APPH - AppHarvest: Faces Liquidity Bottlenecks Even As CEA Revenue Explodes

2023-05-12 18:11:51 ET

Summary

• AppHarvest saw revenue grow by 150% year-over-year for its fiscal 2023 first quarter as three new controlled environment farms came online last year.
• The company's guidance for revenue to come in at not less than $40 million for its full fiscal 2023 has placed its forward price-to-sales multiple at 1.53x.
• Losses and cash burn present a continuation of the paradigm that has placed AppHarvest's future at risk.

AppHarvest ( APPH ) just reported its earnings for its fiscal 2023 first quarter. Revenue of $13 million was up 150% over its year-ago quarter as it expanded its controlled environment farm network by an additional three farms in the prior year. Commercial shipping of tomatoes, cucumbers, salad greens, and strawberries is now ongoing from its four-farm CEA network. CEA always held a distinct promise backed by its material sustainability credentials that have so far failed to be translated into concrete shareholder value creation. AppHarvest is down 30% year-to-date and now trades below Nasdaq's minimum listing requirement to open up another specter of risk for its shareholders.

Short interest in the company remains high at 15.7% with bears betting that current losses and cash burn translate into a continuation of near-term price weakness. However, with revenue for 2023 now guided to be in the $40 million to $50 million range, the current market cap at $76.5 million has opened up a price-to-sales multiple of just 1.53x if we use the top end of AppHarvest's revenue range. Hence, is the company now a buy? No. AppHarvest is guiding for adjusted EBITDA losses to be in the range of $67 million to $76 million for 2023.

Continued Cash Burn Forms A Liquidity Problem

AppHarvest is firing on all cylinders operationally as the company transitions from the buildout phase of its story to focusing on operations. This should clear a path to profitability. Sales during the first quarter reflected a new diversified crop portfolio that included tomatoes, strawberries, salad greens, and cucumbers. Critically, this should help provide a hedge against the price oscillations of a singular commodity.

Tomato sales at $10.97 million formed 84.4% of total revenue and an increase of 112% over its year-ago comp. Strawberries were the second-largest crop sales at $1 million. It's important to flag that the bulk of these sales were made to a single distributor, Mastronardi Produce, under a purchase and marketing agreement. Whilst Mastronardi has helped AppHarvest ramp up its CEA operations by providing industry knowledge, this dependency does create a unique type of concentration risk. Total debt as of the end of the first quarter stood at $178.82 million , down slightly sequentially from $180.54 million in the fourth quarter. This drove a quarterly interest expense of $2.7 million.

The company currently operates four CEA facilities in the state of Kentucky; a 60-acre flagship tomato farm in Morehead, a 15-acre indoor farm for salad greens in Berea, a 30-acre farm for strawberries and cucumbers in Somerset, and a 60-acre farm for tomatoes in Richmond. The four-farm network consists of 165 acres under glass. Crucially, AppHarvest should be able to grow around 1.5 million tomato plants through 2023 at any time. This construction of this network was flagged by its management as the largest simultaneous CEA buildout in the United States.

The 2023 Outlook Against Efforts To Raise More Funds

AppHarvest's large debt balance represents another spectrum of risk. The repayments on the $70.3 million Rabo Loan, which is collateralized by Morehead, are based on one month LIBOR plus 2.5% per annum. The one-month LIBOR has shot up on the back of the marked rise in the Fed funds rate and currently sits at 5.11%, up from just 0.82% a year ago. Hence, the company faces rising interest expenses from a debt balance that amounts to 234% of its market cap. This set the backdrop for net losses of $33.6 million during the quarter, up from $30.6 million in the year-ago comp but down sequentially from $93.3 million in the fourth quarter.

Cash outflows from operations for the first quarter at $25 million was only a decline of $2.5 million from the year-ago comp. Whilst capital expenditure was down sharply to reduce outflows from investing activities to $21.17 million from $39 million in the year-ago comp, the company continues to realize outsized free cash outflows.

The current risk-off market sentiment will simply not allow AppHarvest to realize a valuation expansion against its current level of losses. The company will have to depend on more stock sales against a collapsed stock price to meet its liquidity needs.

Average shares outstanding is up by 226% over the last three years, with AppHarvest closing the sales of 52 million common shares in February for $46 million in gross proceeds. Cash and equivalents, including restricted cash, ended the first quarter at $73.5 million, to provide enough of a cash runway through to the end of 2023. AppHarvest will have to raise more funds. Against this pertinent liquidity need, it's hard to rate the company as a buy. However, its CEA buildout is truly vast, and with sales set to ramp this year, new opportunities to raise funds could open up. This is a hold.

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