RYTHM, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2021. Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this evaluation, management has concluded that the Company’s internal control over financial reporting was not effective at the reasonable assurance level as of December 31, 2021. During the year ended December 31, 2021, management identified material weaknesses related to inadequate design of the controls over the preparation of the consolidated financial statements due to the lack of a timeline and process in place to timely close the Company’s annual books and records. 49 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm because we are an “emerging growth company,” and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. Remediation of Material Weakness in Internal Control over Financial Reporting In the course of preparing the financial statements that were included in certain filings with the SEC during the years ended December 31, 2021 and 2020, we identified material weaknesses in internal control over financial reporting. These material weaknesses related to inadequate design of the controls over the preparation of the consolidated financial statements due to the lack of a timeline and process in place to timely close the Company’s annual books and records, which was identified during the fiscal year ended December 31, 2021, and insufficient technical accounting resources and lack of segregation of duties, which were identified during the fiscal year ended December 31, 2020. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of its financial statements would not be prevented or detected on a timely basis. These deficiencies could result in misstatements to our financial statements that could be material and may not be prevented or detected on a timely basis. As of December 31, 2021, we were in varying stages of remediating the current and previously reported material weaknesses in our internal control over financial reporting. During the fiscal year ended December 31, 2021, we have increased the number of accounting resources employed by the Company. We have added technically qualified personnel and are in the process of improving the Company’s technical accounting resources and capabilities. Additionally, the expansion in accounting department resources has enabled the Company to create necessary and proper segregation of duties between transactional, reconciliation and review and approval functions. During the fourth quarter of 2021, we took steps to address our material weakness related to control over the timeliness of our financial statement close process. While these actions, which include adding public company-experienced resources to our accounting department staff, have already served to introduce improved financial statement close-related policies and procedures, we will need to continue to devote specific attention to this aspect of our internal control environment to ensure that this material weakness is fully remediated in the fiscal year ending December 31, 2022. The material weakness related to the timeliness of our financial control process will not be considered fully remediated until these additional controls and procedures have operated effectively for a sufficient period of time and management has concluded, through testing, that these controls are effective. Our management will monitor the effectiveness of our remediation plans and will make changes management determines to be appropriate. If not remediated, this material weakness could result in material misstatements to our annual or interim financial statements that may not be prevented or detected on a timely basis or result in a delayed filing of required periodic reports. If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of the internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our Common Stock could be adversely affected and we could become subject to litigation or investigations by the Nasdaq Capital Market, the SEC or other regulatory authorities, which could require additional financial and management resources. Changes in Internal Control Over Financial Reporting Other than the changes to remediate the material weakness noted above, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 50 PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. Item 11. Executive Compensation. The information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters. The information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services. The information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. 