Tony Martin: Sure. I think if I look right to the very beginning of AppHarvest, it’s a company of great ideals and great companies have ideals. And their ideal is to employ local labor but when you’re faced with a thin labor pool and a high attrition rate, oftentimes, it’s difficult to attract, retain and recruit the appropriate labor force. In the United States, we can rely on contract agricultural labor. These are U.S. residents who perform agricultural type activities along with a program of the federal government called the H2A. What that allowed us to do was to respond to the immediate need of the crop by having agricultural workers who were experienced in agriculture. Now how does that relate to a productivity bonus is you have to measure the performance in the greenhouse.
And to do that, we rely on the system called PRIVA FS. Now greenhouse is set up on a grid pattern where each row has a unique identifier, each crop in the crop plan. They know the density of the crop, and they know the area by grow that’s planted. Each activity has a unique identifier, each worker has a unique identifier and each cart has a unique identifier. Every cart has a way station it goes through. And the objective of a productivity bonus is to take the worker by the activity, by the row, by the cart and measure their performance. And then based on the standard of performance, you pay productivity bonus when they perform above the standard, and it gives you corrective action when you perform below the bonus. That improves the efficiency of the staff.
Now in order to do that, you have to surround that with a database administration because you’ve now got 100 agricultural workers in putting to a database, you have to clear faults and you have to have a quality assurance program or people that are said on the path validating the work of the workforce. The combination of those things, allow you to have a very effective productivity bonus program. We’re now in the process of developing it for Morehead. Our anticipation is we’ll have an effect across all of our properties with the start of the 2023, 2024 agricultural season. I’m certain it’s going to bring benefit. I’m certain it’s going to bring benefit. Does that answer your question?
Ben Theurer: Yes, that makes a lot of sense. Thank you very much, Tony.
Tony Martin: You’re welcome.
Operator: And thank you and one moment for our next question. And our next question comes from Kristen Owen from Oppenheimer. Your line is now open.
Kristen Owen: Great, thank you. Good afternoon and congratulations on all that you’ve accomplished this year, getting the farms up and going and the amount of transition that the business has gone through. I’ll start there, Tony, you’ve touched on it in a number of the questions here and even in some of your prepared remarks discussing the difference between maybe some of the other solutions that are out there or the broad category of CEA? But in your brief time in the seat with AppHarvest, I’m wondering if you can talk a little bit about where you’ve seen AppHarvest differentiation? What stood out to you that brought you into the organization I think we’ve touched a lot on what the opportunity set is, but I’m wondering if you can talk a little bit about the foundation that you’re building upon?
Tony Martin: Sure, I’d be happy to. First, let me say that although I’ve been in the role of COO since January of this year, I had the opportunity early on Jonathan had asked me how I would like to participate with the company. What matters most to me is the ethos of a business, the culture of the business. And to do that, it takes time to assess it. I asked Jonathan, if I could work as a consultant providing advice to the development team. And I could observe the performance of their management and their approach to their work. And I did so for over a year, where I sat in on calls, listen to presentations, reviewed presentations offered objective commentary. Jonathan approached me last November to join the Board, and I said that I would.
And it was in the Board meeting when discussing the reason why the strategy of diversification, not only in crop. But in customer in terms of packaging, in terms of varieties we offer, why it matters so much to a company like AppHarvest. The combination of that ethos, that willingness, that teamwork that’s a spree of core that exists in AppHarvest and the ability of these facilities to provide state-of-the-art, support to a crop prompted me to join AppHarvest. There is nothing that AppHarvest faces today as a challenge that I haven’t experienced in one form or another in my past employment, my past role. And I felt that I could bring an ability to see a problem perhaps earlier come up with some solutions to help address it and to enable a quickening of AppHarvest to achieve their potential, and that’s why I joined them.
Kristen Owen: That is really helpful. And if I could touch on one of the points that you made around diversification I mean, you are talking about new crops, new customers, new packaging, new SKUs, just how you manage the complexity of a business that’s basically gone from one product and a handful of SKUs to now this diverse network. Talk about some of the management of that?
Tony Martin: Sure. I would be happy to. So I’ll give you an example of three crops or three varieties of a crop. We have beefsteak tomato, which is around type tomato, we have tomatoes on the vine, we have Campari. We have Delice tomatoes on the vine, Campari, Delice are all vine type tomatoes. They are all harvested in the cluster. It means that a single cluster is clipped at a single moment. The worker is equipped to deal with clipping a tomato cluster or TOV tomato cluster, Delice cluster, a Campari cluster, and it’s the same action and approximately the same speed. Now weight will change because some tomato varieties are larger than others. But the learnings they have in any single variety that cluster variety is the very same.
TOV is some of the smaller varieties are picked by the each and the action of harvesting and clipping at the calyx are consistent and so the ability of the crew to quickly learn their tasks and understand the correct method brings benefit to the company as such, you’re able to diversify your crop. Now crop issues happen from time-to-time. It’s an intense agricultural biological environment. What’s important that to recognize is that you have long-cycle crops, such as tomatoes on the vine where you get the opportunity within a very limited window to plant the crop for the year. Other crops are short-cycled crops, meaning that if a TOV crop takes three months from germination to harvest, something like a mini cucumber crop, can take six weeks.
As a result, you can have an impact in a long-cycle crop that gets replaced with a short cycle crop allowing the company to remain revenue-producing to cover the cost of its operations. There is one last opportunity that I think needs to be reflected which is in terms of lettuce production, that crop cycles on a 28 to 38-day cycle. It’s a very, very fast cycle. I love lettuces because you could interrupt that crop and be back in production very, very quickly. So the combination of diversifying our crops, diversifying the varieties, ensuring that the workforce is well trained, brings great stability to the business. Does that answer your question?
Kristen Owen: I think that gets to the heart of it, and we can follow up offline because the last point that I want to ask is to build on that and the comments around farm level EBITDA positive by 2025, taking some of these learnings and thinking about the opportunity for, say, Morehead to become EBITDA positive before then? And just how we should think about sort of the pace of the payback cycles on whether it’s a more established farm where you’ve had the learning benefits or something like the autonomous lettuce farm, where maybe there’s more automation there, but the payback can be faster because the cycle times are faster. So the question is, is payback times and how we should think about that bridge to EBITDA positive by 2025 from a farm perspective? Thank you.
Loren Eggleton: Hey Kris, it’s Loren. So we put out there that we expect the farms to be adjusted gross profit positive by 2024. And so I think the first thing we have to remember is that this year, not all of the farms are 100% utilized. So we mentioned on the call as Jonathan mentioned it in the prepared remarks, Richmond only has 30 out of 60 acres currently planted. With the remaining 30 acres, we’re not expecting to plant it now until later this year. We also mentioned that the Berea only has 10 out of 15 acres planted, the last 5 acres being planted here very shortly. So this year, even though we’re showing the nearly tripling of net sales year-over-year does not really reflect what we would expect all of these farms to do at 100% utilization.
So, we’re going to see that benefit next year. So that’s part of the journey there. I would say the next piece beyond that is just continuing to get better at ramping everything up. Looking at cost of goods, particularly on the labor front so Tony was talking about the productivity bonuses I think he has seen tremendous success in his previous.
