Chit Chat Stocks - AppHarvest (APPH) | Deep Dive

Episode Date: June 13, 2021

AppHarvest is a tech-enabled farming company. The company utilizes high-tech greenhouses to grow fruits and vegetables. The company was founded in 2018 and is located in Morehead, Kentucky because of the specific climate needs. Listen in as Brad, Brett, and Ryan dive into what the company does and where they could grow from here. As always enjoy the show! Subscribe to Potential Multibaggers: https://seekingalpha.com/checkout?service_id=mp_1308 Follow Brad and check out his work on Twitter: https://twitter.com/StockMarketNerd?s=20 Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:51) Industry | (7:09) Management & Ownership | (8:50) Valuation | (10:18) Earnings | (11:40) Balance Sheet | (16:46) Our Analysis | (18:50) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. All right, welcome in. This is the Sunday Deep Dive episode. We have Brad Freeman on the show. He's back from vacation. First off, I got to ask, how was your vacation? And then second off,

for the company we're talking about today, App Harvest, have you ever heard of this company? so on the vacation it was good uh 10 days of of pretty not not writing a ton i took three days off of twitter and then my thumbs kind of subconsciously found their way back back to the twitter screen to as they do more as as they always do um this is my first uh kind of experience or or dive into app harvest i hadn't heard about it before and i am a sustainability minor from college. So I was kind of entrenched in this culture almost and what they're kind of doing. So it was interesting that I hadn't heard of it, but it seems like a cool company. Yeah, it should be an interesting look. Definitely not going to be a boring episode today. I'm going

to let Ryan introduce the company. But first, we have to talk about our flagship sponsor, Sponsor Potential Multibaggers. Let me get up the talking points here. So the aim of Potential Multibaggers is to find stocks that can go up 10 times over the next 10 years or compound at 26% per year. So they're looking for those big winners, those potential 100 beggars is in the name, potential multi-beggars. Chris, the man behind potential multi-beggars is always communicating with you and he's picking these high growth stocks to hold them for a long period of time, right? And a little less, this isn't really a talking point, but in order to get to those 10 beggars, I would say temperament is maybe the most important quality. And I think Chris has a lot of

that you can see it and he's communicating with you multiple times a week about this probably about his subscribers yes for sure and he calls this and it's part of his service it's called buy and verify so sometimes you know people might buy something and they might not know what's going down on a year down the line he's going to make sure you understand you know you're able to understand what's happening what happens because of the news release why the stock dropped 10 percent why it went up 10 percent all that good stuff i'll wrap things up by saying if you want to become a multi you can go to seeking alpha and look up from growth to value you can google it should be pretty easy to find there or you can go to at from value on twitter all right ryan you want

to introduce app harvest yeah so app harvest is attempting to be slash sort of already is it's kind of it's in its early stages hopefully they got revenue just a little yeah they do um and they have an operational greenhouse but it's a tech enabled farming company and so as i just mentioned, they have one completely built out greenhouse and it's massive. It's like 60 acres. You can go look at it. There's pictures online, which make it look really pretty, but then there's also videos that kind of go through it. It really is, I don't know if you've ever seen 60 acres of building, but you get a good idea of the scale or at least the size of it. And so this is built in Moorhead, Kentucky. And the reason I think they chose Kentucky, although the founder is also from

there uh is because it's one of the wettest states it's also in appalachians which is close to i think like two-thirds or more of the population um and i think it's the 12th wet estate and so they have a rainwater retention pool that's like 10 acres that's right next to it's like adjacent to the building and so they recycle the rainwater through that or they catch the rainwater there and they recycle it through to use it for their crops and then the uh the actual greenhouse itself uses a glass structure model so they can receive sunlight during the day. Then it also has lights so that it can work efficiently during the night as well. And I guess another point to that, they use 90% less water apparently than conventional agriculture. So that's just

kind of a benefit of having this controlled environment. Other stuff, they actually don't go direct to the grocers or their, I guess, end customers. They use a distributor. I'm blanking on the name it's man master nardi master nardi it's tough name tough name to the prince yeah and they've been in business for a long time but it's a it's their only distributor it's a single distributor and they have standing relationships with uh grocers all over the country so all these costco kroger publics stuff like that and then they also have wendy's um so i guess that kind of gives you a route that they could go sort of the restaurant chain style as well. And then right now they're only harvesting tomatoes. That's what they're using

