AppHarvest, Inc. (APPH) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the AppHarvest First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ 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, Kaveh Bakhtiari. Please go ahead.
Kaveh Bakhtiari: Thank you for joining us for AppHarvest’s first quarter 2021 earnings call. I'm Kaveh Bakhtiari. It's my first day as VP of Investor Relations for AppHarvest and I look forward to working with all of you. This is AppHarvest’s first completed quarter as a public company, so we'll have the full team available for today's conference call. Joining me in Kentucky are several members of the senior leadership team, including Jonathan Webb, Founder and CEO; David Lee, President; and Loren Eggleton, Chief Financial Officer. We'll also be joined by Josh Lessing, Chief Technology Officer; and Jackie Roberts, Chief Sustainability Officer. On today's call, we'll begin with prepared remarks from Jonathan and the rest of the team, then we'll open the lines to take questions.
Jonathan Webb: Less than two years ago, AppHarvest broke ground on our flagship farm in Morehead, Kentucky, that's 50 football fields under glass. We completed construction and assembled a 500-person operating team in the middle of a global pandemic. I'd like to make it clear today that AppHarvest is in the business of delivering on our promises. For those of you new to the AppHarvest story, we're a technology company working to disrupt agriculture. We're here to build a resilient food system. In reality, agriculture has already been disrupted by climate change and our current food system is broken. AppHarvest is committed to being a long-term institutional change agent in agriculture. We are acting now and I expect our accomplishments to have impacts for generations to come. Prior to AppHarvest, I was building some of the largest solar projects in the U.S., while supporting the Department of Defense. When I lived in D.C., all the talk was about energy security, but arguably, a more pressing concern is global food security. Most folks don't realize how fragile our current system is. When food stopped crossing borders and grocery stores had food shortages, COVID started to expose some of the cracks in the system. California just expanded its drought emergency to 41 of 58 counties in the state. California is plagued by wildfires and the Southwest of the U.S. is drought stricken, where the U.S. traditionally has grown much of its fruit and vegetables. In February, we had major ice storms that dipped as far as Texas, stopping imported fruits and vegetables from coming across the border, which is where the U.S. has outsourced most of our vine crop production. Those fruits and vegetables get shipped thousands of miles to make it to our plates with questionable practices around labor and pesticide use.
David Lee: Thanks, Jonathan. It's been a pleasure to join the management team as President in Q1. Before we get into the results, I wanted to share a bit of my background. Just as many of you have considered investing your capital in AppHarvest, I want you to know why I'd bet my career on it. My background includes large public company transformations like Best Buy, Del Monte and Zynga, but more recently at Impossible Foods, where I launched the business as COO and CFO. AppHarvest has the potential to create the global impact and the scale of a larger public company that I’ve helped to transform, but at the growth rate of a new business that benefits from technology like Impossible Foods. We grow at large scale, healthy and nutritious produce sustainably using a fraction of the resources required in traditional agriculture. We do this by leveraging technology, infrastructure and our focus on our location in Appalachia that benefits from climate change and our renewal of local economy, along with being able to access about 70% of the U.S. population within a day's drive. Through our distribution agreement with Mastronardi Produce, all of our USDA grade number one tomatoes are sold in top retail grocery outlets. Groceries and consumers increasingly are requesting U.S. ground chemical pesticide free produce from companies they trust. Despite that, in 2019 more than two-thirds of vine crops for the U.S. market were imported. And because we're doing this at scale, we can deliver this produce for about the same price as standard.
