The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included in this Annual Report on Form 10-K.
Overview
We were founded onJanuary 19, 2018 asAppHarvest Operations, Inc. (f/k/aAppHarvest, Inc. "LegacyAppHarvest "), aDelaware public benefit corporation. 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 43 -------------------------------------------------------------------------------- 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 combine conventional agricultural techniques with cutting-edge technology, including artificial intelligence and robotics, to improve access to nutritious food, while farming more sustainably, building a domestic food supply, and increasing investment in Appalachia. Prior toOctober 2020 , our operations were limited to the "start-up" concerns of organizing and staffing, business planning, raising capital, and acquiring and developing properties for CEA. InOctober 2020 , we partially openedAppHarvest Morehead . We harvested our first crop of beefsteak tomatoes and tomatoes on the vine inJanuary 2021 andMarch 2021 , respectively. InMay 2021 , we opened production of the full 60 acres at AppHarvest Morehead, and inNovember 2022 began harvesting snacking tomatoes. InOctober 2022 , we began shipping salad greens from AppHarvest Berea and harvesting the first strawberries from AppHarvest Somerset. AppHarvest Somerset will primarily grow strawberries, and is expected to seasonally grow cucumbers. Half of AppHarvest Richmond was planted inDecember 2022 and began commercial shipments inJanuary 2023 .
AppHarvest Morehead North, which is adjacent to AppHarvest Morehead, commenced
construction in
The high-tech greenhouse agriculture business is extremely capital-intensive and we expect to expend significant resources to complete the build-out of facilities under construction, to build out and start up our new CEA facilities and continue harvesting existing crops and plant and harvest new crops. 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 new operating facilities at full capacity. Going Concern We have incurred net losses of$176.6 million and$166.2 million during the years endedDecember 31, 2022 andDecember 31, 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. We generated negative cash flows from operations of$86.1 million and$103.9 million during the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. There is no guarantee when, if ever, we will become profitable. In addition, debt service requirements and our plans to continue to invest in the build-out and start-up of our new and future CEA facilities, including AppHarvest Berea,Richmond tomato facility andSomerset facility, will have an adverse impact on our liquidity. As ofDecember 31, 2022 , we had$54.3 million of cash on hand, and an accumulated deficit of$364.0 million . We continue to take actions to maintain appropriate levels of liquidity. InOctober 2022 , we entered into a$30.0 million note and loan agreement withMastronardi Produce-USA, Inc. ("Mastronardi USA ") and received$15.0 million upon execution followed by another$15 million inNovember 2022 . InNovember 2022 , we initiated a third restructuring plan to further reduce operating costs and our losses. InDecember 2022 , we repaid the$30.0 million note and accumulated interest after entering into theBerea Sale-Leaseback Transaction, 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 addition, onFebruary 14, 2023 , the Public Offering closed, and we issued and sold 40,000,000 shares of Common Stock, and onFebruary 24, 2023 , the Overallotment Option closed, and we issued and sold 6,000,000 shares of Common Stock. The net proceeds from the Public Offering, and Overallotment Option, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, were approximately$42.9 million . Despite these actions, we believe there is substantial doubt about our ability to continue as a going concern and absent additional sources of financing, we expect that our existing cash and cash equivalents will only allow us to continue our planned operations into the fourth 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. Basis of Presentation
Currently, we conduct business through one operating segment. We began
generating sales during the first quarter of 2021 and conduct our operations
solely in
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For more information about our basis of presentation, refer to Note 1 - Description of Business to our consolidated financial statements included elsewhere in this Annual Report.
