Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
You should read the following
discussion and analysis of our financial condition and results of our operations together with our consolidated financial statements and
the notes thereto appearing elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations,
whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated
in or implied by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk
Factors,” “Cautionary Statement regarding Forward-Looking Statements” and elsewhere in this report.
Unless otherwise stated or the context otherwise
requires, references in this report to “Agrify”, the “Company,” “we,” “us,” “our,”
or similar references mean Agrify Corporation and its subsidiaries on a consolidated basis.
Overview
Agrify is a developer of branded innovative solutions for the cannabis
and hemp industries. Our Señorita brand offers consumers hemp-derived tetrahydrocannabinol (“THC”) beverages that mirror
well-known cocktails like a margarita – in three flavors – classic Lime Jalapeño Margarita, Mango Margarita, and Paloma.
for its clean, fresh taste and commitment to high-quality, natural ingredients, Señorita offers a low-sugar, low-calorie alternative
to alcoholic beverages and is available at top retailers including Total Wine, ABC Fine Wine & Spirits, and Binny’s in nine
U.S. states and Canada, with plans for expansion and future availability in premier on-premises destinations.
In addition to beverages,
Agrify has also historically been a leading provider of innovative cultivation and extraction solutions for the cannabis industry. Our
comprehensive extraction product line, which includes hydrocarbon, alcohol, solventless, post-processing, and lab equipment, empowers
producers to maximize the quantity and quality of extract required for premium concentrates. Additionally, prior to its sale on December
31, 2024, our proprietary micro-environment-controlled Agrify Vertical Farming Units (“VFUs”) enabled cultivators to produce
high quality products for the cannabis industry.
Agrify 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.
Reverse Stock Splits
On July 5, 2023, we effected a 1-for-20 reverse stock split of 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.
On October 8, 2024, we effected a 1-for-15 reverse stock split of our
common stock. All share and per share information has been retroactively adjusted to give effect to the reverse stock splits 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 we are authorized to issue pursuant to our 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 our outstanding stock options and
warrants, the exercise price or conversion price (as applicable) of our outstanding stock options and warrants, and the number of shares
reserved for issuance under our equity incentive plan. All share and per share information included in this Annual Report on Form 10-K
has been retroactively adjusted to reflect the impact of these reverse stock splits.
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Recent Developments
February 2025 Changes in Directors
On February 5, 2025 the
Company announced that Peter Shapiro and Sanjay Tolia were appointed to our Board of Directors (the “Board”) effective January
31, 2025. The Company also announced Richard Drexler’s departure from the Board effective as of January 31, 2025.
Public Offering
On February 27, 2024, we
entered into a placement agency agreement with Alexander Capital, LP as placement agent, pursuant to which we agreed to issue and sell
an aggregate of 184,000 shares of Common Stock, and, in lieu of Common Stock to certain investors that so chose, Pre-Funded Warrants (“Pre-Funded
Warrants”) to purchase 264,245 shares of Common Stock. The public offering price for each share of Common Stock was $5.70, and the
offering price for each Pre-Funded Warrant was $5.69, which equals the public offering price per share of the Common Stock, less the $0.001
per share exercise price of each Pre-Funded Warrant. The Offering was made pursuant to a registration statement on Form S-1 that we filed
with the SEC on January 26, 2024 and was declared effective on February 14, 2024. Raymond Chang, our former Chairman and Chief Executive
Officer, participated in the offering on the same terms as other investors. The net proceeds from the public offering were approximately
$2.2 million, after deducting placement agent fees and commissions and expenses. The public offering closed on February 28, 2024.
Debt Modification; Warrant Amendments
On May 21, 2024, we and CP
entered into an amendment to the Convertible Note (the “Consolidated Note Amendment”), pursuant to which CP could elect, in
lieu of shares of Common Stock issuable upon conversion of the Convertible Note, to instead receive Pre-Funded Warrants. The conversion
price applicable to the Pre-Funded Warrants remained unchanged at $21.90. Immediately following the execution of the Consolidated Note
Amendment, CP elected to convert $11.5 million of outstanding principal into a Pre-Funded Warrant exercisable at issuance for up to 525,114
shares of Common Stock having a fair value of approximately $2.9 million (the “CP Warrant Conversion”).
On May 21, 2024, we and GIC
Acquisition, LLC (“GIC”), the holder of an unsecured promissory note (the “GIC Note”), amended and restated the
GIC Note (the “Restated GIC Note”) to increase the aggregate principal amount to approximately $2.29 million, extend the maturity
date to December 31, 2025, and provide that the Restated Junior Note may be converted into Common Stock of the Company or, at GIC’s
election, Pre-Funded Warrants, in each case at a conversion price of $4.65. Immediately following the execution of the Restated GIC Note,
GIC elected to convert all of the outstanding principal under the Restated GIC Note into a Pre-Funded Warrant exercisable at issuance
for up to 492,204 shares of Common Stock having a fair value of approximately $2.7 million (the “GIC Warrant Conversion”,
and, collectively with the CP Warrant Conversion, the “Related Party Warrant Conversions”).
On June 30, 2024, we executed
an amendment to the Pre-Funded Warrants, pursuant to which we revised certain provisions of the Pre-Funded Warrants to (i) remove the
adjustment to the exercise price of the Pre-Funded Warrants when there is a bona fide equity financing with the primary purpose of raising
capital (the “Adjustment Provisions”) and (ii) increase the threshold for a change of control from 50% to greater than 50%.
On August 12, 2024, our stockholders approved a proposal to amend the Pre-Funded Warrants to add the Adjustment Provisions at a future
date. Pursuant to that approval, on August 28, 2024, we entered into amendments to the Pre-Funded Warrants to insert the Adjustment Provisions.
