AppHarvest, Inc. (NASDAQ:APPH) Q4 2022 Earnings Call Transcript

AppHarvest, Inc. (NASDAQ:APPH) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good day and thank you for standing by. And welcome to AppHarvest Q4 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation there’ll be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Travis Parman, Chief Communications Officer. Please go ahead.

Travis Parman: Thank you for joining us on the AppHarvest fourth quarter 2022 and full year 2022 earnings call. I’m Travis Parman, Chief Communications Officer for AppHarvest. Joining me today are several members of the senior management team including Jonathan Webb, Founder and CEO; Tony Martin, Chief Operating Officer and Board Member; and Loren Eggleton; Chief Financial Officer. The earnings release is available on our investor website at investors.appharvest.com. On today’s call, we’ll begin with prepared remarks from the team. Then we’ll open the call to questions. Before we start, I’d like to remind you that comments today regarding the company’s future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the securities laws.

These statements are made based on management’s current knowledge and assumptions about future events. And they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For more information on important factors that could affect these expectations. Please see our most recent SEC filings. And now I’d like to turn the call over to Jonathan.

Jonathan Webb: Thanks, Travis. In 2022, the AppHarvest team delivered on our commitment to quadruple the AppHarvest Farm Network now totaling color 165 acres under glass in what we believe is the largest simultaneous build out of controlled environment agriculture infrastructure in U.S. history. AppHarvest has become one of the top three U.S. CEA operators by acreage, along with our distribution partner Mastronardi Produce and our new Chief Operating Officers, former employer Windset Farms. In 2022, we also succeeded in diversifying our crop portfolio to include strawberries, salad greens, and more varietals of tomatoes and now we’ve added cucumbers to. We expect this diversification to support stability in our sales, where there may be price volatility on one variety or commodity.

We believe we’re unlikely to see it in whole categories or across multiple varieties. It also allows us opportunities to choose when or where to grow more lucrative produce mixes. Going forward, we expect to further diversify our portfolio with peppers and more varietals of existing crops. And we’ve already done this at our flagship 60-acre high-tech indoor farm in Morehead, Kentucky. Currently, in its third harvesting season, we’ve added new varietals of premium snacking tomatoes sold under the sunset brand as Flavor Bombs and Sugar Bombs. The new CEA facilities in AppHarvest farm network are the 15-acre salad green facility in Berea, Kentucky, believed to be the world’s largest high-tech indoor farm for autonomously harvested salad greens, featuring a touchless growing system.

It supplies the Queen of Greens brand, washed-and-ready-to-eat salad. AppHarvest Somerset is a 30-acre strawberry farm supplying multiple brands from Mastronardi, including wildberries. Somerset also will grow long English cucumbers during the annual summer refresh for strawberries. AppHarvest Richmond is our second 60-acre tomato farm. The first 30 acres were planted in late 2022 and the initial harvest was this January. We expect to plant the second 30 acres later this year. Combined with Moorhead we expect to grow nearly 1.5 million tomato plants across the combined 120 acres. I want to thank the entire AppHarvest team for their hard work and perseverance and accomplishing this milestone. A build out of this size is challenging as is and we were able to bring three new farms into operation by year in 2022 despite headwinds such as COVID-19 an ongoing supply chain challenges.

In addition to this achievement, we also realized the 60% increase in net sales over the prior year with fiscal year 2022. Net sales of $14.6 million, the addition of new sales of higher price tomato varietals strawberries and salad greens in the fourth quarter, as well as higher market prices for tomatoes helped drive this increase. Our business is now at an inflection point as we move from construction and development phase to one focused on maximizing production and operational efficiency. This January, mark the first time that all four facilities in the AppHarvest farm network. We’re shipping commercially to top national grocery store chains, restaurants, and food service outlets. For fiscal year 2023, we expect our new COO; Tony Martin with his extensive CAE experience to help accelerate our path to profitability.

Tony is working to optimize production, revenue and cost across our four farm network and has rolled out a strategic plan across all operations to focus the team on profitability. I’ll now turn it over to Tony to share more details on our business strategy. Tony?

Photo by Louis Hansel on Unsplash

Tony Martin: Thank you, Jonathan. Good afternoon. Some recent media coverage of the CEA sector reminds me of the quote attributed to the great Mark Twain reports of my death are greatly exaggerated. It’s true that inflationary factors particularly those around energy costs, are challenging a number of players in the industry who struggled to compete in part due to a lack of scale. However, there is still a strong rationale for cost efficient CEA and sustainably grown domestic produce. The USA has become heavily reliant on imported fruits and vegetables. According to the USDA, nearly two-thirds of the fresh fruits and vegetables are imported. It’s estimated that 20,000 additional CEA acres are needed in the U.S. just to displace the current volume of vine crops imports from Mexico, consumers are demanding healthy, great tasting sustainable products.

