of its rights and remedies under the Rabo Loan, including, inter alia, acceleration of the Rabo Loan and commencement for foreclosure proceedings on AppHarvest Morehead. If the outstanding debt under the Rabo Loan were to be accelerated, the Company would be required to repay the entire principal balance of the loan on demand, plus other costs such as attorney’s fees and lender costs. As of May 10, 2023, the Company has not received notice from Rabo alleging a cross-default under the Rabo Loan.
APPHARVEST MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believes,” “expects,” “intends,” “estimates,” “projects,” “anticipates,” “will,” “plan,” “design,” “may,” “should,” or similar language are intended to identify forward-looking statements.
It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Quarterly Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified under “Risk Factors” in Item 1A herein and in our other filings with the Securities and Exchange Commission (the “SEC”). Our ability to continue as a going concern, the impact of COVID-19 and its variants, as well as geopolitical tensions, such as Russia’s incursion into Ukraine, including related decades-high inflation and rising interest rates, may also exacerbate these risks, any of which could have a material effect on us. All forward-looking statements included herein are made only as of the date hereof. Unless otherwise required by law, we do not undertake, and specifically disclaim, any obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise after the date of such statement.
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q, and our audited consolidated financial statements and related notes for the year ended December 31, 2022, included in our Annual Report on Form 10-K filed with the SEC on March 15, 2023 (“Form 10-K”). As used in this section, unless the context suggests otherwise, “we,” “us,” “our,” “Company,” and “AppHarvest” refer to AppHarvest, Inc. and its consolidated subsidiaries.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We were founded on January 19, 2018. Together with our subsidiaries, we are 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. Our 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. We work to improve access to nutritious food, while farming more sustainably, building a domestic food supply, and increasing investment in Appalachia.
On May 5, 2023, we received a notice of default and reservation of rights (the “Notice of Default”) from CEFF II AppHarvest Holdings, LLC (“CEFF”), an affiliate of Equilibrium Controlled Foods Fund, LLC (“Equilibrium”) related to our borrowings under the credit agreement dated July 23, 2021, as subsequently amended (the “Equilibrium Loan”). See “—Debt Facilities - Notice of Default” for more information regarding the Notice of Default.
Going Concern
We have incurred losses from operations and generated negative cash flows from operating activities since inception. During the three months ended March 31, 2023, and the year ended December 31, 2022, we incurred net losses of $33.6 million and $176.6 million, respectively, and generated negative cash flows from operations of $25.0 million and $86.1 million, respectively. There is no guarantee when, if ever, we will become profitable. In addition, our debt service requirements and our plans to continue investing in the development of our CEA facilities, including AppHarvest Berea, AppHarvest Richmond, and AppHarvest Somerset, will have an adverse impact on our liquidity. We continue to take actions to maintain appropriate levels of liquidity. In December 2022, we completed a sale-leaseback transaction on our AppHarvest Berea property (the “Berea Sale-Leaseback”), which provided us with net proceeds of $57.5 million (of which $22.5 million was required to be set aside for construction costs for AppHarvest Richmond). In February 2023, we raised approximately $43.0 million in net proceeds in the Public Offering. As of March 31, 2023, we had $50.0 million of cash on hand, and an accumulated deficit of $397.6 million. Despite these actions, management believes there is substantial doubt about our ability to continue as a going concern. In light of higher expenses experienced in the first quarter of 2023 related to deposits into the designated reserve account as required by
the March 31, 2023, amendment to the Rabo Loan, increased professional fees, and lower revenue from strawberries and higher expenses expected in the second quarter of 2023 related to additional deposits into the Rabo reserve account, increased capital expenditures and to lost revenues as a result of the mitigation and replanting efforts we are undertaking at AppHarvest Berea, we currently estimate that absent additional sources of financing, our existing cash and cash equivalents will only allow us to continue our planned operations into the third quarter of 2023. Investors should read the section below titled Liquidity and Capital Resources for additional information regarding our financial condition and ability to continue operations.
Nasdaq Notice
On April 18, 2023, we received an additional letter from Nasdaq, notifying us that, for the previous 30 consecutive business day periods prior to the date of the letter, the closing bid price for our Common Stock was below $1.00. In accordance with Nasdaq Listing Rule 5810(c)(3)(A) we were provided an initial period of 180 calendar days, or until October 16, 2023, to regain compliance with Nasdaq’s bid price requirement. If, at any time before October 16, 2023, the bid price for our Common Stock closed at $1.00 or more for a minimum of 10 consecutive business days, we would regain compliance with the bid price requirement, unless Nasdaq staff exercised its discretion to extend this 10-day period pursuant to Nasdaq rules.
Factors Affecting Our Financial Condition and Results of Operations
We have expended, and expect to continue to expend, substantial resources as we:
•build-out and ramp-up the second half of AppHarvest Richmond and invest in additional CEA facilities in the future;
•finalize construction of AppHarvest Berea and AppHarvest Somerset;
•continue our third growing season at AppHarvest Morehead, which began during the third quarter of 2022, and plant and harvest new crops in AppHarvest Berea salad greens facility, and AppHarvest Somerset, including future growing seasons;
•fulfill our obligations under the Purchase and Marketing Agreement with Mastronardi;
•identify and invest in future growth opportunities, including new or expanded facilities and new product lines;
•invest in sales and marketing efforts to increase brand awareness, engage customers and drive sales of our products;
•invest in product innovation and development; and
•incur additional general and administrative expenses, including increased finance, legal and accounting expenses, associated with being a public company and expanding operations.