As a result of the warrant amendments and the subsequent issuance of 189,645 shares of Common Stock to Ionic Ventures, LLC (“Ionic”)
at an effective purchase price of approximately $2.109 per share of Common Stock, the number of shares of Common Stock underlying the
Pre-Funded Warrant held by CP was adjusted to 5,452,288 and the number of shares of Common Stock underlying the Pre-Funded Warrant held
by GIC was adjusted to 1,085,122. On August 30, 2024, CP partially exercised its Pre-Funded Warrant and entities affiliated with Mr. Chang
and Ms. Chan received an aggregate of 383,127 shares of Common Stock upon the exercise. On September 27, 2024, we further amended the
Pre-Funded Warrants to remove the Adjustment Provisions from each warrant and (ii) preventing the holders from any additional exercise
of either of the Pre-Funded Warrants at any time between September 27, 2024 and October 9, 2024.
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Change in Accounting Firm
On June 20, 2024 after an
evaluation process, the Audit Committee of our Board (the “Audit Committee”) dismissed Marcum LLP as our independent registered
public accounting firm and appointed MATSUURA (“Matsuura”) as our independent registered public accounting firm for the fiscal
year ending December 31, 2024, in each case effective as of June 25, 2024. On June 30, 2024, the audit practice of Matsuura was combined
in a transaction pursuant to which Matsuura merged its operations with GuzmanGray, a professional corporation (“GuzmanGray”).
On July 19, 2024, Matsuura resigned as our auditors and the Audit Committee appointed GuzmanGray as our independent registered public
accounting firm effective as of the Effective Date.
Equity Line of Credit Facility
On August 28, 2024, we entered
into the Purchase Agreement and a registration rights agreement with Ionic pursuant to which Ionic committed to purchase up to an aggregate
of $15.0 million of our Common Stock, subject to certain limitations, from time to time and at our sole discretion over the 36-month term
of the Purchase Agreement.
From and after the date the
registration statement relating to the resale of the shares sold to Ionic was declared effective, November 5, 2024, we may from time to
time on any business day, by written notice delivered by us to Ionic, direct Ionic to purchase between $250,000 and $750,000 of shares
of Common Stock on such business day, at a purchase price per share that will be equal to 93% (or 80% if the Common Stock is not then
trading on the Nasdaq Capital Market) of the lowest daily VWAP over a specified measurement period beginning after the delivery of the
purchase notice, as described further in the Purchase Agreement (each, a “Regular Purchase”). The Purchase Agreement also
permitted us to deliver an exemption purchase notice for $400,000 on the date of signing, with the shares so purchased to be delivered
following the Commencement Date, and we delivered an exemption purchase notice for $400,000 for the purchase by Ionic of 189,645 shares
of Common Stock. On November 5, 2024, we issued 189,645 shares of Common Stock to Ionic. We will control the timing and amount of any
sales of Common Stock to Ionic pursuant to the Purchase Agreement. Ionic has no right to require us to sell any shares of Common Stock
to Ionic, but Ionic is obligated to make purchases as we direct, subject to certain conditions.
Sale of Cultivation Business
On December 31, 2024, we entered into and closed an Asset Purchase
Agreement (the “Cultivation Purchase Agreement”) with CP Acquisitions, LLC (“CP”), an entity affiliated with Raymond
Chang, our former Chairman and Chief Executive Officer. Under the Cultivation Purchase Agreement, CP acquired assets from us relating
to our VFUs, including the related Agrify total-turnkey (“TTK”) solution assets and Agrify Insights TM software
solutions (collectively the “Cultivation Business”). The aggregate consideration received by us for the sale of the Cultivation
Business consisted of the assumption by CP of (i) all of our obligations pursuant to secured indebtedness then due CP with an aggregate
amount of principal and accrued interest of approximately $7 million, and (ii) certain other liabilities relating to the Cultivation Business.
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Señorita Acquisition
On December 12, 2024, we completed the acquisition of substantially
all of the assets of Double or Nothing, LLC (“Double or Nothing”) in connection with its Señorita brand of beverages
hemp-derived containing cannabinoids. Under the Purchase Agreement, we acquired the Señorita brand of beverages and related assets
from Double or Nothing relating to the portions of its business operating in compliance with Canadian law and under the Agricultural Improvement
Act of 2018 (the “2018 Farm Bill”) and applicable state laws.
Private Placement
On November 20, 2024, we raised gross proceeds of approximately $25.9
million in a private placement following the closing of certain securities purchase agreements with institutional investors and other
accredited investors. In connection with the private placement, we issued (i) 203,988 shares Common Stock and (ii) pre-funded warrants
to purchase up to an aggregate of 949,515 shares of Common Stock at a purchase price per share of Common Stock of $22.30 and a purchase
price per pre-funded warrant of $22.2999.
Convertible Note
On November 5, 2024, we
issued a Secured Convertible Note (the “Note”) to RSLGH, LLC (the “Investor”), a subsidiary of Green Thumb Industries
Inc. (“Green Thumb”). The Note is a secured obligation and ranks senior to all of our indebtedness except for certain indebtedness
set forth in the Note. The Note will mature on November 5, 2025 (the “Maturity Date”) and contains a 10.0% annualized interest
rate, with interest to be paid on the first calendar day of each September and March while the Note is outstanding, in cash, beginning
January 1, 2025. The principal amount of the Note will be payable on the Maturity Date.
