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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________

FORM 10-Q

_____________________________________________

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

or

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to

Commission file number 001-39288

AppHarvest, Inc.

_____________________________________________

(Exact name of registrant as specified in its charter)

Delaware			82-5042965
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification Number)

500 Appalachian Way

Morehead, KY 40351

(606) 653-6100

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common stock, $0.0001 par value per share			APPH			The Nasdaq Stock Market LLC
Warrants, each whole warrant exercisable for one share of Common Stock at an exercise price of $11.50 per share			APPHW			The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer			☐			Accelerated filer			☐
Non-accelerated filer			☒			Smaller reporting company			☒
						Emerging growth company			☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-2 of the Exchange Act) ☐

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.0001, outstanding at May 7, 2021, were 100,253,268.

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APPHARVEST, INC AND SUBSIDIARIES

TABLE OF CONTENTS

			Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			1
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations and Comprehensive Loss			2
Condensed Consolidated Statements of Stockholders’ Equity			3
Condensed Consolidated Statements of Cash Flows			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
Item 4. Controls and Procedures			26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3. Defaults Upon Senior Securities			52
Item 4. Mine Safety Disclosures			52
Item 5. Other Information			52
Item 6. Exhibits			53

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Table of Contents

Part I - Financial Information

Item 1. Financial Statements

APPHARVEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands except per share amounts)

			March 31, 2021						December 31, 2020
Assets
Current Assets
Cash and cash equivalents			$	297,660					$	21,909
Accounts receivable, net			1,182						—
Inventories, net			4,903						3,387
Prepaid expenses and other current assets			3,531						481
Total current assets			307,276						25,777
Operating lease right-of-use assets, net			1,703						1,307
Property and equipment, net			190,962						152,645
Other assets, net			7,481						1,188
Total non-current assets			200,146						155,140
Total assets			$	507,422					$	180,917
Liabilities and stockholders’ equity
Current Liabilities:
Accounts payable			$	23,070					$	1,342
Accrued expenses			8,204						5,184
Current portion of lease liabilities with a related party			—						59,217
Current portion of lease liabilities			300						166
Current portion of financing obligation with a related party			—						58,795
Note payable with a related party			—						30,000
Other current liabilities			832						77
Total current liabilities			32,406						154,781
Lease liabilities, net of current portion			1,850						1,370
Deferred income tax liabilities			1,769
Private Warrant liabilities			29,920						—
Other liabilities			227						—
Total non-current liabilities			33,766						1,370
Total liabilities			66,172						156,151
Commitments and contingencies (Note 12)
Stockholders’ equity
Preferred stock, par value $0.0001, 10,000 shares authorized, 0 issued and outstanding, as of March 31, 2021 and December 31, 2020, respectively			—						—
Common stock, par value $0.0001, 750,000 shares authorized, 97,925 and 44,461 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively			10						4
Additional paid-in capital			491,552						45,890
Accumulated deficit			(49,643)						(21,128)
Accumulated other comprehensive loss			(669)						—
Total stockholders’ equity			441,250						24,766
Total liabilities and stockholders’ equity			$	507,422					$	180,917

See accompanying notes to the unaudited condensed consolidated financial statements.

1

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APPHARVEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS (Unaudited)

(In thousands except per share amounts)

			Three Months Ended March 31,
			2021						2020
Net sales			$	2,299					$	—
Cost of goods sold			6,836						—
			(4,537)						—
Operating expenses:
Selling, general and administrative expenses			31,489						980
Total operating expenses			31,489						980
Loss from operations			(36,026)						(980)
Other income (expense):
Development fee income from a related party			—						134
Interest expense from related parties			(658)						(2)
Change in fair value of Private Warrants			9,826						—
Other			356						30
Loss before income taxes			(26,502)						(818)
Income tax expense			(2,013)						—
Net loss			(28,515)						(818)
Other comprehensive loss:
Net unrealized loss on cash flow hedges, net of tax			(669)						—
Comprehensive loss			$	(29,184)					$	(818)
Net loss per common share:
Basic and diluted			$	(0.35)					$	(0.02)
Weighted average common shares outstanding:
Basic and diluted			80,729						32,858

See accompanying notes to the unaudited condensed consolidated financial statements.

2

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APPHARVEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)

			Redeemable Convertible Preferred Stock																																																						Additional Paid-in Capital						Accumulated Deficit						Total Stockholders’ Equity
			Series A												Series A-1												Series B																											Common Stock
			Shares						Amount						Shares						Amount						Shares						Amount																					Shares						Amount
Balance, December 31, 2019			2,770						$	5,203					392						$	992					1,483						$	6,063																				9,677						$	1					$	497					$	(3,680)					$	(3,182)
Retroactive application of recapitalization			(2,770)						(5,203)						(392)						(992)						(1,483)						(6,063)																					21,123						2						12,256						—						12,258
Adjusted balance, December 31, 2019			—						—						—						—						—						—																					30,800						3						12,753						(3,680)						9,076
Issuance of preferred shares, net			—						—						—						—						—						—																					2,470						—						4,880						—						4,880
Stock-based compensation			—						—						—						—						—						—																					—						—						19						—						19
Net loss			—						—						—						—						—						—																					—						—						—						(818)						(818)
Balance, March 31, 2020			—						$	—					—						$	—					—						$	—																				33,270						$	3					$	17,652					$	(4,498)					$	13,157

			Redeemable Convertible Preferred Stock																																																															Additional Paid-In Capital						Accumulated Deficit						Accumulated Other Comprehensive Loss						Total Stockholders’ Equity
			Series A												Series A-1												Series B												Series C															Common Stock
			Shares						Amount						Shares						Amount						Shares						Amount						Shares						Amount									Shares						Amount
Balance, December 31, 2020			2,770						$	5,203					392						$	992					2,632						$	10,942					5,131						$	28,069								9,750						$	1					$	686					$	(21,128)					$	—					$	(20,441)
Retroactive application of recapitalization			(2,770)						(5,203)						(392)						(992)						(2,632)						(10,942)						(5,131)						(28,069)									34,711						3						45,204						—						—						45,207
Adjusted balance, December 31, 2020			—						—						—						—						—						—						—						—									44,461						4						45,890						(21,128)						—						24,766
Business Combination and PIPE Shares, net			—						—						—						—						—						—						—						—									53,361						6						433,521						—						—						433,527
Conversion of Private Warrants			—						—						—						—						—						—						—						—									—						—						5,819						—						—						5,819
Stock option exercise			—						—						—						—						—						—						—						—									103						—						35																		35
Stock-based compensation			—						—						—						—						—						—						—						—									—						—						6,287																		6,287
Net loss			—						—						—						—						—						—						—						—									—						—						—						(28,515)						—						(28,515)
Net unrealized loss on cash flow hedges, net of tax			—						—						—						—						—						—						—						—									—						—						—						—						(669)						(669)
Balance, March 31, 2021			—						$	—					—						$	—					—						$	—					—						$	—								97,925						$	10					$	491,552					$	(49,643)					$	(669)					$	441,250

See accompanying notes to the unaudited condensed consolidated financial statements.

3

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APPHARVEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

			Three Months Ended March 31,
			2021						2020
Operating Activities
Net loss			$	(28,515)					$	(818)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of Private Warrants			(9,826)						—
Deferred income tax provision			2,013						—
Depreciation and amortization			1,802						21
Stock-based compensation expense			6,287						19
Rent expense in excess of rent payments			19						—
Interest accrual with a related party			—						2
Amortization of development fee with a related party			—						(134)
Changes in operating assets and liabilities
Accounts receivable			(1,182)						—
Inventory			(1,516)						—
Prepaid expenses and other current assets			(3,133)						2
Other assets, net			(5,993)						(20)
Accounts payable			8						(98)
Accrued expenses			3,694						52
Other current liabilities			(42)						21
Other non-current liabilities			227						—
Net cash used in operating activities			(36,157)						(953)
Investing Activities
Purchases of property and equipment			(11,183)						(83)
Purchases of property and equipment from a related party			(122,911)						—
Advances on equipment			(444)						—
Net cash used in investing activities			(134,538)						(83)
Financing Activities
Proceeds from Business Combination and PIPE shares, net			448,500						—
Payments on financing obligation to a related party			(2,089)						—
Proceeds from stock option exercise			35						—
Issuance of preferred stock, net			—						4,880
Net cash provided by financing activities			446,446						4,880
Change in cash and cash equivalents			275,751						3,844
Cash and Cash Equivalents
Beginning of period			21,909						6,031
End of period			$	297,660					$	9,875
Non-cash Activities:
Fixed assets purchases in accounts payable			$	20,313					$	—
Fixed assets purchases in accrued liabilities			$	1,408					$	—
Operating lease right-of-use assets and liabilities			$	735					$	30

See accompanying notes to the unaudited condensed consolidated financial statements.