Key Components of Statement of Operations
Net Sales
Substantially all of our net sales for the three months ended March 31, 2023, and 2022, were generated from the sale of tomatoes, and for the three months ended March 31, 2023, to a lesser extent salad greens, strawberries, and cucumbers, under an agreement with one customer, Mastronardi. Net sales include revenues earned from the sale of our products, less commissions, shipping, distribution and other costs incurred as defined in our customer agreements.
Cost of Goods Sold
Cost of goods sold for the three months ended March 31, 2023, and 2022, consisted of expenses incurred related to the production of inventory sold to customers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2023, and 2022, consisted of payroll and payroll related expenses, stock-based compensation, professional services and legal fees, licenses and registration fees, insurance, depreciation, rent and various other personnel and office related costs. SG&A also includes start-up expenses related to new CEA facilities which were under construction and ramping up operations in 2022.
Interest Expense
Interest expense for the three months ended March 31, 2023, and March 31, 2022, primarily relates to long-term debt to help finance the construction of our CEA facilities. Interest expense for the three months ended March 31, 2023, also includes interest related to our Berea financing obligation. All of the interest expense for the three months ended March 31, 2022, has been capitalized as a component of the cost of those facilities.
Results of Operations
Comparison of the Three Months Ended March 31, 2023 and March 31, 2022
The following table sets forth our historical operating results for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended | | | |
(Dollars in thousands) | | | | | | | | March 31, 2023 | | March 31, 2022 | | | |
Net sales | | | | | | | | $ | 13,011 | | | $ | 5,164 | | | | |
Cost of goods sold | | | | | | | | 34,345 | | | 13,554 | | | | |
Gross loss | | | | | | | | (21,334) | | | (8,390) | | | | |
Operating expenses: | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | | | | | | 10,016 | | | 21,039 | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total operating expenses | | | | | | | | 10,016 | | | 21,039 | | | | |
Loss from operations | | | | | | | | (31,350) | | | (29,429) | | | | |
Other income (expense): | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Interest expense | | | | | | | | (2,698) | | | — | | | | |
| | | | | | | | | | | | | |
Change in fair value of Private Warrants | | | | | | | | 9 | | | (1,329) | | | | |
Other | | | | | | | | 166 | | | 14 | | | | |
Loss before income taxes | | | | | | | | (33,873) | | | (30,744) | | | | |
Income tax benefit | | | | | | | | 243 | | | 109 | | | | |
Net loss | | | | | | | | $ | (33,630) | | | $ | (30,635) | | | | |
The following sections discuss and analyze the changes in the significant line items in our unaudited condensed consolidated statements of operations for the comparison periods identified.
Net Sales
Net sales for the three months ended March 31, 2023, were $13.0 million compared to $5.2 million for the comparable prior year period. The increase of $7.8 million for the three months ended March 31, 2023, was primarily due to the start-up of operations at AppHarvest Richmond, AppHarvest Somerset and AppHarvest Berea as we increased our tomato production capacity and began to sell strawberries, salad greens and cucumbers. The mitigation efforts at the Berea facility that we began to undertake in April 2023, as more fully described in “Risk Factors – We face risks inherent in the agriculture business, including the risks of diseases and pests”, is expected to negatively impact net sales for the quarter ended June 30, 2023, by approximately $3.0 million. We anticipate that we will make up these sales in the second half of the year and do not expect a material negative impact for the full year ended December 31, 2023.
Cost of Goods Sold
Cost of goods sold for the three months ended March 31, 2023, was $34.3 million compared to $13.6 million for the comparable prior year period. The increase of $20.8 million for the three months ended March 31, 2023, was due costs related to the start-up of operations at AppHarvest Richmond, AppHarvest Berea, and AppHarvest Somerset, which was slightly offset by a decrease in cost of goods sold at AppHarvest Morehead of approximately $0.8 million during the three months ended March 31, 2023 compared to the comparable prior year period.
Selling, General, and Administrative Expenses
SG&A for the three months ended March 31, 2023 was $10.0 million compared to $21.0 million for the comparable prior year period. The $11.0 million decrease during the three months ended March 31, 2023 was primarily driven by a $5.5 million decrease in stock-based compensation expense and lower salaries largely due to reduced headcount as a result of restructuring initiatives in the prior year, and a decrease in new facility start-up costs of approximately $0.4 million compared to the comparable prior year period.
Interest Expense
Interest expense for the three months ended March 31, 2023, and March 31, 2022, was incurred on long-term debt used to help finance the construction of our CEA facilities. For the three months ended March 31, 2023, interest expense also includes interest associated with the Berea financing obligation. For the three months ended March 31, 2023, $2,226 of interest has been capitalized as a component of the cost of those facilities compared to all, or $1,648, of the interest expense for the three months ended March 31, 2022.