for their current Moorhead facility, but they have two other facilities currently under construction and they're hoping to have 12 by 2025. And they're going to try to use or try to grow a bunch of vine crops beyond just tomatoes. I think they're starting with cucumbers and peppers. That's what they're hoping to use in the other facilities or grow. But I'll get into the history. Jonathan Webb He's the CEO. He's the founder. He was originally from Kentucky, but he went and worked in the solar industry in Washington, D.C. for most of his early professional years. And apparently, while he was in D.C., he heard lawmakers talking constantly about food imports skyrocketing, and most of the specialty crop production was actually moving outside of the U.S., which, if you look at a lot of the data, it actually has. They put this on their investor slide deck, but in importation, domestic tomatoes, the percentage of those that were imported used to be 41% in 2009. Now it's 60% in 2019.

There's similar figures like that for cucumbers and peppers. A lot of it comes from Mexico. But this gave him an idea to basically come back to Kentucky, build a sustained environment. And he assembled this team with a lot of agricultural know-how. And also, there's a big labor force, apparently, in Kentucky that used to be there for the coal mining and, I believe, tobacco production. But those jobs have since sort of no longer exist. So there's basically this untapped labor source that he's using.

They talk about that a lot. And then I'm not, I'm honestly not sure how they got funding for their first facility. Must have been Venture. I think they had some VCs in that slide back. So yeah, it must have been. Okay. And then they've actually, they announced a SPAC a while back, but they just went public February 1st.

So I guess it's been what, three months, four months now since they've been on the public markets. They have one quarterly report that's been out. Yeah. So that's good. You can look at a conference call, look at an earnings release, see how they're going to do that. All that industry and competition, it's fairly easy to identify.

the estimates are for the U.S. fruit and veggie market to hit over a trillion dollars in annual spend by 2025. Now, these are outside research estimates, but they back in a CAGR or compound growth rate of about 13%, which seems optimistic, but we'll see. I mean, either way, it's a gigantic market opportunity. However, App Harvest identifies a $6.71 billion, you know, quote, tam here for leafy greens i'm not exactly sure how to use that information but i mean you know people are going to eat fruits and vegetables and that market is kind of growing over time the tam is obviously large yeah i mean i don't know what it's fragmented but it's large yeah it's it's kind of hard to it's hard to do anything with that information because they still have to

execute uh but some other indicators for increased demand for products that app harvest likes to sell or is planning to sell so plant-based or similar diets are growing at a rapid rate in the u.s i think it's up about 600 over the last few years and then some competitors there's tons of them but they include someone like fresh del monte produce nestle sun kiss there's a ton out there do those do the controlled farming as well uh no no i'm stuck i don't think many people at all do that there's some controlled farming in the netherlands i'm not sure exactly direct competitors in that regard. Um, but those are more standard. Yeah. I've heard that's like a huge market for controlled farming. Uh, and they talk about, uh, the CEO constantly being in discussions with the

Dutch government. Uh, so I guess maybe he's leveraging their know-how, but, uh, Brad, you want to hit management? Sure. Yeah. That, that 13% CAGR number is pretty, pretty shocking to me. I mean, if they're, if they're calling that the fruit and vegetable market, I'd be kind of surprised if it was growing that far in excess of our GDP growth. But I guess it would make more sense if it was that controlled farming that we were talking about. But I'm going on a tangent. So off to management. So the founder CEO is Jonathan Webb. His LinkedIn picture, I found this interesting, was him in a jean shirt and a baseball cap. He loves that look. He's really embracing that persona for sure. As Ryan kind of went into, he previously led a solar energy project

in a public-private partnership with the Department of Defense, the largest one they'd ever done for solar energy at that time. He seems to be pretty deeply ESG motivated in terms of sustainability and then how we kind of talked about leveraging this labor force that has been maybe left behind. He seems pretty darn passionate about that as well. He's only 36 years old, so he could theoretically be there for a very long time. The president is David Lee. Interestingly, he was a member of the board of directors and then they kind of promoted him, I guess you could call it to president, not really a promotion, kind of a change. He's the former CFO and COO of Impossible Food. So that was, that was interesting. We talked about Martha Stewart being on the board of