And increasingly those customers are concerned about where their food comes from, and its effects production has on people and the planet. These factors are driving growth. Major food retailers increasingly are interested in CEA for the reliability it offers in terms of quantity and quality. That’s based on its climate resilient, more sustainable year round growing approach, and it uses far fewer resources than traditional open field farming. CEA produce often can be picked, packed, shipped, and on a store shelf within 24 hours compared to 10 days or longer with imported product. That means longer shelf life and less waste for the retail seller. That translates into higher margins. Benefits also accrue to the end consumer with better quality and longer lasting product.

Estimates for the period from 2020 to 2026 show a more than $2.2 billion opportunity for CEA grown products. We believe the AppHarvest model is sustainable, both from an environmental and social impact perspective. Vertical farming relies on electrical lighting and municipal water contrasted with our approach that leverages sunshine and rainwater first, boosted with technology as needed to grow at scale. The advantage is clear. As the team ramps up production and works to optimize efficiency across the farm network, we follow a five point strategy. We’re calling this the next phase of Project New Leaf. It will focus our efforts on operations across all the farms. The first element is to leverage deeper synergies with our marketing and distribution partner Mastronardi Produce.

Mastronardi has extensive resources and experience in the CEA sector. We will collaborate with them as the true strategic partner for mutually beneficial results. The next is improving labor efficiency. We are leveraging experienced agricultural workers to drive efficiency. We are strategically deploying them to help supplement the work and to train local crop care specialists and Pacos team members. We are implementing a new incentive program at the farms to drive productivity. This includes training, quality assurance, performance measurement, and performance management components, improving enterprise wide feedback through clear KPIs and cross organizational information sharing. We are implementing a new reporting format to improve efficiencies to create more opportunity to share ideas, and to pursue best-in-class solutions across four farm network.

This format is designed specifically for the management of farm financial performance, productivity in terms of yield, quality and efficiency, reporting occurs weekly with each farm team, farm general managers and other key stakeholders comparing performance to our KPIs. We’re initiating comprehensive spending reviews. The team is further scrutinizing our suppliers to determine their ROI to our core operations. As part of this assessment, we’re also identifying opportunities where it makes sense to in-source versus outsource and reducing third-party spend when possible, aligning the company to milestones for a five-year strategic vision. Agriculture and crop decisions often require more than a single fiscal period, payback periods on investment decisions they also exceed more than one-year.

For Project New Leaf, to be successful every team member needs to understand the full strategic vision. We must contemplate decisions over the appropriate period and the key milestones to achieve in years one through five. When producing at this massive scale, even small, incremental improvements in core operations can have a huge impact. As our crop care specialists become more efficient, and we test and identify which crop varietals perform best in our environment, we can become more productive. This requires fine tuning over the course of multiple crop cycles. The expected benefit is that we greatly improve the reliability of our forecasting. And pardon the pun, we’re seeing the fruits of our labor at our flagship farm in Moorhead. With two years under our belts, we’re finding that ramping up to full production at Morehead will come around the 36-month mark.

Moorhead now on its third harvest season is performing significantly better on its KPIs. We expect that applying our learnings from Morehead will help us reduce the curve to operational excellence at the three new farms. Based on my experience, I see tremendous opportunity for AppHarvest. I believe we can leverage the state-of-the-art indoor farms to become a significant and profitable producer in an ecosystem that increasingly needs it. Now over to Loren to, review our Q4 and full year 2022 results.

Loren Eggleton: Thanks, Tony. I’ll start by briefly reviewing our fourth quarter and FY 2022 results, our financing and then move to the 2023 outlook. We reported fourth quarter net sales of $4.5 million compared to net sales of $3.1 million in the fourth quarter of 2021. Going forward, we will report overall net sales by produce type rather than a metric of pounds sold. This change in reporting is driven by the diversified crop portfolio that is expected to include tomatoes, salad greens, strawberries, and cucumbers. It also helps resolve our distribution partners concerns related to proprietary pricing information. In Q4, 2022, we recorded a net loss of $93.3 million and a non-GAAP adjusted EBITDA loss of $24.1 million as we work to rapidly expand our farm network.

