AppHarvest (APPH) builds and operates indoor farms in the Appalachia region, using technology to pursue sustainable farming. It's an early-stage growth company, with revenue growth of over 100% in its most recent quarter. AppHarvest has bold expansion plans, but like all growth companies, in needs capital to realize those plans. Unfortunately, a close look at AppHarvest's financial situation suggests it may not have either the time or the financial resources to achieve its goals.
AppHarvest's Plan
Let's consider AppHarvest's capital requirements. The company has a long-term plan to develop 12 farming facilities by 2025, though it has recently moderated those projections. Management currently bases 2025 sales guidance on only nine of those facilities being developed, but even those scaled-down assumptions look doubtful.
Image source: Getty Images.
Here's the status of the company's facilities, including the farms under construction, as of the end of the last fiscal quarter and with recently updated information from the company:
| Facility | Status as of March 31, 2022 | Status as of July 7, 2022 |
|---|---|---|
| Morehead tomato facility | Operational since October 2020 | Operational |
| Berea salad greens facility | 79% complete | ~ 90% complete |
| Richmond tomato facility | 75% complete | ~ 85% complete |
| Somerset berry facility | 65% complete | ~ 80% complete |
| Morehead salad greens facility | Development paused pending financing | No change |
Data source: AppHarvest 10-Q filing for Q1 2022, AppHarvest update on July 7, 2022.
Where is the cash to resume work on Morehead (and complete the remaining in-process and planned facilities) going to come from? A company typically has two choices when looking to fund capital projects. It can use internally generated cash or cash on hand, or it can look to raise external financing. Let's see where AppHarvest stands in terms of cash on hand and cash-generating power.
The current cash situation
| As of March 31, 2022 | |
|---|---|
| Cash and cash equivalents on balance sheet | $97.6 million |
| Operating cash flow | ($27.5 million) |
| Purchases of property and equipment | $39 million |
Data source: AppHarvest 10-Q filing for Q1 2022.
The cash situation isn't great. Rather than generating cash from operations, AppHarvest is burning though it. At the current rate, the company will burn through cash on hand in about three and a half quarters. The $39 million in property and equipment purchases relates to the construction of the three in-process facilities. If we assume the company continues to spend on construction at the same rate, suddenly that three-and-a-half quarters of cash on hand becomes one-and-a-half. You can see why AppHarvest paused development of the Morehead salad greens facility. There just isn't enough cash to proceed right now.
How about external financing? That's a possibility, but not a great one. The company has two options here: borrow money or issue stock.
Borrowing costs are significantly higher than they were a year ago, when AppHarvest last borrowed cash. So far in 2022, we've seen three interest rate hikes by the Federal Reserve. This translates into higher borrowing costs for companies. Further, given AppHarvest's current debt load of over $156 million and the company's precarious cash situation, banks may be hesitant to lend more.
Issuing more stock isn't an appealing option, either. Over the past year, AppHarvest's stock price has fallen nearly 70%, from over $15 to around $4.50 per share. You want to issue stock, if you must, when your stock price is high, not when the market has cut it by two-thirds. Issuing equity now would be highly dilutive to existing shareholders and would send a bad message to the market. The company does have an existing $100 million equity commitment from an investor, but issuing equity under that agreement would likely still water down existing holdings.
What the future holds
The financial situation for AppHarvest isn't great, and the company doesn't have good options to fix it. In the likely best-case scenario, AppHarvest will complete the three facilities still in process by the end of this year and start producing revenue-generating crops from them in 2023. Hopefully, this turns the situation around enough to obtain financing to get the Morehead salad greens facility back on track. If things work out, maybe the company can get that construction going again by the end of 2023.
Shareholders should understand that failure is a realistic scenario. Cheering on the company from the sidelines seems the most prudent course of action at this point. In the meantime, the upcoming second-quarter report for AppHarvest will be critical. The company needs to provide investors with some good news in terms of additional financing or a reduced cash burn.
Editor's note: A previous version of this article misstated the status of the Morehead tomato facility, which has been operational since October 2020. The Fool regrets the error.