directors. She, she got a pretty sweet equity deal. And then good for Martha. In terms of ownership, 12 directors and executives combined own 39% of the company and Webb personally owns 18.7 so he definitely has a lot of skin in the game at this point in time that's it yeah and it's a tall task with these specs trying to find out who owns everything is that like did you find it like on whale wisdom or do they update anything on the 10q yes they uh they published a pretty detailed s1 um after or maybe not not s1 but it seemed like i mean it was 200 pages it felt a lot like an IPO prospectus where we got the ownership stake and we got what they do in a shareholder letter. So that's where I got the information from. So it should be pretty accurate.

Okay. Okay. Yeah. I was just trying to check because I was having trouble finding that. So it's a good resource if anyone wants to look at the company. I'll hit or go ahead, Ryan. There is also a pretty hefty performance stock unit package for Jonathan Webb. I believe he gets up to 3% of the outstanding equity upon, I forget what the date was, but it bests over the next or the coming years. Okay.

That seems, you know, it's reasonable if they can execute. Hopefully it's on executional roles, not just, it's going to happen. Well, it's performance stock units. So I guess, but they better be performance. Based off the benchmarks.

They better, yeah, they better be high performance. All right. I'll have valuation. Market cap is $1.84 billion. Ticker is APP8. So they've gone from that SPAC ticker to the actual app harvest one enterprise value is closer to 1.5 billion however the cash buffer

within that enterprise value i think is on pace to disappear quite rapidly so i'd really use the market cap here uh they just got to revenue so they have no value wait excuse me valuation metrics to speak of but based on their projections and again this is a spec so the estimates are estimates, they're predictions. They trade at 4.75 times their 2025 revenue estimates. Del Monte, which was kind of the closest agricultural competitor I could find, is at an EV to sales below one. So still at a premium of what they're projecting. And then the most important thing I think for the valuation here is trying to consider what the future dilution and debt will be. Both are probably coming. It kind of depends on where the

share price goes uh but they're they have some debt coming and that that's going to be a big part of the story here yeah and i mean the thing that's kind of strange is that they aren't they're not financing the new projects with shares or like equity issuance they're using debt right that's one of the concerns i had is they raised 500 million dollars i thought that was going to be for all these farms but they bought a root ai which i guess That's that's you're going to get into that too, Ryan. I don't know. Yeah. I don't know. That kind of surprises me. So I wonder where that, I guess, uh, dilute dilution would come from,

I guess just stock options to employees. I talked about every employee has stock options. So yeah, they need to raise money in some form. I'm not, I'm not, I don't know what they're going to do, but they're going to have to do it. All right. Uh, is it, is it me for earnings? Yep. All right. So they had, there isn't a whole lot to talk about. So they had 2.3 million in net sales for Q1. So they just started harvesting tomatoes this quarter.

So that's why the sales, I mean, it's up infinity percent. Yeah, that was the coin thing. They had it up infinity. It broke all the charts there. Yeah. And they sold 3.8 million pounds of tomatoes. Okay. So I did a quick sort of back of the napkin math.

I looked how much does a pound of tomatoes cost? And people typically said apparently like $1.96 or something like that. Uh, and so obviously they have less in sales than they have in pounds of tomatoes, uh, sold. So are you sure that I've seen their low cost provider? Are you sure? Yeah. Are you, there could be an issue there if that's what the consumer is buying versus

what app harvest is going to the distributor, the distributor goes to the grocery store and the grocery store goes to consumer. There could be some jumps up in price. I'll check it at the break. Um, but I thought it was how much is going to the grocer. are buying it for. But they do have negative gross margins right now. Gross loss was four and a half million. Obviously, the goal is that that's not perpetual. But they're launching a lot of commercial operations, sales, training new hires. I think they went from 20 employees to

