RYTHM, Inc. 10-Q/A

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The information contained in this Quarterly Report on Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on March 31, 2022 (the “Form 10-K”) and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K in the section entitled “Risk Factors” in the Annual Report on Form 10-K for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this Quarterly Report on Form 10-Q. The following should also be read in conjunction with the unaudited financial statements and notes thereto that appear elsewhere in this report. Except as otherwise indicated herein or as the context otherwise requires, references in this quarterly report to “we,” “us,” “our,” “Company,” and “Agrify” refer to Agrify Corporation, a Nevada corporation. Overview We are one of the most innovative providers of advanced cultivation and extraction solutions for the cannabis industry, bringing data, science, and technology to the forefront of the market. Our proprietary micro-environment-controlled Agrify Vertical Farming Units (or “VFUs”) enable cultivators to produce the highest quality products with what we believe to be an unmatched consistency, yield, and Return on Investment (“ROI”) at scale. Our comprehensive extraction product line, which includes hydrocarbon, ethanol, solventless, post-processing, and lab equipment, empowers producers to maximize the quantity and quality of extract required for premium concentrates. We believe we are the only company with an automated and fully integrated grow solution in the industry. Our cultivation and extraction solutions seamlessly combines our integrated hardware and software offerings with a broad range of associated services including consulting, engineering, and construction and is designed to deliver the most complete commercial indoor farming solution available from a single provider. The totality of our product offerings and service capabilities forms an unrivaled ecosystem in what has historically been a highly fragmented market. As a result, we believe we are well situated to create a dominant market position in the indoor agriculture sector. Agrify Corporation was incorporated in the state of Nevada on June 6, 2016, originally incorporated as Agrinamics, Inc. (or “Agrinamics”). On September 16, 2019, Agrinamics amended its articles of incorporation to reflect a name change to Agrify Corporation. Our corporate headquarters are located in Troy, Michigan. We also lease properties located within various geographic regions in which we conduct business, including Colorado, Georgia, Massachusetts, Michigan, and Oregon. Reverse Stock Split On January 12, 2021, we effected a 1-for-1.581804 reverse stock split on our Common Stock. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented, unless otherwise indicated. 61 On October 18, 2022, the Company effected a 1-for-10 reverse stock split of its Common Stock. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented unless otherwise indicated. On July 5, 2023, the Company effected a 1-for-20 reverse stock split of its Common Stock. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented unless otherwise indicated. No fractional shares of Common Stock were issued as a result of these reverse stock splits. Any fractional shares in connection with these reverse stock splits were rounded up to the nearest whole share and no stockholders received cash in lieu of fractional shares. The reverse stock splits had no impact on the number of shares of Common Stock that the Company is authorized to issue pursuant to its articles of incorporation or on the par value per share of the Common Stock. Proportional adjustments were made to the number of shares of Common Stock issuable upon exercise or conversion of the Company’s outstanding stock options and warrants, the exercise price or conversion price (as applicable) of the Company’s outstanding stock options and warrants, and the number of shares reserved for issuance under the Company’s equity incentive plan. All share and per share information included in this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the impact of these reverse stock splits. Recent Business Developments Private Placement On January 25, 2022, we entered into a Securities Purchase Agreement (the “Securities Agreement”) with an institutional investor and other accredited investors for the sale by us of (i) 12,252 shares (the “SA Shares”) of the our Common Stock, (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to an aggregate of 7,853 shares of Common Stock and (iii) warrants to purchase up to an aggregate of 15,079 shares of Common Stock (the “Common Warrants” and, collectively with the Pre-Funded Warrants, the “SA Warrants”), in a private placement offering. The combined purchase price for one share of Common Stock (or one Pre-Funded Warrant) and the accompanying fraction of a Common Warrant was $1,360.00. Subject to certain ownership limitations, the SA Warrants are exercisable six months from issuance. Each Pre-Funded Warrant is exercisable into one share of Common Stock at a price per share of $0.20 (as adjusted from time to time in accordance with the terms thereof). Each Common Warrant is exercisable into one share of Common Stock at a price per share of $1,496.00 (as adjusted from time to time in accordance with the terms thereof) and will expire on the fifth anniversary of the initial exercise date. The institutional investor that received the Pre-Funded Warrants fully exercised such warrants in March 2022. Raymond Chang, our Chairman and Chief Executive Officer, and Stuart Wilcox, who is currently our Chief Operating Officer, and at the time was a member of our Board of Directors, participated in the private placement on essentially the same terms as other investors, except for having a combined purchase price of $1,380.00 per share. The gross proceeds to us from the private placement were approximately $27.3 million, before deducting the placement agent’s fees and other offering expenses, and excluding the proceeds, if any, from the exercise of the SA Warrants. 62 Acquisition of Lab Society On February 1, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with LS Holdings Corp. (“Lab Society”), Lab Society NewCo, LLC, a newly-formed wholly-owned subsidiary of the Company (“Merger Sub”), Michael S. Maibach Jr. as the Owner Representative thereunder, and each of the shareholders of Lab Society (collectively, the “Owners”), pursuant to which we agreed to acquire Lab Society. Concurrently with the execution of the Merger Agreement, we consummated the merger of Lab Society with and into Merger Sub, with Merger Sub surviving such merger as a wholly-owned subsidiary of the Company (the “Lab Society Acquisition”). The aggregate consideration for the Lab Society Acquisition consisted of: (a) $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness of Lab Society at closing; (b) 2,128 shares of Common Stock (the “Buyer Shares”); and (c) the Earn-out Consideration (as defined below), to the extent earned. We withheld 638 of the Buyer Shares issuable to the Owners (the “Holdback Lab Buyer Shares”) for the purpose of securing any post-closing adjustment owed to us and any claim for indemnification or payment of damages to which we may be entitled under the Merger Agreement. The Holdback Lab Buyer Shares shall be released following the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions of the Merger Agreement. Additional information regarding the Company’s contingent consideration arrangements may be found in Note 5 – Fair Value Measures, included elsewhere in the notes to the condensed consolidated financial statements. The Merger Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Owners may become entitled to additional consideration with a value of up to $3.5 million based on the eligible net revenues achieved by the Lab Society business during the fiscal years ending December 31, 2022, and December 31, 2023, of which 50% will be payable in cash and the remaining 50% will be payable by issuing shares of Common Stock. Based upon the combined first and second quarter actual revenue performance, Lab Society’s revenue trend is significantly below the originally estimated revenue trends incorporated into our original fair value estimates at the time of the acquisition. We have concluded Lab Society will not achieve any contingent earn-out consideration in connection with its first earn-out period. Accordingly, we reversed the current accrued contingent consideration liability associated with Lab Society’s first earn-out period as of June 30, 2022. The reversal of this liability of approximately $1.0 million, as required by ASC 805, was recorded as a reduction in operating expenses during the second quarter of 2022. The purchase price allocation for the business combination has been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement period (up to one year from the acquisition date). The estimated fair value at acquisition is $7.9 million and may be adjusted upon further review of the values assigned to identifiable intangible assets and goodwill.   