Agricultural startup AppHarvest (NASDAQ:APPH) filed for Chapter 11 bankruptcy on July 24th, marking the latest in a long line of financial troubles for the struggling company. The company, widely touted by noted writer and now-Senator JD Vance through his venture capital firm, offers several lessons for investors.
But before we explain the story of how hundreds of millions went up in smoke, here’s what exactly made AppHarvest so intriguing to investors?
AppHarvest is an agricultural technology company specializing in indoor farming. It produces a variety of commercial food crops, including tomatoes, berries and various greens. Its technology creates and maintains an indoor climate that, according to the company, uses 90 percent less water than traditional farming methods.
The company also uses robotic harvesting methods powered by artificial intelligence, a fact that briefly drove shares sharply up earlier this year as investors piled into AI stocks.
What Went Wrong for AppHarvest?
The driving force behind AppHarvest’s bankruptcy was the company’s inability to meet the financing costs associated with its indoor farms.
The company’s debt currently stands at $341 million, while the current assets reported in its most recent quarterly report totaled just $110.6 million.
Given that AppHarvest generated net sales of just $13 million in the last quarter, it also had virtually no ability to meet its obligations using revenue generated by its core farming activities.
The decision to file bankruptcy was preceded by several signs of financial weakness at AppHarvest. In June, one of the company’s creditors called AppHarvest’s $66.7 million loan on a facility in Richmond, Kentucky, alleging that AppHarvest had defaulted on the loan terms. This resulted in foreclosure proceedings and a significant cash crunch for AppHarvest.
Management also took extraordinary steps to raise additional cash in the leadup to its decision to file bankruptcy. The company sold one of its farms in Berea, Kentucky, to a partnered distributor.
AppHarvest also sold an additional 46 million shares of stock at $1 each in the most recent quarter. Given that the company’s outstanding share total is just over 155 million, this offering massively diluted existing investors’ holdings.
Beyond its financial woes, AppHarvest has also been the target of investor lawsuits stretching back to 2021. These suits have alleged a variety of reporting errors and omissions that range from skewed workforce retention statistics to misleading press releases.
Other suits allege that operational flaws and mismanagement resulted in as much as 50 percent of the company’s first harvest being wasted.
Following the company’s Chapter 11 bankruptcy filing, AppHarvest will continue to operate its farms as it streamlines its business.
The Berea farm will ultimately be transferred to AppHarvest partner Mastronardi Produce in accordance with the sale agreement reached earlier in the year. The company has also secured $30 million in additional cash to fund its ongoing operations during this period.
How AI Hype Went Up In Smoke
Arguably the most important lesson investors can take away from AppHarvest’s collapse is the fact that market enthusiasm for new technologies can generate runs in even struggling companies.
Early in 2023, AppHarvest shares began to climb as investors bought up shares in companies with AI exposure. Starting from a final 2022 close of $0.57 per share, AppHarvest rose to over $2.60 per share by February before plummeting back to earth in the face of business realities. Today, shares trade at just $0.08.
This serves as a sharp reminder for investors of just how much the hype around AI technology can distort business valuations. While there’s little doubt that AI will create significant value in some areas, the market’s extreme enthusiasm has also carried some stocks higher on little more than wishful thinking of long-term disruption.
Traditional industries like farming may see productivity improvements from AI, but AppHarvest’s attempts to completely change the way crops are grown carried considerable risks. Investors who overlooked these risks have now been saddled with near-total losses, demonstrating how even seemingly good ideas can fail as businesses operating under real-world conditions.
Another key takeaway from the AppHarvest collapse is the fact that it can be wise to sell a stock when new information undermines the original investment thesis.
In AppHarvest’s case, indications of financial weakness and misreporting were commonplace for nearly two years before the company filed for bankruptcy. Investors who sold earlier on were able to exit at higher prices, while those who held or bought as the stock watched their investment dwindle as the company’s fortunes grew worse.
Finally, AppHarvest may provide a broader warning to investors who are banking on high-growth startups that have not yet achieved profitability. The market today is full of small startups with seemingly good business plans. Picking and choosing the winners from this large slew of companies, however, can be extremely difficult.
The concrete data provided by years of revenue and earnings reporting makes analyzing a company’s value far easier, and small startups like AppHarvest can carry considerable amounts of risk due to their lack of established cash flows.
Can AppHarvest Recover?
While it’s far from impossible for a company to recover from bankruptcy, the prospects for AppHarvest do not appear particularly strong at this time. With the company in the early stages of an uncertain restructuring and sales still at such low levels, investors have little cause for confidence.
Adding to these problems is the fact that AppHarvest still hasn’t proven the usefulness of its agricultural model for producing food on a large scale. Given these factors, there does not seem to be a strong argument for betting on the company’s long-term prospects.
That isn’t to say, however, that indoor farming is a lost cause. The global market for indoor agriculture is expected to grow at a CAGR of nearly 13 percent through 2030.
This growth may create opportunities for other agricultural technology companies, especially if climate change begins forces agriculture to adapt to significantly higher temperatures or drier growing conditions. For now, however, there isn’t a company with a clear competitive moat in this market for investors to confidently put money into.
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