Income Taxes
We recorded an income tax benefit of $243 during the three months ended March 31, 2023, resulting in an effective income tax rate of 0.7% for the three months ended March 31, 2023, compared to an income tax benefit of $109 during the three months ended March 31, 2022. The variance from the U.S. federal statutory rate of 21% for the three months ended March 31, 2023 was primarily attributable to increases in our valuation allowance largely driven by increases in our net operating loss carryforwards.
Liquidity and Capital Resources
Liquidity and Going Concern
At March 31, 2023, we had an accumulated deficit of $397.6 million. We have incurred losses and generated negative cash flows from operations since our inception in 2018. We expect to continue to incur losses and negative cash flows from operating expenses for the foreseeable future as we continue construction, build-out and start-up of our CEA facilities and ramp up operations and production at our new CEA facilities. In addition, our material cash requirements, as described below, will have an adverse impact on our liquidity.
Cash and cash equivalents totaled $50.0 million and $54.3 million as of March 31, 2023, and December 31, 2022, respectively. We expect that we will need additional capital to continue to fund our operations. Currently, our primary sources of liquidity are cash flows generated from the Public Offering that was completed in February 2023, and revenues from the sale of our tomatoes, salad greens, strawberries and cucumbers. Based on our current operating plan, we plan to rely on the net proceeds from the Public Offering for working capital and general corporate purposes as we ramp up production and sales from the four farms. The current volatility in the equity markets, coupled with the trading price of our common stock, create additional challenges to raising a sufficient amount of capital through equity financing in the near term.
We will need to raise additional funds in order to operate our business, meet obligations as they become due and continue the ongoing construction, build-out and start-up of our CEA facilities. We are pursuing additional financing alternatives, which include third-party equity or debt financing, or other sources, such as strategic relationships and other transactions with third parties, that may or may not include business combination transactions. However, financing may not be available to us in the necessary time frame, in amounts that we require, on terms that are acceptable to us, or at all. If we are unable to raise the necessary funds when needed, it may materially and adversely impact our ability to execute on our operating plans, and the construction, build-out and start-up of our future CEA facilities could be delayed, scaled back, or abandoned. These factors raise substantial doubt about our ability to continue as a going concern. In light of higher expenses experienced in the first quarter of 2023 related to deposits into the designated reserve account as required by the March 31, 2023, amendment to the Rabo Loan, increased professional fees, and lower revenue from strawberries and higher expenses expected in the second quarter of 2023 related to additional deposits into the Rabo reserve account, increased capital expenditures and to lost revenues as a result of the mitigation and replanting efforts we are undertaking at AppHarvest Berea, we currently estimate that in the absence of additional sources of financing, our existing cash and cash equivalents will only allow us to continue our planned operations into the third quarter of 2023.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of those securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants that will further limit or restrict our ability to take specific actions, such as incurring additional debt or making capital expenditures. If we raise additional funds through collaborations with third parties, we may be required to relinquish valuable rights to our technologies, or future revenue streams.
Our failure to raise capital as and when needed could have significant negative consequences for our business, financial condition and results of consolidated operations. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors”.
Material Cash Requirements
Cash requirements for the next twelve months are expected to consist primarily of our current payroll, working capital requirements, planned capital expenditures, and debt service requirements. During the three months ended March 31, 2023, and the year ended December 31, 2022, we spent $18.5 million and $156.8 million, respectively on capital expenditures. We expect to incur approximately $40 million to $45 million more in capital expenditures during the next twelve months dependent on the continued availability of financing on acceptable terms. Principal payments on our outstanding debt are approximately $3.8 million over the next twelve months. In addition, under the terms of the master credit agreement with Rabo AgriFinance LLC dated June 15, 2021, as subsequently amended (the “Rabo Loan”), we were required to make a deposit of $0.5 million on April 30, 2023 and must make an additional deposit of $0.5 million by May 31, 2023, to secure our obligations under the Rabo Loan.
In the long-term, our cash requirements are expected to be associated with planting and harvesting our crops, acquiring and building out new facilities, investment and development in CEA technology, attracting, developing and retaining a skilled labor force, and working capital.
For a discussion of our future funding requirements, please refer to Part II, Item 1A. Risk Factors, “There is substantial doubt about our ability to continue as a going concern and we will require significant additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to delay, limit, reduce or terminate our operations and future growth.”
Debt Facilities
Equilibrium Loan Agreement
On July 23, 2021, we entered into a credit agreement with CEFF, an affiliate of Equilibrium, for a construction loan in the original principal amount of $91.0 million (the “Equilibrium Loan”) for the development of a CEA facility at our property in Richmond, Kentucky (the “Project”). The Equilibrium Loan provides monthly disbursements to fund capital costs of the Project in excess of our required equity contribution of 34.5% of the capital costs of the Project. The Equilibrium 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 Equilibrium Loan through maturity, which is expected to be July 23, 2024, with no required principal payments until maturity. On July 29, 2022, we amended the Equilibrium Loan to require that we decrease the balance of the Equilibrium Loan to $81.0 million on or prior to December 31, 2022 and further decrease the balance to $76.0 million on our prior to March 31, 2023. On December 21, 2022, we further amended the Equilibrium Loan to decrease the balance to $66.3 million, amend certain covenants and waive alleged defaults. In exchange, we agreed to deposit $22.5 million of the proceeds associated with the Berea Sale Leaseback into a segregated deposit account to be used for certain on-going construction work at AppHarvest Richmond. As of March 31, 2023, we had $66.3 million outstanding on the Equilibrium Loan.