Our initial fair value estimates related to the various identified intangible assets were determined under various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate. During the three-month period ended June 30, 2022, the Company identified a potential impairment triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there may be an impairment to the carrying value of its long-lived assets and accordingly performed interim testing to determine the proper fair value of its long-lived assets as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 8– Intangible Assets, Net and Goodwill, included elsewhere in the notes to the condensed consolidated financial statements. 63 Securities Purchase Agreement On March 14, 2022, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with an accredited investor (the “Investor”), pursuant to which, among other things, we agreed to issue and sell to the Investor, in a private placement transaction (the “Private Placement”), in exchange for the payment by the Investor of $65 million, less applicable expenses as set forth in the Securities Purchase Agreement, (i) a senior secured promissory note in an aggregate principal amount of $65 million (the “SPA Note”), and (ii) a warrant (the “SPA Warrant”) to purchase up to an aggregate of 34,406 shares of Common Stock. The SPA Note will be a senior secured obligation of us and ranks senior to all indebtedness of us. We will be required to make amortization payments equal to 4.0% of the original principal amount of the SPA Note on the first day of each calendar month starting on February 1, 2023 and extending through the maturity date of March 1, 2026 (the “Maturity Date”), at which time all remaining outstanding principal and accrued but unpaid interest will be due. The SPA Note has a stated interest rate of 6.75% per year, and we will be required to pay interest on March 1, June 1, September 1, and December 1 of each calendar year through and including the Maturity Date. Following the one-year anniversary of the SPA Note’s issuance, we may, in lieu of paying interest in cash, pay such interest in kind, in which case interest on the SPA Note will be calculated at the rate of 8.75% per year and will be added to the principal amount of the SPA Note. At any time following the one-year anniversary of the SPA Note’s issuance, we may prepay all (but not less than all) of the SPA Note by redemption at a price equal to 106.75% of the then-outstanding principal amount under the SPA Note plus accrued but unpaid interest. The Investor will also have the option of requiring us to redeem the SPA Note if we undergo a fundamental change at a price equal to 107% of the then-outstanding principal amount under the SPA Note plus any accrued interest thereon. The Securities Purchase Agreement provides for up to two additional closings subject to certain conditions set forth in the Securities Purchase Agreement and on substantially the same terms as the initial closing. Each subsequent closing would result in the issuance of a senior secured note with an original principal amount of $35.0 million and warrants to purchase shares of Common Stock equal to 65% of such principal amount divided by the closing price of Common Stock on the trading day immediately prior to such subsequent closing. The SPA Note will impose certain customary affirmative and negative covenants upon us, as well as covenants that (i) restrict us and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, (ii) restrict the ability of us and its subsidiaries from making certain investments, subject to specified exceptions, (iii) restrict the declaration of any dividends or other distributions, subject to specified exceptions, (iv) require us to maintain specified earnings and adjusted EBITDA targets, and (v) require us to maintain minimum amounts of cash on hand. If an event of default under the SPA Note occurs, the Investor can elect to redeem the SPA Note for cash equal to 115% of the then-outstanding principal amount of the SPA Note (or such lesser principal amount accelerated by the Investor), plus accrued and unpaid interest, including default interest, which accrues at a rate per year equal to 15% from the date of a default or event of default. For the quarter ending June 30, 2022, we defaulted on certain of financial debt covenants associated with our SPA Note. As a result of this default, the lender would have the ability to call the balance of the note, along with a 115% penalty, amounting to a total repayment obligation of approximately $75.0 million ($65.0 million in principal and $9.8 million of default penalty), plus increase the interest due on the outstanding unpaid balance(s) from 6.75% to 15%. All amounts due would immediately become a current liability in the event the lender were to call the note. If the lender were to call the debt instrument due to the default, we would not have sufficient cash on hand as of June 30, 2022 to pay off the existing debt and default penalty amounts. As of June 30, 2022, cash, restricted cash, cash equivalents, and marketable securities totaled approximately $ 59.9 million, which would be insufficient to cover the combined amount of debt liability, including the default penalty amount. Subsequent to the end of the second quarter of 2022, we reached an agreement in principle with our institutional lender to amend the existing SPA Note and to modify certain financial covenants which, once complete, should give us additional flexibility to operate and meet our long-term strategic goals while also allowing us to responsibly adjust to the many challenges currently facing the cannabis industry. Until the date the SPA Note is fully repaid, the Investor will, subject to certain exceptions, have the right to participate for up to 30% of any debt, Preferred Stock or equity-linked financing of us or its subsidiaries. 64 Each SPA Warrant to be issued in the initial closing will have an exercise price of $1,350.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be immediately exercisable, has a term of five and one-half years from the date of issuance and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Warrant (the “SPA Warrant Shares”), in which case the SPA Warrant shall also be exercisable on a cashless exercise basis at the Investor’s election. The Securities Purchase Agreement requires us to file resale registration statements with respect to the SPA Warrant Shares as soon as practicable and in any event within 45 days following the initial closing and any subsequent closings. The SPA Warrant will provide that In no event will the number of shares of Common Stock issued upon exercise of the SPA Warrant result in the Investor’s beneficial ownership exceeding 4.99% of our shares outstanding at the time of exercise (which percentage may be decreased or increased by the Investor, but to no greater than 9.99%, and provided that any increase above 4.99% will not be effective until the sixty-first day after notice of such request by the Investor to increase its beneficial ownership limit has been delivered to us). The Securities Purchase Agreement also contains customary representations and warranties of us and the Investor. There is no material relationship between us or its affiliates and the Investor other than in respect of the Securities Purchase Agreement, the SPA Note and the SPA Warrant. Impact of coronavirus pandemic (“COVID-19”) The extensive impact of the pandemic caused by COVID-19 has resulted and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world. In an effort to halt the outbreak of COVID-19, a number of countries, states, counties, and other jurisdictions have imposed, and may impose in the future, various measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, limitations on gatherings of people, reduced operations, and extended closures of businesses. To date, although all of our operations are functioning, COVID-19 has continued to cause some disruptions to our business, such as some temporary delays in the delivery of our inventory. Although the ability of our suppliers to timely ship their goods has affected some of our deliveries, currently the difficulties experienced by our suppliers have not yet materially impacted our ability to deliver products to our customers. However, if this continues, it may negatively affect any inventory we may have and more significantly delay the delivery of merchandise to our customers, which in turn will adversely affect our revenues and results of operations. The extent to which COVID-19 and the related global economic crisis, affect our business, results of operations and financial condition, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any recovery period, future actions taken by governmental authorities, central banks and other third parties (including new financial regulation and other regulatory reform) in response to the pandemic, and the effects on our produce, clients, vendors and employees. We continue to service our customers amid uncertainty and disruption linked to COVID-19 and we are actively managing our business to respond to its impact. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include assumptions about collection of accounts and notes receivable, the valuation and recognition of stock-based compensation expense, valuation allowance for deferred tax assets and useful life of fixed assets and intangible assets. 65 Financial Overview Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial position and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate estimate, which include estimates related to accruals, stock-based compensation expense, and reported amounts of revenues and expenses during the reported period. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions. Revenue Recognition Overview We generate revenue from the following sources: (1) equipment sales, (2) providing services and (3) construction contracts. In accordance with ASC 606 “Revenue Recognition”, we recognize revenue from contracts with customers using a five-step model, which is described below: ● identify the customer contract; ● identify performance obligations that are distinct; ● determine the transaction price; ● allocate the transaction price to the distinct performance obligations; and ● recognize revenue as the performance obligations are satisfied. Identify the customer contract A customer contract is generally identified when there is approval and commitment from both use and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability, and consideration is probable. Specifically, we obtain written/electronic signatures on contracts and a purchase order, if said purchase orders are issued in the normal course of business by the customer. Identify performance obligations that are distinct A performance obligation is a promise by us to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and our promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Determine the transaction price The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies. 66 Allocate the transaction price to distinct performance obligations The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer. Our contracts typically contain multiple performance obligations, for which we account for individual performance obligations separately, if they are distinct. The standalone selling price reflects the price we would charge for a specific piece of equipment or service if it was sold separately in similar circumstances and to similar customers. Recognize revenue as the performance obligations are satisfied Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer. Significant Judgments We enter into contracts that may include various combinations of equipment, services and construction, which are generally capable of being distinct and accounted for as separate performance obligations. Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once we determine the performance obligations, it determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. We then allocate the transaction price to each performance obligation in the contract based on the SSP. The corresponding revenue is recognized as the related performance obligations are satisfied. Judgment is required to determine the SSP for each distinct performance obligation. We determine SSP based on the price at which the performance obligation is sold separately and the methods of estimating SSP under the guidance of Accounting Standards Codification (“ASC”) 606-10-32-33. If the SSP is not observable through past transactions, we estimate the SSP, considering available information such as market conditions, expected margins, and internally approved pricing guidelines related to the performance obligations. We license our software as a SaaS type subscription license, whereby the customer only has a right to access the software over a specified time period. The full value of the contract is recognized ratably over the contractual term of the SaaS subscription, adjusted monthly if tiered pricing is relevant. We typically satisfy our performance obligations for equipment sales when equipment is made available for shipment to the customer; for services sales as services are rendered to the customer and for construction contracts both as services are rendered and when contract is completed. We utilize the cost-plus margin method to determine the SSP for equipment and build-out services. This method is based on the cost of the services from third parties, plus a reasonable markup that we believe is reflective of a market-based reseller margin. We determine the SSP for services in time and materials contracts by observable prices in standalone services arrangements. We estimate variable consideration in the form of royalties, revenue share, monthly fees, and service credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Variable consideration is typically not subject to constraint. Changes to variable consideration were not material for the periods presented. If a contract has payment terms that differ from the timing of revenue recognition, we will assess whether the transaction price for those contracts include a significant financing component. We have elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if we expect that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service, will be one year or less. For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative estimate of the financing component and its relative significance, requires judgment. Accordingly, we impute interest on such contracts at an agreed-upon interest rate and will present the financing components separately as financial income. For the three and six months ended June 30, 2022 and 2021, we did not have any such financial income. 67 Payment terms with customers typically require payment 30 days from the invoice date. Our agreements with customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise a concern over delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented. We have elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service. Accordingly, we will accrue all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. We have payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We receive payment from customers based on specified terms that are generally less than 30 days from the satisfaction of performance obligations. There are no contract assets related to performance under the contract. The difference in the opening and closing balances of our deferred revenue primarily results from the timing difference between our performance and the customer’s payment. We fulfill obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. Accounts receivables are recorded when the customer has been billed or the right to consideration is unconditional. We recognize deferred revenue when consideration has been received or an amount of consideration is due from the customer, and we have a future obligation to transfer certain proprietary products. In accordance with ASC 606-10-50-13, we are required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of our contracts, these reporting requirements are not applicable. The majority of our remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the right to invoice practical expedient. We generally provide a one-year warranty on our products for materials and workmanship but may provide multiple-year warranties as negotiated, and will pass on the warranties from its vendors, if any, which generally covers this one-year period. In accordance with ASC 450-20-25, we accrue for product warranties when the loss is probable and can be reasonably estimated. The reserve for warranty returns is included in accrued expenses and other current liabilities in our condensed consolidated balance sheets. Accounting for Business Combinations We allocated the purchase price of acquired companies to the tangible and intangible assets acquired, including in-process research and development assets, and liabilities assumed, based upon their estimated fair values at the acquisition date. These fair values are typically estimated with assistance from independent valuation specialists. The purchase price allocation process requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, contractual support obligations assumed, contingent consideration arrangements, and pre-acquisition contingencies. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. 