4

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APPHARVEST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

1. Description of Business

AppHarvest was founded on January 19, 2018 and, together with its subsidiaries, is a sustainable food company creating a resilient and scalable ecosystem of applied technology greenhouses to serve the rapidly growing consumer demand for fresh, chemical-free, non-GMO fruits, vegetables and related products. AppHarvest is operating and building some of the largest and most advanced agricultural facilities in the world. AppHarvest combines conventional agricultural techniques with the latest in controlled environment agriculture (“CEA”) technology to grow high-quality fruits and vegetables throughout the year. AppHarvest’s vision is to create America’s AgTech capital from within Appalachia and provide better produce, better farming practices, and better jobs.

Prior to October 2020, AppHarvest’s operations were limited to organizing and staffing, business planning, raising capital, and acquiring and developing properties for CEA. In October 2020, AppHarvest partially opened its first CEA facility in Morehead, Kentucky, which AppHarvest estimates can cultivate more than 720,000 tomato plants with an approximate yield of more than 40 million pounds per year. AppHarvest harvested its first crop of beefsteak tomatoes in January 2021 and began harvesting its first crop of tomatoes on the vine in March 2021. AppHarvest’s Morehead CEA facility has been fully operational since March 2021 and AppHarvest is currently constructing two additional CEA facilities in Berea and Richmond, both in Madison County, Kentucky.

AppHarvest is organized as a single operating segment. Substantially all of the assets and operations of AppHarvest are located in the United States (“U.S.”).

Basis of Presentation

On January 29, 2021, (the “Closing Date”), Novus Capital Corporation (“Novus”), a special purpose acquisition company, consummated the business combination agreement and plan of reorganization (the “Business Combination Agreement”) dated September 2020, by and among ORGA, Inc., a wholly owned subsidiary of Novus (“Merger Sub”), and AppHarvest Operations, Inc., a Delaware corporation (f/k/a AppHarvest, Inc.) (“Legacy AppHarvest”).

Pursuant to the terms of the Business Combination Agreement, a business combination between Novus and Legacy AppHarvest was effected through the merger of Merger Sub with and into Legacy AppHarvest, with Legacy AppHarvest surviving the merger as a wholly-owned subsidiary of Novus (the “Merger” and, collectively with the other transactions described in the Business Combination Agreement, the “Business Combination”). On the Closing Date, Novus changed its name to AppHarvest, Inc. (the “Company”, “we”, “our” or “AppHarvest”).

Pursuant to the Business Combination Agreement, the Merger was accounted for as a reverse recapitalization (the “Reverse Recapitalization”) in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) . Under this method of accounting, Novus is treated as the “acquired” company and Legacy AppHarvest is treated as the acquirer for financial reporting purposes. The Reverse Recapitalization was treated as the equivalent of Legacy AppHarvest issuing stock for the net assets of Novus, accompanied by a recapitalization. The net assets of Novus are stated at historical cost, with no goodwill or other intangible assets recorded.

Legacy AppHarvest was determined to be the accounting acquirer based on the following predominant factors:

•Legacy AppHarvest stockholders have the largest portion of voting rights in the Company;

•The Board and Management are primarily composed of individuals associated with Legacy AppHarvest; and

•Legacy AppHarvest was the larger entity based on historical operating activity and Legacy AppHarvest had the larger employee base at the time of the Business Combination.

The consolidated assets, liabilities and results of operations prior to the Reverse Recapitalization are those of Legacy AppHarvest. The shares and corresponding capital amounts and losses per share, prior to the Business Combination, have been retroactively restated based on shares reflecting the exchange ratio established in the Business Combination. Activity within the Statements of Stockholders’ Equity for the issuance and repurchases of Legacy AppHarvest redeemable convertible preferred stock were also retroactively converted to Legacy AppHarvest common stock.

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APPHARVEST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial reporting and Securities and Exchange Commission regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year ended December 31, 2021. A description of the Company’s significant accounting policies is included in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the Legacy AppHarvest December 31, 2020 audited consolidated financial statements and the accompanying notes.

The unaudited condensed consolidated financial statements include the accounts of the Company and its controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Certain prior period balances have been reclassified to conform to the current period presentation in the unaudited condensed consolidated financial statements and the accompanying notes.

All dollar and share amounts are in thousands, except per share amounts, unless otherwise noted. Share and per share amounts are presented on a post-conversion basis for all periods presented, unless otherwise specified.

2. Summary of Significant Accounting Policies

Use of Estimates in Condensed Consolidated Financial Statements

In preparing the condensed consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Although these estimates are based on the Company’s knowledge of current events and actions the Company may undertake in the future, actual results could differ from those estimates and assumptions. Significant items subject to such estimates and assumptions include the recording of revenue, valuation of inventory, the valuation of stock-based compensation, the valuation of private warrants, lease accounting, the useful life of fixed assets and income taxes.

The Company’s results can also be affected by economic, political, legislative, regulatory, legal actions, and the global volatility and general market disruption resulting from the global outbreak of the novel coronavirus disease (“COVID-19”). Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, and government fiscal policies, can have a significant effect on operations. While the Company maintains reserves for anticipated liabilities and carries various levels of insurance, the Company could be affected by civil, criminal, environmental, regulatory or administrative actions, claims, or proceedings.

Accounts Receivables

Accounts receivable consist of amounts due from customers in connection with our normal business activities and are carried at sales value less allowance for doubtful accounts. The allowance for doubtful accounts is established to reflect the expected losses of accounts receivable based on past collection history, age, account payment status compared to invoice payment terms and specific individual risks identified. Write-offs are recorded against the allowance for doubtful accounts when all reasonable efforts for collection have been exhausted. The provision at March 31, 2021 and December 31, 2020 did not have a material impact on the condensed consolidated financial statements.

Convertible Preferred Stock

Prior to the Business Combination, the Company recorded shares of redeemable convertible preferred stock at their respective fair values on the dates of issuance, net of issuance costs. The Company applied the guidance in Accounting Standards Codification (“ASC”) 480-10-S99-3A and therefore classified all of its outstanding redeemable convertible preferred stock as temporary equity. The redeemable convertible preferred stock was recorded outside of stockholders’ equity because, in the event of certain deemed liquidation events considered not solely within the Company’s control, such as a merger, acquisition and sale of all or substantially all of the Company’s assets, the preferred stock would become redeemable at the option of the holders. In the event of a change of control of the Company, proceeds received from the sale of such shares would be distributed in accordance with the liquidation preferences set forth in the Company’s Amended and Restated Certificate of Incorporation then in effect.

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APPHARVEST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

All convertible preferred stock previously classified as temporary equity was retroactively adjusted and reclassified to permanent equity as a result of the Business Combination. As a result of the Business Combination, each share of redeemable convertible preferred stock that was then issued and outstanding was automatically converted into Legacy AppHarvest Common Stock, such that each converted share of preferred stock was no longer outstanding and ceased to exist. Each share of Legacy AppHarvest common stock, including the Legacy AppHarvest common stock issued upon conversion of Legacy AppHarvest preferred stock, was converted into and exchanged for 2.1504 (the “Exchange Ratio”) shares of the Company’s common stock.The Exchange Ratio was established pursuant to the terms of the Business Combination Agreement.

During the three-month period ended March 31, 2020, Legacy AppHarvest issued shares of Legacy AppHarvest Series B redeemable convertible preferred stock to new and existing investors for net proceeds of $4,880.

Warrants

At March 31, 2021, there were 13,250 warrants to purchase Common Stock outstanding, consisting of 10,500 public warrants (“Public Warrants”) and 2,750 private warrants (“Private Warrants”), (collectively, “Warrants”) held by the Novus initial stockholders. Each warrant entitles the registered holder to purchase one share of Common Stock at a price of $11.50 per share. The warrants expire on January 29, 2026, or earlier upon redemption or liquidation.

The Company may redeem the Public Warrants:

•    In whole and not in part;

•    At a price of $0.01 per Warrant;

•    Upon not less than 30 days’ prior written notice of redemption;

•    If, and only if, the reported last sale price of the shares of common stock equals or exceeds $18.50 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations), for any 20 trading days within a 30 trading day period commencing at any time after the warrants become exercisable and ending on the third business day prior to the notice of redemption to warrant holders; and

•    if, and only if, there is a current registration statement in effect with respect to the shares of common stock underlying the warrants.

If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement.

The Public Warrants were determined to be equity classified in accordance with U.S. GAAP.

The Private Warrants are identical to the Public Warrants except that the Private Warrants and the shares of common stock issuable upon the exercise of the Private Warrants will not be transferable, assignable or salable until after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Warrants will be exercisable for cash or on a cashless basis, at the holder’s option, and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. As a result of the provisions in the warrant agreement that provide for differences in the mechanics of a cashless exercise dependent upon the characteristics of the warrant holder, and because the holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provisions preclude the Private Warrant from being classified in equity. Accordingly, the Private Warrants are classified as a liability and remeasured at fair value at each reporting date.

The Company accounts for its Private Warrants in accordance with ASC 815-40, under which the Company has determined that the Private Warrants are recognized as liabilities at fair value and subject to re-measurement at each balance sheet date until exercised. Changes in fair value of the Private Warrants is recognized in the Company’s condensed consolidated statement of operations and comprehensive loss. The fair value of the Private Warrants is estimated at each measurement date using a Black-Scholes option pricing model. See Note 5 - Fair Value Measurements for inputs used in calculating the estimated fair value.

