Description

Thesis  

Appharvest (APPH) is a structurally unprofitable “ESG” “public benefit corporation” that went public through a SPAC with very aggressive projections. APPH’s core business is to build greenhouses (for tomatoes today and other vegetables in the future) in lower cost areas starting with rural Appalachia. APPH’s SPAC financial projections have already been cut in half and current guidance is still too aggressive and likely needs to be cut again. They even did some bizarre  robotics acquisition last year, and then said that because of that, that the earnings per facility is now even higher than originally projected…while cutting guidance for the year. In reality, APPH’s core business is uneconomic (operating costs dramatically higher than wholesale tomato prices) and incinerating cash (free cash burn over the next 2 years roughly equal to the current market cap.) Scaling the business will accomplish nothing other than accelerating the timeline to an inevitable bankruptcy as the unit economics of the company’s facilities don’t work. APPH is in critical need of new capital and will need to raise more capital continuously to fund operating losses. APPH shares are likely to significantly diluted over the next 2-3 years before the company files for bankruptcy.

Overview

AppHarvest is aiming to solve the problem of a lack of locally grown and pesticide-freeplant-based foods by growing tomatoes, cucumbers, peppers, and leafy greens in giant greenhouses. AppHarvest integrates “best of breed technology” in lighting, integrated pest management, rainwater collection and other variables to create Controlled Environment Agriculture (CEA) greenhouses. 

On September 29, 2020, Novus Capital Corporation took APPH public via SPAC.  It sounds great and at a high level, makes a lot of sense.  Grow produce closer to the markets and save on transportation costs while giving unemployed Kentuckians jobs where there is plenty of rain/water in a controlled environment.  “The initial Morehead, Kentucky, tomato facility cost over $100mn to construct, uses ~90% less water than open field growth of tomatoes and will produce ~30x more yield in the 60-acre greenhouse relative to 1,500+ acres of open field growth.” Appharvest sells its tomatoes at grocers like Kroger (in the Appalachia region) but does not get a premium price for its products over other tomato brands. The APPH story sounds so nice, but doesn’t make economic sense.

Look how impressive those empty greenhouses are before planting!

While it was a private company, APPH was financed by Jeff Ubben’s Inclusive Capital, the same people who financed electric vehicle fraud Nikola. Ubben was on the APPH board until he stepped down on March 7th of this year. 

Financials

When APPH went public they provided the following projections:

Fast forward to the end of FY21, and they finished with slightly more than $9m (vs $25m guidance) in revenue on their lone active 60 acre facility (the only part of the guidance they hit).  Instead of the estimated -31m in adjusted EBITDA, they finished at -$69.9m lost, and lost more than the $30m in “FCF before growth spend” they touted as late as January 2021. 

Got to love the press release on 2/24/22 saying “Company achieves high end of net sales guidance range and low-end of Net Loss and Adjusted EBITDA loss range for FY2021” after guiding way down last May.  Also got to love this little line here, “With the first year of operations completed and baselines set, the company is also able to more accurately forecast business results.” Are they?  This guidance for FY22 looks a bit aggressive as well.  This is coming on the back of the huge cut in guidance in May when they said on the call that, “With this investment in technology, along with our latest view on our operational performance, we are raising our long-term illustrative performance on adjusted EBITDA for a 60-acre farm of the future producing tomatoes from $15.8 million as previously presented at our Analyst Day event last December to $23.3 million, resulting in a potential 17% to 23% return on invested capital on an unlevered basis,” but then refused to talk about how they were getting there.  That 7.5m additional EBITDA suggests that they might need less labor since that is the majority of their costs…or that they will get a much higher price for their tomatoes….but doesn't really make much sense from what we can see.  Their original projections were all based off growing 42-45 million pounds of tomatoes and an average sell price of 95c per pound to get the returns. 