68 Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to: ● future expected cash flows from software license sales, support agreements, consulting contracts, other customer contracts, and acquired developed technologies; ● expected costs to develop in-process research and development into commercially viable products and estimated cash flows from the projects when completed; ● the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; ● cost of capital and discount rates; and ● estimating the useful lives of acquired assets as well as the pattern or manner in which the assets will amortize. The fair value estimates related to the various identified intangible assets were determined under various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate. Goodwill and Intangible Assets Amortization of acquired intangible assets is the result of the acquisition of TriGrow, which occurred in 2020, the acquisition of Precision and Cascade which occurred in 2021, the acquisition of PurePressure, which also occurred in 2021, and the acquisition of Lab Society, which occurred in 2022. As a result of these transactions, customer relationships, acquired developed technology, non-compete agreements and trade names were identified as intangible assets, and are amortized over their estimated useful lives. We recognize the excess of the purchase price over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized but is tested for impairment annually on December 2 or more frequently if events or changes in circumstances indicate that the carrying amount of the goodwill may not be recoverable. We have determined it is a single reporting unit for the purpose of conducting the goodwill impairment assessment. A goodwill impairment charge is recorded if the amount by which our carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Factors that could lead to a future impairment include material uncertainties such as a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in our market value as a result of a significant decline in our stock price. During the three-month period ended June 30, 2022, the Company identified a potential impairment triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there may be an impairment to the carrying value of its long-lived assets and accordingly performed interim testing to determine the proper fair value of its long-lived assets as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 8 – Intangible Assets, Net and Goodwill, included elsewhere in the notes to the condensed consolidated financial statements. 69 Capitalization of Internal Software Development Costs We capitalize certain software engineering efforts related to the continued development of Agrify Insights™ cultivation software under ASC 985-20. Costs incurred during the application development phase are only capitalized once technical feasibility has been established and the work performed will result in new or additional functionality. The types of costs capitalized during the application development phase include employee compensation, as well as consulting fees for third-party software developers working on these projects. Costs related to the research and development are expensed as incurred until technical feasibility is established as well as post-implementation activities. Internal-use software is amortized on a straight-line basis over the estimated useful life of the asset, which ranges from two to five years. Income Taxes We account for income taxes pursuant to the provisions of ASC Topic 740, “Income Taxes,” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized. We follow the provisions of ASC 740-10-25-5, “Basic Recognition Threshold.” When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10-25-6, the benefit of a tax position is recognized in the condensed consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. We believe our tax positions are all highly certain of being upheld upon examination. As such, we have not recorded a liability for unrecognized tax benefits. We recognize the benefit of a tax position when it is effectively settled. ASC 740-10-25-10, “Basic Recognition Threshold” provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. ASC 740-10-25-10 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority. For tax positions considered effectively settled, we recognize the full amount of the tax benefit. Accounting for Stock-Based Compensation We follow the provisions of ASC Topic 718, “Compensation — Stock Compensation.” ASC Topic 718 establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC Topic 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as options issued under our Stock Option Plans. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying Common Stock, expected option life, and expected volatility in the market value of the underlying Common Stock. 70 The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options and warrants have characteristics different from those of our traded stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the expected term. The expected dividend yield is based upon our history of having never issued a dividend and management’s current expectation of future action surrounding dividends. We calculate the expected volatility of the stock price based on the corresponding volatility of our peer group stock price for a period consistent with the underlying instrument’s expected term. The expected lives for such grants were based on the simplified method for employees and directors. In arriving at stock-based compensation expense, we estimate the number of stock-based awards that will be forfeited due to employee turnover. Our forfeiture assumption is based primarily on its turn-over historical experience. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in our financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized in our financial statements. The expense we recognize in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed above. Results of Operations We have incurred recurring losses to date. Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. We expect we will require additional capital to meet our long-term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities. 71 Comparison of the Three and Six Months Ended June 30, 2022 and 2021 The following table summarizes our results of operations for the three and six months ended June 30, 2022 and June 30, 2021: Three Months ended June 30, Six Months ended June 30, 2022 (As Restated) 2021 2022 (As Restated) 2021 Revenue $ 19,329 $ 11,825 $ 45,350 $ 18,833 Cost of goods sold 17,717 11,298 39,568 18,846 Gross profit (loss) 1,612 527 5,782 (13 ) General and administrative 19,378 4,399 29,137 8,857 Selling and marketing 2,332 782 4,422 1,398 Research and development 2,438 774 4,522 1,656 Change in contingent consideration (907 ) — (907 ) — Impairment of goodwill and intangible assets 69,904 — 69,904 — Total operating expenses 93,145 5,955 107,078 11,911 Loss from operations (91,533 ) (5,428 ) (101,296 ) (11,924 ) Interest income (expense), net (3,311 ) 55 (2,752 ) 23 Other expenses - (63 ) - (63 ) Change in fair value of warrant liabilities 20,181 - 30,966 - Gain on extinguishment of notes payable — — — 2,685 Other income, net 16,870 (8 ) 28,214 2,645 Net income (loss) before income taxes (74,663 ) (5,436 ) (73,082 ) (9,279 ) Income tax benefit (62 ) — (262 ) — Net income (loss) (74,601 ) (5,436 ) (72,820 ) (9,279 ) Income (loss) attributable to non-controlling interest 3 200 4 167 Net income (loss) attributable to Agrify Corporation $ (74,604 ) $ (5,636 ) $ (72,824 ) $ (9,446 ) Net income (loss) per share attributable to Common Stockholders – basic and diluted $ (561.31 ) $ (55.41 ) $ (569.13 ) $ (114.12 ) Weighted-average common shares outstanding – basic and diluted 132,911 101,721 127,956 83,310 Revenue Our goal is to provide our customers with a variety of products to address their entire indoor agriculture needs. Our core product offering includes our VFUs and Agrify Integrated Grow Racks with our Agrify Insights™ cultivation software, which are supplemented with environmental control products, grow lights, facility build-out services and extraction equipment. We continue to monitor and address COVID-19 pandemic impacts on our supply chain. Although the availability of various products is dependent on our suppliers, their locations, and the extent to which they are impacted by the COVID-19 pandemic, we are proactively working with manufacturers to meet the needs of our customers during the pandemic. Product shortages have generally led to increases in prices globally, with significant impacts to sales and interim profits. We generate revenue from sales of cultivation solutions, including ancillary products and services, Agrify Insights™ cultivation software, facility build-outs and extraction equipment and solutions. We believe that our product mix forms an integrated ecosystem which allows us to be engaged with our potential customers from the early stages of the grow cycle — first during the facility build-out, to the choice of cultivation solutions, running the grow business with our Agrify Insights™ cultivation software and finally, our extraction, post-processing and testing services to transform harvest into a sellable product. We believe that the delivery of each solution in the various stages in the process will generate sales of additional solutions and services. 