ESG
AppHarvest is both a public benefit corporation ("PBC") and aCertified B Corporation because we believe in collective benefit over individual gain. We believe growing healthy fruits and vegetables are good business, and new technologies can deliver cleaner produce with safer growing methods, which we believe benefits all stakeholders. We are all in this together, for good. PBCs are for-profit corporations and, underDelaware law, our directors have a duty to balance the financial interests of stockholders, the best interests of those materially affected by our conduct (including our stockholders, employees, communities, customers and suppliers), and the specific public benefits identified in our second amended and restated certificate of incorporation (the "amended and restated certificate of incorporation") when making decisions. Our amended and restated certificate of incorporation includes three specific public benefit goals: •Goal 1 Drive positive environmental change in agriculture • Goal 2 Empower individuals in Appalachia • Goal 3 Improve the lives of our employees and the communities in which we operate
In early 2021, we launched our first materiality assessment with
While our PBC charter-specific goals broadly relate to our corporate purpose and inform all other ESG efforts, our materiality assessment (which was guided bySustainability Accounting Standards Board standards, now a resource of theInternational Financial Reporting Standards Foundation (the "IFRS Foundation "), the United Nation'sSustainable Development Goals and the B Impact Assessment fromB Lab ) andB Corporation assessment will inform our specific ESG strategies. Our ESG key performance indicators ("KPIs") will align with our material issues to measure our progress. Our first full year of operations ending onDecember 31, 2021 served as our baseline year for reporting ESG KPIs. More information on our key ESG programs, goals and commitments, and key metrics can be found in our 2021 sustainability report, which is available on our website https://www.appharvest.com/. Website references throughout this document are provided for convenience only, and the content on the referenced websites is not incorporated by reference into this Annual Report. While we believe all of our ESG goals align with our long-term growth strategy and financial and operational priorities, they are aspirational and may change, and there is no guarantee or promise that they will be met or that they will not hinder financial or operational performance.
Recent Developments
Nasdaq Notice
OnJanuary 11, 2023 , we received a 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 untilJuly 10, 2023 , to regain compliance with Nasdaq's bid price requirement. If, at any time beforeJuly 10, 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. OnJanuary 26, 2023 , as a result of our Common Stock trading over$1.00 for 10 consecutive business days, we received a notice from the Nasdaq Listing Qualifications Office indicating that we regained compliance with the minimum bid price requirement under Nasdaq Listing Rule 5450(a)(1). 45 --------------------------------------------------------------------------------
Public Offering
OnFebruary 9, 2023 , we entered into the Underwriting Agreement withCowen and Company, LLC , as representative of the several underwriters named therein, relating to the Public Offering of 40,000,000 shares of our Common Stock, at a price to the public of$1.00 per share. OnFebruary 14, 2023 , the Public Offering closed and we issued and sold 40,000,000 shares of Common Stock to the underwriters. In addition, pursuant to the Underwriting Agreement, we granted the underwriters the Overallotment Option to purchase up to 6,000,000 additional shares of Common Stock. The underwriter exercised the Overallotment Option onFebruary 22, 2023 , to purchase 6,000,000 shares of Common Stock and onFebruary 24, 2023 , we issued the 6,000,000 shares under the Overallotment Option. The net proceeds from the Public Offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, were approximately$42.9 million , including the$6.0 million from the Overallotment Option.
Factors Affecting Our Financial Condition and Results of Operations
We have expended, and expect to continue to expend, substantial resources as we:
•continue the build-out and start-up of AppHarvest Richmond and invest in additional CEA facilities in the future;
•finalize construction of
•continue our third growing season at AppHarvest Morehead, which began during the third quarter of 2022, and plant and harvest new crops at AppHarvest Berea, AppHarvest Richmond, 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.
Business Combination and Public Company Costs
OnJanuary 29, 2021 , we consummated the Business Combination. Upon consummation of the Business Combination and the closing of the concurrent private placement of the 37,500 shares of our Common Stock (the "PIPE"), the most significant change in our reported financial position and results of operations was an increase in cash and cash equivalents of approximately$435.2 million , including$375.0 million in gross proceeds from the PIPE. As a consequence of the Business Combination, we became the successor to anSEC -registered and Nasdaq-listed company, which requires us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors' and officers' liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees. 46 --------------------------------------------------------------------------------
Key Components of Statement of Operations
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with United States 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, Root AI acquisition related costs 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.
Net sales
Substantially all of our net sales in 2022 and 2021 were generated from the sale of tomatoes, and to a lesser extent salad greens and strawberries, 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 (COGS) consists 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 year endedDecember 31, 2022 andDecember 31, 2021 consisted of payroll and payroll related expenses, stock-based compensation, professional services and legal fees, licenses and registration fees, insurance, depreciation, rent and various other personnel and office related costs. SG&A also includes start-up expenses related to pre-commencement commercial activities for tomatoes on the vine atAppHarvest Morehead in 2021 and new CEA facilities which were under construction and ramping up operations in 2022.