2024 Board and Management Changes
Also on November 5, 2024,
immediately following the issuance of the Note, Raymond Chang, our prior CEO and Chairman, resigned as a member of the Board and any subsidiaries
and as President and Chief Executive Officer of the Company, and I-Tseng Jenny Chan resigned as a member of the Board. Benjamin Kovler,
Armon Vakili and Richard Drexler replaced Raymond Chang and I-Tseng Jenny Chan on the Board and Benjamin Kovler assumed the position of
Interim CEO.
Effective May 17, 2024, Leonard Sokolow resigned as a member of the
Board and its committees. Effective December 3, 2024, Brian Towns resigned from his roles as the Company’s Executive Vice President
and General Manager of Extraction Division to pursue other opportunities. On December 31, 2024, in connection with the Cultivation Purchase
Agreement, David Kessler ceased serving as the Company’s Chief Science Officer, Executive Vice President and General Manager of
Cultivation.
Lines of Business
Hemp-Derived Beverages
The Company acquired the Señorita
brand of hemp-derived beverages in November 2024. Señorita was designed and formulated by world-class winemakers Charles Bieler
and Joel Gott. Recognizing a growing generational demand for adult beverage alternatives, Bieler and Gott gave the classic margarita a
modern twist—replacing alcohol with hemp-derived to create a delightful, hangover-free beverage alternative. Through the use of
all-natural, premium ingredients like organic Mexican agave, fresh lime juice and sweet, tangy mango, Señorita quickly gained acclaim,
taking home the top spot in The High Times Cannabis Cup just one year after inception. Gott and Bieler continue to collaborate on the
brand with Mr. Kovler and the Agrify team.
Señorita currently
offers three award-winning flavors – classic Lime Jalapeño Margarita, Paloma, and Mango Margarita. A fourth flavor, low-calorie
Ranch Water, is expected to debut in 2025. Señorita’s hemp-derived beverages are currently available at top retailers including
Total Wine, ABC Fine Wine & Spirits, and Binny’s in nine U.S. states and Canada. Products are also available for direct-to-consumer
purchase where permissible under state law at senoritadrinks.com.
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Extraction Solutions
Our extraction equipment and
business solutions can be used within indoor processing facilities by fully licensed cannabis and hemp cultivators and processors or in
some cases, by individual processors for individual use in compliance with applicable law. We sell our proprietary extraction solutions
to independent, licensed cultivators and processing labs.
In light of our increased
focus on hemp-derived beverages following the Señorita acquisition, the Board is exploring a variety of alternatives for the extraction
business while focusing on optimizing shareholder value creation.
We strategically acquired
four of the top brands in the extraction space in late 2021 and early 2022 in Precision Extraction, PurePressure, Lab Society, and Cascade
Sciences. These iconic brands encompass everything from hydrocarbon, alcohol, and solventless extraction to distillation and post-processing.
Combined, these four acquisitions provide what we believed to be one of the most comprehensive extraction solutions from a single provider.
Our extraction brands provide equipment and solutions for extraction, post-processing, and testing for the cannabis and hemp industries.
The extraction, post-processing and testing services are complementary and highly attractive areas of the supply chain.
Discontinued Operations
Cultivation Solutions
Prior to its sale on December
31, 2024, we sold proprietary cultivation solutions to independent licensed cultivators. The two primary products we sold were the VFUs
and Agrify Insights™ software.
The proprietary VFU technology
offered a modular, compartmentalized micro-climate growing system for indoor vertical farming. The VFU system was designed for craft farmers,
single-state operators, and multi-state operators who were looking to consistently produce higher-quality crops at scale. The VFUs were
designed to line up horizontally in rows, and could be stacked vertically up to three units tall.
The VFUs were designed to
work in conjunction with the Agrify Insights™ software. Each VFU sold included a license for Agrify Insights™ and a monthly
Software-as-a-Service (“SaaS”) subscription fee was charged per VFU. The VFU could not operate successfully without Agrify
Insights™, and we typically charged between $1,500 to $2,400 per VFU sold annually. Agrify Insights™ license agreements were
generally for a multi-year term, with an annual auto-renewal.
TTK Solution
The Company’s TTK
Solution was the industry’s first-of-its-kind program in which the Company engaged with qualified cannabis operators in the
early phases of their business plans and provides critical support, typically over a 10-year period, which includes: access to
capital for construction costs, the design and build-out of their cultivation and extraction facilities, state-of-the-art
cultivation and extraction equipment, subscription to the Company’s Agrify Insights™, process design, training,
implementation, proven grow recipes, product formulations, data analytics, and consumer branding. While we have not entered into any
new TTK Solutions since January 1, 2024 and will not in the future, we have previously deployed this program with certain key former
customers. The data-driven TTK Solution for cultivation solutions enabled our customers to get to market faster by providing them
with seamlessly integrated hardware and software offerings as well as access to capital and a wide range of associated services from
experts including consulting, training, design, engineering, and construction.
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Note Amendment, Consolidation and Conversion
On January 25, 2024, following
stockholder approval at an annual meeting of stockholders on January 8, 2024, we and CP consolidated the outstanding principal and interest
due under the junior secured promissory note (the “Junior Secured Note”) to CP and a promissory note with an original principal
amount of $35.0 million (the “Exchange Note”) to High Trail Special Situations LLC (the “Original Lender”) into
a convertible note (the “Convertible Note”) and amended and restated the Convertible Note (as amended and restated, the “Restated
Note”), with an outstanding principal amount of approximately $18.3 million at the time of issuance of the Restated Note. The Restated
Note amended the terms of the Convertible Note by, among other things, (i) reducing the conversion price to $1.46 per share of our “Common
Stock”), (ii) increasing the beneficial ownership limitation to 49.99% with respect to any individual or group, provided that CP
could assign its right to receive shares upon conversion to Raymond Chang, our former Chairman and Chief Executive Officer and/or I-Tseng
Jenny Chan, a former member of the Board, or their affiliates, in which case the 49.99% beneficial ownership limitation would have applied
to each of them individually, (iii) extending the maturity date to December 31, 2025, (iv) increasing the interest rate from 9% to 10%
per annum, (v) increasing the default interest from 15% to 18% per annum, and (vi) providing for the payment of interest every six months,
or in lieu of cash interest payments, we could issue shares of our Common Stock as payments-in-kind at a conversion price equal to the
higher of (i) $1.46 or (ii) a 20% discount to our trailing seven-day volume weighted average price as of the date of interest payment.