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APPHARVEST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

Derivative Financial Instruments

Derivative financial instruments are used to manage foreign currency exchange risks. The financial instruments used by the Company are straight-forward, non-leveraged instruments. The counterparties to these financial instruments are financial institutions with strong credit ratings. The Company maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit ratings of these institutions. For all transactions designated as hedges, the hedging relationships are formally documented at the inception and on an ongoing basis in offsetting changes in cash flows of the hedged transaction.

The Company records derivative financial instruments on the condensed consolidated balance sheets as either an asset or liability measured at its fair value. Changes in a derivative's fair value (i.e. unrealized gains or losses) are recorded each period in earnings unless the derivative qualifies as a hedge on future cash flows. Gains and losses related to a hedge are either recognized in income immediately to offset the gain or loss on the hedged item, or deferred and recorded in the stockholders' equity section of the condensed consolidated balance sheets as a component of accumulated other comprehensive loss (“AOCL”) and subsequently recognized in the condensed consolidated statements of operations and comprehensive loss when the hedged item affects net income. The ineffective portion of the change in fair value of a hedge, if any, is recognized in income immediately. For derivative instruments that are not designated as hedges, the gain or loss related to the change in fair value is also recorded to net income immediately.

New Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 is part of the FASB’s overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 removes certain exceptions to the general principles of ASC 740, Income Taxes, in order to reduce the cost and complexity of its application in the areas of intraperiod tax allocation, deferred tax liabilities related to outside basis differences, year-to-date losses in interim periods and other areas within ASC 740. The Company adopted ASU 2019-12 on January 1, 2021 and the adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements.

No other new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on the condensed consolidated financial statements.

3. Business Combination

As discussed in Note 1, on January 29, 2021, Novus completed the Business Combination with Legacy AppHarvest through the Merger, with Legacy AppHarvest surviving the Merger as a wholly-owned subsidiary of the Company. Upon the consummation of the Business Combination, each share of Legacy AppHarvest common stock issued and outstanding was canceled and converted into the right to receive 2.1504 shares of the Company’s common stock.

Upon the closing of the Business Combination, the Company’s certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares of all classes of capital stock to 760,000 shares, of which 750,000 shares were designated common stock, $0.0001 par value per share, and 10,000 shares designated Preferred Stock, $0.0001 par value per share.

Each option to purchase Legacy AppHarvest common stock that was outstanding immediately prior to the Business Combination, whether vested or unvested, was converted into an option to purchase a number of shares of the Company’s common stock equal to the product (rounded down to the nearest whole number) of (i) the number of shares of Legacy AppHarvest common stock subject to such Legacy AppHarvest option and (ii) the Exchange Ratio, at an exercise price per share (rounded up to the nearest whole cent) equal to (A) the exercise price per share of such Legacy AppHarvest option, divided by (B) the Exchange Ratio.

Each restricted stock unit awarded by Legacy AppHarvest that was outstanding immediately prior to the Business Combination, whether vested or unvested, was converted into an award of restricted stock units to acquire a number shares of the Company’s common stock equal to the product (rounded down to the nearest whole number) of (1) the number of shares of Legacy AppHarvest common stock subject to the Legacy AppHarvest restricted stock unit award and (2) the Exchange Ratio.

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Notes to Condensed Consolidated Financial Statements (unaudited)

In connection with the execution of the Business Combination Agreement, the Company entered into separate subscription agreements (the “Subscription Agreements”) with certain investors (each a “Subscriber”), pursuant to which the Subscribers agreed to purchase, and the Company agreed to sell to the Subscribers, an aggregate of 37,500 shares of common stock (the “PIPE Shares”), for a purchase price of $10.00 per share and an aggregate purchase price of $375,000, in a private placement pursuant to the Subscription Agreements (the “PIPE”). The PIPE investment closed concurrently with the closing of the Business Combination.

Prior to the Business Combination, Novus had outstanding 10,000 Public Warrants and 3,250 Private Warrants which were listed on the Nasdaq Capital Market under the symbol “NOVSW.” Upon the closing of the Business Combination, they became listed on the Nasdaq Global Select Market under the symbol “APPHW.” The Warrants remain subject to the same terms and conditions as prior to the Business Combination.

Also immediately prior to the closing of the Business Combination, Novus assumed the Legacy AppHarvest convertible note (the “Convertible Note”). Upon completion of the Business Combination, the outstanding principal and unpaid accrued interest due on the Legacy AppHarvest Convertible Note was converted into an aggregate of 3,242 shares of common stock, and the converted note was no longer outstanding, and ceased to exist. See Note 9 Note Payable with a Related Party.

Upon consummation of the Business Combination and the closing of the PIPE, the most significant change in Legacy AppHarvest’s financial position and results of operations was a total net increase in cash and cash equivalents of approximately $435,239, including $375,000 in gross proceeds from the PIPE.

The Business Combination is accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Novus was treated as the “acquired” company for financial reporting purposes. See Note 1 Description of Business for further details. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy AppHarvest issuing stock for the net assets of Novus, accompanied by a recapitalization. The net assets of Novus are stated at historical cost, with no goodwill or other intangible assets recorded.

The following table reconciles the elements of the Business Combination to the unaudited condensed consolidated statements of stockholders’ equity and cash flows for the three months ended March 31, 2021:

						Recapitalization
Cash - Novus trust and cash, net of redemptions						$	99,896
Cash - PIPE financing						375,000
Non-cash Convertible Note conversion						30,808
Non-cash net liabilities assumed from Novus						(2,850)
Less: Fair value of assumed common stock Private Warrants						(45,565)
Less: transaction costs allocated to equity						(23,762)
Net impact on total stockholders’ equity						433,527
Less: cash payments for transaction costs at Closing						(2,634)
Less: non-cash Convertible Note conversion						(30,808)
Add: non-cash net liabilities assumed from Novus						2,850
Add: non-cash fair value of assumed common stock Private Warrants						45,565
Net impact on net cash provided by financing activities						448,500
Less: transaction costs included in net cash used in operating activities(a)						(13,261)
Total net increase in cash and cash equivalents						$	435,239

(a) Including transaction costs in the amount of $2,887 allocated to the Private Warrants.

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Notes to Condensed Consolidated Financial Statements (unaudited)

4. Revenue Recognition

The Company began recognizing revenue in connection with its first harvest during the three months ended March 31, 2021, and generated no revenues prior to this period. Substantially all of the Company’s revenues are generated from the sale of tomatoes under an agreement with one customer, Mastronardi Produce Limited (“Mastronardi”).

On March 28, 2019, the Company entered into a Purchase and Marketing Agreement (the “Mastronardi Morehead Agreement”) with Mastronardi pursuant to which Mastronardi will be the sole and exclusive marketer and distributor of all tomatoes, cucumbers, peppers, berries and leafy greens produced at the Company’s CEA facility in Morehead, Kentucky that meet certain quality standards (collectively, the “Products”). Under the terms of the Mastronardi Morehead Agreement, the Company is responsible for growing, producing, packing, and delivering the Products to Mastronardi, and Mastronardi is responsible for marketing, branding and distributing the Products to its customers. Mastronardi will pay the Company market prices for the Products that are consistent with the best and highest prices available during the duration of the applicable growing season for like kind U.S. Department of Agriculture Grade No. 1 products. Mastronardi will set the market price for the Products and will pay the Company the gross sale price of the Product sold by Mastronardi, less a marketing fee and Mastronardi’s costs incurred in the sale and distribution of the Products. If Mastronardi rejects, returns or otherwise refuses Products for failure to meet certain quality standards, the Company has the right, at its cost and expense, to sell or otherwise dispose of the Products, subject to certain conditions.

The Mastronardi Morehead Agreement has a term of 10 years. The Company has a limited, one-time right to terminate the Mastronardi Morehead Agreement if certain return targets are not reached. During the term of the Mastronardi Morehead Agreement, Mastronardi has a right of first refusal to enter into similar arrangements with regard to any additional growing facilities the Company establishes in Kentucky or West Virginia.

The Company recognizes revenue at a point in time and at the amount it expects to be entitled to be paid when its performance obligation is complete, which is generally when control of the Products is transferred to its customers upon pick-up by the customer or the customer’s agent from the Company’s facilities. Prices for the Company’s Products are based on agreed upon rates with customers and do not include financing components or noncash consideration. Revenue is recorded net of variable consideration, such as commissions and other shipping, handling and marketing costs incurred as defined in the customer agreements. Revenue is also recorded net of provisions for returns and rejections for Products that do not meet quality specifications, with such provisions calculated using historical averages adjusted for any expected changes due to current business conditions. Payment terms are generally 30 days.

5. Fair Value Measurements

The company categorizes its assets and liabilities into one of three levels based on the assumptions (inputs) used in determining their values, as defined below:

•Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

•Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•Level 3: Unobservable inputs reflecting management’s assumptions about the inputs used in pricing the asset or liability.