As further described in “— Notice of Default”, on May 5, 2023, we received a Notice of Default from CEFF related to our borrowings under the Equilibrium Loan.
GNCU Loan Agreement
On July 29, 2022, we entered into a loan agreement with Greater Nevada Credit Union (the “GNCU Loan Agreement”) for an original principal amount of $50.0 million. 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, we 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 proceeds of the GNCU Loan were used at closing to, in part, pay off a then-existing loan and accrued interest thereon, of approximately $45.7 million, 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 $2.6 million. The GNCU Loan required us to contribute $3.3 million to be held in an interest reserve account and $19.1 million in a project account, to be used to pay interest and the balance of project cost for AppHarvest Somerset in excess of the loan, respectively. The balance of these amounts are reflected
in restricted cash in the consolidated balance sheet as of March 31, 2023. As of March 31, 2023, we had $50,0 million outstanding under the GNCU Loan.
Rabo Loan Agreement
On June 15, 2021, we entered into a master credit agreement with Rabo AgriFinance LLC (“Rabo”) for a real estate term loan in an original principal amount of $75.0 million (the “Rabo Loan”). The Rabo Loan matures on April 1, 2031, with quarterly interest payments that commenced on July 1, 2021 and quarterly principal payments that commenced 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 AppHarvest Morehead CEA facility and requires compliance with certain financial covenants. In July 2022, in exchange for a waiver from ratio covenant compliance and reporting for the June 30, 2022 period, we agreed to fund an additional $2.0 million to a reserve account.
On February 2, 2023, we amended the Rabo Loan to grant the lender a first priority security interest in the reserve deposit account with JPMorgan Chase Bank. In return, the Rabo waived one technical event of default existing with the Rabo Loan related to our failure to report separation from certain of our former executive officers within the timeframe required by the Rabo Loan.
On March 31, 2023, we further amended the Rabo Loan. The amendment modified the first day upon which we must comply with the leverage ratio covenant from March 31, 2023, to June 30, 2023. The amendment also required that the we deposit $2.0 million into a designated reserve account on March 31, 2023 and make two additional deposits, each of $0.5 million on April 30, 2023 and May 31, 2023, to secure our obligations under the Rabo Loan. The amendment also added covenants restricting our ability to incur certain debts and allows Rabo to terminate our existing interest rate swap at the their discretion, and requires that we reimburse Rabo for certain third-party financial advisory expenses. As of March 31, 2023, we had $70.3 million outstanding under the Rabo Loan.
As further described in “— Notice of Default”, on May 5, 2023, we received a Notice of Default from CEFF related to our borrowings under the Equilibrium Loan. An event of default under the Equilibrium Loan would trigger a cross-default under the Rabo Loan.
Notice of Default
On May 5, 2023, we received a Notice of Default from CEFF, an affiliate of Equilibrium, related to our borrowings under the Equilibrium Loan. The Notice of Default alleges certain defaults relating to increases in the construction budget and delays in construction made without CEFF’s approval, the existence of a mechanic’s lien, and alleged construction deficiencies. We plan on asserting several defenses to the claims in the Notice of Default. We believe that certain of the alleged defaults have no basis in the loan documents and/or rely on a mischaracterization of facts. Certain other alleged defaults are subject to cure periods and we plan on sending additional materials to CEFF to satisfy certain demands within the timeframe of such cure periods. An event of default under the Equilibrium Loan would entitle CEFF to exercise any of its rights and remedies in the Equilibrium Loan documents, including, inter alia, a demand for payment from the Company in its capacity as guarantor of the Equilibrium Loan, acceleration of the Equilibrium Loan and commencement for foreclosure proceedings on AppHarvest Richmond. The Notice of Default also contains a demand that we deposit an additional $15 million into a previously-established construction cost escrow account. Concurrent with the Notice of Default, CEFF also sent notice to the bank where such account is held asserting its right under a deposit account control agreement to block such account. As a result, further withdrawals from such account will require CEFF’s approval. The balance of the account as of March 31, 2023 was $5.3 million and is reflected in cash and cash equivalents on the condensed consolidated balance sheet. As of the date of the filing of this report, the balance in the account was $1.9 million. If the outstanding debt under the Equilibrium Loan were to be accelerated, we would be required to repay the entire principal balance of the loan on demand, plus other costs such as attorney’s fees, lender costs, and a prepayment premium. In addition, an event of default beyond the applicable notice and cure periods under the Equilibrium Loan would trigger a cross-default under the Rabo Loan which would entitle Rabo to exercise any of its rights and remedies under the Rabo Loan, including, inter alia, acceleration of the Rabo Loan and commencement for foreclosure proceedings on AppHarvest Morehead. If the outstanding debt under the Rabo Loan were to be accelerated, we would be required to repay the entire principal balance of the loan on demand, plus other costs such as attorney’s fees and lender costs. As of the date of this filing, we have not received notice from Rabo alleging a cross-default under the Rabo Loan. We are working with Equilibrium to come to a resolution, but we cannot guarantee a resolution on a timely basis, on favorable terms, or at all. If the amounts outstanding under the Equilibrium Loan or the Rabo Loan were to become immediately due and payable, we would need to take immediate further action to raise additional funds in the capital markets or otherwise to fund our obligations, and there is no guarantee that we would be able to successfully do so.