This is compared to a prior year net loss of $88.4 million and non-GAAP adjusted EBITDA loss of $18.3 million. Following a third-party recoverability assessment, we also recorded a non-cash impairment charge of $50.1 million, which reduced the carrying value of certain long-lived assets. We achieved our previously revised guidance for full year 2022 as announced in the third quarter. We delivered net sales of $14.6 million as compared to $9.1 million for the prior year, an increase of 60% year-over-year. This increase in net sales was driven by a combination of higher market prices for tomatoes and addition of new sales of higher priced tomato varietals, strawberries and salad greens in the fourth quarter. Supply chain related delays at AppHarvest Berea and AppHarvest Somerset affected the timing of commercial shipments from both farms resulting in net sales at the lower end of the previously forecasted range of $14 million to $17 million.

We reported a net loss of $176.6 million for 2022 compared to a loss of $166.2 million for the prior year, this increase in net loss was driven by the ramp up of production at the three new farms. In terms of non-GAAP adjusted EBITDA loss, we achieved our revised guidance with a loss of $72 million versus a prior outlook of non-GAAP adjusted EBITDA loss in the range of $67 million to $72 million. Turning now to our balance sheet and liquidity, we ended the year with cash and cash equivalents of $54.3 million. In the fourth quarter of 2022, we utilized our ATM with Cowen selling 475,600 shares that in proceeds of approximately $932,000, leaving $97.6 million still available on the ATM facility. In February 2023, we completed our follow-on offering to raise $46 million before deducting the underwriter’s discount, commissions and estimated operating expenses.

We expect to use the net proceeds from this offering for working capital and general corporate purposes as we ramp up production and sales from the four farms. Because we have focused on non-dilutive capital, this is the first public offering that we have made since going public over two years ago. Going forward, we will lean in on our past success with generating non-dilutive capital. In Q3, we secured $50 million in USDA guaranteed loans with Greater Nevada Credit Union at AppHarvest Somerset and in December, we completed the $127 million sale leaseback of the Berea farm to Mastronardi Berea LLC with an initial annual lease rate of 7.5% over 10 years. Some of the proceeds from the sale leaseback repaid the $30 million bridge loan from Mastronardi, announced in Q4 and the first two years of prepaid rent at the Berea facility.

We also focused on cost containment efforts to restructure the organization and to create operational efficiencies that we estimate will result in approximately $26 million in annualized savings in 2023. In terms of capital expenditures, we expect to spend approximately $60 million to $65 million in 2023. To account for final project details at the Richmond Berea and Somerset facilities and ongoing maintenance across the four farm network nearly $10 million of this CapEx spend requirement was previously funded and should not be a reduction in balance sheet cash this year. Let me turn next to what we expect for 2023 and beyond. As Jonathan mentioned, we quadrupled our farm network in 2022 and diversified our crop portfolio to include strawberries, salad greens, and more varietals of tomatoes.

In 2023, we also added cucumbers with this significant infrastructure in place coupled with the project newly strategy Tony is leading focus on operations across the farm network. We expect to nearly triple our net sales year-over-year in 2023. We believe in our ability to be self-sufficient and to generate positive operating cash flow over the longer term with our four farm network. As we’ve stated in the past, we plan to expand capacity, but only after becoming profitable across the farm network and securing the required capital. Operations in the first quarter of 2023 continue to ramp up as expected. AppHarvest Berea is opening on a phased approach as previously announced, and we anticipate the third five-acre salad greens growing area to be planted in the late first quarter of 2023.

AppHarvest Somerset, which grows both strawberries and cucumbers, has already planted about 45,000 long English cucumber plants in advance of the full seasonal summer refresh for the facility. This smaller planting will allow us to calibrate packaging equipment and assess harvesting capabilities before a full planting the long English cucumbers. Harvesting of the cucumbers is anticipated in the second quarter of 2023. With all four facilities in the AppHarvest farm network now commercially shipping in Q1, 2023 under a variety of brands from Mastronardi Produce, we expect to see significant year-over-year net sales increases throughout 2023 and even more in 2024. We anticipate FY 2023 guidance of net sales to be in the range of $40 million to $50 million and non-GAAP adjusted EBITDA loss to be in the range of $67 million to $76 million.