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Notes to Condensed Consolidated Financial Statements (unaudited)

The table below presents the Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used for each measurement:

												Fair Value as of March 31, 2021
(In thousands)						Balance Sheet Account						Level 1						Level 2						Level 3						Total
Assets:
Foreign currency options						Other assets, net						$	—					$	166					$	—					$	166
Total assets												$	—					$	166					$	—					$	166
Liabilities:
Foreign currency forward contracts						Other current liabilities						$	—					$	798					$	—					$	798
Private Warrants						Private Warrant liabilities						—						29,920						—						29,920
Total liabilities												$	—					$	30,718					$	—					$	30,718

The Company’s condensed consolidated financial instruments include foreign currency forward and option contracts that are measured at fair value based on observable market transactions as of the reporting date. The fair values of the outstanding derivative instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for terms specific to the contracts. See Note 11. Derivative Financial Instruments for more information on the Company’s use of financial instruments.

The Private Warrant liabilities are determined using a Black-Scholes option pricing model, a Level 2 valuation. The significant inputs to the Private Warrant valuation are as follows:

						On the Closing Date of the Business Combination						March 31, 2021
Exercise price						$	11.50					$	11.50
Stock price						$	24.95					$	18.30
Volatility						25.0		%				55.8		%
Remaining term in years						5.00						4.83
Risk-free rate						0.45		%				0.92		%
Dividend yield						—						—

The following table summarizes the private warrant activity for the three months ended March 31, 2021:

						(In thousands)
Fair value of Private Warrants on the Closing Date						$	45,565
Fair value of Private Warrants converted to Public Warrants						(5,819)
Change in fair value of Private Warrants						(9,826)
Fair value of Private Warrants outstanding as of March 31, 2021						$	29,920

The Company did not have any assets or liabilities subject to fair value measurements on a recurring basis as of December 31, 2020.

The Warrants are deemed equity instruments for income tax purposes, and accordingly, there is no tax accounting relating to changes in the fair value of the Private Warrants recognized. The changes in the fair value of the Private Warrants may be material to our future operating results.

The Company measures certain assets and liabilities at fair value on a non-recurring basis. Assets and liabilities that are measured at fair value on a non-recurring basis include long-lived assets which would generally be recorded at fair value as a result of an impairment charge. Assets acquired and liabilities assumed as part of a business combination or asset acquisition are also measured at fair value on a non-recurring basis during the measurement period allowed by the accounting standards codification guidance for business combinations, when applicable.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Carrying values of cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, accrued expenses, and other current liabilities approximate fair values because of their short-term nature.

6. Inventories

Inventories are valued at the lower of cost (first-in, first-out) or net realizable value. Finished goods inventories represent costs associated with boxed produce not yet sold. Growing crop inventories primarily represent the costs associated with growing produce within the Company’s CEA facilities. Materials and supplies primarily represent growing and packaging supplies. Inventory costs are comprised of the purchase and transportation cost plus production labor and overhead.     

Inventories consisted of the following:

			March 31, 2021						December 31, 2020
Growing crops			$	3,275					$	2,606
Raw materials			1,597						781
Finished goods			31						—
Total inventories, net			$	4,903					$	3,387

7. Property and Equipment

Property and equipment at cost and accumulated depreciation are as follows:

			March 31, 2021						December 31, 2020
Land			$	19,449					$	7,277
Buildings			76,165						57,362
Machinery and equipment			43,357						9,581
Construction in progress			50,824						78,174
Leasehold improvements			2,320						871
Less: accumulated depreciation			(1,153)						(620)
Total property and equipment, net			$	190,962					$	152,645

Depreciation expense for the three months ended March 31, 2021 and 2020 was $1,772 and $21, respectively.

During the three months ended March 31, 2021, the Company continued construction on the two additional CEA facilities in Berea, Kentucky and Richmond, Kentucky. The Company also acquired the Morehead CEA facility and related property from Equilibrium Controlled Environment Foods Fund, LLC and its affiliates (“Equilibrium”), a related party (See Note 10(a)).

The purchase price for the Morehead CEA facility was $125,000, which was equal to a multiple of Equilibrium’s cost of acquire, develop and construct the Morehead CEA facility. The Morehead CEA facility was placed in service during the three months ended March 31, 2021. As of December 31, 2020, building cost included $56,748 related to Morehead CEA facility right-to-use assets held under a finance lease with Equilibrium.

8. Accrued Expenses

Accrued expenses are as follow:

			March 31, 2021						December 31, 2020
Payroll and related			$	2,237					$	563
Professional service fees			2,284						693
Construction costs			1,408						2,574
Other accrued liabilities			935						352
Incentive compensation			864						—
Utilities			476						384
Interest on convertible debt with a related party			—						618
Total accrued expenses			$	8,204					$	5,184

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APPHARVEST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

9. Note Payable with a Related Party

On September 28, 2020, the Company entered into a convertible promissory note with Inclusive Capital Partners Spring Master Fund, L.P., a related party, to finance capital investments and operating needs. The Convertible Note had a principal balance of $30,000 and interest at 8.0% per annum. The outstanding principal amount of the Convertible Note and unpaid accrued interest was extinguished at a conversion price equal to $9.50 per share upon the successful closing of the Business Combination. The note principal of $30,000 and accrued interest of $618 were included as current liabilities at December 31, 2020. In connection with the Business Combination on January 29, 2021, the outstanding principal and unpaid accrued interest due was converted into an aggregate 3,242 shares of the Company’s common stock, such that the Convertible Note was no longer outstanding and ceased to exist.

10. Commitments and Contingencies

(a)Equilibrium Transaction

On March 1, 2021, the Company closed on the Membership Interest Purchase and Sale Agreement (the “MIPSA”) with Equilibrium that was entered into in December 2020, pursuant to which it purchased from Equilibrium 100% of its membership interests in its subsidiary, Morehead Farm LLC. The purchase price for Morehead Farm LLC (“Morehead Farm”) was $125,000 which was equal to a multiple of Equilibrium’s cost to acquire, develop and construct the Morehead Facility.

At closing, Morehead Farm LLC, which owns the Morehead facility, became a wholly owned subsidiary of the Company. Concurrent with the closing of the MIPSA the Master Lease Agreement that the Company had entered into on May 13, 2019 with Morehead Farm LLC to lease the Morehead facility and ancillary agreements related thereto, were terminated. As a result, the closing date balances of $66,504 for the financing obligation related to construction in progress assets and $58,496 for the finance lease liability related to the completed portion of the Morehead facility were settled and de-recognized from the Company’s unaudited condensed consolidated balance sheet.

(b)Other Leases

The Company’s other lease portfolio is primarily comprised of operating leases for offices. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on whether the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Leases are classified as operating or finance leases at the commencement date of the lease.

Operating lease right-of-use assets, net and liabilities are recognized within the condensed consolidated balance sheets based on the present value of lease payments over the lease term. As the implicit rate is generally not readily determinable for most leases, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate reflects the estimated rate of interest that the Company would pay to borrow on a collateralized basis over a similar term in a similar economic environment. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Leases may include renewal options, and the renewal option is included in the lease term if the Company concludes that it is reasonably certain that the option will be exercised. A certain number of the Company’s leases contain rent escalation clauses, either fixed or adjusted periodically for inflation of market rates, that are factored into the calculation of lease payments to the extent they are fixed and determinable at lease inception.

For the period ended March 31, 2021 and 2020 the Company recognized $97 and $14, respectively, of operating lease expense in selling, general and administrative expense (“SG&A”) within the unaudited condensed consolidated statement of operations and comprehensive loss.

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Notes to Condensed Consolidated Financial Statements (unaudited)

The future minimum rental payments required under the leases for each year of the next five years and in the aggregate thereafter are as follows:

			Operating leases
Remainder of 2021			$	319
2022			426
2023			415
2024			368
2025			355
2026 and thereafter			729
Total minimum payments required			2,612
Less: imputed interest costs(1)			(462)
Present value of net minimum lease payments(2)			$	2,150
Weighted-average imputed interest rate			6.32		%
Weighted-average remaining lease term			6.3

____________________________

(1)Represents the amount necessary to reduce net minimum lease payments to present value using actual rate in the lease agreement or the Company’s incremental borrowing rate at lease inception.

(2)Included in the unaudited condensed consolidated balance sheet as of March 31, 2021 as current and non-current lease liability of $300 and $1,850, respectively.

			Period Ended March 31,
			2021						2020
Cash paid for amounts included in the measurement of operating lease liabilities			$	52					$	10
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities			$	735					$	30

(c)     Agreements with Dalsem

The Company entered into agreements with Dalsem Greenhouse Technology, B.V. (“Dalsem”) for the construction of new CEA facilities in Richmond, Kentucky and Berea, Kentucky on November 20, 2020 and December 11, 2020, respectively. Under terms of the agreements, Dalsem will provide certain services related to the design, engineering, procurement, construction, startup and testing of a greenhouse and certain ancillary facilities at each site. Total costs under the agreements are based on actual costs incurred by Dalsem and payments are due upon the completion of certain established project milestones, with a portion of each payment due in Euros and a portion due in U.S. dollars. Either party is entitled to terminate the agreements upon the occurrence of certain events of default and the Company is entitled to terminate the agreements if Dalsem fails to meet certain performance requirements. The Company may also terminate the agreements without cause with written notice and a termination payment to Dalsem.

(d)     Purchase Commitments

There were no purchase commitments that were unrecorded at March 31, 2021 and December 31, 2020, respectively.