Summary of Cash Flows
A summary of our cash flows from operating, investing and financing activities is presented in the following table:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(Dollars in thousands) | | | | | 2023 | | 2022 |
| | | | | | | |
Net cash used in operating activities | | | | | $ | (25,002) | | | $ | (27,503) | |
Net cash used in investing activities | | | | | (21,171) | | | (39,018) | |
Net cash provided by financing activities | | | | | 41,108 | | | 24,985 | |
Cash and cash equivalents (including restricted cash) beginning of year | | | | | 78,532 | | | 176,311 | |
Cash and cash equivalents (including restricted cash) end of period | | | | | $ | 73,467 | | | $ | 134,775 | |
Net Cash Used In Operating Activities
Net cash used in operating activities was $25.0 million for the three months ended March 31, 2023, compared to $27.5 million for the three months ended March 31, 2022. The change of $2.5 million was primarily due to an increase in working capital for increased operations offset by a decrease in prepayments for fixed assets.
Net Cash Used In Investing Activities
Net cash used in investing activities was $21.2 million for the three months ended March 31, 2023, compared to $39.0 million for the three months ended March 31, 2022. The change of $17.8 million was primarily due to a decrease in purchases of property and equipment during three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Net Cash Provided By Financing Activities
Net cash provided by financing activities was $41.1 million for the three months ended March 31, 2023, compared to $25.0 million for the three months ended March 31, 2022. The change of $16.1 million was primarily due to net proceeds of approximately $43.0 million from the Public Offering, and repayments of debt of approximately $0.9 million during the three months ended March 31, 2023, compared to debt proceeds of approximately $25.9 million during the three months ended March 31, 2022.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with United States generally accepted accounting principals (“U.S. GAAP” or “GAAP”), we use certain non-GAAP measures, such as Adjusted EBITDA and Adjusted gross loss, to understand and evaluate our core operating performance. We define and calculate Adjusted EBITDA as net loss before the impact of interest income or expense, income tax expense or benefit, depreciation and amortization, adjusted to exclude: stock-based compensation expense, Business Combination transaction-related costs, restructuring and impairment costs, remeasurement of warrant liabilities, start-up costs for new CEA facilities, and certain other non-core items. We define and calculate Adjusted gross profit/(loss) as gross profit/(loss) adjusted to exclude the impact of depreciation and amortization and stock-based compensation expense related to cost of goods sold. We believe these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures for trend analyses and for budgeting and planning purposes.
We believe that the use of these non-GAAP financial measures provide additional tools for investors to use in evaluating operating results and trends. Other similar companies may present different non-GAAP measures or calculate similar non-GAAP measures differently. Management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses that are required to be presented in our GAAP financial statements. Because of this limitation, you should consider Adjusted EBITDA and Adjusted gross loss alongside other financial performance measures, including net loss, gross loss, and our other financial results presented in accordance with GAAP.
Reconciliation of GAAP to Non-GAAP
The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
(Dollars in thousands) | | | | | | March 31, 2023 | | March 31, 2022 |
Net loss | | | | | | $ | (33,630) | | | $ | (30,635) | |
| | | | | | | | |
Interest expense | | | | | | 2,698 | | | — | |
Interest income | | | | | | (512) | | | (101) | |
Income tax benefit | | | | | | (243) | | | (109) | |
Depreciation and amortization expense | | | | | | 7,641 | | | 3,112 | |
EBITDA | | | | | | (24,046) | | | (27,733) | |
Change in fair value of Private Warrants | | | | | | (9) | | | 1,329 | |
Stock-based compensation expense | | | | | | 503 | | | 6,035 | |
| | | | | | | | |
Restructuring costs(1) | | | | | | 355 | | | 1,990 | |
Start-up costs for new CEA facilities(2) | | | | | | — | | | 355 | |
| | | | | | | | |
| | | | | | | | |
Adjusted EBITDA | | | | | | $ | (23,197) | | | $ | (18,024) | |
(1) See FN 3 - Restructuring
(2) Start-up costs are related to the pre-commencement commercial activities for tomatoes, salad greens and strawberries at the Richmond, Berea and Somerset CEA facilities
The following table presents a reconciliation of gross loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted gross loss:
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
(Dollars in thousands) | March 31, 2023 | | March 31, 2022 | | $ Change |
| | | | | |
Net sales | $ | 13,011 | | | $ | 5,164 | | | $ | 7,847 | |
Cost of goods sold | 34,345 | | | 13,554 | | | 20,791 | |
Gross loss | (21,334) | | | (8,390) | | | (12,944) | |
Depreciation and amortization | 6,508 | | | 2,272 | | | 4,236 | |
Stock-based compensation expense | 157 | | | 141 | | | 16 | |
Adjusted gross loss | $ | (14,669) | | | $ | (5,977) | | | $ | (8,692) | |
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results could differ from those estimates and assumptions.