Josh Lessing: I’m Joshua Lessing, and in April, I joined AppHarvest as Chief Technology Officer. Previously, I co-founded and led an AI company focused on controlled environment agriculture in order to build a sustainable and resilient global food system. AppHarvest shares this mission. And together we will restructure the world’s food supply based on a new model that will support the planet and its people. Most of all, we will do it faster and at greater scale than anyone has ever imagined. Today, the food industry is fraught with complexity, inefficiency and a crumbling infrastructure that has been pushed to its very limit. If we want to give customers the products they deserve and protect the planet in the process, we must abandon the broken system developed by outmoded industry incumbents. Now it’s time to build the future. And to do so, we’ve established the AppHarvest technology division. It is obvious that the world needs a copy and paste solution. One that can be replicated globally, a sustainable, scalable, predictable infrastructure that we can count on to produce the food that we need and as strong enough to survive the challenges to come. In AppHarvest, we’ve set out to build it. And we call it Project TalOS, a digital operating model for farming with AI at its core that can manage a global network of facilities and execute complex supply strategies intelligently and autonomously, put simply AppHarvest must build for farming, the technologies that were required for Amazon to transform retail. Right now, we are building and deploying a system that utilizes a vast array of technologies to drive automatic decision-making at individual facilities and across the organization at large. This proprietary platform capability will allow us to deliver superior products at lower costs and higher margins. And we’ll open the door for new revenue streams, creating previously unrealized synergies across the value chain from seed to table. To create the Farm of the Future, we’re making investments in robotics, artificial intelligence, teleoperation, and proprietary seed genetics. With robots roving through the facility and interacting and caring for every crop, we’ll be able to continuously collect data on plant production and feed it into our AI using software tool line facility operations with sales and logistics, which will make farming as reliable and predictable, as a factory. Presently, we are training our intelligent robot Virgo to manage crops and inform growing decisions. Virgo is the world’s premier universal harvester, and could be configured to harvest multiple crops, ranging from tomatoes and cucumbers to more delicate fruits, such as strawberries. But it’s the insights collected and analyzed by our robot and fed into its AI. That is the true game changer. Since every piece of fruit is an outcome that resulted from the many variables of the growing process. Granular plant level data from each fruit means we can learn exactly how to optimize quality, production, sales and logistics. This foundation will give us the opportunity to restructure the world’s food supply in order to mirror the hyper efficient e-commerce landscape. The future is a local supply chain, where food is produced, where it’s consumed by carefully calibrated facilities that guarantee consistency and predictability. The future is higher quality, more nutritious and more affordable produce without the carbon footprint of transnational supply chains. The future is products that people actively seek out in their grocery stores because they’re superior on every dimension. This is the future and the future is now. And now you will hear from Jackie Roberts about the strides that we’ve been making in sustainability.
Jackie Roberts: Thanks, Josh. I want to start with reiterating what you’ve already heard. AppHarvest is working to address some of the world’s growing threats around food insecurity, due in large part to loss of natural resources, such as water, land and healthy soils, and the impacts from climate change and severe weather. I’ve been in the environmental field as an engineer for 30 years, these problems are getting worse, not better, and we need solutions. We’re working to create solutions for these issues, but we’re also working to build a new kind of company, one that drives improvement in environmental and social issues broadly known today as ESG issues. We are now one of only a handful of companies traded on any exchange that is both a public benefit corporation and B Corp Certified. We have set ourselves against the highest ESG standards, but also put the governance systems in place to backup those commitments. And it’s not just through the B Corp third-party certification. We also have a diverse board with the ESG experience, a sustainability committee of the board and a set of ESG KPIs that we will measure at the close of our first year of operations. ESG performance is also tied to compensation for all non-exempt employees. And finally, we’ve just released our detailed sustainability report in April. Why is top-tier ESG performance and our sense of purpose important? I learned during my years, working at the Carlyle Group that ESG leadership can drive value. Our sustainability work from the board down, aims to ensure that our purpose translates into value in terms of higher revenues, a stronger brand, cost savings, more engaged employees and better talent retention. We’re excited to see emerging data verifying the growing recognition of B Corp certification among consumers and employees. As one specific way that we see our ESG performance translating into value and strengthening marketing and sales. We believe employees, consumers and investors are building their capacity to differentiate between greenwashing and real ESG commitments. We think we’re ahead of the curve because we have extensive experience on our sustainability team and our board. In Q1, we can report that we’re hitting our environmental targets with the assist of a range of advance technology