There was no impairment related to goodwill or other intangibles during the year
ended
During the year endedDecember 31, 2021 , we recorded goodwill impairment expense and other intangible impairment expense of$59.9 million , for a non-cash charge of$59.7 million , net of tax of$0.2 million , to fully impair the carrying value of goodwill and definite lived intangible assets included in our acquisition of Root AI. The impairment reflected current market valuations and strategic investment requirements as we continue to develop commercial technologies throughAppHarvest Technology, Inc.
Fixed Asset Impairment
During the year ended
47 --------------------------------------------------------------------------------
Interest Expense
Interest expense for the year endedDecember 31, 2022 primarily relates to long-term debt to help finance the construction of our CEA facilities and has been capitalized as a component of the cost of those facilities. Interest expense from related parties for the year endedDecember 31, 2021 primarily relates to the finance lease and financing obligation for AppHarvest Morehead which were settled upon purchase ofMorehead Farm onMarch 1, 2021 and the convertible note that was converted to Common Stock upon completion of the Business Combination onJanuary 29, 2021 . Note 10 - Debt to our consolidated financial statements included elsewhere in this Annual Report.
Results of Operations
Comparison of the Years Ended
The following table sets forth our historical operating results for the periods indicated: Year Ended December 31, 2022 2021 $ Change (Dollars in thousands) Net sales$ 14,592 $ 9,050 $ 5,542 Cost of goods sold 56,995 41,938 15,057 Gross loss (42,403) (32,888) (9,515) Operating expenses: Selling, general and administrative expenses 81,266 107,245 (25,979) Goodwill and other intangible asset impairment - 59,901 (59,901) Fixed asset impairment 50,101 - 50,101 Total operating expenses: 131,367 167,146 (35,779) Loss from operations (173,770) (200,034) 26,264 Other income (expense): Interest expense from related parties - (658) 658 Change in fair value of Private Warrants 111 35,047 (34,936) Other (480) 448 (928) Loss before income taxes (174,139) (165,197) (8,942) Income tax expense (2,507) (989) (1,518) Net loss$ (176,646) $ (166,186) $ (10,460) 48
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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: Year Ended December 31, 2022 2021 $ Change (Dollars in thousands) Net loss$ (176,646) $ (166,186) $ (10,460) Interest expense from related parties - 658 (658) Interest income (769) (277) (492) Income tax expense 2,507 989 1,518 Depreciation and amortization expense 16,354 10,794 5,560 EBITDA (158,554) (154,022) (4,532) Fixed asset impairment 50,101 - 50,101 Goodwill and other intangible asset impairment - 59,901 (59,901) Change in fair value of Private Warrants (111) (35,047) 34,936 Stock-based compensation expense 26,918 40,910 (13,992) Issuance of common stock for commitment shares - 1,006 (1,006)
Transaction success bonus on completion of Business Combination
- 1,500 (1,500) Start-up costs for new CEA facilities(1) 2,873 - 2,873 Restructuring and Root AI fixed asset impairment costs 5,529 946 4,583 Business Combination transaction costs - 13,883 (13,883) Berea sale leaseback transaction costs 1,225 - 1,225 Root AI Acquisition costs - 1,032 (1,032) Adjusted EBITDA$ (72,019) $ (69,891) $ (2,128) 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: Year Ended December 31, 2022 2021 $ Change (Dollars in thousands) Net sales$ 14,592 $ 9,050 $ 5,542 Cost of goods sold 56,995 41,938 15,057 Gross loss (42,403) (32,888) (9,515) Depreciation and amortization 12,072 8,310 3,763 Stock-based compensation expense 666 1,880 (1,214) Adjusted gross loss (29,665) (22,698) (6,967) The following sections discuss and analyze the changes in the significant line items in our Consolidated Statements of Operations and Comprehensive Loss for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 .