Immediately following the execution of the Restated Note, CP immediately elected to convert approximately $3.9 million of outstanding
principal into an aggregate of 178,108 shares of Common Stock, and assigned its rights to receive such shares to entities affiliated with
Mr. Chang and Ms. Chan. Following the conversion, there was $15.0 million in principal amount outstanding under the Restated Note. In
connection with the sale of the Cultivation Business on December 31, 2024, CP assumed all of our obligations under the Restated Note.
Issuance of Junior Note
On August 14, 2024, we issued
the 2024 CP Note to CP. Pursuant to the 2024 CP Note, CP would lend up to $1,500,000 to the Company. The 2024 CP Note bore interest at
a rate of 10% per annum, would mature in full on July 1, 2025, and could be prepaid without any fee or penalty. The 2024 CP Note was secured
by our assets and ranked junior to existing secured indebtedness. The 2024 CP Note could have been converted into Common Stock of the
Company or, at CP’s election, Pre-Funded Warrants with an exercise price of $0.001 per share, in each case at a conversion price
of $3.9495. In connection with the sale of the Cultivation Business on December 31, 2024, CP assumed all of our obligations under the
2024 CP Note.
Mack Molding Modification Agreement
On October 27, 2023, and effective
as of October 18, 2023, we entered into a Modification and Settlement Agreement (the “Modification Agreement”) with Mack Molding
Company (“Mack”) with respect to a dispute with Mack under an existing supply agreement. On February 29, 2024, we met our
contractual obligations under the terms of the Modification Agreement. In settlement of the dispute, we made cash payments of $500,000
and $250,000 to Mack and issued to Mack a warrant to purchase 750,000 shares of Common Stock.
On August 30, 2024, we entered
into an amendment to the Modification Agreement with Mack, which modified the payment terms and VFU purchase requirements under the Modification
Agreement. Pursuant to the amendment, we agreed to make payments of $1.0 million prior to October 31, 2024 and an additional $1.0 million
prior to December 31, 2024. We also agreed to purchase at least 25 VFUs prior to October 31, 2024 and a further 25 VFUs between November
1, 2024 and December 31, 2024. As a precursor to the sale of the Cultivation Business on December 31, 2024, this agreement was settled
on December 16, 2024 and the corresponding warrants issued to Mack were terminated.
Convertible Note Amendment
On October 18, 2024, we entered
into an amendment with CP to the 2024 CP Note, pursuant to which the maximum principal sum of the 2024 CP Note was increased from $1,500,000
to $3,000,000. The conversion price applicable to the 2024 CP Note remained unchanged with an exercise price of $0.001 per share, in each
case at a conversion price of $3.9495 (as may be adjusted per the 2024 CP Note). In connection with the sale of the Cultivation Business
on December 31, 2024, CP assumed all of our obligations under the 2024 CP Note.
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Nasdaq Compliance
On January 19, 2023, we received a deficiency letter from the Listing
Qualifications Department (the “Staff”) of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying us that, for the
previous 30 consecutive business days, the bid price for our Common Stock had closed below $1.00 per share, which is the minimum closing
price required to maintain a continued listing on The Nasdaq Capital Market under the Minimum Bid Requirement. In accordance with Nasdaq
Listing Rule 5810(c)(3)(A), we had 180 calendar days to regain compliance with the Minimum Bid Requirement. To regain compliance with
the Minimum Bid Requirement, the closing bid price of our Common Stock must be at least $1.00 per share for a minimum of 10 consecutive
trading days during this 180-day compliance period, unless the Staff exercises its discretion to extend the minimum trading day period
pursuant to Nasdaq Listing Rule 5810(c)(3)(G). On July 19, 2023, we received a notice from Nasdaq confirming our compliance with the minimum
bid price rule.
As disclosed in the Current Report on Form 8-K filed on April 17, 2023,
the audit committee of our Board (the “Audit Committee”) concluded that, as a result of inadvertent errors in the accounting
for warrants previously issued by us, it was appropriate to restate our previously issued unaudited consolidated interim financial statements
as of and for the quarterly periods ended March 31, 2022, June 30, 2022 and September 30, 2022 included in our Quarterly Reports on Form
10-Q for such periods in amended quarterly reports for the affected periods. As a result of such restatements, we were unable to timely
file the Forms 10-K and 10-Q with respect to such periods without unreasonable effort or expense. On April 18, 2023, we received a notice
from Nasdaq that we were noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of our failure to file our Annual Report on Form
10-K with the SEC by the required due date.
On May 17, 2023, we received
a second notice from Nasdaq that we remained noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of our failure to file our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2023 with the SEC by the required due date.
On August 16, 2023, we received
a third notice from Nasdaq that we remained noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of our failure to file our Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2023 with the SEC by the required filing date. Nasdaq granted us an exception
until October 16, 2023, to file the delinquent reports.