tools. Our Integrated Pest Management known as IPM worked extremely well in the first quarter, enabling us to deliver on our goal of shipping tomatoes free of chemical pesticide residues. All of the techniques, Josh has described, such as state-of-the-art computer vision to spot the pets’ and disease early, machine learning to take data from 300 sensors and use it to decide on appropriate amounts of water and nutrients without wasting those inputs, as well as biological controls, the good pests are assets that enable us to hit this goal. We’re performing great on our water efficiency target. It’s still early, but we’re already using only 1.8 gallons per pound of tomato, which is 92% less than the global average for tomatoes, which is 25 gallons per pound. And even with these early results, we're also doing 80% better than what we believe is best-in-class for growing tomatoes with drip irrigation and lots of plastic mulch in open fields intended to reduce water use. Our irrigation system is using 100% rainwater as planned and re-circulating our water so we have no discharges. We did have a pump break and we had to discharge to the backup municipal water system for a few days while we waited for a new pump, but what we learned is we always need to have a spare pump on the site. So we don't have a repeat of this issue. While rainwater is pretty efficient at delivering nutrients, we use technology to enhance the ability of the plants to absorb these nutrients available in the water by aerating the irrigation system to create nanobubbles, which increases the oxygen level in the water. That in turn makes the transfer of nutrients from the water to the plants more seamless. Our high efficiency led lighting is also working very well for what the growers need. Our large glass roof serves as a passive solar array of 2.7 million square feet of glass equal to over 50 football fields and this helps us be more energy efficient every day, particularly when the sun is out. Resiliency is also part of our story, in terms of building a food system that is future-proof, but we had a real world test with a major ice storm hitting Kentucky in February. We successfully operated through the storm, which is the type of severe weather event predicted to increase with climate change. We hired and onboarded over 100 employees during this two-week event, ensuring that our ability to ramp our production didn't stop. I want to close by talking a bit about our social impact. AppHarvest is founded to also create the right kind of jobs. We completed a third-party living wage assessment this quarter and have been verified as a living wage company. In addition to our wages, we offer a comprehensive benefits package that includes a portfolio of medical, dental, vision and life insurance options to all our employees and their families. Regardless of title or rank, AppHarvest pays a 100% of all premiums on the coverage. We also offer a competitive 401(k) match for everyone in the company. AppHarvest makes every full-time employee, a stakeholder. All employees receive equity incentives when they're hired from the entry-level up to the C-suite. Our team has now grown to 500 employees at the end of the first quarter. We believe our workforce is our biggest asset. And we believe that engaged employees will drive improved performance. The draft results this week of our first employee engagement survey which had an 83% participation rate, include 93% of employees saying I'm proud to work for AppHarvest, 91% saying I know how my work contributes to the goals of AppHarvest and 87% saying I would recommend AppHarvest as a great place to work. I'd like to now introduce our Chief Financial Officer, Loren.
Loren Eggleton: Thanks Jackie. Now I'd like to discuss a few of the operational highlights and what they mean for the business this year and over the long-term. We achieved first quarter net sales of $2.3 million, which was in line with our outlook of $2.1 million to $2.6 million as compared to no sales in the first quarter of 2020 before our Morehead facility was operational. In terms of the actual yield for the first quarter, we were pleased that our Morehead facility generated a total of 3.8 million pounds of tomatoes sold. This includes a mix of beefsteak and TOV tomatoes as well as varying levels of quality for each. As you know, we started planting our Morehead facility in phases beginning in the fall of 2020. This first quarter of 2021 was the company's first quarter of harvesting and therefore our first quarter of net sales. We started harvesting the first 15 acres of beefsteaks in mid-January, followed by the second 15 acres of beefsteaks at the beginning of February and then the first 15 acres of TOV at the very end of March. By the end of the first quarter, we were harvesting 45 acres of 60 acres at Morehead. In terms of pricing, per our agreement with Mastronardi Produce, Mastronardi pays us a market price less than marketing fee and their costs incurred in the sale and distribution of our produce, the sales that we reported on the face of our income statement is net of these items. The blended price per pound we realized during the first quarter, which you can generally calculate from our financials by dividing net sales by the pounds sold, reflects the mix of varying grades of tomatoes. With Grade No. 1 selling at a premium and the price fluctuating by season and over time due to market conditions. It also reflects product mix though in Q1 substantially all of our pounds sold were beefsteak tomatoes. This being our first harvest of our new facility, we expect our grade mix to migrate upward over the coming quarters as we fine tune our farm operations and implement additional technology and data analytics into our processes. Gross loss was $4.5 million, which reflects with phased launch of commercial operations and sales at our Morehead facility and the demands required of training our labor force of our newly started operations. We expect gross margin to improve over the coming quarters as