They guided FY22 to $24-$32m in revenue vs the original $59m plan which is “more than double the net sales from last year” (because we missed so badly).  “The company’s Morehead, Ky., farm is its only facility currently in operation and will be the main driver for the full-year 2022 outlook…“ and they do point out that the “company expects a contribution of mid-single digit millions of dollars from the three new farms given their estimated timing of completion toward the end of the year.”  



Just for frame of reference.  The original facility was Morehead, and building started in May 2019 and didn’t finish until October of 2020, or 17 months later.  Planting of the first tomatoes commenced in November, and the first harvest was not until January of 2021.  They broke ground on Richmond and Berea in October of 2020, and 17 months later would be in March of 2022 and they are not quite there yet.  At the pace they are going, it seems like we’re a couple of quarters out before they will be ready to plant any crops, so figure end of Q3 or early Q4 would be when they generate any revenue.  They barely generated $9m of revenue for a full year of harvesting tomatoes in 2021.  Management is projecting that tomato prices will rebound back to historical (let’s call it 75c/lb vs the 95c/lb they originally used) and they will be growing 8m pounds in Q1, and then give higher # of Q2 and Q4 as well (Q3 we’ll keep the same b/c that’s when they clean out the facilities to replant for following year).  

https://www.lanereport.com/113571/2019/05/appharvest-secures-82m-investment-to-build-eastern-ky-greenhouse/

Depending on if we use 75c/lb or 95c/lb, we get to $20-26m in rev…add in the MSD of rev from new farms, and I guess we get to 25m to 31m in rev, so we can get to the rev guidance.  Those are some big assumptions to make to get there. 

Compare to what it looked like in 2021.  You have to assume that they do a better job of getting #1 tomatoes b/c apparently if you don’t….you just get paid next to nothing for them.  

Tomato prices are seasonal and APPH has come no where close to achieving 95 cents/lb wholesale pricing even in the seasonally peak winter and fall quarters. At a $0.49/lb wholesale tomato price, even assuming APPH’s aggressive #1 tomato yield assumptions and their labor and other cost assumptions, their plant would have a gross profit of  -$3MM.

Seems like a lot of things have to go right to hit that guidance: they will need to execute and grow USDA #1 tomatoes, sell at full price, which has to get back at historical prices, and then have the new farms all completely up and running and planted without delays to add to the revenue from the Morehead facility.  Oh yeah, I forgot to mention that it costs $25m to run said facility, so even in the most robust situation of 95c/lb tomatoes and growing almost 50% more tomatoes….we are still only just breaking even.  The numbers don’t work unless they hit their 42.5m revenue estimate they were projecting….you know, when they were predicting they could grow 42-45m pounds of tomatoes, or almost 2.5x more what they did their first year.  And this was before labor costs started going up as well as energy costs. 

This was the guidance given on the Q4 print. 
“The company’s Morehead, Ky., farm is its only facility currently in operation and will be the main driver for the full-year 2022 outlook of net sales of $24 to $32 million, more than double the net sales from last year. The company expects a contribution of mid-single digit millions of dollars from the three new farms given their estimated timing of completion toward the end of the year. “The Adjusted EBITDA loss expectation is in the range of $70 to $80 million, modestly higher than the $69.9 million last year despite the expected quadrupling of the farm network and significant inflation.

AppHarvest expects to invest approximately $140 to $150 million in capital expenditure for full-year 2022, which accounts for the completion of the three farms under construction and the related equipment necessary to operate them.”

Sell side was telling us that management was telling them that the first facility at Morehead was only at 75% capacity in year 1, and will ramp to 90% in year 2 (FY22), but even if that is the case, they only grew 18.3m pounds in FY21 (at 75%), so if you they move to 90% capacity, they would grow 22m pounds in FY22.  And already on the last call, they said on the call, “Additionally, our outlook for Morehead also accounts for steps we recently took to mitigate the impacts of a disease affecting some of our tomato plants there, which we estimate could reduce yields by between 10% and 15% in 2022..” so already giving excuses for an already weak guide that they likely still miss.