72 The following table provides a breakdown of our revenue for the three and six months ended June 30, 2022 and 2021: Three Months ended June 30, % Six Months ended June 30, % (In thousands) 2022 2021 Change Change 2022 2021 Change Change Cultivation solutions, including ancillary products and services $ 321 $ 1,124 $ (803 ) (71 )% $ 703 $ 1,353 $ (650 ) (48 )% Agrify Insights™ cultivation software 44 — 44 100 % 45 8 37 463 % Facility build-outs 9,006 10,701 (1,695 ) (16 )% 22,217 17,472 4,745 27 % Extraction solutions 9,958 — 9,958 100 % 22,385 — 22,385 100 % Total revenue $ 19,329 $ 11,825 $ 7,504 64 % $ 45,350 $ 18,833 $ 26,517 141 % Revenues increased by $7.5 million, or 64% for the three months ended June 30, 2022, compared to the same period in 2021. The comparative increase in revenue was generated primarily from extraction solutions sales of equipment and services from our acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021, which contributed $10.0 million in revenue for the three months ended June 30 2022. Sales related to cultivation products decreased by $759 thousand during the three months ended June 30, 2022 primarily due to the variability in the sales cycle associated with our VFU equipment. In addition, comparative quarterly facility build-out revenue decreased by $1.7 million as a result of our legacy facility build-out projects nearing completion. Revenues increased by $26.5 million, or 141% for the six months ended June 30, 2022, as compared to the same period in 2021. The comparative increase in revenue was generated primarily from extraction solutions sales of equipment and services from our acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021 which contributed $22.4 million in revenue for the six months ended June 30, 2022. Additionally, facility build-out revenues increased by $4.7 million due to the continued build-out of facilities under our TTK Solutions. This was partially offset by a decrease in cultivation product and service sales of $613 thousand. Cost of Goods Sold Cost of goods sold represents a combination of the following: construction-related costs associated with our facility build-outs, internal and outsourced labor and material costs associated with the assembly of both cultivation equipment (primarily VFUs) and extraction equipment, as well as labor and parts costs associated with the sale or provision of other products and services. 73 The following table provides a breakdown of our cost of goods sold for the three and six months ended June 30, 2022 and 2021: Three Months ended June 30, % Six Months ended June 30, % (In thousands) 2022 2021 Change Change 2022 2021 Change Change Cultivation solutions, including ancillary products and services $ 1,335 $ 1,117 $ 218 20 % $ 1,740 $ 1,886 $ (146 ) (8 )% Agrify Insights™ cultivation software — — — — % — — — — % Facility build-outs 8,712 10,181 (1,469 ) (14 )% 21,788 16,960 4,828 28 % Extraction solutions 7,670 — 7,670 100 % 16,040 — 16,040 100 % Total cost of goods sold $ 17,717 $ 11,298 $ 6,419 57 % $ 39,568 $ 18,846 $ 20,722 110 % Cost of goods sold increased by $6.4 million, or 57%, for the three months ended June 30, 2022 compared to the same period in 2021. The comparative quarterly increase in the cost of goods sold is largely associated with the incremental expense associated with the sales of our extraction-related equipment, for which there was no associated revenue or expense in the prior year quarterly period. Costs associated with our extraction-related equipment sales totaled $7.7 million in the three months ended June 30, 2022. Additionally, our second quarter cost of goods sold amount for the second quarter of 2022 includes $929 thousand of incremental expense associated with increases to our inventory reserves related to slow-moving inventory, as well as $181 thousand of the incremental cost associated with increases to our warranty reserves. Cost of goods sold increased by $20.7 million, or 110%, for the six months ended June 30, 2022 compared to the same period in 2021. The comparative quarterly increase in the cost of goods sold is similarly associated with the introduction of our extraction-related equipment sales in the year-to-date 2022 fiscal period. Costs associated with extraction equipment-related equipment sales accounted for $16.0 million of the comparative year-to-date fiscal 2022 increase in cost of goods sold. Additionally, cost of goods sold related to facility build-outs increased by $4.8 million for the six months ended June 30 2022, directly related to the comparative increase in subcontractor construction costs associated with active design and build projects during the first half of the 2022 fiscal year. Gross Profit (Loss) Three Months ended June 30, % Six Months ended June 30, % (In thousands) 2022 2021 Change Change 2022 2021 Change Change Gross profit (loss) $ 1,612 $ 527 $ 1,085 206 % $ 5,782 $ (13 ) $ 5,795 44,577 % Gross profit totaled $1.6 million, or 8.3 % of total revenue during the three months ended June 30, 2022 compared to a gross profit of $527 thousand, or 4.5% of total revenue during the three months ended June 30, 2021. The comparative $1.1 million second-quarter year-over-year improvement in gross profit, as well as the comparative improvement in gross profit margin, is primarily attributable to the introduction of our extraction solutions revenue in 2022, which contributes to higher gross profit and gross profit margins than those realized on our cultivation-related revenue, which includes our TTK Solutions build-out revenue. During the second quarter of 2022, we realized a gross profit margin of 23% associated with our extraction solutions revenue, while we realized a gross loss of approximately (7)% on our facility build-outs and cultivation-related revenues. Our gross profit and gross profit margins for the three-month period ended June 30, 2022, were negatively impacted as a result of increases in inventory reserves and warranty reserves, which totaled $929 thousand and $181 thousand, respectively. Absent these periodic charges, reported gross profit margins would have been approximately 14.1% during the second quarter of 2022. 74 Gross profit totaled $5.8 million, or 12.7 % of total revenue during the six months ended June 30, 2022 compared to a gross loss of ($13) thousand, or (0.1)% of total revenue during the six months ended June 30, 2021. The comparative $5.8 million year-over-year improvement in gross profit, as well as the comparative improvement in gross profit margin, is similarly attributable to the introduction of our extraction solutions revenue during the first six months of 2022. No extraction solutions-related revenues were recognized during the first six months of 2021. Extraction solutions revenue contributes a higher gross profit and gross profit margins than those realized on our cultivation-related revenue, which includes our TTK Solutions build-out revenue. During the first six months of 2022, we realized a gross profit margin of 28% associated with our extraction solutions revenue, while we realized a gross loss of approximately (2)% on our cultivation-related revenues. As with our second quarter of 2022, our gross profit and gross profit margin for the six months ended June 30, 2022 is also adversely impacted by the inventory and warranty reserves described above. General and Administrative Three Months ended June 30, % Six Months ended June 30, % (In thousands) 2022 2021 Change Change 2022 2021 Change Change General and administrative $ 19,378 $ 4,399 $ 14,979 341 % $ 29,137 $ 8,857 $ 20,280 229 % General and administrative (“G&A”) expenses consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses, associated with executive and other administrative functions. Other G&A expenses include, but are not limited to, professional fees for legal, consulting, depreciation and amortization and accounting services, as well as facility-related costs. G&A expense increased by $15.0 million, or 341%, for the three months ended June 30, 2022, compared to the same period in 2021. The primary driver of the increase in comparative general and administrative expense in the second quarter of 2022 is largely the result of an $8.6 million increase in trade and loan receivable allowances recorded during the quarter. During the second quarter of 2022, the Company increased its trade receivables reserve by approximately $1.5 million and its loans receivable reserve by approximately $7.1 million, specifically related to Greenstone Holdings (“Greenstone”). Both reserves were deemed necessary due to the current financial instability within the cannabis industry. The Company specifically established the loan reserve related to Greenstone based upon its review of Greenstone’s financial stability, which would impact collectability and is primarily the result of unfavorable market conditions within the Colorado market. The Company will continue to monitor the operations of Greenstone in an effort to collect all outstanding receivables but due to the uncertain nature of Greenstone’s business at this time the Company has made the decision to place a reserve against the loan receivable amounts. Additional information regarding recent developments with Greenstone may be found in Note 6 – Loan Receivable, included elsewhere in the notes to the condensed consolidated financial statements Other year-over-year increases in the second quarter of 2022 general and administrative expenses included $3.9 million of incremental G&A expenses related to our acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021, an increase in wage and benefits-related expenses of $1.1 million, an increase in facility and other related expenses of $936 thousand, an $800 thousand legal settlement accrual, an increase in directors’ and officers’ insurance of $182 thousand, an increase in investor relations of $133 thousand and an increase in depreciation and amortization of $34 thousand. G&A expense increased by $20.3 million, or 229%, for the six months ended June 30, 2022, compared to the same period in 2021. As described above, the primary drivers of the year-over-year increase in the comparative six-month period G&A expenses are largely attributable to an increase in trade and loan receivable allowances of $7.8 million and $6.9 million of incremental G&A expenses related to our acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021. Other drivers of the comparative year-over-year increase in G&A expense include an increase in payroll and related expenses increase of $2.4 million, an increase in acquisition-related expenses of $2.1 million, an increase in facility and other related expenses of $1.2 million, an increase in investor relations of $339 thousand, an increase in directors’ and officers’ insurance of $310 thousand, and an increase in depreciation and amortization of $152 thousand. These increases were partially offset by a reduction in stock compensation expense of $892 thousand. 