On October 17, 2023, we received
a Staff Delisting Determination (the “Staff Determination”) from the Listing Qualifications Department of Nasdaq notifying
us that we were not in compliance with Nasdaq’s continued listing requirements under Nasdaq Listing Rule 5250(c)(1) as a result
of its failure to file the delinquent reports in a timely manner.
On November 16, 2023, we received
a notice from Nasdaq that we remained noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of our failure to file our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2023 with the SEC by the required filing date.
On December 1, 2023, we received
a notice from Nasdaq stating that because we reported stockholders’ equity of $(17.17) million in our Quarterly Report on Form 10-Q
for the quarter ended March 30, 2023, we were no longer in compliance with Nasdaq Listing Rule 5550(b)(1) (the “Primary Equity Listing
Rule”), which requires that listed companies maintain a minimum of $2.5 million in stockholders’ equity. In response, we timely
requested a hearing before a Nasdaq Hearings Panel (the “Panel”), which stayed any further action by the Listing Qualifications
Staff. The hearing was held on January 11, 2024. We arrived at the hearing having previously cured any additional grounds for delisting
as a result of delinquent periodic filings during 2023 that were filed prior to the hearing.
On January 30, 2024, we received
formal notice that the Panel had granted our request for an exception through April 15, 2024 to evidence compliance with the Primary Equity
Listing Rule, which was subsequently extended to May 22, 2024. On May 21, 2024, we regained compliance with the Primary Equity Listing
Rule as a result of the amendment and subsequent conversion of certain outstanding indebtedness.
On March 5, 2024, we received
a deficiency letter from Nasdaq notifying us that, for the last 30 consecutive business days, the bid price for our Common Stock had closed
below $1.00 per share, which is the minimum closing price required to maintain continued listing on the Nasdaq Stock Market under the
Minimum Bid Requirement. The compliance period for the Company expired on September 3, 2024.
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On September 4, 2024, Nasdaq
notified us in writing that we were eligible for an additional 180-day compliance period, or until March 3, 2025, to regain compliance
with the Minimum Bid Requirement. On October 8, 2024, we completed a 1-for-15 reverse stock split of our Common Stock, in which each fifteen
shares of Common Stock issued and outstanding were combined and converted into one share of Common Stock to regain compliance with the
Minimum Bid Requirement. On October 22, 2024, Nasdaq notified us that we had regained compliance with the Minimum Bid Requirement.
Use of Estimates
The preparation of financial
statements in accordance with GAAP 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 receivable, the valuation and recognition of stock-based compensation expense, valuation allowance for deferred
tax assets, goodwill, impairment of long-lived assets, provision for litigation, inventory reserve, fair value measurements and useful
life of fixed assets and intangible assets.
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 U.S. GAAP. The preparation of financial statements in
conformity with U.S. 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 estimates, which include estimates related to accruals, stock-based compensation
expense, recoverability of goodwill 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.
Warrants
We account for warrants as
either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable
authoritative guidance in Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity (“ASC
480”) and ASC Topic 815, Derivatives and Hedging (“ASC 815”). Management’s assessment considers whether the warrants
are freestanding financial instruments pursuant to ASC 480, whether they meet the definition of a liability pursuant to ASC 480, and whether
the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our own
Common Stock among other conditions for equity classification.
For issued or modified warrants
that meet all of the criteria for equity classification, they are recorded as a component of additional paid-in capital at the time of
issuance. For issued or modified warrants that are precluded from equity classification, they are recorded as a liability at their initial
fair value on the date of issuance and marked-to-market each reporting period with the changes in fair value of warrant liabilities recorded
in other income (expense), net in the accompanying consolidated statements of operations until the warrants are exercised. The fair value
of the warrant liabilities are estimated using a Black-Scholes option-pricing model.
The estimated fair value of
the warrant liabilities is determined using Level 3 inputs. Inherent in a Black-Scholes option-pricing model are assumptions used in calculating
the estimated fair values that represent our best estimate. The volatility rate is determined utilizing our own share price and the share
price of competitors over time.
Discontinued Operations
On December 31, 2024, we entered into a Purchase Agreement with CP.
Under the Purchase Agreement, CP acquired the Cultivation Business assets from us relating to our VFUs, including the related Agrify TTK
solution assets and Agrify Insights TM software solutions. As the sale of the Cultivation Business represented a strategic shift
that will have a major effect on our operations and financial results, they have been presented in discontinued operations separate from
continuing operations for the years ended December 31, 2024 and 2023 in the Company’s consolidated statements of operations and
applicable footnotes in accordance with ASC 205, Presentation of Financial Statements.
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Revenue Recognition
Overview
We generate revenue from equipment
sales and hemp-derived beverage sales.
In accordance with ASC 606,
Revenue Recognition (“ASC 606”), 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.
Revenue is recognized when, or as, performance
obligations are satisfied by transferring control of a promised product or service to a customer. The Company satisfies its performance
obligation upon transferring goods or services to a customer and transfers control upon the customer taking possession.
We enter into contracts that
may include various combinations of equipment and services, 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, the transaction price is determined, 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 Standalone Selling Price (“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 ASC 606. If the SSP is not observable through past transactions, we estimate the
SSP, taking into account available information such as market conditions, expected margins, and internally approved pricing guidelines
related to the performance obligations. 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.
We utilize the cost-plus margin
method to determine the SSP for equipment and 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.
Payment terms with customers
typically require payment in advance or payment 30 days from 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 contract liabilities 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 contract liabilities 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.
35
In accordance with ASC 606,
we are required to include disclosure on our 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, 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 Topic 450, Accounting for Contingencies
(“ASC 450”) 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 consolidated balance sheets.
Business Combinations
We allocated the purchase price of acquired companies to the tangible
and intangible assets acquired according to ASC 805, Business Combinations, 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.