11. Derivative Financial Instruments

During the three months ended March 31, 2021, the Company entered into foreign currency forward and option contracts to hedge certain cash flows related to anticipated expenditures related to the construction of its Berea, Kentucky and Richmond, Kentucky CEA facilities. These contracts, which have maturities ranging through December 2022, qualify as cash flow hedges and are used to hedge the Company’s foreign currency risk associated with the Euro denominated payments due upon the completion of established project milestones under the applicable CEA facility construction contracts. As of March 31, 2021, the total notional amount outstanding of foreign currency contracts designated as cash flow hedging instruments was €49,692. The Company maintains collateral of $5,000 for the hedge program which is included in other non-current assets and margin call deposits of $670 which are included in prepaid expenses and other current assets in the unaudited condensed consolidated balance sheet at March 31, 2021.

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APPHARVEST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

The Company has elected to measure hedge effectiveness using the “spot method” under which the hedging relationship is considered perfectly effective and changes in the fair value of the forward and options contracts attributable to changes in the spot rate are recorded as a component of other AOCL. As the hedged items are ultimately capitalized as part of the CEA facility fixed assets, the AOCL amounts will be reclassified into earnings over the same periods as the future depreciation expense related to those assets. Consistent with the allocation of greenhouse facility fixed asset depreciation, the AOCL reclassification will also be allocated between cost of goods sold (“COGS”) and SG&A within the unaudited condensed consolidated statement of operations and comprehensive loss.

Under the “spot method”, changes in the fair value of forward contracts attributable to changes in the difference between the forward rate and the spot rate (forward points) and the fair value of option contracts attributable to time and volatility values (up-front premium) will be excluded from the measure of hedge effectiveness and amortized as COGS and SG&A on a straight-line basis over the terms of the underlying contracts. During the three months ended March 31, 2021, the Company recognized amortization expense of $30 related to its foreign currency hedge contracts within its unaudited condensed consolidated statement of operations and comprehensive loss.

As of March 31, 2021, the Company had a net liability of $(632) in foreign currency contracts designated as cash flow hedging instruments, which is included in other current and non-current liabilities according to the expected settlement dates of the related contracts. The Company recorded unrealized losses of $(669), net of tax impact of $244, in AOCL for the three months ended March 31, 2021. The Company will release the AOCL amounts, net of tax impact, in the periods that the underlying transactions impact earnings as described above.

12. Stock Compensation and Other Benefit Plans

Equity Incentive Plan

On January 29, 2021, stockholders approved the 2021 Equity Incentive Plan, (the “Plan”), replacing the 2018 Equity Incentive Plan, (the “2018 Plan”), pursuant to which the Company’s Board of Directors may grant stock awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards, to officers, key employees, and directors. The Plan allows for non-employee director grants, which are accounted for in the same manner as employee awards. There are 10,027 registered shares of common stock reserved for issuance under the Plan. During the three months ended March 31, 2021, no awards were granted under the Plan.

There are 5,371 registered shares of common stock reserved for issuance upon exercise or settlement, as applicable, of awards made under the 2018 Plan. While no further awards may be granted under the 2018 Plan, that plan continues to govern all outstanding awards previously issued under it.

Vesting of the restricted stock units issued under the 2018 Plan (“2018 RSUs”) was dependent on a liquidity event, the Business Combination, which occurred on January 29, 2021. Accordingly, the Company recognized a one-time stock-based compensation expense of $2,616 as of that date as a retroactive catch-up of cumulative stock-based compensation expense for such awards from their original grant dates. Total stock-based compensation expense related to 2018 RSU’s was $6,244 during the three months ended March 31, 2021. As of March 31, 2021, the Company had 1,830 granted but unvested 2018 RSU’s with unrecognized stock-based compensation expense of $17,111 remaining.

Total stock-based compensation expense was $6,287 and $19 for the three months ended March 31, 2021 and 2020, respectively. Of these amounts, $6,027 and $19 were included in SG&A for the three months ended March 31, 2021 and 2020, respectively, and $260 and zero, respectively, in COGS for the three months ended March 31, 2021 and 2020, respectively, within the Company’s unaudited condensed consolidated statements of operations and comprehensive loss.

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APPHARVEST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

Employee Stock Purchase Plan

On January 29, 2021, stockholders approved the 2021 Employee Stock Purchase Plan, (the “ESPP”). The ESPP provides eligible employees with a means of acquiring equity in the Company at a discounted price using their own accumulated payroll deductions. Under the terms of the ESPP employees can elect to have amounts of their annual compensation withheld, up to a maximum set by the board, to purchase shares of Company common stock for a purchase price equal to 85% of the lower of the fair market value per share (at closing) of Company common stock on (i) the offering date or (ii) the respective purchase date. There are 2,005 shares of common stock reserved for issuance under the ESPP. During the three months ended March 31, 2021, there were no shares purchased under the ESPP.

Employee Cash Incentive Plan

On March 23, 2021, the Compensation Committee of the Board (the “Committee”) adopted an Employee Cash Incentive Plan (the “Cash Incentive Plan”) which will govern the terms of annual cash incentive awards granted to eligible employees of the Company, as determined by the Committee from time to time. The Company’s named executive officers are eligible to participate in the Cash Incentive Plan, except that Jonathan Webb, the Company’s Chief Executive Officer, is not eligible to participate for the 2021 performance period. The Committee (or its delegate) will administer the Cash Incentive Plan and will have the authority to determine all of the awards granted under the Cash Incentive Plan.

The Cash Incentive Plan provides for a cash incentive award determined based on the achievement of specified annual Company performance goals, which include net revenue, adjusted EBITDA and improvement in the Company’s benefit corporation certification score, as well as individual performance goals. The performance measures for the Company’s named executive officers for the Company’s fiscal year ending December 31, 2021 will be described in the Company’s annual proxy statement filed in 2022. Each eligible employee will be assigned an individual incentive target expressed as a percentage of the employee’s annual base salary.

Following the end of each annual performance period, the Committee will determine achievement of the Company and individual performance goals. The Committee may modify and/or adjust the performance goals or the related level of achievement, in whole or in part, as it deems appropriate or equitable. Any cash incentive awards that become payable under the Cash Incentive Plan will generally be paid no later than 90 days following the end of the applicable performance period. In order to receive an award under the Cash Incentive Plan, the participant must generally remain employed and in good standing with the Company through the date of payment.

13. Income Taxes

The Company’s effective income tax rate was (7.6)% and 0% for the three months ended March 31, 2021 and 2020, respectively. The variance from the U.S. federal statutory rate of 21% for the three months ended March 31, 2021 was primarily attributable to a change in the Company’s valuation allowance. The Company’s income tax provision is impacted by a valuation allowance on the Company’s net deferred tax assets, net of reversing taxable temporary differences and considering future annual limitations on net operating loss carryforward utilization enacted by U.S. tax reform legislation. The Company maintains a valuation allowance on its net deferred tax assets for all periods presented as the Company cannot be certain that future taxable income will be sufficient to realize its deferred tax assets. Valuation allowances are provided against deferred tax assets when, based on all available evidence, it is considered more likely than not that some portion or all the recorded deferred tax assets will not be realized in future periods. There was no income tax expense recognized in the three months ended March 31, 2020.

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APPHARVEST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

14. Net Loss Per Common Share

Diluted net loss per common share is the same as basic net loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss. The following common share equivalent securities have been excluded from the calculation of weighted-average common shares outstanding because the effect is anti-dilutive:

Anti-dilutive common share equivalents			March 31, 2021						March 31, 2020
Stock options			2,866						2,159
Restricted Stock Units			2,561						—
Warrants			13,250						—
Total anti-dilutive common share equivalents			18,677						2,159

			Period Ended March 31,
			2021						2020
Numerator:
Net loss			$	(28,515)					$	(818)
Denominator:
Weighted-average common shares outstanding, basic and diluted			80,729						32,858
Net loss per common share, basic and diluted			$	(0.35)					$	(0.02)

15. Subsequent Events

In April 2021, the Company acquired Root AI, Inc., (“Root AI”) an artificial intelligence farming startup that creates intelligent robots to help manage high-tech indoor farms, for approximately $60,000. Total consideration included $10,000 in cash and 2,328 shares of the Company’s common stock. Founded in 2018, Root AI is based in Somerville, Massachusetts and has 19 full-time employees. The acquisition of Root AI is expected to provide the Company with a baseline of harvesting support while helping to evaluate crop health, predict yield, and optimize overall operations of its CEA facilities. The acquisition of Root AI will be accounted for under the acquisition method.

On April 12, 2021, the Company granted a total of 6,003 restricted stock units under the Plan.

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APPHARVEST MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believes,” “expects,” “intends,” “estimates,” “projects,” “anticipates,” “will,” “plan,” “may,” “should,” or similar language are intended to identify forward-looking statements.

It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Quarterly Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified under “Risk Factors” in Item 1A herein and in our other filings with the Securities and exchange Commission (the “SEC”). The impact of COVID-19 may also exacerbate these risks, any of which could have a material effect on us. All forward-looking statements included herein are made only as of the date hereof. Unless otherwise required by law, we do not undertake, and specifically disclaim, any obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise after the date of such statement.