500 employees. So there's going to be a lot of expenses recognized early on. And then they had a net loss of 28 and a half million. They're a bit of chronic adjusters. They tout EBITDA number. I mean, they don't even really count it because it's pretty negative as well. But did you guys see free cash flow before growth? Did you see that in the prospectus? Brad, did you see that chart? Yeah. I mean, that was, yeah, that was, that was pretty interesting. I'm not sure. I've kind of, I mean, before we spend on anything. So that was like, this is the cash that we're to do operating cash flow minus capex plus capex all right guys just say it's operating cash yeah and the other part i wonder though because the honestly the sort of executive team felt a little

more conservative than that when you read the conference call commentary but i wonder how much of that comes from the sponsor encouraging it's part of the yeah the spac they're gonna get multiple on that stuff like that uh anyway they acquired a company called root ai in the first quarter as well. They talked a lot about what it does, but it's basically using artificial intelligence, which we hate that term here, but using artificial intelligence to hopefully enhance their crops and make the greenhouse a little more efficient. And then guidance, they did reaffirm their revenue guidance, which is good. It would suck if they downgraded their guidance after a a single quarter. And now they got the, as you know, they're in the real, you know, they got

regulations, more regulated. So you can trust that. And they're expecting net sales of 20 to 25 million for the year, obviously, as capacity expands, that should go up. It's not free growth, but there would be growth. Yeah. Brad, do you want to hit balance sheet? Sure. So the merger boosted cash position. They are, they're burning through cash as we went over. So it's gone down a little bit since then. But from from 20 million to what they have now is around 300 million in in completely liquid cash. So the SPAC merger, it did clean up the balance sheet to a certain extent, as they all do. They had about 30 million in debt that was converted to stock when it was closed. Their interest expense went from six hundred eighteen thousand to zero.

But I mean, while they have no traditional debt to speak of, they do have 31 million in accrued expenses and accounts payable. they do have $30 million in what they call private warrant liabilities. And they also bought Moorhead Farm for about $125 million recently. They took out $75 million in debt at roughly 4.5% interest. So that wasn't included in the most recent 10K in terms of their debt, but I'm sure it'll be in the next one. They're looking to raise another $200 million to finance what they call CapEx. What Ryan talked about with the root AI acquisition was 60 million total, 10 million in cash and 50 million in stock. So the traditional debt is coming, I think, and it'll probably continue to come as this company stays in hopefully hyper growth mode for a very long time.

And just an interesting note from the latest 10Q, the company thinks they have cash on hand to fund operations for the next 12 months. So I mean, I was kind of hoping that they would have said maybe 24 months or 36 months um but i but 12 months i mean it's it's not zero months so so thank you for that that piece of information app harvest and good to know yeah that's a that's an important note um thank you for finding that yeah they need money or they will need money how they choose to get that uh remains to be seen yeah it seemed it seems like so far they're gonna go through debt but you know if the stock does well they'll probably will hopefully use their share price is a little bit of a currency too all right let's hit the ad break and then we're going to

talk our opinion on the company anecdotal evidence and then we're going to go through the new topic or sorry segments bull case bear case that should be exciting cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply all right welcome back in ryan you were trying to look up a little bit what we paused there did you find anything on the tomatoes uh

So that price that I mentioned earlier was retail price. So that's how much the consumer is buying it from the grocery store. I don't have any pricing on the, is that considered wholesale pricing? What I was selling to the distributor, I guess, I don't know what the proper term is, but yeah.

So exclude that number. Yeah. And you should hope that that number comes down over time. If their tech is as good as they say it is. All right, let's get to the next segment. Anecdotal evidence, any customer stories,