The other reason that they missed guidance was that they assumed pricing of $0.95 for the year (note that they finished at $0.49/lb) for the year.  We should keep in mind that prices in the summer tend to be 20% lower than normal and in the winter 20-25% higher than normal.
One thing to keep in mind is that even if we had hit the assumed pricing of $0.95/lb for the year, and even if they grew tomatoes 25% more tomatoes, they would still only have hit slightly short of $22million in revenue. Note: they achieved a wholesale price of $0.69/lb in seasonal peak fourth quarter of 2021.

So I can totally see them seeming on track for improvement when they report Q1 this week, only to see them cut guidance in Q2 as tomato prices come back. 

It is unclear how soon the new facilities would come online, but given how aggressive the original projections were, and the progression of their farms, I would not expect much if any revenue out of any of the new farms

Notice the subtle change in when the farms will come outline through the last 4 quarters.
On the Q4 call, they said this about the next 4 farms, “, “The 15-acre Berea, Kentucky salad greens facility is about 68% complete. The 60-acre Richmond, Kentucky tomato facility is approximately 65% complete. And the 30-acre Somerset, Kentucky berry facility is about 55% complete. We expect to ramp up each facility with a phased approach that brings on additional acreage over time, similar to the opening of the full 60 acres at Morehead.” 

This compares to the Q3 call when they updated us about the progress of the farms more than 3 months ago..” Our 15-acre Berea, Kentucky leafy green facility and our 60-acre Richmond, Kentucky tomato facility are both over 50% complete, and both are scheduled to begin operations by the end of 2022.

 In June, we announced that we broke ground on a 30-acre berry facility in Somerset, Kentucky. The Somerset facility is approximately 30% complete with operations expected to begin by the end of 2022. In June, we also announced that we've begun initial site prep on a 10-acre leafy green facility located adjacent to our flagship Morehead farm.”

The Q2 call:
Let me turn next to our progress on farm development and financing. Work continues on the 4 previously announced CEA facilities currently under construction. While we remain on track with our plan to deliver 12 high-tech indoor farms by the end of 2025, as David mentioned, we're now counting on 9 in our external guidance. Our Berea, Kentucky, leafy green facility is approximately 37% complete. And our Richmond, Kentucky tomato farm is approximately 31% complete. Both facilities are scheduled for completion by mid-2022.

 Two additional facilities that we announced that we broke ground on in June are in Somerset, Kentucky and Morehead, Kentucky. The Somerset facility is expected to grow berries and the Morehead facility, which is adjacent to our first facility, is expected to grow leafy greens. We expect these facilities to be operational by the end of 2022.

The Q1 call:
Richmond is another 60-acre high-tech farm for vine crops that we plan to start with tomatoes. Berea is a 15-acre high-tech leafy green facility. Importantly, we locked in our steel and glass prices with fixed-price contracts to insulate these projects from commodity pricing volatility. We've successfully reached all of our milestones for site preparation, permitting and construction for both facilities.

 The Richmond project is 17% complete, and the Berea project is 23% complete, based on the number of project weeks for each, and they are slated to be operational next year. In addition to these projects, we are announcing we expect to move ahead on 2 more projects this summer for late 2022 delivery, which will put us at 5 operating farms by the end of 2022 and well on track for 12 by the end of 2025.

Keep in mind the original projections given during the September 2020 presentation:

But, let’s not worry about the new farms for now.  Management has talked about how they have found financing by putting up the farms as collateral, and getting 4-5% rates so that they don’t have to dip into their precious cash pile ($151m as of end of Q4).  But if we look at the trajectory of the available financing (below are some excerpts), even when dealing with a close party and supporter from the beginning (Equilibrium Capital - was CEO there prior to becoming president at APPH in January 2021), the financing they did in late July started at 8% (with rates higher and credit spreads increasing, their marginal cost of debt is likely north of 10% today.) And then you move to December, and they announced a $100mm ATM equity program running through B.Riley. It is likely management is worried that their funding is going to to dry up at some point. 