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q, and our audited consolidated financial statements and related notes for the year ended December 31, 2020 included in our Current Report on Form 8-K/A filed with the SEC on March 2, 2021. As used in this section, unless the context suggests otherwise, “we,” “us,” “our,” “Company,” “AppHarvest” refer to AppHarvest, Inc. and its consolidated subsidiaries.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

AppHarvest was founded on January 19, 2018 and, together with its subsidiaries, is a sustainable food company creating a resilient and scalable ecosystem of applied technology greenhouses to serve the rapidly growing consumer demand for fresh, chemical-free, non-GMO fruits, vegetables and related products. We are operating and building some of the largest and most advanced agricultural facilities in the world. We are combining conventional agricultural techniques with the latest in controlled environment agriculture (“CEA”) technology to grow high-quality fruits and vegetables throughout the year. Our vision is to create America’s AgTech capital from within Appalachia and provide better produce, better farming practices, and better jobs.

Prior to October 2020, our operations were limited to organizing and staffing, business planning, raising capital, and acquiring and developing properties for CEA. In October 2020, we partially opened our first CEA facility in Morehead, Kentucky, which we estimate can cultivate more than 720,000 tomato plants with an approximate yield of more than 40 million pounds per year. We harvested our first crop of beefsteak tomatoes in January 2021 and we began harvesting our first crop of tomatoes on the vine in March 2021. Our Morehead CEA facility has been fully operational since March 2021, and production of the full 60 acres began as of the first week of May 2021.

We have six additional facilities in our current CEA facility development pipeline. We are currently constructing two CEA facilities in Berea, Kentucky and Richmond, Kentucky and have successfully reached all milestones for site preparation, permitting and construction. As of the filing date of this Quarterly Report on Form 10-Q, the Richmond facility is approximately 17% complete and the Berea facility is approximately 23% complete, based on the number of completed project weeks scheduled. We expect to begin construction of a 30 acre strawberry facility in Pulaski County, Kentucky in the second quarter of 2021 and anticipate the facility will be operational in the third quarter of 2022. We have signed an agreement to purchase the land for a 10 acre leafy green facility which we expect to close and begin construction on in the second quarter of 2021. We anticipate that the leafy green facility will be operational in the fourth quarter of 2022.

We expect to have five facilities operational by the end of 2022, with approximately 175 acres under production. We anticipate that we will have 12 operational CEA facilities in Appalachia with more than 500 acres of aggregate production capacity by the end of 2025.

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In April 2021, we acquired Root AI, Inc. (now AppHarvest Technology, Inc.), an artificial intelligence and robotics company, including their team with experience in CEA. This group is focused on technological and operational improvements within AppHarvest, including the development of a complete technology solution integrating custom robotics, genetics, management software, and artificial intelligence. We plan to initially leverage this technology internally and may offer this as a services-based technology solution or as a turnkey CEA solution in certain markets. We currently anticipate that development of this technology solution will be completed by the end of 2025.

The Company is organized as a single operating segment. Substantially all of the assets and operations of the Company are located in the United States (“U.S.”).

Basis of Presentation

Currently, we conduct business through one operating segment. Prior to the three months ended March 31, 2021 we were a pre-revenue company with no commercial sales. We began generating sales during the three months ended March 31, 2021 and conduct our operations solely in the U.S..

For more information about our basis of presentation, refer to Note 1 of unaudited condensed consolidated financial statements for the three months ended March 31, 2021, and 2020, included elsewhere in this Quarterly Report on Form 10-Q.

Morehead Facility

On March 1, 2021, we closed on the Membership Interest Purchase and Sale Agreement (the “MIPSA”) with Equilibrium Controlled Environment Foods Fund, LLC and its affiliates (“Equilibrium”) that we entered into in December 2020, pursuant to which we purchased from Equilibrium 100% of the membership interests in Morehead Farm LLC (“Morehead Farm”). The purchase price for Morehead Farm was approximately $125 million, which was equal to a multiple of Equilibrium’s cost to acquire, develop and construct the Morehead facility. At closing, Morehead Farm, a subsidiary of Equilibrium that owns the Morehead facility, became our wholly owned subsidiary. Concurrent with the closing of the MIPSA, the Master Lease Agreement pursuant to which we leased the Morehead facility from Equilibrium and ancillary agreements related thereto, were terminated.

Factors Affecting Our Financial Condition and Results of Operations

We have expended, and expect to continue to expend, substantial resources as we:

•complete the build-out of the Berea, Kentucky and Richmond, Kentucky CEA facilities, develop additional property already purchased, and purchase additional properties for and begin construction on additional CEA facilities;

•continue harvesting existing crops throughout our first growing season ending later this year and plant and harvest new crops in our future growing seasons;

•implement the Purchase and Marketing Agreement with Mastronardi Produce Limited (“Mastronardi”) and fulfill our obligations under that agreement;

•identify and invest in future growth opportunities, including new or expanded facilities and new product lines;

•invest in sales and marketing efforts to increase brand awareness, engage customers and drive sales of our products;

•invest in product innovation and development, including our recent acquisition of Root AI Inc’s technologies; and

•incur additional general and administrative expenses, including increased finance, legal and accounting expenses, associated with being a public company and growing operations.

Business Combination and Public Company Costs

On January 29, 2021, Novus Capital Corporation (“Novus”), a special purpose acquisition company, consummated the business combination agreement and plan of reorganization (the “Business Combination Agreement” and the transactions contemplated thereby, the “Business Combination”) dated September 2020, by and among ORGA, Inc., a wholly owned subsidiary of Novus (“Merger Sub”), and AppHarvest Operations, Inc., a Delaware corporation (f/k/a AppHarvest, Inc.) (“Legacy AppHarvest”), pursuant to which Legacy AppHarvest was merged with and into Merger Sub, with Legacy AppHarvest surviving the merger as a wholly-owned subsidiary of Novus. On the closing date, Novus changed its name to AppHarvest, Inc.

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While the legal acquirer in the Business Combination Agreement was AppHarvest, Inc. (formerly Novus), for financial accounting and reporting purposes under United States generally accepted accounting principles (“GAAP”), Legacy AppHarvest is the accounting acquirer as the Business Combination was accounted for as a “reverse recapitalization.” A reverse recapitalization (i.e., a capital transaction involving the issuance of stock by AppHarvest, Inc. (formerly Novus), for the stock of Legacy AppHarvest) does not result in a new basis of accounting, and the consolidated financial statements of the combined entity represent the continuation of the consolidated financial statements of Legacy AppHarvest in many respects. Accordingly, the consolidated assets, liabilities and results of operations of Legacy AppHarvest will become the historical consolidated financial statements of the combined company, and Novus’s assets, liabilities and results of operations will be consolidated with Legacy AppHarvest beginning on the acquisition date. Operations prior to the Business Combination will be presented as those of Legacy AppHarvest in future reports. The net assets of AppHarvest, Inc. have been recognized at historical cost (which was consistent with carrying value), with no goodwill or other intangible assets recorded upon execution of the Business Combination.

Upon consummation of the Business Combination and the closing of the concurrent private placement of the 37,500 shares of the Company’s common stock (the “PIPE”), the most significant change in our reported financial position and results of operations was an increase in cash and cash equivalents (as compared to Legacy AppHarvest’s consolidated balance sheet at December 31, 2020) of approximately $435.2 million, including $375.0 million in gross proceeds from the PIPE.

As a consequence of the Business Combination, we became the successor to an SEC-registered and Nasdaq-listed company, which requires us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.

Our future results of consolidated operations and financial position may not be comparable to historical results as a result of the Business Combination.

Convertible Debt

On September 28, 2020, we entered into a convertible promissory note with Inclusive Capital Partners Spring Master Fund, L.P., a related party, to finance capital investments and operating needs with a principal balance of $30.0 million. Upon completion of the Business Combination, the outstanding principal and unpaid accrued interest due on the convertible note was converted into an aggregate of 3.2 million shares of common stock in accordance with the terms of the agreement terms, and such converted convertible notes were no longer outstanding and ceased to exist, and any liens securing obligations under the convertible notes were released.

Key Components of Statement of Operations

Non-GAAP Financial Measures

To supplement our unaudited condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain non-GAAP measures, such as EBITDA or Adjusted EBITDA, to understand and evaluate our core operating performance. We define and calculate Adjusted EBITDA as net loss before the impact of interest income or expense, income tax expense or benefit, depreciation and amortization, and further adjusted for the following items: stock-based compensation, transaction-related costs, remeasurement of warrant liabilities and certain other non-recurring, non-cash and non-core items. We believe these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to the our financial condition and results of operations. Our management uses these non-GAAP measures for trend analyses and for budgeting and planning purposes.

We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating projected operating results and trends. Other similar companies may present different non-GAAP measures or calculate similar non-GAAP measures differently. Management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses that are required to be presented in our GAAP financial statements. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are included in discussion of results of operations below.