we seek to increase our utilization and yield, leading to greater labor productivity and overhead leverage over a larger number of pounds sold. Adjusted EBITDA loss came in at $12.4 million for the quarter, significantly better than our previous outlook range of a loss of $14 million to $16 million. This loss is primarily reflective of the organization we are building to support the growth that we anticipate as we build and operate additional facilities as well as now being a public company. On January 29, we completed our business combination with Novus Capital, which resulted in net cash to our balance sheet of approximately $435 million. On March 1, we purchased the Morehead facility for approximately $125 million and we now own the facility, equipment and land outright. During the quarter, we also used $11 million of cash in development and construction costs on our two in-development facilities located in Richmond and Berea, Kentucky. Those are both scheduled for completion in mid-2022. We ended the first quarter with cash and cash equivalents with $297.7 million. As was mentioned earlier, we are close to finalizing a $75 million credit facility that is solely secured by our Morehead facility at a 60% loan-to-value. The credit facility will provide the company with growth capital for the continued development of our high-tech CEA facilities in Central Appalachia. Borrowings under the facility which we expect to have a 10-year maturity and a 20-year amortization will likely bear interest between 4% and 5% annually. Next I'd like to provide additional financial context on the acquisition of Root AI, the agricultural robotics company which we purchased subsequent to the end of the quarter. We paid a total consideration of $60 million, consisting of $10 million in cash and approximately 2.3 million shares of AppHarvest common stock. As David and Josh articulated earlier, we believe strongly in the ability of our new technology division to improve our operating metrics and therefore profitability, as well as to open up new tech-first business models for the company. Toward this goal, we intend to invest an incremental $5 million to $7 million during 2021 on developing technology for the Farm of the Future. There is an administrative item that I want to cover related to the SPAC warrant accounting developments that many companies have been working through over the past several weeks. And a lot of the recently issued statement made by the staff of the SEC on April 12 for all SPAC related companies regarding the classification of their warrants for accounting and reporting purposes. We have reevaluated our historical accounting for the warrants assumed from Novus Capital and the business combination on January 29, and determined that the private warrants should have been accounted for as a liability and mark-to-market. Further, we determined that the public warrants were probably accounted for as equity. Previously we had accounted for the Novus private warrants as equity, similar to many other SPACs and recently De-SPACed companies. We have worked with our current auditor as well as the previous auditor for Novus and our audit committee to restate the Novus 2020 financial statements. Accordingly, we will soon file an amended Form 10-K. This restatement will result an additional noncurrent liabilities of $16.9 million and a noncash expense of $13.7 million in the Novus’ financial statements for the year ended December 31, 2020. As of March 31, the private warrant liability was $29.9 million and results in a non-cash income of $9.8 million, which is reflected in AppHarvest quarterly financial statements. This restatement will not impact our previously reported operating expenses or cash flows. The change in accounting treatment has no effect on AppHarvest cash position, ongoing operations, plans going forward or what we have shared with you today. Now I'd like to turn to our outlook for the full-year 2021. Today we are reiterating our full-year 2021 outlook on net sales of $20 million to $25 million. Further because of the inclusion of the planned incremental investment in the recently acquired technology division, formerly known as Root AI, we are updating the full year outlook for adjusted EBITDA loss to $48 million to $52 million from our prior range of a loss of $43 million to $45 million. With this investment in technology, along with our latest view on our operational performance, we are raising our long-term illustrated performance on adjusted EBITDA for a 60 acre farm in the future producing tomatoes from $15.8 million as previously presented at our Analyst Day event last December to $23.3 million, resulting in a potential 17% to 23% return on invested capital on an unlevered basis. Further with the improved access to non-dilutive capital, the long-term illustrated performance on a leveraged basis, assuming a 60% loan-to-value could result in 43% to 58% return on invested capital. While we are not formally guiding the quarters, we do want to provide some information on the seasonality of our tomato growing operations that I hope will be helpful. Last week, we began harvesting the remaining 15 acres of TOV tomatoes and are now harvesting all 60 acres of the Morehead facility. In early-to-mid Q3 as previously communicated, we will prepare our Morehead facility for the 2021-2022 growing season. For this we will replace the existing plants with new seedlings. The replanting process will result in lower net sales as compared to other quarters of continuous harvesting. We will begin harvesting the new plants in early Q4. All of this is to say that we expect Q2 to be stronger than Q1, Q3 is expected to be softer than Q2 and the Q4 will pick back up with the new growing season. In terms of capital expenditures, for the full-year we expect to spend approximately $145 million to $155 million on the two committed construction projects currently underway in Richmond and Berea, Kentucky. With that, I'll turn it back over to our VP of Investor Relations, Kaveh.