Net sales for the year endedDecember 31, 2022 were$14.6 million compared to$9.1 million for the prior year. The increase of$5.5 million , or 61%, was due to higher tomato sales prices, and the introduction of strawberries and salad greens to our portfolio of Products during the year endedDecember 31, 2022 . These increases were offset by mitigation efforts related to the plant health issue at AppHarvest Morehead, which led us to remove some extra rows in the affected area out of an abundance of caution and re-plant with new seedlings, and active pests at AppHarvest Somerset which impacted approximately half of our strawberry plants. We replanted approximately half of the effected portion with strawberries, and will be using the remaining impacted section to test cucumber packaging equipment and harvesting capabilities ahead of the cucumber season. 49 -------------------------------------------------------------------------------- We expect the strawberry pest issue to create headwinds for the remainder of the strawberry season as we navigate our first season at AppHarvest Somerset. In comparison, net sales for the yearDecember 31, 2021 were adversely impacted by labor and productivity investments associated with the training and development of the new workforce at AppHarvest Morehead and low market prices for tomatoes through the end of the first harvest, which rebounded in the fourth quarter.
Cost of Goods Sold
COGS for the year endedDecember 31, 2022 was$57.0 million compared to$41.9 million for the prior year. The increase of$15.1 million , or 36%, was due to increased sales withMorehead being fully operational during the year endedDecember 31, 2022 , as compared to the phased launch during the year endedDecember 31, 2021 , as well as increased overhead and material costs associated with starting operations at AppHarvest Berea and AppHarvest Somerset.
Selling, General, and Administrative Expenses
SG&A for the year endedDecember 31, 2022 was$81.3 million compared to$107.2 million for the prior year. The decrease of$26.0 million , or 24%, was primarily due to reduction in stock compensation expense of$14.0 million for the year endedDecember 31, 2022 , lower salaries and wages due to restructuring initiatives, and decreased professional fees, partially offset by new facility start up costs. SG&A for the year endedDecember 31, 2022 also includes$1.1 million of fixed asset impairment costs associated with the restructuring of Root AI.
During the year endedDecember 31, 2021 , we recorded a non-cash charge of$59.7 million , net of tax of$0.2 million , to fully impair the carrying value of goodwill and definite-lived intangible assets included in the acquisition of Root AI. We did not incur any impairment related to goodwill or intangible assets in the year endedDecember 31, 2022 .
Fixed Asset Impairment
During the year endedDecember 31, 2022 , we recorded a non-cash fixed asset impairment charge of$50.1 million to reduce the carrying value of certain long-lived assets to an estimated fair value. There were no fixed asset impairment charges recognized during the year endedDecember 31, 2021 . See Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report, as well as Critical Accounting Estimates within this section, for more information regarding this impairment charge. Interest Expense Interest expense for the year endedDecember 31, 2022 andDecember 31, 2021 was incurred on long-term debt used to help finance the construction of our CEA facilities and has been capitalized as a component of the cost of those facilities. Interest expense from related parties for the year-endedDecember 31, 2021 primarily relates to the finance lease and financing obligation for AppHarvest Morehead which were settled upon purchase ofMorehead Farm onMarch 1, 2021 , and the convertible note that was converted to Common Stock upon completion of the Business Combination onJanuary 29, 2021 .
Other
Other expense for the years ending
Income Taxes
Our effective income tax rate was (1.4)% for the year endedDecember 31, 2022 compared to (0.6)% for the prior year. The variance from theU.S. federal statutory rate of 21% for the year endedDecember 31, 2022 was primarily attributable to a change in our valuation allowance related to our net operating loss carryforwards, non-deductible goodwill and intangible asset impairment expense and stock-based compensation expense, offset by the non-taxable change in the private warrant valuation.
Liquidity and Capital Resources
Liquidity and Going Concern
50 -------------------------------------------------------------------------------- AtDecember 31, 2022 , we had an accumulated deficit of$364.0 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 existing 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$54.3 million and$150.8 million as ofDecember 31, 2022 and 2021, 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 proceeds from debt and equity financings, our Berea Sale-Leaseback Transaction, our common stock purchase agreement withB. Riley Principal Capital , our at-the-market offering program (the "ATM") with Cowen, the Public Offering and revenues from the sale of our tomatoes, salad greens and strawberries. Based on our current operating plan, we plan to rely on the remaining availability of$97.6 million under our ATM pursuant to which we may offer and sell, from time to time, shares of Common Stock, and our ability to sell an additional approximately 16.4 million shares of our Common Stock toB. Riley Principal Capital , pursuant and subject to the limitations of the Purchase Agreement. However, our ability to use these sources of capital is dependent on a number of factors, including the prevailing market price of and the volume of trading in our Common Stock. 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 the absence of additional sources of financing, we expect that our existing cash and cash equivalents will only allow us to continue our planned operations into the fourth quarter of 2023.