51 PART IV Item 15. Exhibits, Financial Statements and Schedules. (a) Financial Statements: (1) The financial statements required to be included in this report appear after the signature page to this report as a separate section beginning on page F-1. (2) All supplemental schedules have been omitted since the information is either included in the financial statements or the notes thereto or they are not required or are not applicable. (3) The Exhibit Index of this report appears below. (b) Exhibits: Exhibit No. Description 2.1± Agreement and Plan of Merger dated January 22, 2020 between the Registrant and TriGrow Systems, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 2.2± Plan of Merger and Equity Purchase Agreement, dated as of September 29, 2021, among the Registrant, Sinclair Scientific, LLC, Mass2Media, LLC dba PX2 Holdings, LLC, and each of the equity holders of Sinclair Scientific, LLC named therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2021 2.3 Amendment to Plan of Merger and Equity Purchase Agreement, dated as of October 1, 2021, between the Registrant and Sinclair Scientific, LLC (incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2021) 2.4± Membership Interest Purchase Agreement, dated as of December 31, 2021, among the Registrant, PurePressure, LLC, Benjamin Britton as Member Representative, and each of the equity holders of PurePressure, LLC named therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2022) 2.5± Merger Agreement, dated as of February 1, 2022, among the Registrant, LS Holdings Corp., Lab Society NewCo, LLC, Michael S. Maibach Jr. as Owner Representative, and each of the Owners named therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 2, 2022). 3.1 Articles of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 13, 2021) 3.2 Third Amended and Restated Certificate of Designations of the Series A Convertible Preferred Stock of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 13, 2021) 3.3 Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrant’s Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 26, 2021) 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 26, 2021) 4.2 Form of Representative’s Warrant dated February 19, 2021 (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 11, 2021) 4.3 Form of Representative’s Warrant dated January 27, 2021 (incorporated by reference to Exhibit 4.2 to the Registrant’s Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 26, 2021) 4.4 Form of Warrant issued to Noteholders (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 4.5 Description of Registrant’s Securities (incorporated by reference to Exhibit 4.5 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2021). 4.6 Form of Pre-Funded Warrant dated January 28, 2022 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2022). 4.7 Form of Common Stock Purchase Warrant dated January 28, 2022 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2022). 4.8 Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 18, 2022) 4.9 Form of Senior Secured Note (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 18, 2022) 10.1 Operating Agreement of Agrify-Valiant, LLC dated December 8, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.2 Distribution Agreement dated June 7, 2019 between the Registrant and Bluezone Products, Inc.± (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.3 Distribution Agreement dated March 9, 2020 between the Registrant and Enozo Technologies Inc.± (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 52 10.4 Purchase Agreement dated as of July 10, 2020 between the Registrant and 4D Bios Inc.± (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.5 Employment Agreement dated as of January 4, 2021 between the Registrant and Raymond Chang † (incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2021) 10.9 2020 Omnibus Equity Incentive Plan † (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.10 Form of Note and Warrant Purchase Agreement (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.11 Form of Convertible Promissory Note (incorporated by reference to Exhibit 10.13 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 13, 2021) 10.12 Intellectual Property Assignment and Transfer Agreement by and among the Registrant, Agrify Brands, LLC and The Holden Company effective as of January 1, 2020 (incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.13 Supply Agreement by and among the Registrant and Mack Molding Co. dated December 7, 2020 ± (incorporated by reference to Exhibit 10.15 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 13, 2021) 10.14 Amended and Restated Operating Agreement of Agrify Brands, LLC effective as of August 12, 2020 (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.15* Separation Agreement of Niv Krikov, dated November 3, 2021 10.16 Form of Indemnification Agreement with directors and executive officers (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 11, 2021) 10.17 Employment Agreement, dated as of November 10, 2021, between the Registrant and Thomas Massie † (incorporated by reference to Exhibit 10.19 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2021) 10.18 Employment Agreement, dated as of November 10, 2021, between the Registrant and Timothy Oakes † (incorporated by reference to Exhibit 10.20 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2021) 10.19± Form of Securities Purchase Agreement, dated as of January 25, 2022, between the Registrant and the Purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2022. 10.20 Form of Registration Rights Agreement, dated as of January 25, 2022, between the Registrant and the Purchasers party thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2022. 10.21± Form of Securities Purchase Agreement, dated as of March 14, 2022, between the Registrant and High Trail Special Situations LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 18, 2022) 14.1 Code of Ethics of Agrify Corporation Applicable To Directors, Officers And Employees (incorporated by reference to Exhibit 14.1 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 21.1* Subsidiaries of the Registrant 23.1* Consent of Independent Registered Public Accounting Firm 31.1* Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1** Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2** Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). ± Certain information has been omitted from this exhibit in reliance upon Item 601(a)(5) of Regulation S-K. † Indicates a management contract or compensatory plan, contract or arrangement. * Filed herewith. ** Furnished herewith. Item 16. Form 10-K Summary. None. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. AGRIFY CORPORATION Date: March 31, 2022 By: /s/ Raymond Chang By: Raymond Chang Title: Chief Executive Officer (principal executive officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Raymond Chang Chief Executive Officer and Director March 31, 2022 Raymond Chang (Principal Executive Officer) /s/ Timothy Oakes Chief Financial Officer March 31, 2022 Timothy Oakes (Principal Financial and Accounting Officer) /s/ Thomas Massie Chief Operating Officer and Director March 31, 2022 Thomas Massie /s/ Guichao Hua Director March 31, 2022 Guichao Hua /s/ Krishnan Varier Director March 31, 2022 Krishnan Varier /s/ Timothy Mahoney Director March 31, 2022 Timothy Mahoney /s/ Stuart Wilcox Director March 31, 2022 Stuart Wilcox /s/ Leonard Sokolow Director March 31, 2022 Leonard Sokolow 54 Agrify Corporation Index to Consolidated Financial Statements Fiscal Years Ended December 31, 2021 and 2020: Independent Auditors’ Report (PCAOB ID # 688 ) F-2 Consolidated Financial Statements Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders’ Equity (Deficit) F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 – F-43 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Agrify Corporation and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Agrify Corporation and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2021 , and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Marcum llp Marcum llp We have served as the Company’s auditor since 2019. Melville, NY March 31, 2022 F- 2 AGRIFY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) As of December 31, 2021 2020 Assets: Cash and cash equivalents $ 12,014 $ 8,111 Marketable securities 44,550 — Accounts receivable, net of allowance for doubtful accounts of $ 1,415 and $ 54 , as of December 31, 2021 and December 31, 2020, respectively 7,222 4,014 Inventory, net of reserves of $ 942 and $ 0 , as of December 31, 2021 and December 31, 2020, respectively 20,498 5,170 Deferred IPO costs — 981 Prepaid expenses and other current assets 2,452 364 Total current assets 86,736 18,640 Loan receivable 22,255 — Property and equipment, net 6,232 873 Right-of-use assets, net 1,479 — Goodwill 50,090 632 Intangible assets, net 14,072 1,694 Other non-current assets 1,184 — Total Assets $ 182,048 $ 21,839 Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable $ 9,151 $ 693 Accrued expenses and