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.
Goodwill
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 at least annually in the fourth quarter
of the year, or more frequently if events or changes in circumstances indicate that the carrying amount of the goodwill may not be recoverable.
The Company applies the guidance in ASU 2011-08 Intangibles-Goodwill and Other-Testing Goodwill for Impairment , which provides
entities with an option to perform a qualitative assessment (commonly referred to as “Step Zero”) to determine whether further
quantitative analysis for impairment of goodwill is necessary. 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 sustained decline in our stock price.
Income Taxes
We account for income taxes
pursuant to the provisions of ASC Topic 740, Income Taxes (“ASC 740”) 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.
36
We follow the provisions of
ASC 740, “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 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, “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 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 718”) establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments
for goods or services. ASC 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, as defined in Note 12 – Stockholder’s Equity.
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.
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.
As permitted under ASC 718,
the Company has made an accounting policy choice to account for forfeitures when they occur.
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 consolidated 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.
37
Comparison of Years Ended December 31, 2024
and 2023
The following table summarizes
our results of operations for the years ended December 31, 2024 and 2023:
Year Ended December 31,
(In thousands)
2024
2023
Revenue
$ 9,680
$ 15,142
Cost of goods sold
9,015
11,124
Gross profit
665
4,018
Selling, general and administrative
12,305
16,057
Research and development
743
2,295
Change in contingent consideration
(2,180 )
(1,322 )
Gain on early termination of lease
(39 )
—
Loss on disposal on property and equipment
51
12
Total operating expenses
10,880
17,042
Operating loss from continuing operations
(10,215 )
(13,024 )
Interest expense, net
(256 )
(2,145 )
Change in fair value of warrant liabilities
(17,902 )
4,695
Loss on extinguishment of long-term debt, net
—
(4,311 )
Other income, net
19
1,358
Total other expense, net
(18,139 )
(403 )
Loss from continuing operations before income taxes
(28,354 )
(13,427 )
Income tax (expense) benefit
2
(2 )
Loss from continuing operations, net of income taxes
(28,352 )
(13,429 )
Loss from discontinued operations
(1,501 )
(5,221 )
Loss on disposal of Cultivation business
(11,893 )
—
Loss from discontinued operations, net of income taxes
(13,394 )
(5,221 )
Net loss
(41,746 )
(18,650 )
Income attributable to non-controlling interest
—
1
Net loss attributable to Agrify Corporation
$ (41,746 )
$ (18,649 )
Net loss per share attributable to Common Stockholders – basic and diluted (1)
$ (40.92 )
$ (187.64 )
Weighted average common shares outstanding - basic and diluted (1)
1,020,185
99,391
Revenues
We generate revenue from sales
extraction equipment and solutions and hemp-derived beverages.
The following table provides
a breakdown of our revenue from continuing operations for the years ended December 31, 2024 and 2023:
Year Ended December 31,
(In thousands)
2024
2023
Change
% Change
Ancillary products and services
$ 55
$ 444
$ (389 )
(88 )%
Extraction solutions
11,844
15,669
(3,825 )
(24 )%
Hemp-derived beverages
18
—
18
100 %
Sales discounts on extraction solutions
(2,237 )
(971 )
(1,266 )
(130 )%
Total revenue
$ 9,680
$ 15,142
$ (5,462 )
(142 )%
Revenues decreased by $5.5
million, or 142%, for the year ended December 31, 2024, as compared to the same period in 2023. The comparative decrease in revenue was
primarily driven by increased discounting.
38
Cost of Goods Sold
Cost of goods sold represents
a combination of the following: internal and outsourced labor and material costs associated with the assembly of extraction equipment,
as well as labor and parts costs associated with the sale or provision of other products and services.
The following table provides
a breakdown of our cost of goods sold from continuing operations for the years ended December 31, 2024 and 2023:
Year Ended December 31,
(In thousands)
2024
2023
Change
% Change
Ancillary products and services
$ 1,804
$ 2,252
$ (448 )
(20 )%
Extraction solutions
7,123
8,872
(1,749 )
(20 )%
Hemp-derived beverages
88
—
88
100 %
Total cost of goods sold
$ 9,015
$ 11,124
$ (2,109 )
(19 )%
Cost of goods sold decreased by $2.1 million, or 19%, for the year
ended December 31, 2024, as compared to the same period in 2023. The year-over-year decrease in cost of goods sold was primarily driven
by the decline in sales of Extraction solutions and internal and outsourced labor and materials costs for the extraction solutions sales.
Gross Profit
Year Ended December 31,
(In thousands)
2024
2023
Change
% Change
Gross profit
$ 665
$ 4,018
$ (3,353 )
(83 )%
Gross profit totaled $0.7 million, or 7%, of total revenue during the
year ended December 31, 2024 compared to a gross profit of $4.0 million, or 27% of total revenue during the year ended December 31, 2023.
The comparative $3.4 million year-over-year decrease in gross profit was primarily driven by increased discounting of on hand inventory.
Selling, General and Administrative Expenses
Year Ended December 31,
(In thousands)
2024
2023
Change
% Change
Selling, general and administrative
$ 12,305
$ 16,057
$ (3,752 )
(23 )%
Selling, General and administrative expenses (“SG&A”) consist principally of salaries and related costs for personnel, including stock-based compensation
and travel expenses, associated with executive and other administrative functions. Other SG&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.
SG&A expenses
decreased by $3.8 million, or 23%, for the year ended December 31, 2024, compared to the same period in 2023. The primary drivers of
the year-over-year decrease of SG&A expenses were largely attributable to reductions in salaries and related costs of
approximately $2.1 million, a decrease in stock-based compensation, of approximately $1.7 million, a decrease in insurance expenses,
of approximately $1.5 million, and a decrease in consulting expenses of approximately $0.6 million. These decreases were partially
offset by a $1.7 million increase in bad debt expense.