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 year endedDecember 31, 2022 , we spent$156.8 million on capital expenditures. Although we expect to incur approximately$60 million to$65 million more in capital expenditures during the next twelve months, dependent on the continued availability of financing on acceptable terms, we have already contributed approximately$9.8 million of the capital expenditure requirements into a reserve account from the proceeds of the Sale-Leaseback Transaction. This$9.8 million is reflected in other assets on our consolidated balance sheet atDecember 31, 2022 . As a result, the net impact to our liquidity for the remaining capital expenditures is expected to be approximately$50 million to$55 million over the next twelve months. The increase in our projected capital expenditures is due to construction delays and supply chain disruptions. This is in addition to enhancements in scope for the construction of ourBerea salad greens facility,Somerset facility andRichmond facility related to automation and configuration of equipment, food safety, and office space which have expanded in size from the original scope. For risks related to delays in construction of our CEA facilities, please refer to Part II, Item 1A. Risk Factors, "Any damage to or problems with our CEA facilities or delays in land acquisition or construction, could severely impact our operations and financial condition," and "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."
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.
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. 51 -------------------------------------------------------------------------------- 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". 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."
Public Offering
OnFebruary 9, 2023 , we entered into the Underwriting Agreement withCowen and Company, LLC , as representative of the several underwriters named therein, relating to the Public Offering of 40,000,000 shares of our Common Stock, at a price to the public of$1.00 per share. OnFebruary 14, 2023 , the Public Offering closed and we issued and sold 40,000,000 shares of Common Stock to the underwriters. In addition, pursuant to the Underwriting Agreement, we granted the underwriters the Overallotment Option to purchase up to 6,000,000 additional shares of Common Stock. The underwriters exercised the Overallotment Option onFebruary 22, 2023 , to purchase 6,000,000 shares of Common Stock and onFebruary 24, 2023 , we issued the 6,000,000 shares under the Overallotment Option. The net proceeds from the Public Offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, were approximately$42.9 million , including the$6.0 million from the Overallotment Option.
At-the-Market Offering
We filed a shelf registration on Form S-3 (the "Registration Statement"). Pursuant to the Registration Statement, we may offer and sell securities having an aggregate public offering price of up to$300 million . In connection with the filing of the Registration Statement, we also entered into the ATM Agreement with Cowen pursuant to which we may offer and sell, from time to time, through Cowen, shares of our Common Stock having an aggregate offering price of up to$100 million under the ATM, which is included in the$300 million of securities that may be offered pursuant to the Registration Statement. We are not obligated to sell any shares under the ATM Agreement. Pursuant to the ATM Agreement, we will pay Cowen a commission of up to 3% of the aggregate proceeds from the sale of shares and reimburse certain legal fees. As ofDecember 31, 2022 , we have sold$2.4 million worth of Common Stock under the ATM for net proceeds of$2.3 million , leaving$97.6 million available to be sold.
Purchase Agreement
We have entered into the Purchase Agreement withB. Riley Principal Capital , pursuant to which we have the right to sell toB. Riley Principal Capital up to the lesser of (i)$100 million of newly issued shares of our Common Stock and (ii) the exchange cap, which is 20.1 million shares of our Common Stock (subject to certain limitations and conditions), from time to time during the 24-month term of the Purchase Agreement. Sales, and the timing of any sales, are solely at our option, and we are under no obligation to sell any securities toB. Riley Principal Capital under the Purchase Agreement. As ofDecember 31, 2022 , we have sold an aggregate 3.5 million shares of Common Stock, for aggregate net proceeds of$10.1 million . As ofDecember 31, 2022 , there were 16.4 million shares reserved for future sale pursuant to the Purchase Agreement.