Kaveh Bakhtiari: Thank you, Loren. To close we've had a solid start to the year in our first quarter as a public company and first quarter harvesting produce out of our first high-tech indoor farm in Morehead, Kentucky. We are backed by world-class farm operations, a scalable model, a winning long-term distribution partnership, and our commitment to leverage cutting edge technology to produce and distribute food in a sustainable way. We have an innovative and dedicated management team with access to funding that is looking to AppHarvest to provide a sustainable alternative to the socially, economically and environmentally destructive practices that have come to be associated with conventional agriculture. I look forward to working closely with the investor and analyst community to keep you regularly updated on our progress as we can build on our vision and plan to deliver a long-term stakeholder value. With that operator, we'll now begin to take questions.
Operator: Now our first question coming from the line of Jeff Osborne with Cowen. Your line is open.
Jeff Osborne: Yes. Good morning, guys, and congratulations on your first earnings call as a public company. Just a couple of questions on my end. One, I was wondering if we could get going on the pricing dynamics that you alluded to. How much of that was due to quality of the output to non-grade one versus just a broader market conditions? I thought historically that the winter months had seasonally higher prices relative to the summer. So I'm just trying to get a sense of what the moving pieces are on the price side.
David Lee: Thanks, Jeff. This is David Lee. Here at AppHarvest what we did well is we anticipated and performed well on – in market pricing. A big part of that in Q1 was our relationship with Mastronardi. Mastronardi has the benefit of having a pretty full basket of other produce items. And so you may hear of others who are less insulated to the broader market versus what we have demonstrated in Q1. And our affirmation of our guidance in 2021 reflects that we think we're on track. So hopefully that answers a bit of the questions. Jonathan is here with me and he created the relationship with Mastronardi from the very beginning. So I want to turn to him to have him give some commentary to you on how we did in the market as well.
Jonathan Webb: Yes, Jeff, just to follow-up on that. It's important that a tomato is not a tomato is not a tomato and for the AppHarvest tomato Mastronardi produce has made it abundantly clear that they can deliver and put on store shelves one every tomato and fruit and vegetable we grow. So a good thing for us is in a market that where we're at currently and we still hit our Q1 guidance and continue to be very optimistic about the year ahead.
Jeff Osborne: Yes. And certainly the yields were impressive to see. So congratulations on that. Two other lines of questioning; the change in sort of mid- or long-term illustrative economics to the $23.3 million from the $15.8 million of adjusted EBITDA for a 60 acre facility, how much of that change is because of the assumption of reduced OpEx because of utilization of technology versus higher yields that were originally talked about sort of in that 40 million to 45 million pounds per facility? I just wanted to get a sense of what the moving pieces were to come up with that increase, which is great to see.
David Lee: Thanks, Jeff. This is David again. I'll start and perhaps turn it over to Loren. One of the things that we did as a team in Q1 is build ageratum, a bottoms-up driver based models so that we were tracking the KPIs. Our philosophy is if we can't measure and hold the team accountable, we can't achieve the results our mission requires. So as we integrated with Josh Lessing, our new CTO, how much could technology line of sight, I mean, really how much could we sign up for. This bottoms-up model was a combination of both yield improvement, as well as what I call pure productivity. And I'm happy to have him speak a little bit on the detail of it if you're interested, but it was a mixture of both and it was pretty thorough, bottoms-up. I'm very optimistic given the lack of maturity in technology in the controlled environment ag business that we have some of the best minds to create technology that the mission really requires. And with that, I'll turn it over to Loren just to provide any additional commentary on that guidance.
Loren Eggleton: Yes. Hi, Jeff. So we've really dug in with Josh and their team on kind of how this looks for us on a go-forward basis. We have benefits here. We think to reiterate what David just said is really a mix of on the top line and on OpEx. So it's really a mix. We're not going to go into too many details on that yet, but I would say it's around – the benefits are around 50-50 on top line and OpEx.