Research and Development
Year Ended December 31,
(In thousands)
2024
2023
Change
% Change
Research and development
$ 743
$ 2,295
$ (1,552 )
248 %
Research and development
expenses decreased by $1.6 million, or 248%, for the year ended December 31, 2024, compared to the same period in 2023. The decrease is
attributable to the reductions in personnel, consulting services and materials purchased.
39
Other Expense, Net
Year Ended December 31,
(In thousands)
2024
2023
Change
% Change
Interest expense, net
$ (256 )
$ (2,145 )
$ 1,889
(88 )%
Other income, net
19
1,358
(1,339 )
(99 )%
Change in fair value of warrant liabilities
(17,902 )
4,695
(22,597 )
(481 )%
Loss on extinguishment of notes payable
—
(4,311 )
4,311
(100 )%
Total other expense, net
$ (18,139 )
$ (403 )
$ (17,736 )
4401 %
Interest expense, net
Interest expense was approximately
$0.3 million for the year ended December 31, 2024 compared to interest expense of approximately $2.1 million for the same period in 2023.
The significant decrease in our interest expense was primarily driven by the reduction in notes payable due to conversion.
Other income, net
Other income, net decreased
by $1.3 million, or (99)%, for the year ended December 31, 2024, compared to the same period in 2023.
Change in fair value of warrant liability
Change in fair value of the warrant liability increased by $22.6 million,
or 481%, for the year ended December 31, 2024, compared to the same period in 2023. The increase is related to the measurement of certain
warrants upon reclassification to equity.
Loss on extinguishment of notes payable
Change in loss on extinguishment
of notes payable decreased by $4.3 million, or 100%, for the year ended December 31, 2024, compared to the same period in 2023. We had
no loss on extinguishment of notes payable for the year ended December 31, 2024, compared to a loss of $4.3 million for the same period
in 2023.
Income Tax (Expense) Benefit
Year Ended December 31,
(In thousands)
2024
2023
Change
% Change
Income tax (expense) benefit
$ 2
$ (2 )
$ —
— %
Effective tax rate
— %
— %
Liquidity and Capital Resources
As of December 31, 2024,
our principal sources of liquidity are cash and cash equivalents totaling $31.2 million. Our current working capital needs are to support
revenue growth and manage inventory to meet demand forecasts and support operational growth. Our long-term financial needs primarily include
working capital requirements. 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.
40
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
CP Acquisitions Junior
Secured Note
On October 27, 2023, CP,
an entity affiliated with and controlled by our former Chief Executive Officer and former member of our Board of Directors, purchased
the Exchange Note and the Convertible Note from CP (the “Note Purchase”). As part of the same transaction, we issued the Junior
Secured Note to CP. Pursuant to the Junior Secured Note, CP would lend up to $3.0 million to us. The Junior Secured Note bore interest
at a rate of 10% per annum, would mature in full on December 31, 2023, and could be prepaid without any fee or penalty. On December 4,
2023, we and CP amended and restated the Junior Secured Note agreement. Pursuant to the terms of the amendment, the maximum principal
amount that may be loaned by CP to us was increased to $4.0 million and extended the maturity date thereon to December 31, 2024. On November
30, 2023, CP agreed to forgive $1.0 million of the principal amount outstanding on the Convertible Note.
Consolidated CP Acquisitions
Note
On January 25, 2024, we and CP consolidated the outstanding principal
and interest due under the Junior Secured Note and the Exchange Note as well as the interest due under the Convertible Note into the Convertible
Note (collectively, with the Junior Secured Note and the Exchange Note, the “Consolidated Notes”), and amended and restated
the Convertible Note with the Restated Note having a total outstanding principal of $18.3 million. The Restated Note bore interest at
a rate of 10% per annum and would have matured in full on December 31, 2025. We could redeem all or a portion not less than $5.0 million
of principal at any time at a price equal to 102.5% of the redeemed principal amount plus accrued but unpaid interest. If CP elected to
convert the Restated Note, the conversion price per share would be $21.90, subject to customary adjustments for certain corporate events.
The conversion of the Restated Note would be subject to certain customary conditions. The Restated Note could not have been converted
into shares of Common Stock if such conversion would result in CP and its affiliates owning an aggregate of in excess of 49.99% of the
then-outstanding shares of Common Stock. Immediately following the execution of the Restated Note, CP elected to convert approximately
$3.9 million of outstanding principal into an aggregate of 178,109 shares of Common Stock.
On May 21, 2024, we and CP
entered into the Consolidated Note Amendment, pursuant to which CP could elect, in lieu of shares of Common Stock issuable upon conversion
of the Restated Note, to instead receive Pre-Funded Warrants. The conversion price applicable to the Pre-Funded Warrants remained unchanged
at $21.90. Immediately following the execution of the Consolidated Note Amendment, CP elected to convert $11.5 million of outstanding
principal into the CP Warrant Conversion, exercisable at issuance for up to 525,114 shares of Common Stock having a fair value of approximately
$2.9 million. In connection with the sale of the Cultivation Business on December 31, 2024, CP assumed all of our obligations under the
Restated Note.
GIC Acquisition Note
On July 12, 2023, our Board
approved the issuance of the GIC Note to GIC, an entity that is owned and managed by our former Chairman and Chief Executive Officer.