Net sales

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Prior to the three months ended March 31, 2021,we had not yet generated sales. Substantially all of our net sales are generated from the sale of tomatoes under an agreement with one customer, Mastronardi.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) consist of payroll and payroll related expenses, stock-based compensation, professional services and legal fees, licenses and registration fees, insurance, depreciation, rent and various other personnel and office related costs. SG&A also includes start-up expenses related to pre-commencement commercial activities for tomatoes on the vine at the Morehead CEA facility.

Interest Expense

Interest expense primarily relates to the finance lease and financing obligation for the Morehead CEA facility which were settled upon purchase of Morehead Farm on March 1, 2021 and the convertible note that was converted to common stock upon completion of the Business Combination on January 29, 2021.

Results of Operations

Comparison of the Three Months Ended March 31, 2021 and 2020

The following table sets forth our historical operating results for the periods indicated:

			Three Months Ended
(Dollars in thousands)			March 31, 2021						March 31, 2020						$ Change
Net sales			$	2,299					$	—					$	2,299
Cost of goods sold			6,836						—						6,836
			(4,537)			—			—						(4,537)
Operating expenses:
Selling, general and administrative expenses			31,489						980						30,509
Total operating expenses			31,489						980						30,509
Operating loss			(36,026)						(980)						(35,046)
Development fee income from a related party			—						134						(134)
Interest expense from related parties			(658)						(2)						(656)
Change in fair value of Private Warrants			9,826						—						9,826
Other			356						30						326
Loss before income taxes			(26,502)						(818)						(25,684)
Income tax expense			(2,013)						—						(2,013)
Net loss			$	(28,515)					$	(818)					$	(27,697)

Reconciliation of GAAP to Non-GAAP

						Three Months Ended
(Dollars in thousands)						March 31, 2021						March 31, 2020
Net loss						$	(28,515)					$	(818)
Interest expense from related parties						658						2
Interest income						(23)						(29)
Income tax expense						2,013						—
Depreciation and amortization expense						1,802						21
EBITDA						(24,065)						(824)
Change in fair value of Private Warrants						(9,826)						—
Stock-based compensation expense						6,286						19
Transaction success bonus on completion of Business Combination						1,500						—
Business Combination transaction costs						13,261						—
Root AI acquisition costs						407						—
Adjusted EBITDA						$	(12,437)					$	(805)

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The following sections discuss and analyze the changes in the significant line items in our unaudited condensed consolidated statements of operations for the comparison periods identified.

Net Sales

Net sales for the three months ended March 31, 2021 were $2.3 million compared to $0 for the comparable prior year period, due to initial tomato sales produced at our Morehead CEA facility.

Cost of Goods Sold

Cost of goods sold for the three months ended March 31, 2021 was $6.8 million compared to $0 for the comparable prior year period. The phased launch of commercial production at our Morehead CEA facility, including our initial harvest of beefsteak tomatoes and the planting and initial harvest of tomatoes on the vine, was the main driver of this increase as we had no production in the prior year period. The increase included the hiring and training of our labor force and establishment of production processes and procedures as we ramped up to full production capabilities.

Selling, General, and Administrative Expenses

SG&A for the three months ended March 31, 2021 was $31.5 million compared to $1.0 million for the comparable prior year period. The $30.5 million increase was primarily due to transaction costs related to the Business Combination, stock-based compensation expense, including a one-time charge due to the completion of the Business Combination, payroll and related costs due to higher headcount and professional services and legal fees including accounting and other consulting fees related to becoming a public company. These costs also include approximately $1.0 million of start-up costs related to the pre-commencement commercial activities for tomatoes on the vine at the Morehead CEA Facility.

Development Fee Income from a Related Party

We recognized development fee income of $0.1 million during the three months ended March 31, 2020 which represents the amortization of a one-time development fee we received for limited oversight services the Company performed at Equilibrium’s greenhouse construction site in Morehead, Kentucky. The fee was amortized on a straight-line basis, consistent with the timing of our services, from date of receipt through the project completion date in October 2020. We recognized no such income during the three months ended March 31, 2021.

Interest Expense

Interest expense during the three months ended March 31, 2021 primarily relates to the finance lease and financing obligation for the Morehead facility which were settled upon the purchase of Morehead Farm on March 1, 2021 and the convertible note that was converted to common stock upon completion of the Business Combination on January 29, 2021.

Income Taxes

Our effective income tax rate was (7.6)% and 0% for the three months ended March 31, 2021 and 2020, respectively. The variance from the U.S. federal statutory rate of 21% for the three months ended March 31, 2021 was primarily attributable to a change in our valuation allowance. There was no income tax expense recognized in the three months ended March 31, 2020.

Liquidity and Capital Resources

Cash and cash equivalents totaled $297.7 million as of March 31, 2021. Currently, our primary sources of liquidity are cash flows generated from the successful completion of the Business Combination and revenues from the sale of our tomatoes. We have incurred losses and generated negative cash flows from operations since our inception in 2018. At March 31, 2021, we had an accumulated deficit of $49.6 million.

The large-scale high-tech CEA business is capital-intensive, and we expect to continue to expend significant resources as we accelerate construction of our next two CEA facilities in Central Appalachia, which include a 15-acre facility in Berea, Kentucky, where we will grow leafy greens, and a 60-acre facility outside Richmond, Kentucky, where we expect to grow tomatoes. In addition to construction costs, these expenditures are expected to include working capital, costs associated with planting and harvesting, such as the purchase of seeds and growing supplies, and the cost of attracting and retaining a skilled local labor force. Other unanticipated costs may arise due to the unique nature of the Morehead facility, and the accelerated purchase and development of additional properties for high-tech CEA facilities. We believe we will continue to incur net losses for the foreseeable future as we continue growing and then selling our produce. In addition, we also expect to incur additional costs associated with operating as a public company.

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We believe that our cash and cash equivalents on hand at March 31, 2021 are sufficient to meet our current payroll and working capital requirements for a period of at least 12 months from the date of this Quarterly Report on Form 10-Q, as well as our currently planned capital expenditure requirements as we continue to build out additional large-scale high-tech CEA facilities. The amount and timing of our future funding requirements, if any, will depend on many factors, including the timing and costs of completion of our large-scale high-tech CEA facilities.

We could potentially use our available financial resources sooner than we currently expect and may incur additional indebtedness to meet future financing needs. Adequate additional funding may not be available to us on acceptable terms or at all. In addition, although we anticipate being able to obtain additional financing through non-dilutive means, we may be unable to do so. Our failure to raise capital as and when needed could have significant negative consequences for its business, financial condition and results of consolidated operations. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors”.

Summary of Cash Flows

A summary of our cash flows from operating, investing and financing activities is presented in the following table:

(Dollars in thousands)									March 31,
															2021						2020
Net cash used in operating activities															$	(36,157)					$	(953)
Net cash used in investing activities															(134,538)						(83)
Net cash provided by financing activities															446,446						4,880
Cash and cash equivalents, beginning of year															21,909						6,031
Cash and cash equivalents, end of period															$	297,660					$	9,875

Net Cash from Operating Activities

Net cash used in operating activities was $36.2 million for the three months ended March 31, 2021 compared to $1.0 million for the three months ended March 31, 2020. The change of $35.2 million was primarily due to transaction costs related to the Business Combination, losses incurred related to the beginning of commercial production and sales at our Morehead CEA facility, as well as higher payroll and related costs due to increased headcount, and professional services and legal fees including accounting and other consulting fees related to becoming a public company.

Net Cash from Investing Activities

Net cash used in investing activities was $134.5 million for the three months ended March 31, 2021, compared to $0.1 million for the three months ended March 31, 2020. The change of $134.5 million was primarily due to the $125 million purchase of Morehead Farm pursuant to the MIPSA with Equilibrium that we completed on March 1, 2021.The remainder primarily related to construction of our Richmond and Berea CEA facilities.

Net Cash from Financing Activities

Net cash provided by financing activities was $446.4 million for the three months ended March 31, 2021, compared to $4.9 million for the three months ended March 31, 2020. The change of $441.6 million was substantially all related to the proceeds from the Business Combination.

Contractual Obligations

Our contractual obligations consist primarily of operating leases which impact our short-term and long-term liquidity and capital needs. The table below is presented as of March 31, 2021.

			Payments Due by Period
(Dollars in thousands)			Total						Less than 1 Year						1 – 3 Years						3 – 5 Years						More than 5 Year
Contractual obligations
Operating leases			$	2,612					$	425					$	840					$	708					$	639
Total contractual obligations			$	2,612					$	425					$	840					$	708					$	639

The table above does not include the contractual obligations related to our Morehead financing obligation or Morehead lease as concurrent with the closing of the MIPSA on March 1, 2021, the Master Lease Agreement and ancillary agreements related thereto were terminated. The table above also does not include amounts related to the construction of our Richmond and Berea CEA facilities, as the timing and amounts of future expenditures are currently unknown.

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Off-Balance Sheet Arrangements

We have not entered into off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results could differ from those estimates and assumptions.

Stock-Based Compensation and Private Warrants

We recognize in our unaudited condensed consolidated statements of operations and comprehensive loss the grant-date fair value of stock options and restricted stock awards issued to employees and directors. Our stock options and RSU’s are subject to service-based vesting conditions. Our RSUs are also subject to performance-based vesting conditions that were satisfied upon completion of the Business Combination. Stock-based compensation expense is recognized on a straight- line basis over the associated service period of the award, which is generally the vesting term. We recognize forfeitures of awards as they occur.