other current liabilities 28,764 6,550 Notes payable, net of debt discount of $ 0 and $ 4,777 as of December 31, 2021 and December 31, 2020, respectively — 12,493 Derivative liabilities — 7,141 Operating lease liabilities, current 814 — Long-term debt, current 1,089 — Deferred revenue 3,772 152 Total current liabilities 43,590 27,029 Other non-current liabilities 318 435 Operating lease liabilities, non-current 704 — Long-term debt 12 829 Total Liabilities 44,624 28,293 Commitments and contingencies (Note 21) Stockholders’ Equity (Deficit) Common stock, 50,000,000 shares, $ 0.001 par value authorized as of December 31, 2021 and December 31, 2020, respectively; 22,207,103 and 4,211,677 shares issued and outstanding at December 31, 2021 and 2020, respectively 21 4 Preferred stock 2,895,000 shares, $ 0.001 par value authorized as of December 31, 2021 and 2020, respectively; 0 shares issued and outstanding as of December 31, 2021 and 2020, respectively — — Preferred A stock 105,000 , $ 0.001 par value authorized as of December 31, 2021 and 2020, respectively; 0 and 100,000 shares issued and outstanding at December 31, 2021 and 2020, respectively — — Additional paid-in capital 196,013 19,827 Accumulated deficit ( 58,975 ) ( 26,510 ) Total Stockholders’ Equity (Deficit) 137,059 ( 6,679 ) Non-controlling Interests 365 225 Total Liabilities and Stockholders’ Equity $ 182,048 $ 21,839 The accompanying notes are an integral part of these consolidated financial statements. F- 3 AGRIFY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except for number of shares and per share amounts) Year ended December 31, 2021 2020 Revenue, net $ 59,859 $ 12,087 Cost of goods sold 54,625 11,517 Gross profit 5,234 570 Selling, general and administrative 34,970 9,832 Research and development 3,925 3,354 Change in contingent consideration 1,412 — Total operating expenses 40,307 13,186 Loss from operations ( 35,073 ) ( 12,616 ) Interest income (expense), net 74 ( 481 ) Other expenses ( 31 ) — Gain (loss) on extinguishment of notes payable 2,685 ( 5,618 ) Gain on forgiveness of PPP loan 45 — Change in fair value of derivative liabilities — ( 2,924 ) Other income (expense), net 2,773 ( 9,023 ) Net loss before income taxes ( 32,300 ) ( 21,639 ) Income tax provision 25 — Net loss ( 32,325 ) ( 21,639 ) Income (loss) attributable to non-controlling interest 140 ( 22 ) Net loss attributable to Agrify Corporation $ ( 32,465 ) $ ( 21,617 ) Net loss per share attributable to common stockholders – basic and diluted $ ( 1.69 ) $ ( 5.32 ) Weighted average common shares outstanding – basic and diluted 19,090,932 4,175,176 The accompanying notes are an integral part of these consolidated financial statements. F- 4 AGRIFY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands, except share amounts) Common Stock Preferred A Stock Additional Paid-In Subscription Accumulated Total Stockholders’ Equity (Deficit) attributable Non- controlling Total Stockholders’ Equity Shares Amount Shares Amount Capital Receivable Deficit to Agrify Interests (Deficit) Balance, January 1, 2020 3,616,125 $ 4 — $ — $ 4,124 $ ( 40 ) $ ( 4,893 ) $ ( 805 ) $ — $ ( 805 ) Stock based compensation — — — — 1,921 — — 1,921 — 1,921 Stock subscription — — — — — 40 — 40 — 40 Issuance of Preferred A Stock — — 100,000 — 10,000 — — 10,000 — 10,000 Investment in Agrify Valiant — — — — — — — 40 40 Acquisition of TriGrow Systems 595,552 — — — 1,356 — — 1,356 207 1,563 Warrants issued and recorded as debt discount in connection with notes payable issuances — — — — 2,426 — — 2,426 — 2,426 Net loss — — — — — — ( 21,617 ) ( 21,617 ) ( 22 ) ( 21,639 ) Balance, December 31, 2020 4,211,677 $ 4 100,000 $ — $ 19,827 $ — $ ( 26,510 ) $ ( 6,679 ) $ 225 $ ( 6,454 ) Balance, January 1, 2021 4,211,677 $ 4 100,000 $ — $ 19,827 $ — $ ( 26,510 ) $ ( 6,679 ) $ 225 $ ( 6,454 ) Stock-based compensation — — — — 5,552 — — 5,552 — 5,552 Beneficial conversion feature associated with amended Convertible Promissory Notes — — — — 3,869 — — 3,869 — 3,869 Conversion of Convertible Notes 1,697,075 2 — — 13,098 — — 13,100 — 13,100 Issuance of common shares in connection with acquisition 8,000 — — — 176 — — 176 — 176 Issuance of common stock – Initial Public Offering (“IPO”), net of fees 6,210,000 6 — — 56,955 — — 56,961 — 56,961 Issuance of common stock – Secondary public offering, net of fees 6,388,888 6 — — 79,833 — — 79,839 79,839 Conversion of Preferred A Stock 1,373,038 1 ( 100,000 ) — ( 1 ) — — — — — Acquisition of Precision and Cascade 666,403 1 — — 12,354 — — 12,355 — 12,355 Acquisition