We are applying lessons learned at Morehead to accelerate our path to operational excellence at each of the three new farms with the potential to achieve positive adjusted gross profit in 2024. In 2025, we expect to achieve positive adjusted EBITDA status for farm operations. With this trajectory, we believe that we may be able to achieve positive adjusted EBITDA status on a consolidated basis in 2026. In summary, AppHarvest achieved multiple key business milestones for the full year 2022 that we believe will accelerate our path to profitability. We quadrupled the AppHarvest farm network by year end 2022. And as of January 2023, each of the facilities in the four farm network were shipping commercially. We diversified our crop portfolio to include strawberries, salad greens, and more varietals of tomatoes, and added cucumbers in 2023.

We expect this diversification to support stability in our sales. We achieved the lower end of our revised full year 2022 guidance despite several headwinds. We shifted our business focus in Q1, 2023 to maximizing production and operational efficiency with the rollout of the next phase of Project New Leaf our five-point strategic plan across all operations. We remain confident in our ability to be self-sufficient and to generate positive operating cash flow over the longer term with the four farm network. AppHarvest expects to nearly triple its net sales year-over-year in 2023. With that, I’ll turn it back over to our Chief Communications Officer, Travis Parman.

Travis Parman: Thank you, Loren. Operator will now begin to take questions.

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Q&A Session

Operator: And thank you. And our first question comes from Brian Holland from Cowen. Your line is now open.

Jacob Henry: Thank you. And hi, this is Jacob Henry on for Brian Holland. I’m wondering how we should think about the ramp-up in Morehead as a proxy for the three new facilities. What learnings from Morehead? Are you able to take into account? And is there anything about the contract of the new farms that will impact the time line of scale out either one way or the other?

Tony Martin: So I’ll answer the first part of your question, and I’ll get you to repeat the second part because I had difficulty with the audio. With regards to the learnings at Morehead, Morehead was challenged last year with a virus in the crop that was endemic worldwide in tomato production called the tomato brown fruit rugose virus. Unfortunately, it had a dramatic effect on the production of tomatoes and the quality of tomatoes that Morehead produced. This year, through extensive hygiene protocols, starting with the acquisition of the seed through the germination of the seed through the introduction of the plant in the greenhouse and a solid approach on integrated pest management where pest management people started with the initial delivery of the crop into the greenhouse.

We have been able to manage the greenhouse where we are virtually free of the virus. That’s not to say we’re without it, we’ve had 2,500 plants affected by 700,000 plants in our Moorehead facility, a feature of less than a third of percent. And so, we take those learnings and we apply them to Richmond. Richmond is free of the virus and as a result, both in Morehead and in Richmond, we are without economic damage or a reduction in our expected results from those farms this year. Now could I have your second part of your question?

Jacob Henry: Yes, thank you that was great. The second part is just about, I guess, on the other two facilities; Berea and Somerset, is there anything different about the contract of those farms given their growing different crops that will impact the time line to ramp up the full scale?

Tony Martin: Oh yes, most certainly, each crop has its unique requirement, and Berea is a highly technical, very advanced touchless greenhouse. As a result, there’s great integration between technology and agriculture. And we have to learn the management of both. I’ll just give you an indication as to how we’re succeeding when we started the pack line in Berea, we processed about 400 cases in the first week. Yesterday, we did 12,000 cases. And as a result, as production increases, we’re demonstrating our ability to pack it. The other thing that’s occurring is that we’re modifying the varieties that we grow. So – in the beginning, you trial certain seed type, certain lettuce types. They have a certain characteristics. As we progress, we are optimizing on the varieties we’re growing and the pack types we’re capable of producing.

Lastly, the methods by which we pack are expanding. We now pack in four ounce, six ounces, eight ounce, one pound clamshells. We pack in one pound, three-pound bags, and we’re now selling to both retail and institutional clients. Our goal is that every ounce every lease of salad is packed and placed in premium packaging to premium clients. With regards to strawberries, strawberries grow, of course, on plants. There’s a flowering and a natural cycle of strawberries. Strawberries can be grown from rootstock or can be grown from plugs. The varietal that we chose was a UC Davis variety given to us by or selected for us by Mastronardi. It produces wonderful fruit and – but strawberries can be a challenging crop. They’re not free of either pest or sometimes disease.

And as a result, we had to remove about 7.5 acres of strawberry production due to a broad might that was brought in at propagation. Going forward, like the learnings we had in Morehead, we’ll test – we’ll test the seedlings prior to entry into the greenhouse. In addition, it’s given us the opportunity to trial the equipment for cucumber production as we move through the quarter in anticipation of a volume.

Jacob Henry: Great, that’s all great information. Thank you. On a different note, how should we think about modelling SG&A in 2023 mindful of where you finished the year as well as other factors like labor costs and cost improvements?