Certain accounting estimates involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. Management considers these accounting policies to be critical accounting estimates. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. The significant accounting estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the critical accounting estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K.
There have been no material changes to the critical accounting estimates disclosed in the Form 10-K.
Recent Accounting Guidance
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that we adopt as of the specified effective date.
See Note 2 - Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for a discussion of recent accounting pronouncements and their effect on us.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
As a smaller reporting company, this information is not required.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the fiscal quarter ended March 31, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer and accounting officer have concluded that as of March 31, 2023, our disclosure controls and procedures were effective at a reasonable assurance level and, accordingly, provided reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Limitations on Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
From time to time, we may be subject to litigation and claims arising in the ordinary course of business. We do not currently; however, expect such claims to have a material adverse effect on our business, operating results, cash flows or financial condition. However, depending on the nature and timing of a given dispute, an unfavorable resolution could materially affect our current or future results of operations or cash flows. For a description of our legal proceedings, see Part I, Item 1, Note 11. Commitments and Contingencies for more information.
Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. Before you make a decision to buy our securities, you should carefully consider the risks and uncertainties described below together with all of the other information contained in this Quarterly Report. If any of the events or developments described below were to occur, our business, prospects, operating results and financial condition could suffer materially, the trading price of our securities could decline, and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
Summary of Risks Affecting Our Business
Our business is subject to a number of risks of which you should be aware before making a decision to invest in our securities. These risks include, among others, the following:
•There is substantial doubt about our ability to continue as a going concern and we will require significant additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to delay, limit, reduce or terminate our operations and future growth.
•We have a history of losses and expect to incur significant expenses and continuing losses for the foreseeable future. Our business could be adversely affected if we fail to effectively manage our future growth and liquidity.
•Any acceleration of debt under the Equilibrium Loan or the Rabo Loan in connection with the Notice of Default we received could significantly and adversely affect our results of operations and financial condition.
•We have an evolving business model, which increases the complexity of our business and makes it difficult to evaluate our future business prospects.
•We face risks inherent in the greenhouse agriculture business, including the risks of diseases and pests.
•We currently rely primarily on a single facility for the majority of our operations.
•Any damage to or problems with our CEA facilities, or delays in land acquisition or construction, could severely impact our operations and financial condition.
•Mastronardi is currently our sole, exclusive marketing and distribution partner. We are highly dependent on this relationship, and impairment to or termination of this relationship could adversely affect our results of operations and financial condition.
•We depend on employing a skilled local labor force, and failure to attract, develop, and retain qualified employees could negatively impact our business, results of operations and financial condition.
•We could be adversely affected by a change in consumer preferences, perception and spending habits in the food industry, and failure to develop and expand our product offerings or gain market acceptance of our products could have a negative effect on our business.
•We may be unable to successfully execute on our growth strategy. Failure to adequately manage our planned growth strategy may harm our business or increase our risk of failure.
•We have agreed not to compete with Mastronardi outside of Kentucky and West Virginia, which may limit our business opportunities.
•We build CEA facilities which may be subject to unexpected costs and delays due to reliance on third parties for construction, material delivery, supply-chains and fluctuating material prices.
•We may not be able to compete successfully in the highly competitive natural food market.
•We have only recently commenced our third harvest, which makes it difficult to forecast future results of operations.
•Demand for our current and expected future products, which include tomatoes, salad greens, strawberries, cucumbers and other produce, is subject to seasonal fluctuations and may adversely impact our results of operations in certain quarters.
•Food safety and foodborne illness incidents or advertising or product mislabeling may materially adversely affect our business by exposing us to lawsuits, product recalls, regulatory enforcement actions, or changes in consumer demand increasing our operating costs and reducing demand for our product offerings.
•As a public benefit corporation, our duty to balance a variety of interests may result in actions that do not maximize stockholder value.
•If we are unable to apply technology effectively in driving value for our clients through our technology-based platforms, our results of operations, client relationships and growth could be adversely affected.
Risks Related to Our Business and Industry
There is substantial doubt about our ability to continue as a going concern and we will require significant additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to delay, limit, reduce or terminate our operations and future growth.
We have incurred losses from operations and generated negative cash flows from operating activities since inception. Our current operating plan, which includes our planting and harvesting activities, indicates that we will continue to incur losses from operations and generate negative cash flows from operating activities. In addition, debt service requirements and our plans to continue investing in the build-out and start-up of future CEA facilities, including AppHarvest Berea, AppHarvest Richmond and AppHarvest Somerset, will have an adverse impact on liquidity. The impact of these events and conditions on our liquidity raise substantial doubt about our ability to continue as a going concern.