Brad, anything here nothing to report uh as i kind of said i was i am i do i am a self-proclaimed tree hugger and did did minor in sustainability in undergrad but but um this is my first uh kind of experience um looking into the company yeah and you're in the that 70 percent for like are close to kentucky market or appalachia so you might be able to check out some products soon uh ryan what do you have on anecdotal uh nothing because they are primarily selling on the east coast right now i believe um but the video there there was like a video that went basically follow jonathan webb through the facility was interesting although that kind of stuff can be misleading

as uh a lot of trouble yeah as any nicola shareholders uh might know so that is the big concern here yeah take that with a grain of salt but it's also worth watching uh to get like a grasp on the scale or the size of the facility yeah and i checked out the root ai website did you guys look at those videos at all do you not that it seemed like pretty good stuff but that's kind of an important thing if they're really gonna if they think that the robotics with the root ai stuff is going to help them get better profit margins you kind of got to check that out see if it's legit it seemed like pretty good pickers but you know they're not going to show like the robots being bad um all right i guess i'll hit my anecdotal evidence i watched the

cnbc interview with the ceo at martha stewart which is about a 10 minute clip very interesting it was a bit of a turnoff because sorkin uh was interviewing him and he basically asked he was like all right look you got no revenue right now it's pretty plain question he's like how do we value this company and then he got all worked up kind of went into some sort of pre almost like a preacher mode where he was like this is the future we're building i don't know that that stuff turns me off i mean yeah they have a real product but you know it has to be hard to i mean this is on them because they went public but it has to be hard to answer questions about valuation when you don't have financials to really show well yeah it is tough

but they decided to go public and i'll be honest i was not a fan of their answer but it doesn't mean the company's bad or anything like that um all right next up is future growth opportunities brad what are your thoughts here yeah mine's very very macro global uh motivated so i think climate change brings with it a severe intensification of weather and climate systems um this makes growing food outdoors a lot more unpredictable and a lot more challenging and a lot less successful in most parts of the world. So I think that just innately favors what App Harvest is doing and provides kind of a really sustainable and durable growth runway for somebody like App Harvest to take advantage of remains to be seen if they will, but the

opportunity is there. Yeah, that makes sense. There's definitely a global or macro economic tailwind for them. And there is one right now. And it seems like a pretty safe bet that that should continue into the future yeah and they they even talk about that a lot as well and i i think controlled environment farming is probably the way the world's heading yeah i don't think the ceo is wrong about that yeah they for certain crops yeah i don't know they talk about it's a complicated industry because like they talk about you know climate change and all that stuff it is a good it is probably going to create more demand for stuff that but they talk about the wildfires in california you know that that's more of like

a forestry whatever we don't need to get into that you know there may be uh they may be a little disingenuous with some of their claims but they're definitely right directionally i'd agree with that uh i guess for me future growth opportunities the path the growth path is pretty much laid out here uh it's clear it's not very complicated at all um continue i think i don't know if it's fully operational but continue uh expanding capacity within the first greenhouse if you haven't uh make that thing fully operational and then replicate that exact same process at your other greenhouses uh that you're currently building once you have one i imagine it's a little easier next time. I would think the inputs that would have to change are more just like light exposures

slash water intake for the plants. I imagine that's pretty easy to control. I don't think a lot has to change there. Building out new foods that they harvest. So I think the big ones they talked about were cucumbers and peppers. I see no reason why they can't move into that stuff as well. Yeah. Yeah. That makes sense. I'll hit mine. I mean, it's really just getting the products to market they they had two million in revenue last quarter but in reality they're scaling up quickly we need to see them prove over the next few years here that the product works that the facilities work but then outside of that i think there's a sneaky one that this is a huge candidate to get giant government subsidies and if you're listening to this you might not agree on that

like morally or something like that and you wouldn't vote for it maybe but it's a huge potential for them we've seen it with the solar companies electric vehicle companies i wouldn't bank on it happening or invest because of it but i mean this guy's connections to dc i'm talking about the the founder jonathan webb they were kind of touting the un council coming by uh which seemed to i don't know how much that actually means but it seems like they're trying to establish a strong relationship with the government and they need a lot of funding so government subsidies could help them um ryan i was looking for how many times it says esg on the s1 but i don't find anything uh okay oh well let's move to highlights and lowlights brad what do you like

don't like about this business starting with lowlights to me this is essentially i mean it is a late stage venture capital investment um trading in the public markets their gross profit margin is was negative 200 last quarter um just just to give you an idea of how i and in my opinion, how long they have to go to be, to be a real legitimate, sustainable, durable business. There's so much execution risk left here. I own a company called Nanox, which, um, this, the, the stage that this company is in kind of reminds me Nanox, but, but I don't know, maybe, maybe the excitement of, of what they can do if they, if they pull it off and if they execute isn't, isn't as compelling to me. So, so that would be the low light. And I guess the highlight