75 Selling and Marketing Three Months ended June 30, % Six Months ended June 30, % (In thousands) 2022 2021 Change Change 2022 2021 Change Change Selling and marketing $ 2,332 $ 782 $ 1,550 198 % $ 4,422 $ 1,398 $ 3,024 216 % Selling and marketing expenses consist primarily of salaries and related costs of personnel, travel expenses, trade shows and advertising expenses. Selling and marketing expenses increased by $1.6 million, or 198%, for the three months ended June 30, 2022, compared to the same period in 2021. The increase is attributable to our acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021 of $802 thousand, an increase in travel and other expenses of $321 thousand, an increase in payroll and related expenses of $278 thousand and an increase in advertising and trade show expenses of $149 thousand. Selling and marketing expenses increased by $3.0 million, or 216%, for the six months ended June 30, 2022, compared to the same period in 2021. The increase is attributable to our acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021 of $2.2 million, an increase in payroll and related expenses of $513 thousand, an increase in advertising and trade show expenses of $172 thousand and an increase in travel and other expenses of $97 thousand. Research and Development Three Months ended June 30, % Six Months ended June 30, % (In thousands) 2022 2021 Change Change 2022 2021 Change Change Research and development $ 2,438 $ 774 $ 1,664 215 % $ 4,522 $ 1,656 $ 2,866 173 % Research and development (“R&D”) expenses consisted primarily of costs incurred for the development of our Agrify Insights™ cultivation software and next-generation generation VFUs, which includes: ● employee-related expenses, including salaries, benefits, and travel; ● expenses incurred by the subcontractor under agreements to provide engineering work related to the development of our next generation VFUs; ● expenses related to our facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies. R&D expense increased by $1.7 million, or 215%, for the three months ended June 30, 2022, compared to the same period in 2021. The increase in comparative period R&D expenses is attributable to increases in wage and benefits-related expenses of $574 thousand, third-party consulting services of $529 thousand, $467 thousand of incremental R&D expense related to the acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021, and material and other costs of $94 thousand. As a percentage of net revenue, R&D expenses were 12.6% of total revenue for the three months ended June 30, 2022, compared to 6.6% for the three months ended June 30, 2021. R&D expense increased by $2.9 million, or 173%, for the six months ended June 30, 2022, compared to the same period in 2021. The comparative periodic increase in R&D expense is attributable to third-party consulting services of $988 thousand, increases in wage and benefits-related expenses of $801 thousand, $777 thousand of incremental R&D expense related to the acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021 and material and other costs of $302. As a percentage of net revenue, R&D expenses were 10% of total revenue for the six months ended June 30, 2022, compared to 8.8% for the six months ended June 30, 2021. We expect to continue to invest in future developments of our VFUs, Agrify Insights™ cultivation software and our extraction products. Although we continue to increase our investment in R&D activities, we expect R&D expenses to decrease as a percentage of revenue due to our revenue growth. 76 Change in contingent consideration Three Months ended June 30, % Six Months ended June 30, % (In thousands) 2022 2021 Change Change 2022 2021 Change Change Change in contingent consideration $ (907 ) $ — $ (907 ) (100 )% $ (907 ) $ — $ (907 ) (100 )% Change in contingent consideration decreased by $(907) thousand, or 100%, for the three months and six months ended June 30, 2022, compared to the same periods in 2021. The change in contingent consideration expense, which was recognized by us during the second quarter of 2022, primarily relates to the reduction in the projected earn-out achievement associated with Lab Society’s first twelve-month earn-out period, for which current revenue projections are trending below our original earn-out achievement fair value estimates. During the second quarter of 2022, the Company reduced the current fair value estimate of contingent consideration to be earned by the former members of Lab Society by approximately $(1.0) million. This was partially offset by an increase of $121 thousand to the final contingent consideration amount earned by the former members of Precision and Cascade. As per the guidelines of ASC 805, we are required to record subsequent changes to our original fair value estimates related to contingent consideration as an operating expense in the period of change and not as an increase to goodwill. Impairment of Goodwill and intangible assets Three Months ended June 30, % Six Months ended June 30, % (In thousands) 2022 2021 Change Change 2022 2021 Change Change Impairment of Goodwill and intangible assets $ 69,904 $ — $ 69,904 100 % $ 69,904 $ — $ 69,904 100 % During the three months period ended June 30, 2022, the Company identified a potential impairment triggering event associated with both a sustained decline in our stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, we deemed that there was a need to perform a detailed analysis necessary to support the current carrying value of our long-lived assets, including our goodwill and intangible assets, as of June 30, 2022. Based on its interim testing, the Company noted that the current carrying value of equity significantly exceeded the calculated fair value of equity, by an amount greater than the aggregate value of our goodwill and intangible assets. Accordingly, the Company concluded that the entire carrying value of its goodwill and intangible assets should be impaired, resulting in a second-quarter impairment charge of $69.9 million. Additional information regarding the Company’s interim testing on goodwill may be found in Note 8 – Intangible Assets, Net and Goodwill, included elsewhere in the notes to the condensed consolidated financial statements. 77 Other Income (Expense), Net Three Months ended June 30, % Six Months ended June 30, % (In thousands) 2022 2021 Change Change 2022 2021 Change Change Interest (expense) income, net $ (3,311 ) $ 55 $ (3,366 ) (6,120 )% $ (2,752 ) $ 23 $ (2,775 ) (12,065 )% Other expenses — (63 ) 63 100 % — (63 ) 63 (100 )% Change in fair value of warrant liabilities 20,181 — 20,181 100 % 30,966 — 30,966 100 % Gain on extinguishment of notes payable — — — — % — 2,685 (2,685 ) (100 )% Total other (expense) income, net $ 16,870 $ (8 ) $ 16,878 (210,975 )% $ 28,214 $ 2,645 $ 25,569 967 % Interest (expense) income, net decreased by $(3.4) million, or 6,120%, for the three months ended June 30, 2022 compared to the same period in 2021. The decrease in interest (expense) income, net primarily is attributable to an increase in interest expense, including the amortization of debt discount costs of $(2.7) million related to our SPA Note. This partially was offset by interest income of $654 thousand from our TTK Solutions. Interest (expense) income, net decreased by $(2.8) million, or 12,065%, for the six months ended June 30, 2022 compared to the same period in 2021. The decrease in interest (expense) income, net primarily is attributable to an increase in interest expense, including the amortization of debt discount costs, of $(2.9) million related to our SPA Note. This partially was offset by interest income of $1.1 million from our TTK Solutions. Other expenses of $0 for the three and six months ended June 30, 2022, compared to $(63) thousand for the three and six months ended June 30, 2021 are attributable to the amortization of premiums related to the held to maturity securities. The change in fair value of warrant liabilities during the three and six months ended June 30, 2022 is related to the fair value remeasurement of warrants issued during the six months ended 2022. Gain on extinguishment of notes payable decreased by $(2.7) million, or 100%, for the six months ended June 30, 2022 compared to the same period in 2021. We recognized a gain on extinguishment of $2.7 million in connection with the derecognition of the net carrying amount of the extinguished debt of $19.6 million (inclusive of $13.1 million of principal, $7.1 million of derivative liabilities, less $587 thousand of debt discount) and the recognition of the $16.9 million fair value of the new convertible notes (including the same principal amount of $13.1 million plus the $3.8 million fair value of the beneficial conversion feature). Additional information relating to the Company’s Gain on extinguishment of notes payable may be found in Note 12 – Convertible Promissory Notes, included elsewhere in the notes to the condensed consolidated financial statements. 