Debt Facilities
Mastronardi Note and Loan Agreement
OnOctober 24, 2022 ,AppHarvest Berea Farm, LLC , our wholly-owned indirect subsidiary, entered into a note and loan agreement (the "Note and Loan Agreement" in the principal amount of$30.0 million (the "Note") withMastronardi USA . Pursuant to the Note and Loan Agreement,Mastronardi USA agreed to advance$15.0 million upon the execution of the agreement and further amounts of up to$15.0 million provided that no event of default had occurred under the Note and certain other conditions had been met. The first tranche of$15.0 million was funded onOctober 25, 2022 , the second inNovember 2022 . The maturity date had extension options for two successive terms of thirty days each toJanuary 18, 2023 andFebruary 17, 2023 , respectively, subject to the satisfaction of certain conditions, including that we shall have agreed to the material terms for a sale leaseback transaction withMastronardi USA , its affiliate or another third party. We exercised the first extension and then repaid the Note at the completion of the sale leaseback transaction withMastronardi USA inDecember 2022 . 52 --------------------------------------------------------------------------------
GNCU Loan Agreement
OnJuly 29, 2022 , we entered into a loan agreement withGreater 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 theFederal 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 the JPM Loan (subsequently defined) and accrued interest, 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 ofDecember 31, 2022 .
Rabo Loan Agreement
OnJune 15, 2021 , we entered into a master credit agreement withRabo AgriFinance LLC for a real estate term loan in the original principal amount of$75.0 million (the "Rabo Loan"). The Rabo Loan matures onApril 1, 2031 , with quarterly interest payments commencing onJuly 1, 2021 and quarterly principal payments commencing onJanuary 1, 2022 , with the remaining balance of principal and interest due upon maturity. Payments are based on one month LIBOR plus 2.500% per annum. The Rabo Loan is collateralized by the business assets of the first Morehead CEA facility and requires compliance with financial covenants. OnJuly 29, 2022 , we obtained a waiver fromRabo AgriFinance LLC whereby we were no longer required to measure or report the current ratio for theJune 30, 2022 reporting period but will begin to report the current ratio covenant compliance for theDecember 31, 2022 , reporting period. The change aligns all measurements of material financial covenants to begin with theDecember 31, 2022 , measurement date. In exchange, we agreed to fund an additional$2.0 million to a reserve account. AtJune 30, 2022 , we would not have met the current ratio requirement for the Morehead CEA subsidiary. Our liability under the Rabo Loan was$71.3 million atDecember 31, 2022 .
Equilibrium Loan Agreement
OnJuly 23, 2021 , we entered into a credit agreement withCEFF II AppHarvest Holdings, LLC , an affiliate of Equilibrium for a construction loan in the original principal amount of$91.0 million (the "Construction Loan") for the development of a CEA facility at our property inRichmond, Kentucky (the "Project"). The Construction 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 Construction Loan requires monthly interest payments based on drawn capital at an initial interest rate of 8.000% per annum, which will increase by 0.2% per annum, beginning two years after closing of the Construction Loan through maturity, which is expected to beJuly 23, 2024 , with no required principal payments until maturity. OnJuly 29, 2022 , we amended the credit agreement with Equilibrium to require that we decrease the balance of the Construction Loan to$81.0 million on or prior toDecember 31, 2022 and further decrease the balance to$76.0 million on or prior toMarch 31, 2023 . As ofDecember 31, 2022 , we had$66.3 million outstanding on the Construction Loan.
Berea Facility
OnDecember 23, 2022 , we entered into the Purchase Agreement with the Buyer, for the Berea Land and the Berea Property for a sale price of$125.0 million . The Buyer is a joint venture between Mastronardi, our exclusive marketing partner for all fresh fruits and vegetables grown inKentucky andWest Virginia pursuant to our Purchase and Marketing Agreement, andCOFRA Holding . The purchase price was determined based on an appraisal of the Property. The Purchase Agreement was finalized onDecember 27, 2022 and coincided with the Sale-Leaseback Transaction for net proceeds to us of$57.5 million , of which$22.5 million was set aside for enhancement costs for ourRichmond tomato facility, after giving effect to the paydown of the Note owed toMastronardi Produce-USA, Inc , the payment of$19.1 million in prepaid rent under theBerea Lease, the payment and holding back of amounts owed and estimated to be incurred for completion of the facility located on the Property, and transaction fees, taxes and expenses. 53 -------------------------------------------------------------------------------- Concurrently with the closing of the Sale-Leaseback Transaction, we entered into the Lease. The Lease is repayable over an initial term of 10 years, with four renewal options of five years each. The total annual rent under the Lease shall initially be$9.5 million per year, and shall increase annually starting after the second lease year. We are entitled to a rent credit equal to 25% of the marketing fees received by Mastronardi prior to the third anniversary of the commencement of the Lease, with respect to products grown or produced at the facilities owned by the Company and located inMorehead ,Richmond andSomerset, Kentucky . See Note 11-Commitments and Contingencies for more information about the Berea Sale-Leaseback Transaction.