is the space that they're operating in. I mean, there are a lot of reasons to move more and more agriculture indoors that we've kind of highlighted before. So if this is real and if management is capable and if their products are creating real value, then yeah, over 5, 10, 15, 20 years, this could become something very real and could provide a ton of upside. So my highlight is you don't, and this is, some people will think maybe this is a backhanded highlight, but you don't need to own a lot of this today. You need to own very, very little of this today in order to really reap the rewards over the longterm. And I think that that's the way to approach it. So that would be my highlight. Yeah. I think we can all agree here. High risk, high reward, no matter how you're

looking at this, at this company. Yeah, no doubt. And I, it's also worth noting, like it's a business that was started a couple of years ago and has essentially gone scorched earth with their growth strategy. So there will be blemishes. They spend a lot of money. Yeah. There will definitely be some flaws in the business. And so I guess that kicks, I'll start with my highlights. I guess that there are macro tailwinds. They have a good narrative going for them as well. I mean, you think about where the world's heading, You think about bringing in that production domestically, less import costs, stuff like that. That's great. And so far, the first facility looks pretty cool. It looks like I would say maybe I'm getting Trevor Milton here, but that video seemed legit. Lowlights for me. There were a lot of red flags with the CEO. I think he started crying in an interview. I don't know if it was fake crying. i worry about the people i just worry about that type of stuff the the religious figures maybe i

just watched that we were documenting and staring me but that stuff always doesn't like it just turns me on you know it yeah and maybe he's just overly passionate but that can even be sort of a double-edged sword as well uh and then there was a lot of promotionalism over esg if you look at their investor decks, which is fine. And he did work in solar, but then they also bragged about the low cost of utility, which comes from being that close to a natural gas pipeline. Okay. So little hypocritical, I thought there. And then there's also a lot of promoting of the stock on the investor decks. Obviously that's what the investor decks are for, but they just hired like a new head of investor relations too. I don't know if that's the kind of person

you've got to hire early on. Jeffrey Ubin, it might be Ubin, serves on the board. He's been on the board of directors of Nikola since inception. They currently have a non-compete clause outside of Kentucky and West Virginia with their only customer. So the customer concentration risk is huge. If there's anything that happens to that relationship, I don't know what happens to the business model. I don't even know if the non-compete clause extends past the termination of the relationship, but I'd love to see that contract. Yeah. I remember Brian Feroldi and Brian Stoffel who do kind of a similar show to this and they covered App Harvest and they were saying that as well. Before they were going to invest in this

company, they'd have to look at that contract. And I would recommend that as well. Check out that contract, see all the details, stuff like that. All in my highlights, sounds innovative. And if they're right, they'll be doing billions and billions in revenue within a decade because they can get those they're touting um 30x yields of a traditional per acre kind of deal and if they're right i mean that's going to be huge and it's going to work but we don't know yet um and then i like david lee the new president that came on who seems to be taking over the operations if the conference call is any indication he seems good seemed like he knew for sure yeah we'll see what happens. But man, yeah, just having an operational guy experience kind of takes away

some of my worries a bit, although they're still there. Lowlights, I'd say there's a lot for me, but I'll highlight one specifically that you guys haven't covered because I agree with all the ones that you had. So they're expecting a cost of capital for these new term loans, mortgages that Brad was mentioning on these facilities to be about 4% to 5%. And then even with their optimistic profitability numbers in the SPAC, I'm really skeptical if return on invested capital can be greater than this cost of capital that they're touting. And then while the root AI acquisition seems smart, it obviously fits into their product strategy, I'm not really sure the ROI of these robots to pick produce are at the levels yet

where it gives AppHarvest any sort of cost advantage. Just for reference, like in undergrad, I did engineering and one of the classes to do is called like mechatronics which is the combination of mechanical and electrical engineering and it's the hardest thing to do these problems of like getting manufacturing units and robots to pick things are probably the hardest problem there it's it's an extremely hard problem there's tons of variables you have to combine electrical mechanical and computer science i mean it's just a really difficult task and i'm not sure they're going to get a good roi on that but with that being said i hope they prove me wrong and then i'm kind of rooting for this company to

They talk about, yeah, obviously, anytime you're looking at SPAC, you have to be squinty-eyed because you kind of have to read between the lines. There is a lot of fraught and rosy projections. But they also, David Lee came on and talked about return on invested capital numbers in the conference call. And he thinks, obviously, he might be a little biased, but he thinks it can dramatically exceed that cost of capital. Those are adjusted even to them. I don't think so. So they're touting that in the investor name. Could have changed.