78 Income Tax Benefit Three Months ended June 30, % Six Months ended June 30, % (In thousands) 2022 2021 Change Change 2022 2021 Change Change Income tax benefit $ (62 ) $ — $ (62 ) 100 % $ (262 ) $ — $ (262 ) 100 % Effective tax rate 0.1 % 0.0 % 0.3 % 0.0 % The change in the income tax benefit for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to a goodwill impairment charge recorded during the second quarter of 2022 which resulted in a $(62) thousand benefit related to the reversal of our deferred tax liability on indefinite-lived assets. The change in the income tax benefit for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily due to a discrete income tax benefit of $(200) thousand recorded during the first quarter of 2022, which is attributable to a non-recurring partial release of our U.S. valuation allowance as a result of the Lab Society acquisition. Income (Loss) Attributable to Non-Controlling Interest We consolidate the results of operations of two less than wholly-owned entities into our consolidated results of operations. On December 8, 2019, we formed Agrify Valiant LLC, a joint-venture limited liability company in which we are 60% majority owner and Valiant-America, LLC owns 40%. Agrify Valiant LLC started its operations during the second quarter of 2020. On January 22, 2020, as part of the acquisition of TriGrow, we received TriGrow’s 75% interest in Agrify Brands, LLC (formerly TriGrow Brands, LLC), a licensor of an established portfolio of consumer brands that utilize our grow technology. The license of these brands is ancillary to the sale of our VFUs and provides a means to differentiate customers’ products in the marketplace. It is not a material aspect of our business and we have not realized any royalty income. Accordingly, we are currently evaluating whether to continue this legacy business from an operational standpoint, as well as from a legal and regulatory perspective. Income (loss) attributable to non-controlling interest represents the portion of profit (or loss) that are attributable to non-controlling interest calculated as a product of the net income of the entity multiplied by the percentage of ownership held by the non-controlling interest. Going Concern We have incurred operating losses since our inception and have negative cash flows from operations. We also have an accumulated deficit of $131.8 million as of June 30, 2022. In addition, for the quarter ending June 30, 2022, we will recognize significant impairment charges to the carrying value of its goodwill and intangible assets and will be in default of certain financial debt covenants associated with its $65 million senior secured promissory note (“the SPA Note). As a result of its default, we are actively working to restructure our existing SPA Note in order to avoid having the note called by the lender. If the lender were to call the debt instrument due to the default, we would not have sufficient cash on hand as of June 30, 2022 to pay off the existing debt and default penalty amounts. Cash on hand is approximately $59.9 million, while the debt liability, including the potential default penalty, would be approximately $75.0 million as of June 30, 2022. Subsequent to the end of the second quarter of 2022, we reached an agreement in principle with our institutional lender to amend our existing SPA Note and to modify certain financial covenants which, once complete, should give us additional flexibility to operate and meet our long-term strategic goals while also allowing us to responsibly adjust to the many challenges currently facing the cannabis industry. These financial statements have been prepared on a going concern basis, which implies we believe these conditions raise substantial doubt about our ability to continue as a going concern within the next twelve-months from the date these financial statements are available to be issued. The Company’s continuation as a going concern is dependent upon its ability to obtain necessary debt or equity financing to continue operations until the Company begins generating sufficient cash flows from operations to meet its obligations. 79 There is no assurance that we will ever be profitable. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern. Liquidity and Capital Resources As of June 30, 2022, our principal sources of liquidity were cash and cash equivalents and marketable securities totaling $29.9 million and $30 million in restricted cash and restricted marketable securities. Prior to consideration of any debt restructuring, we believe we have sufficient cash on hand to continue operations for the next six to nine months. We have, in each of the past two quarters, used a total of approximately $30.0 million to support our activities in each quarter. Our current working capital needs are to support revenue growth, fund construction and equipment financing commitments associated with our TTK Solutions, manage inventory to meet demand forecasts and support operational growth. Our long-term financial needs primarily include working capital requirements and capital expenditures. We anticipate that we will allocate a significant portion of our current balance of working capital to satisfy the financing requirements of our current and future TTK arrangements. These arrangements require a significant amount of upfront capital necessary to fund construction, associated with facility build-outs, and equipment. There are many factors that may negatively impact our available sources of funds in the future, including the ability to generate cash from operations, raise debt capital and raise cash from the issuance of our securities. The amount of cash generated from operations is dependent upon factors such as the successful execution of our business strategy and general economic conditions. We may opportunistically raise debt capital, subject to market and other conditions. Additionally, as part of our growth strategies, we may also raise debt capital for strategic alternatives and general corporate purposes. If additional financing is required from outside sources, we may not be able to raise such capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected. Indebtedness We entered into one Loan Agreement and Promissory Note with Bank of America pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. We received total proceeds of approximately $779 thousand from the unsecured PPP Loan which was originally scheduled to mature in May 2022. We applied for forgiveness on the $779 thousand of our PPP Loan however was denied by the SBA. On June 23, 2022, we received a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and bears interest at a rate of 1.00% per year. The PPP loan is payable in 34 equal combined monthly principal and interest payments of approximately $24.0 thousand commencing August 7, 2022. On March 14, 2022, we entered into a Securities Purchase Agreement with an institutional investor. The Purchase Agreement provides for the issuance of a senior secured note (the “SPA Note”) in the aggregate amount of $65 million and a warrant exercisable 34,406 shares of Common Stock, with the potential for two potential subsequent closings for notes with an original principal amount of $35 million each. The initial closing pursuant to this debt facility occurred on March 24, 2022. The SPA Note is a senior secured obligation and ranks senior to all other indebtedness. We will be required to make amortization payments equal to 4.0% of the original principal amount of the SPA Note on the first day of each calendar month starting on February 1, 2023 and extending through the maturity date of March 1, 2026 (the “Maturity Date”), at which time all remaining outstanding principal and accrued but unpaid interest will be due. The SPA Note has an interest rate of 6.75% per year, and we will be required to pay interest on March 1, June 1, September 1, and December 1 of each calendar year through the Maturity Date. Following the one-year anniversary of the SPA Note’s issuance, we may, in lieu of paying interest in cash, pay such interest in kind, in which case interest on the SPA Note will be