Summary of Cash Flows
A summary of our cash flows from operating, investing, and financing activities is presented in the following table:
Year Ended December 31, (Dollars in thousands) 2022 2021 Change Net cash used in operating activities$ (86,129) $ (103,924) $ 17,795 Net cash used in investing activities (179,682) (315,409) 135,727 Net cash provided by financing activities 168,032 573,734 (405,702) Cash and cash equivalents, beginning of year 176,311 21,909 154,402
Cash and cash equivalents (including restricted cash), end of period
$ 78,532
Net cash used in operating activities was$86.1 million for the year endedDecember 31, 2022 compared to$103.9 million in the prior year. The decrease of$17.8 million , or 17%, reflects non-recurring material expenditures, including$13.8 million for transaction costs related to the Business Combination that were incurred in 2021 and payment of utility and hedge program deposits that were made in 2021, partially offset by increased operating expenses in 2022 related to full production at AppHarvest Morehead, and the commencement of planting and harvesting at ourSomerset ,Berea , and Richmond CEA facilities.
Net cash used in investing activities was$179.7 million for the year endedDecember 31, 2022 compared to$315.4 million for the prior year. The decrease of$135.7 million , or 43%, was primarily due to expenditures of$123.0 million for the purchase of AppHarvest Morehead from Equilibrium that we completed onMarch 1, 2021 ,$9.8 million for the acquisition of Root AI, and a$5.0 million investment in an unconsolidated entity in the year endedDecember 31, 2021 . The decrease was partially offset by an increase of$5.4 million in capital expenditures related to purchases of property and equipment primarily related to construction of ourRichmond ,Berea , and Somerset CEA facilities and cash of$1.1 million received for our sale of the land associated with AppHarvest Berea, during the year endedDecember 31, 2022 .
Net cash provided by financing activities was$168.0 million for the year endedDecember 31, 2022 compared to$573.7 million for the prior year. The decrease of$405.7 million , or 71% was primarily due to the proceeds from the Business Combination of approximately$448.5 million received during the year endedDecember 31, 2021 , which was primarily offset by the combined proceeds from the financing transaction related to the Berea Sale-Leaseback Transaction and repayments of debt in the aggregate amount of$44.2 million during the year endedDecember 31, 2022 .
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the 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. 54 --------------------------------------------------------------------------------
Long-lived Asset Impairment
Long-lived assets are assessed for recoverability when events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. We assess the recoverability of long-lived assets at an individual CEA facility level, which we consider to be the lowest level for which independent identifiable cash flows are available. Indicators of impairment might include persistent negative economic trends affecting the markets we serve, recurring losses or lowered expectations of future cash flows to be generated by our CEA facilities, and declines in the market price of our long-lived assets. When necessary, the amount of impairment is determined based on the excess of carrying value over the estimated fair value of the assets. Judgment and estimation are required in assessing long-lived assets for impairment, including whether events or changes in circumstances require an impairment assessment and the determination of fair value. AtDecember 31, 2022 and throughout the fourth quarter, we experienced a significant decline in the market value of our Common Stock. Because our CEA facilities represent the vast majority of our net asset value and all of our future earnings potential, we viewed the decline in our market value as an indicator of long-lived asset impairment. In addition, our history of current and historical operating and cash flow losses combined with projections of operating and cash flow losses for the foreseeable future are also factors we considered. While our CEA facilities are relatively new construction and we remain optimistic on the long-term value of controlled environment agriculture to address systemic issues with food production, the decline in our market value caused us to re-assess the recoverability of our asset groups. AtDecember 31, 2022 , we recorded a non-cash impairment charge of$50.1 million to reduce the carrying value of real and personal property associated with our CEA facilities to their estimated fair value. In estimating the fair value of the real and personal property within each asset group, we engaged valuation specialists to estimate the price that would be received to sell the asset groups in an orderly transaction between market participants. Due to the specialized nature of the CEA asset groups, the age, and significant amount of construction in progress, only the cost approach was fully developed for our asset groups. Specifically, fair value was determined by the Company's valuation specialists using a cost-approach methodology that applied market trend factors to original cost data to arrive at an estimate of fair value. The contributory value of the land at each site was valued utilizing the sales comparison approach. The income approach was excluded as the appraised properties consist of large, specialized facilities. An investigation of the marketplace did not reveal sufficient arm's-length lease data relating to comparable facilities from which to derive a market rent or comparable rates of return for this analysis of the real property. It would be difficult, if not totally speculative, to estimate the value of the property based on a prospective income stream given the start-up nature of the Company's operations. We recognized a$1.1 million impairment charge for certain technology property and equipment that will no longer be utilized following our alignment of our technology initiatives with our core farm operations.