Operator: Now our next question coming from the line of Ben Theurer with Barclays. Your line is open.
Ben Theurer: Yes. Perfect. And also from my side, thanks for taking questions and congrats on the first quarter. Just to stay a little bit within technology and the investments you've made and what you're looking on Project TalOS, could you elaborate a little more off like next steps in further developing also leveraging the investment you've done in Root AI? And where you think this is going to take you considering the target of going into different type of crops; be it vine crops, be it fruits, you've mentioned strawberries. Just to understand how well the learning process can then be applied from one to another. That would be my first question. Thank you.
David Lee: Thanks, Ben, and thanks for your question. One quick reminder before we have Josh speak to the specifics of the technology, remember we always intended to be a bit different than other players because we operate at scale and we always intend to operate with technology that's already available and we can walk you through the great technology, whether it's the cutting-edge LED or the nanobubble technology in our nutrient system. But specifically what we wanted, frankly, from Josh's team was the ability to combine an operating system plus devices and hardware, so that we had something that could be used, not just for a vine crop, but frankly, for any crop. So with that let's turn it over to Josh and he can be a little more specific of the technology.
Josh Lessing: Thank you. So really what we've modeled in here are things that we have line of sight into and just kind of stepping back, for CEA, we're just hitting the tip of the iceberg is what can be achieved with technology. So these numbers contemplate both robotics, doing things like harvesting. It also looks into forms of algorithmic decision-making around both labor and operations. And on top of that artificial intelligence is they can drive growing performance to yield per square meter, but at the same time reduce input costs. And so right now, when we're looking for a lot of this technology, we're designing it from the ground up so that it can be heavily recycled, by that I mean that each new crop can leverage the technology of previous crops. And it's something that we already see in technology today, which can harvest both tomatoes, cucumbers, strawberries, all leveraging the same tech stack. We're building that into everything that we make.
David Lee: Hey, Ben, one other point. This is David. I wanted to make sure we touch on how his technology actually ties to what's in our development pipeline and it's important. Jonathan's been spending a lot of his time as CEO personally on the great progress actually we've made in the future farms under development. So I wanted to make sure he can give you some of that color.
Jonathan Webb: Yes. And it’s – the technology that's being developed, what takes – there's the physics of life you can't speed up, and physically building large infrastructure, you can only go so fast. And here in this region, we've been able to prove that the start of construction at Morehead we were running two 10-hour shifts a day virtually around the clock in the middle of a global pandemic. So I'm not sure we're ever going to face a more challenging environment to build and we proved on time on budget for our first facility. But now as we're ramping up to scale, we're designing facilities that Josh will be able to deploy his robotics and AI into these facilities. So our broader team is staying out front on development, where we look to start construction on at least two more facilities this year, strawberries being one of those and leafy greens. So now when you look at the AppHarvest portfolio, we're spread across vine crops, all leafy greens and berries. So Josh has his team behind the scenes working to build the robotics and AI that we'll be deploying. And the broader part of our team is out front on development to build the facilities.
Ben Theurer: Okay, perfect. Thank you very much. And then my second question is, you've mentioned you've locked in a steel and glass for the current two facilities that are under construction, but then you've also mentioned you have two additional ones, and just wanted to understand what your initial expectation was in terms of CapEx need to build a new 60-acre facility which was always named onto that the $100 million tack, or maybe $135 million. Do you think that's actually geared more towards the higher end considering the increase in construction material? Or do you – is it really – do you think this is going to come down over time? So just to understand a little bit how we plan about your CapEx in the next coming years, just considering the ramp up of new facilities you're building out to get to the 12?
David Lee: Great. Thanks, Ben. It's a great question. I think we can help guide you to looking at what we've done, as I think as a young company, that's the best predictor of how you should model our performance in the future. So here's what I'm proud of the team did. We anticipated potentially higher steel and glass prices. We lock them in for Richmond and Berea, which as you know, is not insignificant, with regard to the spend that Loren mentioned will occur in 2021. I think he mentioned in his comments spend of approximately $145 million to $155 million for the company in the course of the remainder of this year. You should also note that we talked about how we have the ability to leverage a very competitive process, not just for non-dilutive capital, but frankly, for whom we partner with to build the 12 by 2025, we haven't disclosed more on that, but the fact that we are affirming 2021 that we delivered on Q1, I hope gives some confidence in the results that we achieved and we'll have to prove to you that we can persistently deliver on that in the future, but it's a good indication of where we're heading.