5/17/21 Q1 call:
We are confident we can secure nondilutive, attractive financing for our 12 high-tech farms being developed by the end of 2025. For example, we have negotiated terms for a 60% loan-to-value transaction for our Morehead facility at an expected rate between 4% and 5%, and we expect the transaction to close in Q2. We are also far along in negotiations for approximately $200 million of development financing for 2 of our projects underway.

7/29/21 8k: “On July 23, 2021, AppHarvest Richmond Farm, LLC, a Delaware limited liability company (the “Borrower Subsidiary”) and wholly-owned indirect subsidiary of AppHarvest, Inc. (the “Company”), entered into a credit agreement, dated July 23, 2021, (the “Credit Agreement”) with CEFF II AppHarvest Holdings, LLC, a Delaware limited liability company, an affiliate of Equilibrium Capital (the “Lender”) for a construction loan in the original principal amount of $91 million (the “Construction Loan”) for the development of a controlled environment agriculture facility upon that certain real property owned by the Borrower Subsidiary in Richmond, Kentucky (the “Project”).

The Construction Loan provides for monthly disbursements to fund capital costs of the Project in excess of the Borrower Subsidiary’s required equity contribution of 34.5% of the capital costs of the Project. The Construction Loan requires monthly interest payments based on drawn capital at an initial interest rate of 8.0% per annum which will increase on a monthly basis by 0.2% per annum, beginning two years after closing of the Construction Loan, through maturity which is expected to be three years from the Closing Date (as defined in the Credit Agreement), with no required principal payments until maturity. The closing of the Construction Loan is expected to occur in the third quarter of 2021.”

8/11/21 Q2 earnings call:
On June 16, we announced that we secured a $75 million nondilutive credit facility from Rabo AgriFinance, tied to a 60% loan-to-value mortgage on our initial Morehead farm. And on July 27, we announced the $91 million financing at approximately 66% loan-to-value in the form of a construction loan, from a sustainability-focused and leading CEA investor, Equilibrium Capital, who has supported us since early in our history.

 The borrowings under the $75 million credit facility at Rabo carries an interest rate of 4.1%. And the $91 million construction loan with Equilibrium has an interest rate of approximately 8%.

11/10/21 Q3 call:
Overall, I'm very pleased with the progress our team has made to fund our future and farm development through a number of financing vehicles. I believe we remain in a solid position to execute on our near-term development time line because of the $221 million in cash on our balance sheet, the over $75 million in available credit on our financing agreement equipment capital that we announced in July, the $25 million credit facility with JPMorgan we announced in September, and finally, the approximately $20 million in 2021 reduced CapEx as a result of positive construction at Morehead North.

12/15/21 8k:
Under the agreement, AppHarvest has the right, without obligation, to sell and issue up to $100 million of shares of its common stock to B. Riley, subject to certain limitations and satisfaction of certain conditions. Purchase notices may be issued to B. Riley over a 24-month period. AppHarvest issued B. Riley approximately 197,628 shares of common stock as consideration for B. Riley’s commitment to purchase AppHarvest common stock under the purchase agreement. Further details will be contained in a Current Report on Form 8-K AppHarvest will file with the Securities and Exchange Commission.

AppHarvest reiterated its full-year 2021 outlook of net sales of $7 million to $9 million and full-year 2021 outlook for Adjusted EBITDA in the range of a loss of $70 million to $75 million. The company also announced that it remains on track with its previously announced construction timeline and its plan to open three more farms by the end of 2022, which are expected to produce vine crops, berries and leafy greens, and the 10-acre Morehead North leafy green facility that has an expected 2023 delivery.

2/24/22 Q4 call”
Lastly, there remain 2 of our facilities, Berea and Somerset, which we have yet to announce permanent financing for. But we do believe can become additional sources of liquidity through asset-backed oil structures. We are currently negotiating these types of financing arrangements with interested parties and are highly confident that these 2 farms can raise incremental capital in a similar fashion to Morehead and Richmond.