Loren Eggleton: Yes, so just in terms of general P&L timing. So as we announced today, expecting net sales of $40 million to $50 million for the year and at this time, we would expect that Q2 will be the highest sales quarter of this year followed by Q4 and then Q1. And then lastly Q3, which has historically been our lowest sales quarter of the year, because of the summer refresh and the buying crops. We would expect that cost of goods sold slightly more than doubles from 2022 as we increase production in three new farms. However, and to your question, on SG&A because of the restructuring actions that we took last year or throughout last year, we would also expect that SG&A should decline by nearly 40% to 50% from 2022.

Jacob Henry: Okay, thank you. And then last one from me. Regarding the enhanced relationship with Mastronardi that was mentioned earlier, can you provide additional color around what deeper synergies with Mastronardi could look like?

Jonathan Webb: Yes. Brian, this is Jonathan. Just to kind of layer on what Tony was saying a moment ago, we’re deepening that relationship. I mean, to put it in perspective for the industry, AppHarvest had nothing three years ago, and now we have the second largest footprint of CEA facilities in the U.S. and the only party with a larger footprint in the U.S. is our distribution partner, Mastronardi. So – and Tony’s previous employer, where he was CFO at Windset, is roughly tied with us on second. So around the table, we make up a vast majority of that production in the U.S. And so for us, it’s far more than a transaction with Mastronardi and they’re not just selling our product. And I think showing what the deal we announced in Berea is just a glimmer of that, which is they want to see us succeed in a market where interest rates are going up and capital markets are tight for us to be able to get 7.5% infrastructure dollars on a sale leaseback of that facility shows the types of conversations that are happening with Mastronardi, But yes, Tony is taking his experience he’s executed on previously at Windset, bringing that here and then helping us figure out how can we best optimize this relationship with Mastronardi where they do have deep experience all across Mexico, deep experience in Canada and what can we use to leverage the farm network we’ve built and the experience they have to optimize these assets and get to profitability as quickly as possible.

But I would say you’ll continue to see us pushing that Mastronardi relationship forward and what you saw in Berea is just a signal of what we’re working on with them.

Tony Martin: It’s Tony. I think from a farm perspective, the advantages we have with Mastronardi are they themselves are farmers. They help us with a varietal selection. They provide expertise in crop maintenance, crop management, crop services work. They assist us in the analysis and design of productivity bonus. They have provided guidance on such matters as crop care, but also in terms of the types of certifications we have to undergo in order to meet the quality specifications of customers. They have an incredible team of growers that they make available to us to help our growers deepen their understanding and knowledge. And so, the advantage of someone like Mastronardi from the perspective of our productivity and our production is they bring years of experience that we can parlay that experience into the benefit to AppHarvest, enhancing and strengthening the understanding of our crew here.

Jonathan Webb: Yes. And just – and with a specific note Brian , I mean they’re sending large groups of their executive team down to Kentucky on a regular basis, sitting in the middle of our facilities with us. So it’s, again, far more than a sales and distribution relationship. It’s something that we’re trying to heavily integrate as we go from not just one facility and one crop type, but a whole host of variety of crops and tomatoes and now strawberries, leafy greens, how can we best integrate and optimize for the facilities we have, and that’s going to be something where we try to deepen and strengthen that relationship.

Tony Martin: In terms of enhancing our communication, we have weekly, sometimes daily meetings with them both on-site and in Zoom and we speak specifically to their operating team. It’s a great advantage for us, especially as we start up and roll out these new operations.

Operator: And thank you and one moment for our next question. And our next question comes from Ben Theurer from Barclays. Your line is now open.

Ben Theurer: Perfect. Thank you so much. Good afternoon. First question I have is as you change going forward, the reporting because obviously, now you have a more diversified portfolio. How should we think about the contribution, particularly to your guidance of $40 million to $50 million revenues this year? How much is to come from which, call it, sub-segment, tomatoes versus berries versus leafy greens, just to get a little bit of a sense of the magnitude here that would be my first question? Thank you.

Jonathan Webb: Yes. So we’re not hey Ben – we’re not going to give guidance by produce type, is not for this year, but I think it’s fair to assume for this year that tomatoes will make up the vast majority of the net sales for this year. We are going to have salad greens, strawberries and cucumbers, and I would expect that it could be in that order in terms of magnitude. But I would expect that tomatoes could likely be at least 50%, if not more, of the net sales for this year.