of PurePressure 240,301 — — — 2,211 — — 2,211 — 2,211 Exercise of options 657,620 — — — 2,132 — — 2,132 — 2,132 Exercise of warrants 754,101 1 — — 7 — — 8 — 8 Net loss — — — — — — ( 32,465 ) ( 32,465 ) 140 ( 32,325 ) Balance December 31, 2021 22,207,103 $ 21 — $ — $ 196,013 $ — $ ( 58,975 ) $ 137,059 $ 365 $ 137,424 The accompanying notes are an integral part of these consolidated financial statements. F- 5 AGRIFY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Year ended December 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss attributable to Agrify Corporation $ ( 32,465 ) $ ( 21,617 ) Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities: Depreciation and amortization 1,310 407 Amortization of premium on investment securities 951 — Interest on investment securities ( 1,035 ) — Change in fair value of contingent consideration 1,412 — Provision for doubtful accounts 1,187 54 Provision for inventory obsolescence 942 — Compensation in connection with the issuance of stock options 5,552 1,921 Issuance of common shares in connection with acquisition 176 — Non-cash interest (income) expense ( 42 ) 447 (Gain) loss on extinguishment of notes payable, net ( 2,685 ) 5,618 Gain on forgiveness of PPP loan ( 45 ) — Change in fair value of derivative liabilities — 2,924 Deferred income taxes 25 — (Gain) loss from disposal of fixed assets ( 5 ) 120 (Gain) loss attributable to non-controlling interests 140 ( 22 ) Changes in operating assets and liabilities, net of acquisition: Accounts receivable ( 3,391 ) ( 3,709 ) Inventory ( 6,568 ) ( 2,941 ) Prepaid expenses and other current assets ( 1,745 ) 12 Right of use assets, net 29 — Accounts payable 1,127 ( 527 ) Accrued expenses and other current liabilities 8,284 4,780 Deferred revenue ( 3,303 ) ( 2,249 ) Net cash used in operating activities ( 30,149 ) ( 14,782 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 2,220 ) ( 136 ) Purchases of intangibles assets ( 104 ) — Purchase of securities ( 62,209 ) — Proceeds from the sale of securities 17,743 — Proceeds from the sale of fixed assets 101 — Issuance of loan receivable ( 22,143 ) — Cash paid for business combination, net of cash acquired ( 35,908 ) ( 1,092 ) Net cash used in investing activities ( 104,740 ) ( 1,228 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Preferred A Stock — 10,000 Proceeds from IPO, net of fees 56,961 — Proceeds from Secondary public offering, net of fees 79,839 — Proceeds from exercise of options 2,132 — Proceeds from exercise of warrants 8 — Payments of financing leases ( 148 ) — Minority interest in Valiant — 40 Proceeds from PPP Loans — 823 Payments of financing leases — ( 88 ) Proceeds from notes payable — 13,100 Proceeds from issuance of common stock — 40 Net cash provided by financing activities 138,792 23,915 Net increase in cash 3,903 7,905 Cash and cash equivalents – Beginning of period 8,111 206 Cash and cash equivalents – End of period $ 12,014 $ 8,111 Supplemental disclosure of non-cash investing and financing activities: Equipment sold for loan receivable to customer $ 289 $ — Warrants issued and recorded as debt discount in connection with notes payable issuances $ — $ 2,426 Bifurcated embedded conversion options recorded as derivative liabilities and debt discount $ — $ 2,769 The accompanying notes are an integral part of these consolidated financial statements. F- 6 AGRIFY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands unless otherwise specified, except share and per share data) Note 1 — Nature of Business and Basis of Presentation Description of Business Agrify Corporation (“Agrify” or the “Company”) is a developer of highly advanced and proprietary precision hardware and software grow solutions for the indoor agriculture marketplace and provides equipment and solutions for cultivation, extraction, post-processing, and testing for the cannabis and hemp industry. The Company was formed in the State of Nevada on June 6, 2016 as Agrinamics, Inc., and subsequently changed its name to Agrify Corporation. The Company is sometimes referred to herein by the words “we,” “us,” “our,” and similar terminology. The Company has eight wholly owned subsidiaries, which are collectively referred to as the “Subsidiaries”: ● AGM Service Corp LLC (formerly AGM Service Corp Inc.); ● TriGrow Systems, LLC (“TriGrow”, which acted as the Company’s exclusive distributor and which was acquired in January 2020 as TriGrow Systems, Inc. and converted to TriGrow Systems, LLC in May 2020); ● Ariafy Finance, LLC; ● Agxiom, LLC; ● Harbor Mountain