Pursuant to the GIC Note, GIC was obligated to lend us up to $0.5 million, $0.3 million of which was delivered at issuance and the remaining
$0.2 million delivered on July 31, 2023. The GIC Note bore interest at a rate of 10% per annum, would mature in full on August 6, 2023,
and could be prepaid without any fee or penalty. The GIC Note ranked junior to all existing secured indebtedness. On October 27, 2023,
the maturity date of the GIC Note was subsequently amended to December 31, 2024, at which point principal and accrued interest will be
repaid in full.
On May 21, 2024, GIC and
the Company entered into the Restated GIC Note, (the Restated GIC Note collectively with the Consolidated Note Amendment, the “Related
Party Debt Amendments”) to increase the aggregate principal amount to approximately $2.29 million, extend the maturity date to December
31, 2025, and provide that the Restated Junior Note may be converted into Common Stock of the Company or, at GIC’s election, Pre-Funded
Warrants, in each case at a conversion price of $4.65. Immediately following the execution of the Restated GIC Note, GIC elected to convert
all of the outstanding principal under the Restated GIC Note into a Pre-Funded Warrant exercisable at issuance for up to 492,203 shares
of Common Stock.
CP Promissory Note
On August 14, 2024, we issued
a junior secured promissory note (the “2024 CP Note”) to CP. Pursuant to the 2024 CP Note, CP would lend us up to $1,500,000.
The 2024 CP Note bore interest at a rate of 10% per annum, would mature in full on July 1, 2025, and could be prepaid without any fee
or penalty. The 2024 CP Note was secured by our assets and ranked junior to our existing secured indebtedness. The 2024 CP Note could
be converted into Common Stock or, at CP’s election, Pre-Funded Warrants with an exercise price of $0.001 per share, in each case
at a conversion price of $3.9495. In connection with the sale of the Cultivation Business on December 31, 2024, CP assumed all of our
obligations under the 2024 CP Note.
41
Investor Convertible
Note
On November 5, 2024, we
issued the Note to the Investor. The Note is a secured obligation and ranks senior to all indebtedness of the Company except for
indebtedness held by Mack, as described in Note 12 – Stockholder’s Equity (Deficit). The Note will mature on November 5,
2025 and has a 10.0% annualized interest rate, with interest to be paid on the first calendar day of each September and March while
the Note is outstanding, in cash, beginning January 1, 2025. The principal amount of the Note will be payable on its maturity date.
The Note provides for advances of up to $20.0 million in the aggregate, of which $10.0 million was advanced upon issuance. If the
Investor elects to convert the Note, the conversion price per share will be $3.158, subject to customary adjustments for certain
corporate events. The conversion of the Note will be subject to certain customary conditions and the receipt of stockholder approval
to the extent necessary under Nasdaq listing rules.
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 years ended December 31,
2024 and 2023:
(In thousands)
December 31,
2024
December 31,
2023
Net cash (used in) provided by:
Operating activities - continuing operations
$ (11,583 )
$ (30,975 )
Investing activities- continuing operations
(54 )
25,179
Financing activities- continuing operations
42,373
(4,227 )
Net increase (decrease) in cash and cash equivalents
$ 30,736
$ (10,023 )
Cash Flows from Operating Activities
For the year ended December
31, 2024, our operating cash flows included a net loss of $41.7 million, a $17.9 million change in the fair value of warrant liabilities,
$11.9 million related to loss on disposal of the Cultivation Business, $1.4 million of depreciation and amortization, $1.2 million of
stock based compensation expense, offset by a decrease of $5.9 million related to gain on settlement of contingent liability, $2.2 million
decrease related to accrued acquisition liabilities due to issuance of held-back-shares, change in provision for credit losses of $0.3
million, change in provision for inventory of $0.7, and a gain on early termination of lease of $0.1 million. Net cash was increased by
changes in operating assets and liabilities of $7.0 million.
For the year ended December
31, 2023, we incurred a net loss of $18.6 million primarily due to $4.7 million related to the change in fair value of warrant liabilities,
$1.9 million of depreciation and amortization, $2.7 million of stock based compensation expense, and $24 thousand of debt issuance costs.
Net cash was increased by changes in operating assets and liabilities of $13.7 million.
Cash Flows from Investing Activities
For the year ended December
31, 2024, net cash used in investing activities was approximately $0.1 million, which included cash inflows of $0.3 million from the proceeds
from repayment of loan receivable, and cash outflows of $0.4 million related to issuance of loans receivable.
For the year ended December
31, 2023, net cash provided by investing activities was approximately $25.2 million, which included cash inflows of $10.5 million in proceeds
from sale of marketable securities and $15.1 million in proceeds from repayment of loan receivable, and cash outflows of $0.6 million
related to a certain loan issuance and $0.3 million in purchases of property and equipment.
Cash Flows from Financing Activities
For the year ended
December 31, 2024, net cash provided by financing activities was $42.4 million. Net cash provided by financing activities was
primarily driven by proceeds from the issuance Common Stock in connection with private placement of $25.8 million, proceeds from the
issuance of related party notes of $14.5 million, proceeds from the issuance of Common Stock pursuant to a registered offering with
the U.S. Securities and Exchange Commission and pre-funded warrants offering of $2.1 million, proceeds from the issuance of Common
Stock through stock subscription of $0.3 million, offset by payments on insurance financing loans of $0.4 million.
For the year ended December
31, 2023, net cash used in financing activities was $4.2 million. Net cash used in financing activities was primarily driven by the repayment
of certain of our debt instruments of $10.3 million, and payments on insurance financing loans of $1.3 million, offset by proceeds generated
from the sale of securities pursuant to our “at the market” program, net, of $1.5 million and proceeds from issuance of a
related party note of $4.4 million.
42
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
Not applicable.