Ben Theurer: Okay, perfect. And then just to understand a little bit the balance sheet and where we’re at. I mean, obviously, a lot of things have moved since the fourth quarter and what you’re showing in terms of cash, restricted cash, you had the capital raise, which was almost $40 million income. But if you would have to like kind of think of like, okay, maybe last Friday, where do we stand on cash versus restricted cash? And as we’ve seen in the first facilities, I mean gross profit continues to be negative. So just to understand how that evolves now with four facilities because that’s not an SG&A dilution yet, but how should we think about the losses and how it impacts the cash burn rate?

Loren Eggleton: Yes. So I would say, as we think about ending the year with $54.3 million cash, we raised $43.1 million approximately net on the share offering. We announced – we’ve got about $60 million to $65 million remaining in CapEx. Now I guess, what may not have been clear in the prepared remarks is only about $40 million to $45 million of that CapEx range is what we would expect to use and unrestricted cash. And we’ve got a $9.8 million holdback on Berea as part of the sale-leaseback transaction for the changes in enhancements, $7.9 million in restricted cash for greater about as of the end of the year for completion of the Somerset project and then about $2.4 million that was in escrow for the completion of the Berea EPC contracts so maybe about $40 million to $45 million of unrestricted cash from the beginning of the year to finish out the CapEx. But I would say – with the recent share offering, plus the potential sources of financing to get us through the end of the year.

As you’ve seen with Berea there’s interest in the sale leasebacks on our facilities. Since we announced Berea sales leaseback, we’ve had some inbound interest, and we’ll continue to evaluate additional sale leasebacks as a form of non-dilutive capital.

Ben Theurer: Okay perfect. And then my last question, I guess, that one is most likely more for Tony as it comes to the ramp-up and have all the people aligned and as you’ve nicely laid it out in your prepared remarks, but what also was within the press release, one of the things that just came to my mind was around this enabling labor efficiency. And clearly, that’s been one of the issues you had at the beginning? So Tony, from your experience, maybe help us understand what you think needs to change. What do you think needs to be implemented in order to make labor more efficient and to ultimately be at that gross profit positive, which I think is a lot related to some of these inefficiencies?

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.

Tony Martin: I can talk to that. Yes, we implemented this or I implemented this elsewhere with the team. And we saw an immediate savings. Now I haven’t extrapolated this yet AppHarvest, but we saw immediate savings in in the labor for — in the labor cost of between 20% and 30% as a result of the productivity bonus that we put in place. And the reason for it is the benefit that accrues by higher efficiency has delivered one-third of the benefit is to the payment of the staff. One-third of the benefit is to the payment of the system and one-third of the benefit being the savings is to the benefit of the company. We have to model that for AppHarvest, and we have to determine the level of efficiency and productivity within the staff that we can achieve.

Loren Eggleton: And so what we kind of laid out in terms of the adjusted gross profit positive next year, the adjusted EBITDA positive for the farm operations in ’25 and then on a consolidated basis in ’26, kind of lays out how we think about the four farm network. Now I would say Morehead, if we start all the farms from zero from day one, Morehead probably takes the longest just because it was the first one. I think what we’re seeing so far and Tony, feel free to chime in on this. But with Richmond, in the first, call it, two months now of harvesting there, we’re seeing that things are better there starting out on its first harvest then certainly then what we saw Morehead when AppHarvest started out. So we would expect that Richmond would have a much shorter ramp-up curve than Morehead.

And I think it’s also one of these things that we kind of talked about on early on about having training people at Morehead and being able to move them out to other facilities to help with that ramp.

Tony Martin: So one of the things we talk about under Project New Leaf is improving the enterprise-wide feedback. And the way we do that weekly, and it’s a great deal of work, but weekly. I have a meeting with each farm and the farm personnel that attend the meeting are the General Manager, the grower, the ICM manager, the facility manager, the packers’ manager, and the crop labor supervisor. With regards to the four farm meeting where we share ideas, share advantages, share new trials, share the opportunity for improvement. We have a four farm meeting weekly where we go through and we discuss the performance in detail of each farm where we look at things like productivity and yield and percent compliance and the measures of a business that matter.

Lastly, I met with the executive to discuss the very same information consolidated and aligned from the perspective of the company. And so by sharing information by sharing approach by training people, given the opportunity to train people in Morehead and then bring them to Richmond, accelerate the process that we saw in more head, we accelerated in a greenhouse like Richmond.

Kristen Owen: Great. Thank you for the color. Really appreciate it.

Operator: And thank you. And I’m showing no further questions. This concludes today’s conference call. Thank you for participating. You may now disconnect.