Operator: Now our next question coming from the line of John Baumgartner with Mizuho. Your line is open.
John Baumgartner: Good morning. Thanks for the question, great to hear all your progress so far. I guess, first question is in terms of coming to market through Mastronardi. How will the distribution of your early volumes split between retail and food service? And how do you think about the split of volumes as you reach scale over the next few years?
David Lee: Well, thanks for the question. Mastronardi has been a great partner to us in that their ability to get to the top 25 groceries, but as well, very large food service customers, like the one we highlighted Wendy's is an example of their reach across the board. I'm going to turn it over to Jonathan because he's been in market and working on this business longer than I have to give you a little more color commentary on where we want to be eventually with our food service and retail penetration.
Jonathan Webb: To date, a majority of our product is going to grocer, but that's going to shift to the left and right over time, as the market demand continues to increase for controlled environment products and U.S. grown. So it's a unique situation for any rapidly growing company where the demand will exceed supply. So for us, we're going to lean into those that they want our product. And we've announced that we've been at Kroger, one of the largest – many of the largest grocers in the top 25. And we're also now at Wendy's, but again, that we're going to lean into to the partners where that need the most product and Mastronardi has been a great partner for us. We're again, we're focused on what is AppHarvest? We're an operator. We're developer of assets, and we're a technology company and sales and distribution of a perishable commodity is something that we thought we'd be better going with a strong partner who can quickly get us onto all the shelves and that's what we've elected to do with Mastronardi.
John Baumgartner: Okay. And then I guess as a follow-up, now these first volumes are coming to the market. How do you expect to communicate your story to consumers? And I guess, grocers in food service at large? I mean, is this going to be some sort of a brand story and if it is, how do you think about marketing campaigns this year and next year, coinciding with the launch? And then longer term, I guess also given the consumption of produce is below level desire by health officials here in the U.S., how do you think about the ways, if any, to partner with government agencies to combine a message of a good for you type of product, with a better for the earth type of approach to building awareness going forward. It would seem like there's cost-effective ways to amplify your message of what you're doing over time?
Jonathan Webb: Well, you're absolutely right. And on all of that, we put Martha Stewart on our board for a reason. There's really no bigger icon in food and in home than Martha. And she spent a lot of time with me here in Kentucky. Right now, our job is to build a suite of assets that are going to produce not just tomatoes, but a whole host of fruit and vegetables. And this year, we wanted to show that we could operate, we could develop them, we could get onto store shelves and in the coming months, and in the next year, we're going to be leaning in heavily into that AppHarvest brand. And frankly, those hills – that you see that hill logo, we need the consumer to go and look just simply at those hills and understand there's trust and transparency, behind what we do. And Jackie alluded earlier on the call, we have put a heavy emphasis on ESG and again, you look at all consumer trends. Consumers want to know where their products are coming from, and we're going to continue to work overtime to provide that in the grocery store. But again, this year we just wanted to get market penetration, get on store shelves be selling at the top grocers. And next year is, we have a whole host of products. We'll have berries. We'll have leafy greens and we'll have vine crops all in market next year. And that's when we will be leaning into the brand. And then I would touch on the government side. You're absolutely right. A 1 in 10 – USDA has said, 1 in 10 Americans eat enough fruits and vegetables. That is a staggering number when you look at healthcare costs in this country. And we are certainly cognizant that fruit and vegetable consumption can be a part of the overall solution. We've had very high level discussions with leaders and political parties, both in the left and right side of the aisle. This is not a political issue. This is an American issue, and we're going to strongly be having a presence in D.C. for the years to come to figure out how we can make sure every American has affordable fresh fruits and vegetables on their plates.
Operator: Now our next question coming from the line of Gerry Sweeney with ROTH Capital. Your line is open.
Gerry Sweeney: Good morning. Thank you for taking my call or question. I wanted to circle back a little bit on the technology side; you spoke about robotics, AI, seed genetics, each of these are their own discipline, seed genetics itself is a really long cycle program. So my question really is, are you going to develop this internally, externally, test different technologies and longer-term is this more about collecting the data, finding out what's the best options out there in implementing this into the greenhouses?