calculated at the rate of 8.75% per year and will be added to the principal amount of the SPA Note. 80 At any time following the one-year anniversary of the SPA Note’s issuance, we may prepay all (but not less than all) of the SPA Note by redemption at a price equal to 106.75% of the then-outstanding principal amount under the SPA Note plus any accrued but unpaid interest. The noteholder also has the option of requiring us to redeem the SPA Note if we undergo a fundamental change at a price equal to 107% of the then-outstanding principal amount under the SPA Note plus any accrued interest. For the quarter ending June 30, 2022, we will be in default of certain of financial debt covenants associated with its SPA Note. As a result of this default, the lender would have the ability to call the balance of the note, along with a 115% penalty, amounting to a total repayment obligation of approximately $75.0 million ($65.0 million in principal and $9.8 million of default penalty), plus increase the interest due on the outstanding unpaid balance(s) from 6.75% to 15%. All amounts due would immediately become a current liability in the event the lender were to call the note. If the lender were to call the debt instrument due to the default, we would not have sufficient cash on hand as of June 30, 2022 to pay off the existing debt and default penalty amounts. As of June 30, 2022, cash, restricted cash, cash equivalents, and marketable securities totaled approximately $59.9 million, which would be insufficient to cover the combined amount of debt liability, including the default penalty amount. Subsequent to the end of the second quarter of 2022, we reached an agreement in principle with its institutional lender to amend its existing SPA Note and to modify certain financial covenants which, once complete, should give us additional flexibility to operate and meet its long-term strategic goals while also allowing it to responsibly adjust to the many challenges currently facing the cannabis industry. Summary Statement of Cash Flows The following table presents the major components of net cash flows from and used in operating, investing, and financing activities for the six months ended June 30, 2022, and 2021: (In thousands) June 30, 2022 June 30, 2021 Net cash (used in) provided by: Operating activities $ (50,491 ) $ (13,837 ) Investing activities (29,637 ) (51,865 ) Financing activities 86,722 137,432 Net increase in cash and cash equivalents $ 6,594 $ 71,730 Cash Flow from Operating Activities For the six months ended June 30, 2022, we incurred a net loss of $(72.8) million, which included a non-cash gain related to the remeasurement of warrant liabilities of $31.0 million, non-cash expenses of impairment of goodwill and intangible assets of $69.9 million, a provision of $8.6 million to accounts receivable allowance for doubtful accounts ($7.1 million for doubtful accounts related to Greenstone TTK Solution), amortization of issuance costs and amortization of debt discount related to the SPA Note of $3.1 million, $2.2 million related to depreciation and amortization, $1.9 million in connection with the issuance and acceleration of stock options, non-cash interest income of $1.0 million related to TTK Solutions, a provision of slow-moving inventory of $929 thousand, a $(907) thousand change in fair value of contingent consideration associated with the acquisition of Precision, Cascade and Lab Society and a gain attributed to non-controlling interest in the amount of $4 thousand. Net cash was reduced by a $20.2 million increase in inventory due to demand forecast, a $2.3 million decrease in accounts payable, a $4.3 million increase in accounts receivable, a $4.0 million decrease in accrued expenses and other current liabilities, a $0.8 million decrease in prepaid expenses and other current assets, and a $1.0 million decrease in deferred revenue. For the six months ended June 30, 2021, we incurred a net loss of $(9.4) million, which included non-cash expenses of $313 thousand related to depreciation and amortization, $3.1 million in connection with the issuance and acceleration of stock options, non-cash interest expenses of $46 thousand related to leases, and gain attributed to non-controlling interest in the amount of $167 thousand. Net cash was reduced by an $11.1 million increase in accounts receivable, a $4.5 million increase in prepaid inventory due to demand forecast and a $2.7 million increase in prepaid expenses, partially offset by a $12.8 million increase in accrued expenses ($11.1 million related to construction costs). 81 Cash Flow from Investing Activities Net cash used in investing activities primarily relates to net purchases of marketable securities, cash paid associated with our 2022 acquisition of Lab Society, the issuance of loans receivable in connection with our financing of construction and equipment under its TTK Solutions offering, and purchases of property and equipment, expenditures, and purchase of marketable securities. The capital expenditures support growth and investment in property and equipment, to expand research, development, and testing capabilities and, to a lesser extent, the replacement of existing equipment. For the six months ended June 30, 2022, net cash used in investing activities was $(29.6) million, which included cash outflows of $20.4 million related to the issuance of TTK-related loans receivable, $9.1 million of expenditures for property and equipment, $3.5 million paid in connection with our 2022 acquisitions of Lab Society and $3.4 million in net purchases of marketable securities. For the six months ended June 30, 2021, net cash used in investing activities was $(51.9) million, which included cash outflows of $1.1 million of leasehold improvements, purchasing computer equipment and small machinery, a $483 thousand issuance of loan receivable and $50.3 million purchases of held to maturity securities. Cash Flow from Financing Activities For the six months ended June 30, 2022, net cash provided by financing activities was $86.7million. Net cash provided by financing activities was primarily driven by our two private placements during 2022. We received $25.8 million in net proceeds from our issuance of Common Stock and warrants in a private placement, and $62.4 million in net proceeds from our issuance of debt and warrants in a private placement. Additionally, we received $21 thousand in proceeds from the exercise of stock options and warrants. Each of the above inflows of cash was offset by $1.5 million in payments relating to financing loans and financing leases. For the six months ended June 30, 2021, net cash provided by financing activities was $137.4 million. Net cash provided by financing activities was attributable to $57.0 million proceeds from our initial IPO, $80.0 million from our secondary public offering, both net of fees, and proceeds from the exercise of options and warrants of $726 thousand, offset by $94 thousand payments of financing leases. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market, or credit risk that could arise if we had engaged in those types of relationships. Critical Accounting Policies and Estimates Part I, Item, 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. 82 These estimates are based on our knowledge and understanding of current conditions and actions that we may take in the future. Changes in these estimates will occur as a result of the passage of time and the occurrence of future events. Subsequent changes in these estimates may have a significant impact on our financial condition and results of operations and are recorded in the period in which they become known. We have identified the following estimates that, in our opinion, are subjective in nature, require the exercise of judgment and involve complex analysis: the fair value of derivative assets and liabilities, goodwill impairment assessment, revenue recognition and cost of goods sold. The significant accounting policies and estimates that have been adopted and followed in the preparation of our condensed consolidated financial statements are detailed in Note 2 - Summary of Significant Accounting Policies included in our 2021 Annual Report and Note 1 - Overview, Basis of Presentation and Significant Accounting Policies to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no changes in these policies and estimates that had a significant impact on the financial condition and results of operations for the periods covered in this Quarterly Report. Recently Issued Accounting Pronouncements Adopted For more information on recently issued accounting pronouncements are included within Note 2 - Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to condensed consolidated financial statements covered under Part I, Item 1 of this Quarterly Report on Form 10-Q. New Accounting Pronouncements Not Yet Adopted For more information on new accounting pronouncements not yet adopted are included within Note 2 - Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to condensed consolidated financial statements covered under Part I, Item 1 of this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.