The high-tech CEA agriculture business is extremely capital-intensive and we expect to expend significant resources to complete the build-out of facilities under construction, including the development of related technology, continue harvesting existing crops and plant and harvest new crops in our existing and future CEA facilities. These expenditures are expected to include working capital, costs of acquiring and building out new facilities, costs associated with planting and harvesting, such as the purchase of seeds and growing supplies, and the cost of attracting, developing and retaining a skilled labor force, including local labor. In addition, other unanticipated costs may arise due to the unique nature of these CEA facilities and increased production in our single operating facility at full capacity. We currently import many of the supplies and materials for greenhouse production and operations from abroad, including the construction materials for our CEA facilities and seeds for plants. Accordingly, we are subject to risk of fluctuation in exchange rates, which could cause unexpected increases in our costs and harm our financial position. In addition, our ability to execute on our growth strategy and CEA technology require significant additional financing.
We will need to raise additional funds in order to operate our business, meet obligations as they become due and continue the ongoing construction, build-out and start-up of our CEA facilities. In December 2022, we entered into the Sale-Leaseback Transaction with Mastronardi Berea LLC, pursuant to which we sold 40 acres of land located in Berea, Kentucky and AppHarvest Berea situated thereon. In February 2023, we raised $43.0 million in the Public Offering.
We are currently exploring additional financing alternatives, including but not limited to additional sale-leaseback transactions related to our other CEA facilities, 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 us in the necessary time frame, in amounts that we require, on terms that are acceptable to us, or at all. If we are unable to raise the necessary funds when needed, it may materially and adversely impact our ability to execute on our operating plans, the operation of our current CEA facilities and the construction, build-out and start-up of our CEA facilities could be delayed, scaled back, or abandoned. If we become unable to continue as a going concern, we may have to dispose of assets and might realize significantly less than the values at which they are carried on our consolidated financial statements. These actions may cause our stockholders to lose all or part of their investment in our Common Stock. In light of higher expenses experienced in the first quarter of 2023 related to deposits into the designated reserve account as required by the March 31, 2023, amendment to the Rabo Loan, increased professional fees, and lower revenue from strawberries and higher expenses expected in the second quarter of 2023 related to additional deposits into the Rabo reserve account, increased capital expenditures and to lost revenues as a result of the mitigation and replanting efforts we are undertaking at AppHarvest Berea, we currently estimate that in the absence of additional sources of financing, our existing cash and cash equivalents will only allow us to continue our planned operations into the third quarter of 2023.
We have a history of losses, and expect to incur significant expenses and continuing losses for the foreseeable future. Our business could be adversely affected if we fail to effectively manage our future growth.
We incurred net losses of $176.6 million and $166.2 million during the years ended December 31, 2022 and 2021, respectively. We believe we will continue to incur net losses for the foreseeable future as we continue to invest in world-class technology to increase production and commercial sales of our products. There is no guarantee when, if ever, we will become profitable. We expect to expend substantial resources as we:
•complete the build-out of facilities for which building has commenced and begin construction on additional facilities;
•continue harvesting existing crops and plant and harvest new crops in our existing and future facilities;
•fulfill our obligations under our marketing and distribution agreement with Mastronardi;
•identify and invest in future growth opportunities, including the purchase or lease of land and new or expanded facilities;
•invest in sales and marketing efforts to increase brand awareness, engage customers and drive sales of our products;
•invest in product innovation and development; and
•incur additional general administration expenses, including increased finance, legal and accounting expenses, associated with being a public company and growing operations.
These investments may not result in the growth of our business. Even if these investments do result in the growth of our business, if we do not effectively manage our growth, we may not be able to execute on our business plan and vision, respond to competitive pressures, take advantage of market opportunities, satisfy customer requirements or maintain high-quality product offerings, any of which could adversely affect our business, financial condition and results of operations.
We face risks inherent in the agriculture business, including the risks of diseases and pests.
We are focused on providing quality domestic supplies of fresh fruits and vegetables by building large-scale CEA facilities in Appalachia, where we are within a day’s drive to nearly 70% of the U.S. population. We primarily grow three varieties of tomatoes at AppHarvest Morehead — beefsteak tomatoes, tomatoes on the vine and snacking tomatoes. We grow salad greens at AppHarvest Berea and strawberries, alternating with cucumbers, at AppHarvest Somerset. We expect to expand to other tomato varieties and other fruits and vegetables such as peppers, in the future at other facilities. As such, we are subject to the risks inherent in an agricultural business, such as insects, plant and seed diseases and similar agricultural risks, which may include crop losses, for which we are not insured; production of non-saleable products; and rejection of products for quality or other reasons, all of which may materially affect our operational and financial performance. Although our produce is grown in climate-controlled indoor farms s, there can be no assurance that natural elements will not impact the production of these products. In particular, plant diseases, such as root rot or tomato brown rugose fruit virus (“ToBRFV”), or pest infestations, such as whiteflies, aphids, thrips, or mites, can destroy all or a significant portion of our produce and could eliminate or significantly reduce production until we are able to disinfect the farm and grow replacement tomatoes or other vegetables and fruits. ToBRFV is a virus affecting tomatoes, peppers and possibly other plants. Seed and transplant production are the most critical areas to identify the virus as contamination creates the risk of spreading to hundreds, if not thousands, of plants. ToBRFV can be transmitted mechanically and spread between plants or on contaminated tools, clothes or hands and mitigation efforts could require a complete facility clean out, including multiple sanitations with disinfectants known to be effective on ToBRFV. Although ToBRFV does not have any human health implications, it may lead to reduced crop quality, ending a crop cycle early or clearing out a portion of a CEA facility or its entirety. In addition, shipments of tomato crops across the U.S.-Canada border may encounter additional inspections due to ToBRFV, and potentially infected crops may be denied entry.