So as someone entrenched in SPAC land a little bit, I have four of them in my portfolio. They pretty freely call adjusted EBIT a profit and profit adjusted. So you guys could have heard the exact same thing and just translating it differently because quite honestly, they use them interchangeably sometimes when they shouldn't.

Right, right. Yeah. And I don't know if they are using adjusted EBITDA here, but I would check on that. The ROIC number they were touting was like 12% to 16% on adjusted EBITDA before they bought this root AI thing. Now they're blowing up to 20%. There was something that said north of 40%. Oh, that was, no, that was, again, another disingenuous thing. It was return on invested capital.

It was like before financing. I was like, oh, look at that. That's part of it, guys. That's part of it. I can't remember the exact number they're using, but I was like, what? No. What are you guys? You guys aren't software.

All right. Bull case, bear case, new segment. Yeah. So, Brad, we're still feeling out this segment, so just try it out. What kind of bull case do you see with our harvest to succeed here? Sure. Bull case. So, I think it's clear that climate change is going to continue driving more and more

demand for what they're doing. So if the key performance indicators or KPIs or whatever you want to call them, if they can maintain lower water consumption or a lower spoilage rate or less fertilization usage, then if there are sustainable trends here where they can say we're 10% better than all of our competition with this, this, and this, then yeah, this opportunity is absolutely massive. this company is going to be huge over the very long term, and it will be very lucrative. I think that's a big if, but it's an exciting if, for sure. Yeah. We were debating just before this whether the returns on invested capital were legit, but if it is as legit as they're saying, they become the low-cost provider, there is a long runaway to reinvest and generate profits. We'll see. Ryan, what about you? What kind of bull case do you see for App Harvest to having to succeed all the time. Yeah, there is a very wide spread between

the bull case and the bear case here because the bull case is they are a much, much bigger company than what they are today. They're supplying fresh, superior tasting produce across the entire country to grocers and restaurant chains. They successfully have built out several fully operational greenhouses that are tech-advantaged, I guess, and they have the benefits of not being conventional agriculture and having a controlled environment. Also, I would imagine that as they prove themselves, the cost of capital shrinks. If they have a whole bunch of revenue and cash flow behind them, then they probably don't have to pay as much on interest rates to finance new operations. So that's the best case, I would say.

And you can see it. If you put on rosy glasses, you could see that happening. But like I just said, it takes rosy glasses. Definitely optimistic. There's a lot of upside if you're optimistic about this business. Yeah, I'll hit mine. So if they're successful, I think the technology has to be legitimate. they have to get that 30x yield enhancement or anything kind of close to that not it doesn't

have to be exactly 30 which allows them to achieve a scale advantage and then if i think they achieve that scale advantage they can sell like organic produce and kind of the stuff that a lot of consumers want for less than what regular produce goes for and then customers will end up to these products and like we said this will really create untapped demand if you're very optimistic over the next decade. That's kind of the scenario you got to hope for. But now let's go back to the bear case. We don't have to be a little pessimistic here. Brad, what are your thoughts? What could go wrong with this company? Sure. We've highlighted that the balance sheet is not in terrible shape, but it is not by any stretch of the imagination pristine and it's

getting a little more stretched. And so I think that if, I mean, if this big if bull case that I just gave out isn't accurate and they aren't really special in how they can, how they can drive lower water usage or, or, or less soil erosion or whatever it is, then somebody like Scott's miracle, miracle grow or somebody else, if the opportunity looks attractive enough or lucrative enough can just come in and outspend them really, really easily. Um, so that that's, that's the bear case that, that a big boy just comes in and builds 50 of these greenhouses all at once and just overwhelms what app harvest is doing. And I think if these key performance indicators aren't sustainable, if these leads aren't sustainable, that's probably