Management spent some time talking up their partnership with their distributor, so that they will be able to sell any tomatoes they grow and make a big show of saying that once they are up and running, they will be profitable.  Is it possible?  Sure, but the first facility is now on it’s 3rd growing season, and the projections were way off in 2021 and no where close to what the company needs in terms of prices and yields to generate a profit. The average price of 25lb tomatoes from 2015-2020 came in at at 74c/lb. Seems aggressive for management to be using the 95c/lb average. Can they get it higher b/c of selling some speciality tomatoes?  It’s possible, but they haven’t proved this ability yet and were still struggling to get #1 tomatoes last year.

Retail tomato prices have been pretty steady around $2.00/lb

https://fred.stlouisfed.org/series/APU0000712311

Annual average wholesale tomato prices were roughly stable pre-pandemic. 

They spent some time in their original presentation talking other facilities that focus on cucumbers and leafy greens.  It would not surprise me if these were wildly aggressive as well, but only time will tell.  Honestly, it would not surprise me given the demonstrated aggressiveness of the illustrative economics for their tomato facility that the revenue number is also 50% too high for the first year for both cucumbers and leafy greens due to volume shortages or pricing.

Capital Structure

APPH will need to continue to toilet paper their stock in order to finance roughly $400MM in cash burn over the next 2 years. 

Conclusion
This is a business with grand plans, but the economics don’t work.  With cost of capital going up, and unable to get cheap financing moving forward, these guys will continue to burn cash and have to resort to more and more dilutive financing in order to avoid an inevitable bankruptcy in the next 3 years.  APPH is currently trading at 17x sales, or 4.5x next year’s aggressive sales number (assuming everything goes right.) Commodity agriculture companies like Mission Produce (AVO) trade closer to 1x revenues. At 1x 2023 revenues of $100MM, APPH shares would be worthless. Management will continue to dilute shareholders with endless equity offerings until the share price completely collapses.

Other

All of APPH revenues are obtained through sales to its distributor Mastronardi who sets the price APPH receives. 

On March 28, 2019, the Company entered into a Purchase and Marketing Agreement (the “Mastronardi Morehead Agreement”) with Mastronardi Produce Limited (“Mastronardi”) pursuant to which Mastronardi will be the sole and exclusive marketer and distributor of all tomatoes, cucumbers, peppers, berries and salad greens produced at the Company’s CEA facility in Morehead, Kentucky that meet certain quality standards (collectively, the “Products”). Under the terms of the Mastronardi Morehead Agreement, the Company is responsible for growing, producing, packing, and delivering the Products to Mastronardi, and Mastronardi is responsible for marketing, branding, and distributing the Products to its customers. Mastronardi will pay the Company market prices for the Products that are consistent with the best and highest prices available during the duration of the applicable growing season for like kind U.S. Department of Agriculture (“USDA”) Grade No. 1 products. Mastronardi will set the market price for the Products and will pay over to the Company the gross sale price of the Product sold by Mastronardi, less a marketing fee and Mastronardi’s costs incurred in the sale and distribution of the Products. If Mastronardi rejects, returns, or otherwise refuses Products for failure to meet certain quality standards, the Company has the right, at its cost and expense, to sell or otherwise dispose of the Products, subject to certain conditions.

Substantially all of the Company’s revenues are generated from the sale of tomatoes to Mastronardi.

The Mastronardi Morehead Agreement has a term of 10 years. The Company has a limited, one-time right to terminate the Mastronardi Morehead Agreement if certain return targets are not reached. During the term of the Mastronardi Morehead Agreement, Mastronardi has a right of first refusal to enter similar arrangements with regard to any additional growing facilities the Company established in Kentucky or West Virginia.

Martha Stewart is on the company’s board of directors

Appendix

This is cowen’s model from 3/14

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Catalyst

Continued cash burn resulting in additional equity offerings

Inevitable bankruptcy filing.