Josh Lessing: That's a fantastic question. So the place where we seek to take things in-house, are the places that technology doesn't exist in the market or technology stakeholders don't exist in the market and that's very specifically artificial intelligence and robotics as a core asset of the business, having human brain power there. When it comes to things like seed genetics that is something that is very right a longer-term project and something that we would seek to collaborate with outside parties to push forward but there's still a lot of opportunity through those partnerships. And yes, the – although the robots do harvest that's just one job at the farm, where we really see this as a massive driver of the organization is to build on top of that and to be able to leverage the data, ultimately Morehead has over 700,000 plants, every one of those plants having data on them can drive outcomes and make us more profitable than other organizations.
Jonathan Webb: And again, it's a matter of layering technology throughout the facility, but it's allowing us to make data driven decisions in real time. The AI that the Josh's team is developing, the farm operating system that Josh's team is developing and the robotics to our estimation, there's no one single shop in the world that were aware of that, that's doing all this in-house with production at scale. So again it puts us in a fairly unique position to be able to optimize on our production.
David Lee: And one last point on this, this is David. Clearly we got to walk before we can run, but one of the great things about our approach is not only will Josh's technology help in all 12 of our farms by 2025, the maturity or lack thereof of technology to a real industry that's the future of our Ag business globally, means that we will have like AWS to Amazon, the strategic option to have high margin licensing revenue, because we intend to have the best operating system for CEA there really isn't a good solution today. So while we don't count on those things, it was very much part of the strategic rationale for why we wanted to partner with Josh.
Gerry Sweeney: Got it. I got the license aspect. Maybe taking us a step down a little bit, you updated your illustrated profitability on the long-term aspect here. How much on the technology front? Can you maybe provide a little bit of a roadmap on that uptick and profitability? How much is it AI versus labor, maybe robotics, seed genetics, maybe map that out a little bit so we can understand that a little bit? Obviously AI and I think labor would be the lower hanging fruit and maybe some of the other technologies a little bit further up the curve, but I'm curious of your thoughts.
Jonathan Webb: Thanks for that question. We haven't provided the detail that we have on the bottoms-up initiatives in our model. Part of that is we want the benefit of having the best technology in the industry. I can tell you that it is as we described earlier, a combination of productivity as well as improved yield, and it is both software and hardware. At this point we're not going to provide additional proprietary information on our tech.
Operator: And our next question coming from the line of Mark Connelly with Stephens. Your line is open.
Mark Connelly: Thank you. I was hoping you could talk a little bit more about the summer shutdown process. Obviously that's coming during the peak cooling period of the year. I assume that's on purpose. And you've already experienced a very difficult heating situation. I was wondering if you could tell us a little bit about the performance of your systems and whether as you build new greenhouses, you'll be sticking with that schedule or whether you're going to vary the outages across the systems?
Jonathan Webb: So we'll be monitoring over time how to best optimize production, but given this as our first facility at scale and prices in the summer come down and we really want to optimize for that nine months of good pricing. We're simply revamping and leveling up our operating team in Morehead over the summer. But again, we'll be monitoring over time. It's likely, for the leafy green facilities we'll be running continuously throughout the year, for berries we'll be operating at a different pace than we will, vine crops, but again that's where each facility we're going to be monitoring as we ramp up. And we're going to optimize for quality and pricing on each crop.
Mark Connelly: And on the performance of the heating and cooling systems, based on what you experienced within February, will you be making any changes to the systems as you build these new greenhouses?
Jonathan Webb: I was virtually sleeping in the facility in February in the middle of the ice storm. And I could not be prouder of this team, not only did we construct a facility in the middle of a global pandemic, we launched operations in January and we had a record ice storm in February. The resiliency of our facility proved itself, we had virtually no disruptions in the middle of a record ice storm and again that's a testament to our design and a testament our team. So fortunately coming out of February, we don't need to change anything. It proved itself in the middle of the ice storm that we could stay steady state and continue operations. And we've shown that in the middle of quite a disruptive ice storm our facility can run as planned.
Operator: And I'm showing no further questions at this time. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