going to happen. Yeah, that's a good point. If these greenhouse type, and I know they're more than just a greenhouse, but these indoor farming, sorry, is the proper term. If they're really just commodities, then there's no advantage to app harvest where you're right, a company with a lot of money should theoretically be able to come in. But if they got something special, then it might not be repeatable, but we'll see. Ryan, what do you think? What could go wrong with this company? Well, there were a lot of yellow flags slash red flags that I talked about in my low light. So if those turn out to be significant red flags, that's a problem. Also, I mean, they're not inventing a new food here. So these grocery chains have existing suppliers. So they have to go in,

they have to sell to them and get them away from their existing relationships. It sounds like they have a compelling pitch, but obviously that's not a guarantee. So I guess a bad scenario is that they have unused facilities or unused capacity, or they overproduce and there isn't enough demand to meet their financial obligations and they declare bankruptcy or they dilute perpetually. Or they get taken out at 80% drawdown by a private equity firm or something like that. Yeah. I mean, I guess they own that Moorhead or they're trying maybe in the process of owning that Moorhead facility, which is good, but there's obviously a lot of financial risk here. Yeah. And I feel like we're underestimating how difficult it is, or how many, I guess, there's a lot of things that people are overlooking here. What if there's some sort of cataclysmic events, or some, I guess, chemical that, you know, we have sort of a, what's it called, ice juice billions scenario?

Oh, no, you're thinking more of like a natural disaster, realistically, right? yeah or uh like a chipotle equal light kind of thing that just totally ruins uh the reputation entirely i guess okay that is that is far-fetched but i think there's a lot of execution uh that people might think is easier uh than it might really be yeah i didn't think about that with it all centralized one thing goes wrong that's tough but maybe the risk of that is lower than we think i mean i guess that's the benefit of a controlled environment so yeah but Yeah, they talk about the nanobowel technology too, which if you read that, that's just oxygen. All that into mind, bear case, heavy dilution in capital intensity could really be a major

headwind here, and that could hurt per share like the cash flow growth. And then if the product just ends up being a commodity and highly replicable, the tech advantage that they're touting really might just lead to higher input costs and then no savings for the actual consumer, which which is technically good for the consumer if they're kind of spending the same for a product that's more sustainably produced, stuff like that. But I'm looking at this as a potential outside shareholder. That's a big concern I have. But let's not go too long here. Let's wrap things up. More or less interested, Brad, what do you think? Yeah, I got to go less interested. I think in two or three years, I could revisit this and it could look really compelling. Right now,

of less interested. Yeah. That makes sense, Brian. Yeah. Keep it simple. Less interested for me. If you know me as an investor, this really isn't my cup of tea. I guess maybe I'm a little less risk tolerant than some people, but yeah, I'm just going to go less interested. Yeah. I guess it depends on the strategy you like to run with your portfolio. I'm less interested as well. There's upside. There's upside. Yeah. I'm less interested. i'm interested as a consumer i want them to succeed could be you know better for the world better for everyone but no not interested as an outside shareholder right now i mean just look at the look at the sales ratio on their 2025 revenue estimates versus a typical agricultural peer

and then add back in all the capital intensity of this business i mean the numbers just don't work out yeah maybe you know we can see revisiting this five years down the line and being a better risk reward opportunity but right now i i just don't see it i hope i'm wrong or i hope i hope we're all wrong yeah definitely um uh brad what's the stock for next week um so we are going with a a very unknown company that diamond in the rough hoping to to uncover it for you guys called paypal um no i'm just kidding we we're doing paypal next week um i i've believe it or not haven't done a ton of work on this company i'm i'm a loyal venmo user so i'm excited to dig in Yeah, they got a lot of businesses.

People kind of know them from the dot-com days, but they got a lot of business lines. Should be a fun one to check out. All right, that's going to do it for this episode. As always, make sure to check out Potential Multibaggers, our sponsor for the Sunday show. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation.

Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.