We account for our private warrants (the “Private Warrants”) in accordance with ASC 815-40, under which we have determined that the Private Warrants are recognized as liabilities at fair value and subject to re-measurement at each balance sheet date until exercised. Changes in fair value of the Private Warrants are recognized in our unaudited condensed consolidated statements of operations and comprehensive loss. The fair value of the Private Warrants is estimated at each measurement date using a Black-Scholes option pricing model.

We estimate the fair value of our stock option awards and Private Warrants using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the fair value of the common stock, expected term, expected volatility, risk-free interest rate, and expected dividends.

Fair Value of Common Stock — Historically, as there had been no public market for our common stock, the fair value of the common stock for stock-based awards was determined by the board of directors based in part on valuations of the common stock prepared by a third-party valuation firm. Since the closing of the Business Combination our board of directors will determine the fair value of each share of common stock underlying stock-based awards based on the closing price of our common stock as reported by Nasdaq on the date of the grant. For the Private Warrants, the fair value of the common stock is based upon historical values.

Expected Term — The expected term of the options represents the average period the stock options are expected to remain outstanding. As we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior, the expected term of options granted is derived from the average midpoint between the weighted average vesting and the contractual term, also known as the simplified method. For the Private Warrants, the expected term is the time from transaction date, to expiration in years.

Expected Volatility — As we were not a public company before the closing of the Business Combination, and did not have any trading history for common stock, the expected volatility for the stock-based awards was based on the historical volatility of the common stock of comparable publicly traded companies. Since the closing of the Business Combination our expected volatility is based on the trading history for our common stock. For the Private Warrants, the volatility is based on the implied volatility of other comparable Special Purpose Acquisition Company (“SPAC”) warrants.

Risk-Free Interest Rate — The risk-free interest rate is based on the yield of zero-coupon U.S. Treasury notes as of the grant date with maturities commensurate with the expected term of the awards.

Expected Dividends — The expected dividends assumption is based on the expectation of not paying dividends in the foreseeable future; therefore, we used an expected dividend yield of zero.

Assumptions used in applying the Black-Scholes option-pricing model to determine the estimated fair value of stock options granted and Private Warrants issued involve inherent uncertainties and the application of judgment. As a result, if factors or expected outcomes change and significantly different assumptions or estimates are used, our equity-based compensation and Private Warrant liabilities could be materially different.

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Emerging Growth Company and Smaller Reporting Company Status

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act, and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. We expect to remain an emerging growth company at least through the end of the 2021 fiscal year and expect to continue to take advantage of the benefits of the extended transition period, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. We expect to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and non-public companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.

In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an emerging growth company,we intend to rely on such exemptions, we are not required to, among other things: (a) provide an auditor’s attestation report on AppHarvest’s system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; (b) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act; (c) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis); and (d) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation.

We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2025, (b) the last date of our fiscal year in which we have total annual gross revenue of at least $1.07 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding securities held by non-affiliates or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.

We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as the market value of our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

Recent Accounting Guidance

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that we adopt as of the specified effective date.

See Item 1, “Financial Statements - Note 2 Summary of Significant Accounting Policies for a discussion of recent accounting pronouncements and their effect on us.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

As a smaller reporting company, this information is not required.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the fiscal quarter ended March 31, 2021. Based on this evaluation, our principal executive officer and principal financial and accounting officer have concluded that during the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level and, accordingly, provided reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

On April 12, 2021, the staff of the SEC issued a public statement entitled “Staff Statement on Accounting and Reporting Considerations for Warrants issued by Special Purpose Acquisition Companies (“SPACs”)” (the “SEC Staff Statement”). The SEC Staff Statement focused in part on provisions in warrant agreements that provide for potential changes in the settlement amounts dependent upon the characteristics of the warrant holder, and because the holder of a warrant is not an input into the pricing of a fixed-for fixed option on equity shares, such provision would preclude the warrant from being classified in equity and thus the warrant should be classified as a liability. Historically, all of the warrants issued during the initial public offering of Novus were reflected as a component of equity. In light of the SEC Staff Statement, we reassessed the accounting for the warrants and determined that the accounting treatment for the Private Warrants was in error. While the terms of the Private Warrants have not changed, as a result of the SEC Staff Statement, we determined that the Private Warrants should have been classified as liabilities and subsequently remeasured at fair value on a recurring basis pursuant to Accounting Standards Codification Topic 815. The terms of the warrants provide for differences in the mechanics of a cashless exercise dependent upon the characteristics of the warrant holder, and because the holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provisions preclude the Private Warrant from being classified in equity. We determined that there was no impact to the historical accounting by Novus for the Public Warrants as a result of the SEC Staff Statement and that the Public Warrants were properly reflected as a component of stockholders’ equity. The historical financial statements of Legacy AppHarvest, which are the financial statements of the combined company following the consummation of the Business Combination, are not affected by the SEC Staff Statement.

We intend to file an amendment (the "Amended Novus 10-K") to Novus's Annual Report on Form 10-K filed with the SEC on January 29, 2021 reflecting this change in classification of the Private Warrants for the period from March 5, 2020 (inception) through December 31, 2020 (the "Affected Period") and the corresponding restatement to the financial statement items for the Affected Period will be reflected in disclosures in the financial statements included in the Amended Novus 10-K. In addition, the Amended Novus 10-K will reflect the expense of certain issuance costs associated with the Private Warrants that were previously offset against stockholders’ equity.

In connection with the restatement, management re-evaluated the effectiveness of Novus’s disclosure controls and procedures as of December 31, 2020. Management concluded that Novus’s disclosure controls and procedures were not

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effective as of December 31, 2020, due to a material weakness in the internal control over financial reporting related to the accounting for complex equity instruments, solely as a result of Novus’s classification of the Private Warrants as components of equity instead of derivative liabilities. We believe that the identified material weakness was remediated following the Business Combination, as the disclosure controls and procedures and internal controls over financial reporting of Legacy AppHarvest (as the deemed accounting acquirer) became the disclosure controls and procedures and internal control over financial reporting of the combined company, and the financial reporting and accounting personnel of Legacy AppHarvest assumed such roles and responsibilities of the combined company.

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Part II - Other Information

Item 1. Legal Proceedings

From time to time, we may be subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results, cash flows or financial condition.

Item 1A. Risk Factors

Investing in our securities involves a high degree of risk. Before you make a decision to buy our securities, you should carefully consider the risks and uncertainties described below together with all of the other information contained in this Quarterly Report on Form 10-Q. If any of the events or developments described below were to occur, our business, prospects, operating results and financial condition could suffer materially, the trading price of our securities could decline, and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

Selected Risks Affecting Our Business

Our business is subject to a number of risks of which you should be aware before making a decision to invest in our securities. These risks include, among others, the following:

•We are an early-stage company with a history of losses and expect to incur significant expenses and continuing losses for the foreseeable future. Our business could be adversely affected if we fail to effectively manage our future growth.

•We will require additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to delay, limit, reduce or terminate our operations and future growth.

•We face risks inherent in the greenhouse agriculture business, including the risks of diseases and pests.

•We currently rely on a single facility for all of our operations.

•Any damage to or problems with our CEA facilities, or delays in construction, could severely impact our operations and financial condition.

•Mastronardi Produce Limited (“Mastronardi”) is currently our sole, exclusive marketing and distribution partner. We are highly dependent on this relationship, and impairment to or termination of this relationship could adversely affect our results of operations and financial condition.

•We could be adversely affected by a change in consumer preferences, perception and spending habits in the food industry, and failure to develop and expand our product offerings or gain market acceptance of our products could have a negative effect on our business.

•We have agreed not to compete with Mastronardi outside of Kentucky and West Virginia, which may limit our business opportunities.

•We build CEA facilities which may be subject to unexpected costs and delays due to reliance on third parties for construction, material delivery, supply-chains and fluctuating material prices.

•We may not be able to compete successfully in the highly competitive natural food market.

•We have not completed our first growing season at full operating capacity, which makes it difficult to forecast future results of operations.

•Demand for tomatoes and other vine produce is subject to seasonal fluctuations and may adversely impact our results of operations in certain quarters.

•Food safety and foodborne illness incidents or advertising or product mislabeling may materially adversely affect our business by exposing us to lawsuits, product recalls, or regulatory enforcement actions, increasing our operating costs and reducing demand for our product offerings.

•As a public benefit corporation, our duty to balance a variety of interests may result in actions that do not maximize stockholder value.

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Risks Related to Our Business and Industry

We are an early stage company with a history of losses, and expect to incur significant expenses and continuing losses for the foreseeable future. Our business could be adversely affected if we fail to effectively manage our future growth.

We incurred net losses of $28.5 million and $0.8 million for the three months ended March 31, 2021 and 2020, respectively. We believe we will continue to incur net losses for the foreseeable future as we continue our first growing season and commercial sales of our products. Even once we complete our first growing season at full capacity, there is no guarantee when, if ever, we will become profitable. We expect to expend substantial resources as we: