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 theSecurities and Exchange Commission (the "SEC"). The impact of COVID-19 and its variants, as well as geopolitical tensions, such asRussia's incursion intoUkraine , 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 endedDecember 31, 2021 , included in our Annual Report on Form 10-K filed with theSEC onMarch 1, 2022 ("Form 10-K"). As used in this section, unless the context suggests otherwise, "we," "us," "our," "Company," and "AppHarvest" refer toAppHarvest, Inc. and its consolidated subsidiaries.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview We were founded onJanuary 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 combine conventional agricultural techniques with cutting-edge technology, including artificial intelligence and robotics, to improve access to nutritious food, farming more sustainably, building a domestic food supply, and increasing investment in Appalachia. Prior 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 opened our first CEA facility inMorehead, Kentucky (the "Morehead CEA facility"), which we estimate can cultivate approximately 720,000 tomato plants with an approximate yield of 40 million pounds per year. We harvested our first crop of beefsteak tomatoes and tomatoes on the vine inJanuary 2021 andMarch 2021 , respectively. InMay 2021 , we opened production of the full 60 acres at the Morehead CEA facility and, inAugust 2021 , concluded the first harvest. We completed planting of our second crop at the Morehead CEA facility inSeptember 2021 , and began harvest of the crop in the fourth quarter of 2021. We concluded the second harvest at the end ofJuly 2022 . We currently have four other CEA facilities under various stages of construction, a salad greens facility inBerea, Kentucky (the "Berea salad greens facility"), a tomato facility inRichmond, Kentucky (the "Richmond tomato facility"), a facility inSomerset, Kentucky designed to grow berries (the "Somerset facility") and a salad green facility located adjacent to theMorehead CEA facility (the "Morehead salad green facility"). As of the date hereof, construction on theBerea salad greens facility is approximately 91% complete; theRichmond tomato facility is approximately 86% complete, and theSomerset facility is approximately 84% complete. All three CEA facilities are expected to be operational by the end of 2022, with approximately 165 acres under production, though our construction timeline may be affected by the COVID-19 pandemic and related supply-chain disruptions. 15 -------------------------------------------------------------------------------- Table of Contents To incorporate design and other insights we gained from construction of theBerea salad greens facility, and to maintain flexibility in the allocation of capital resources, we have temporarily paused development of theMorehead salad green facility, with resumption of construction contingent upon financing. We expect to develop additional CEA facilities only after obtaining the necessary capital, assuming, among other things, that we are able to obtain necessary capital when needed and on acceptable terms. For a discussion of possible adverse supply chain disruptions related to our construction timeline, please refer to Part II, Item 1A. Risk Factors, "Our business could be adversely affected by economic downturns, inflation, increases in interest rates, natural disasters, public health crises such as the COVID-19 pandemic, political crises, geopolitical events, such as the crisis inUkraine , or other macroeconomic conditions, which have in the past and may in the future negatively impact our business and financial performance." 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." For a discussion of our future funding requirements, please refer to Part II, Item 1A. Risk Factors, "We will require significant additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to delay, limit, reduce or terminate our operations and future growth."
The Company is organized as a single operating segment. Substantially all of the
assets and operations of the Company are located in
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 the
For more information about our basis of presentation, refer to Note 1 - Description of Business of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.
Environmental, Social and Governance ("ESG")
AppHarvest is both a public benefit corporation ("PBC") and a certifiedB Corporation because we believe in collective benefit over individual gain. We believe growing healthy fruits and vegetables are good business, and new technologies can deliver cleaner produce with safer growing methods, which we believe benefits all stakeholders. We are all in this together, for good. Public benefit corporations are for-profit corporations and, 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
More information on our key ESG programs, goals and commitments, and key metrics can be found in our sustainability report, which is available on our website https://www.appharvest.com/. Website references throughout this document are provided for convenience only, and the content on the referenced websites is not incorporated by reference into this Quarterly Report. While we believe all of our ESG goals align with our long-term growth strategy and financial and operational priorities, they are aspirational and may change, and there is no guarantee or promise that they will be met or that they will not hinder financial or operational performance. 16 -------------------------------------------------------------------------------- Table of ContentsRabo Loan OnJune 15, 2021 , we entered into a master credit agreement withRabo AgriFinance LLC (the "Lender") for a real estate term loan in the original principal amount of$75 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. The financial covenants generally begin to be measured onDecember 31, 2022 , except for the working capital ratio. OnJuly 29, 2022 , we obtained a waiver from the Lender whereby we are 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 , the Company would not have met the current ratio requirement for the Morehead CEA subsidiary. The Company's liability under the Rabo Loan was$73.1 million atJune 30, 2022 .
Factors Affecting Our Financial Condition and Results of Operations
We have expended, and expect to continue to expend, substantial resources as we:
•continue the build-out of the four CEA facilities currently under construction inRichmond ,Berea ,Somerset andMorehead, Kentucky and invest in additional CEA facilities in the future;
•conclude our second growing season, which concluded at the end of
•implement the Purchase and Marketing Agreement with
•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 a business combination and plan of reorganization with a special purpose acquisition company ("Business Combination"). Upon consummation of the Business Combination and the closing of the concurrent private placement of the 37,500 shares of the Company's Common Stock (the "PIPE"), the most significant change in our reported financial position and results of operations was an increase in cash and cash equivalents of approximately$435.2 million , including$375.0 million in gross proceeds from the PIPE. As a consequence of the Business Combination, we became the successor to 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. 17 -------------------------------------------------------------------------------- Table of Contents Key Components of Statement of Operations
Non-GAAP Financial Measures
To supplement our unaudited condensed consolidated financial statements, which are prepared and presented in accordance withUnited States generally accepted accounting principles ("GAAP"), we use certain non-GAAP measures, such as Adjusted EBITDA, to understand and evaluate our core operating performance. We define and calculate Adjusted EBITDA as net loss before the impact of interest income or expense, income tax expense or benefit, depreciation and amortization, adjusted to exclude: stock-based compensation expense, Business Combination transaction-related costs, restructuring 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 believe this non-GAAP measure of financial results provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses this non-GAAP measure for trend analyses and for budgeting and planning purposes. We believe that the use of this non-GAAP financial measure provides an additional tool for investors to use in evaluating operating results and trends. Other similar companies may present different non-GAAP measures or calculate similar non-GAAP measures differently. Management does not consider this non-GAAP measure in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of this non-GAAP financial measure is that it excludes significant expenses that are required to be presented in our GAAP financial statements. Because of this limitation, you should consider Adjusted EBITDA alongside other financial performance measures, including net loss and our other financial results presented in accordance with GAAP. Net sales Substantially all of our net sales for the three and six months endedJune 30, 2022 , and 2021, were generated from the sale of tomatoes under an agreement with one customer, Mastronardi. Net sales include revenues earned from the sale of our products, less commissions, shipping, distribution and other costs incurred as defined in our customer agreements.
Cost of Goods Sold
Cost of goods sold for the three and six months endedJune 30, 2022 , and 2021, 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 and six months endedJune 30, 2022 , and 2021, consisted of payroll and payroll related expenses, stock-based compensation, professional services and legal fees, licenses and registration fees, insurance, depreciation, rent and various other personnel and office related costs. SG&A also included start-up expenses related to pre-commencement commercial activities for tomatoes on the vine at the Morehead CEA facility in 2021 and new CEA facilities under construction in 2022.
Interest Expense
Interest expense for the three and six months endedJune 30, 2022 primarily related to long-term debt to help finance the construction of our CEA facilities. Interest expense from related parties for the three and six months endedJune 30, 2021 , primarily related to the finance lease and financing obligation for the Morehead CEA facility which were settled upon purchase ofMorehead Farm, LLC onMarch 1, 2021 , and the convertible note that was converted to Common Stock upon completion of the Business Combination onJanuary 29, 2021 . 18
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Results of Operations
Comparison of the Three and Six Months Ended
The following table sets forth our historical operating results for the periods indicated: Three Months Ended Six Months Ended (Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Net sales$ 4,358 $ 3,138 $ 9,522 $ 5,437 Cost of goods sold 14,121 15,683 27,675 22,519 (9,763) (12,545) (18,153) (17,082) Operating expenses: Selling, general and administrative 20,225 27,467 41,264 58,956 expenses Total operating expenses 20,225 27,467 41,264 58,956 Operating loss (29,988) (40,012) (59,417) (76,038) Interest expense from related parties - - - (658) Interest expense - (88) - (88) Change in fair value of Private 1,069 6,488 (260) 16,314 Warrants Other 55 105 69 461 Loss before income taxes (28,864) (33,507) (59,608) (60,009) Income tax benefit (expense) 159 1,491 268 (522) Net loss$ (28,705) $ (32,016) $ (59,340) $ (60,531)
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 Six Months Ended (Dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Net loss$ (28,705)
- - - 658 Interest expense - 88 - 88 Interest income (154) (73) (255) (96) Income tax (benefit) expense (159) (1,491) (268) 522 Depreciation and amortization expense 3,064 2,800 6,176 4,602 EBITDA (25,954) (30,692) (53,687) (54,757) Change in fair value of Private Warrants (1,069) (6,488) 260 (16,314) Stock-based compensation expense 5,993 13,390 12,028 19,676 Transaction success bonus on completion of Business Combination - - - 1,500 Restructuring and impairment costs 2,256 - 4,246 - Start-up costs for new CEA facilities(1) 923 - 1,278 - Business Combination transaction costs - 543 - 13,804 Root AI acquisition costs(2) - 625 - 1,032 Adjusted EBITDA$ (17,851) $ (22,622) $ (35,875) $ (35,059) (1) Start-up costs are related to the pre-commencement commercial activities for tomatoes, salad greens and berries at theRichmond ,Berea and Somerset CEA facilities (2) The acquisition of Root AI occurred onApril 7, 2021 The following sections discuss and analyze the changes in the significant line items in our unaudited condensed consolidated statements of operations for the comparison periods identified.
Net sales for the three and six months endedJune 30, 2022 were$4.4 million and$9.5 million compared to$3.1 million and$5.4 million for the comparable prior year period. For the three months endedJune 30, 2022 , the increase of$1.2 million 19 -------------------------------------------------------------------------------- Table of Contents was primarily attributable to higher average net sales prices and expanded product variety, which was offset by lower yield. The$4.1 million increase during the six months endedJune 30, 2022 , was primarily due to higher average net sales prices and increased production as the Morehead CEA facility was not fully harvesting until May of 2021, due to the phased initial opening, as well as expanded product variety. Continued operational ramp-up at the facility, including enhanced training and productivity improvements, resulted in a more favorable mix of premium and non-premium tomatoes, which also drove higher net sales for the three and six months endedJune 30, 2022 . Net sales during the three and six months endedJune 30, 2022 were negatively impacted by mitigation efforts related to the plant health issue, which led us to remove some extra rows in the affected area out of an abundance of caution and re-plant with new seedlings. While we initially expected our mitigation efforts would shift a portion of our second quarter sales and production into the third quarter, upcoming maintenance requirements and reduced quality during July led to diminishing pricing and we decided to conclude the second harvest three weeks early, which we expect to have a negative impact on our net sales during the three months endingSeptember 30, 2022 . We now expect the impact of the plant health issue to be toward the higher end of 15% to 20% of 2022 yield, which is higher than our original forecast of 10% to 15%.
Cost of Goods Sold
Cost of goods sold for the three and six months endedJune 30, 2022 was$14.1 million and$27.7 million compared to$15.7 million and$22.5 million for the comparable prior year periods. The decrease of$1.6 million for the three months endedJune 30, 2022 was primarily due to higher average net sales prices during the three months endedJune 30, 2022 , which resulted in an increase to net sellable inventory, as compared to the three months endedJune 30, 2021 . This reduction was offset by increased costs related to higher production volume. See "Critical Accounting Estimates" within this section of this Quarterly Report for more information on the estimation, uncertainty and impact of the Company's critical accounting estimates has had, or is reasonably likely to have, on the Company's financial condition or results of operations.
The increase of
Selling, General, and Administrative Expenses
SG&A for the three and six months endedJune 30, 2022 was$20.2 million and$41.3 million compared to$27.5 million and$59.0 million for the comparable prior year periods. The$7.2 million decrease was primarily driven by a$7.4 million decrease in stock compensation expense for the three months endedJune 30, 2022 , and decreased professional fees partially offset by restructuring and impairment charges of$2.3 million . The$17.7 million decrease during the six months endedJune 30, 2022 was a result of$13.8 million of transaction costs related to the Business Combination in the prior year, as well as a$7.7 million decrease in stock compensation expense, which was offset by$4.2 million of restructuring and impairment charges. See Note 3 - Restructuring to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for more information on this expense. We continue to anticipate a decrease in our annualized SG&A of approximately$16 million due to the restructuring initiative which occurred during the first quarter. In addition, we expect annualized cost savings of approximately$12 million from our restructuring during the second quarter, as we reduced funding towards technology that was not centered on core operations in order to focus technology resources on support of improved production and quality as we expect to quadruple the farm network. We have already realized savings of approximately$3.9 million and$5.3 million for the three and six months endedJune 30, 2022 . We do not expect any further costs associated with the restructurings.
Interest Expense
Interest expense during the three and six months endedJune 30, 2022 , was incurred on debt used to finance the construction of our CEA facilities and was capitalized as a component of the cost of those facilities. Interest expense of$0.0 million and$0.7 million from related parties for the three and six months endedJune 30, 2021 , respectively, primarily related to the finance lease and financing obligation for the Morehead CEA facility which were settled upon purchase ofMorehead Farm, LLC onMarch 1, 2021 , and the convertible note that was converted to Common Stock upon completion of the Business Combination onJanuary 29, 2021 . 20
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Income Taxes
We recorded an income tax benefit of$268 during the six months endedJune 30, 2022 , resulting in an effective income tax rate 0.4% for the six months endedJune 30, 2022 . The variance from theU.S. federal statutory rate of 21% for the six months endedJune 30, 2022 was primarily attributable to increases in the Company's valuation allowance largely driven by increases in our net operating loss carryforwards.
Liquidity and Capital Resources
Cash and cash equivalents totaled$50.9 million and$150.8 million as ofJune 30, 2022 , andDecember 31, 2021 , respectively. Currently, our primary sources of liquidity are cash flows generated from the successful completion of the Business Combination, the proceeds from debt and equity financings, our common stock purchase agreement withB. Riley Principal Capital ("Purchase Agreement") and revenues from the sale of our tomatoes. We have incurred losses and generated negative cash flows from operations since our inception in 2018. We expect to continue to incur losses and negative cash flows from operating expenses for the foreseeable future as we ramp up operations and production at our new CEA facilities. AtJune 30, 2022 , we had an accumulated deficit of$246.7 million . We continue to expect that the restructuring initiatives, as well as the refocus of technology on core operations, which were implemented in the three and six months endedJune 30, 2022 , will increase our liquidity by reducing our annualized SG&A expenses as we have already realized savings of$3.9 million and$5.3 million for the three and six months endedJune 30, 2022 . See Note 3 - Restructuring to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for a discussion of these restructuring initiatives.
Material Cash Requirements
As ofJune 30, 2022 , there were no material changes in our cash requirements from those disclosed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Form 10-K. Cash requirements for the remainder of the fiscal year are expected to consist primarily of our current payroll, working capital requirements, planned capital expenditure and debt service requirements. During the three and six months endedJune 30, 2022 , we spent$48.6 million and$87.6 million , respectively on capital expenditures. We expect to incur approximately$85 million to$90 million more in capital expenditures during the remainder of the fiscal year based on the continued availability of financing on acceptable terms. We believe that our cash and cash equivalents on hand and available under our loan agreements atJune 30, 2022 , as well as available proceeds from the Purchase Agreement, are sufficient to meet our current payroll and working capital requirements for a period of at least 12 months from the date of this Quarterly Report, as well as our debt service requirements and currently planned capital expenditure requirements as we continue to build out theBerea salad greens facility,Richmond tomato facility and theSomerset facility this year. We have the ability to defer and adjust our capital expenditures based on our ability to secure additional funding. The amount and timing of our future funding requirements, if any, will depend on many factors, including the timing and costs of completion of our large-scale high-tech CEA facilities. We will plan the timing of completion of our CEA facilities around available funding. We could potentially use our available financial resources sooner than we currently expect and may incur additional indebtedness to meet future financing needs. Adequate additional funding may not be available to us on acceptable terms or at all. In addition, although we anticipate being able to obtain additional financing through non-dilutive means, we may be unable to do so. Our failure to raise capital as and when needed could have significant negative consequences for our business, financial condition and results of consolidated operations. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled "Risk Factors". 21
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