The Company did not recognize any long-lived asset impairment charges during 2021.
Private Warrants We account for our Private Warrants in accordance with ASC 815-40, Derivatives and Hedging: Contracts in Entity's Own Equity, under which we have determined that the Private Warrants are recognized as liabilities at fair value and subject to re-measurement at each balance sheet date until exercised. Changes in fair value of the Private Warrants are recognized in our audited Consolidated Statements of Operations and Comprehensive Loss. The fair value of the Private Warrants is estimated at each measurement date using a Black-Scholes option pricing model.
We estimate the fair value of our stock option awards and Private Warrants using the Black-Scholes option pricing model, which is subject to uncertainty and requires the input of the following assumptions:
Fair Value of Common Stock - Historically, as there had been no public market for our Common Stock, the fair value of the Common Stock for stock-based awards was determined by the Board based in part on valuations of the Common Stock prepared by a third-party valuation firm. Since the closing of the Business Combination, the fair value of each share of Common Stock underlying stock-based awards and our Private Warrants is based on the closing price of our Common Stock as reported by Nasdaq on the date of the grant. Expected Term - The expected term of the options represents the average period the stock options are expected to remain outstanding. As we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior, the expected term of options granted is derived from the average midpoint between the weighted average vesting and the contractual term, also known as the simplified method. For the Private Warrants, the expected term is the time from transaction date to expiration in years. 55 -------------------------------------------------------------------------------- Expected Volatility - As we were not a public company before the closing of the Business Combination, and did not have any trading history for Common Stock, the expected volatility for the stock-based awards was based on the historical volatility of the Common Stock of comparable publicly traded companies. Since the closing of the Business Combination, our expected volatility is primarily based on the trading history for our Common Stock.
Risk-Free Interest Rate - The risk-free interest rate is based on the yield of
zero-coupon
Expected Dividends - The expected dividends assumption is based on the expectation of not paying dividends in the foreseeable future; therefore, we used an expected dividend yield of zero.
Assumptions used in applying the Black-Scholes option-pricing model to determine the estimated fair value of Private Warrants involve inherent uncertainties and the application of judgment. As a result, if factors or expected outcomes change and significantly different assumptions or estimates are used, our Private Warrant liabilities could be materially different.
Inventory Valuation
Inventory is valued at the lower of cost or net realizable value. The net realizable value of inventories represents the estimated selling price for inventories in the ordinary course of business, less all estimated costs of completion and costs necessary to make the sale. The determination of net realizable value is subject to uncertainty and requires judgment, including consideration of factors such as expected future selling price the Company expects to realize by selling the inventory and the contractual arrangements with customers. The estimates are made at a point in time, using available information, expected business plans and expected market conditions. As a result, the actual amount received on sale could differ from the estimated value of inventory. Periodic reviews are performed on the inventory balance. The impact of changes in inventory reserves is reflected in cost of goods sold.
Recent Accounting Guidance
From time to time, new accounting pronouncements are issued by theFinancial Accounting Standards Board or other standard setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial position or consolidated results of operations under adoption.
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