Although we have taken, and continue to take, proactive precautions to guard against crop diseases, pests, and contamination (including Salmonella, E. coli and Listeria monocytogenes), including robust food safety protocols and comprehensive testing, these extensive efforts may not be sufficient. For example, in June 2021, and during the course of the fourth quarter of 2021, we experienced outbreaks of various pests and disease on certain of our plants and during the second quarter of 2022, we observed pest-damaged tomatoes on the vine and active pests. Also, during the fourth quarter of 2022 we observed pest-damaged strawberries and active pests. In response, we undertook several mitigation efforts, including the removal of plants, a shortening of the growing period of plants that were or may have been affected, and modifications to operational practices to eliminate or greatly reduce potential transmission vectors. These efforts adversely affected yields for the 2021-2022 growing season at AppHarvest Morehead and the 2022-2023 growing season at our Somerset facility, including shorter-than -expected growing seasons. In April 2023, in the course of conducting our routine food safety testing, we discovered during a preharvest inspection the presence of Listeria monocytogenes, an organism which can cause serious health issues, in a production area at AppHarvest Berea. We voluntarily suspended operations at AppHarvest Berea beginning April 17, 2023, and undertook, and are continuing to undertake, several mitigation efforts including removal of the plants from AppHarvest Berea, a thorough cleaning and disinfection of the farm, thorough testing to validate the cleaning and sanitation process, and replacement of plants. As a result of our proactive testing, effective protocols, and decisive actions, no implicated product was shipped. We expect these mitigation efforts to affect yields for the second quarter 2023. Diseases and pests can also enter CEA facilities from outside sources over which we have limited or no control. Diseases and pests can be inadvertently brought in by employees and/or independent contractors, from seed and propagation vendors and from the trucks that transport supplies to the farm. Once a disease or pest is introduced, it is necessary to quickly identify the problem and take remedial action to preserve the growing season. Failure to identify and remediate any diseases or pests in a timely manner could cause the loss of all or a portion of our crop and result in substantial time and resources to resume operations, as well as have a negative impact on our reputation. Crop losses caused by these agricultural risks have and could continue to negatively and materially impact our business, prospects, financial condition, results of operations and cash flows.
We have an evolving business model, which increases the complexity of our business and makes it difficult to evaluate our future business prospects.
Our business model is continuing to evolve. We are 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. We may in the future also pursue additional CEA opportunities through partnerships with third parties, including opportunities outside of the U.S. From time to time, we may continue to modify aspects of our business model relating to our products and services. For example, while we were previously engaged in building an applied technology company, through our AppHarvest Technology, Inc. subsidiary, we recently temporarily paused development of CEA technology solutions with resumption of development contingent upon financing. We do not know whether these or any other modifications will be successful. The evolution of and modifications to our business model will continue to increase the complexity of our business and place significant strain on our management, personnel, operations, systems, technical performance and financial resources. Future additions to or modifications of our business model are likely to have similar effects. Further, any new products or services we offer that are not favorably received by the market could damage our reputation or our brand. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
We currently rely primarily on a single facility for the majority of our operations.
Our first CEA facility is a 2.76 million square foot CEA facility in Morehead, Kentucky, which partially opened in October 2020 and became fully operational in March 2021. For the immediate future, we will rely primarily on the operations at AppHarvest Morehead while we continue to build up our operations at AppHarvest Berea, AppHarvest Somerset and AppHarvest Richmond. Adverse changes or developments affecting AppHarvest Morehead could impair our ability to produce our products and our business, prospects, financial condition and results of operations. Any shutdown or period of reduced production at AppHarvest Morehead, which may be caused by regulatory noncompliance or other issues, as well as other factors beyond our control, such as severe weather conditions, natural disaster, fire, power interruption, work stoppage, disease outbreaks or pandemics (such as COVID-19), equipment failure or delay in supply delivery, would significantly disrupt our ability to grow and deliver our produce in a timely manner, meet our contractual obligations and operate our business. Our farm equipment is costly to replace or repair, and our equipment supply chains may be disrupted in connection with pandemics, such as COVID-19, decades-high inflation, trade wars, labor shortages, or other factors. If any material amount of our machinery were damaged, we would be unable to predict when, if at all, we could replace or repair such machinery or find co-manufacturers with suitable alternative machinery, which could adversely affect our business, financial condition and operating results. Any insurance coverage we have may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
Any damage to or problems with our CEA facilities, or delays in land acquisition or construction, could severely impact our operations and financial condition.
Any damage to or problems with AppHarvest Morehead, AppHarvest Berea, AppHarvest Somerset, AppHarvest Richmond, or any other CEA facilities we build or use in the future, including defective construction, repairs, or maintenance, could have an adverse impact on our operations and business. We face risks including, but not limited to:
•Weather.