Holdings, LLC (“HMH”)(acquired in July 2020); ● Cascade Sciences, LLC (“Cascade”)(which was acquired by the Company on October 1, 2021); ● Precision Extraction NewCo, LLC (“Precision”)(which was a newly formed subsidiary in connection with October 1, 2021 acquisition of Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions and Cascade); and ● PurePressure, LLC (“PurePressure”)(which was acquired by the Company on December 31, 2021). The Company also has ownership interests in the following companies: ● Teejan Podoponics International LLC (“TPI”)(the Company has owned 50% of TPI” since December 2018); ● Agrify-Valiant, LLC (“Agrify-Valiant”)(the Company owns 60% of Agrify-Valient, which was formed in December 2019); and ● Agrify Brands, LLC (“Agrify Brands”)(formerly TriGrow Brands, LLC)(the Company owns 75% of Agrify Brands, which ownership position was created as part of the January 2020 acquisition of TriGrow). On February 1, 2022, the Company 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 the Company agreed to acquire Lab Society. Concurrently with the execution of the Merger Agreement, the Company 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”). See Note 23, Subsequent Events included elsewhere in the notes to the consolidated financial statements. Reverse Stock Split On January 12, 2021, the Company effected a 1-for-1.581804 reverse stock split. 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. Initial Public Offering and Secondary Public Offering On February 1, 2021, we closed our initial public offering, or (“IPO”), of 6,210,000 shares of common stock (inclusive of 810,000 shares of common stock from the full exercise of the over-allotment option of shares granted to the underwriters). The offer and sale of all of the shares in the IPO were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File Nos. 333- 251616 and 333-252490), which was declared effective by the SEC on January 27, 2021. Maxim Group LLC and Roth Capital Partners acted as the underwriters. The public offering price of the shares sold in the offering was $ 10.00 per share. The total gross proceeds from the offering were $ 62.1 million. F- 7 After deducting underwriting discounts and commissions of $ 4 million and offering expenses paid or payable by us of approximately $ 1 million, the net proceeds from the offering were approximately $ 57 million. During the fiscal year ended December 31, 2021, we used the net proceeds from the IPO for our current working capital needs to support accounts receivable growth, manage inventory to meet demand forecasts, and support operational growth. On February 19, 2021, we consummated a secondary public offering (the “February Offering”) of 5,555,555 shares of common stock for a price of $ 13.50 per share, less certain underwriting discounts and commissions. On March 22, 2021, we closed on the sale of an additional 833,333 shares of common stock on the same terms and conditions pursuant to the exercise of the underwriters’ over-allotment option. The exercise of the over-allotment option brought the total number of shares of common stock sold by us in connection with the February Offering to 6,388,888 shares and the total net proceeds received in connection with the February Offering to approximately $ 80 million, after deducting underwriting discounts and estimated offering expenses. During the fiscal year ended December 31, 2021, we used the net proceeds from the IPO for our current working capital needs to support accounts receivable growth, manage inventory to meet demand forecasts, and support operational growth. On September 14, 2021, the Company entered into a letter agreement and waiver (the “Letter Agreement”), to amend the terms of its underwriting agreement with the representative of the underwriters in the IPO. Pursuant to the letter agreement, the representative agreed to waive the right of first refusal included in the underwriting agreement in consideration of (i) a cash payment of $ 2.4 million and (ii) the right to participate as a co-manager with ten percent ( 10 %) of the economics with respect to the Company’s next public offering of securities, payable in cash upon the closing of such offering. Coronavirus (“COVID-19”) Pandemic The spike of COVID-19 in the first quarter of 2020 has caused significant volatility in the U.S. markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. economy. To date, there has not been a material impact on the Company’s business operations and financial performance. The extent of the impact of COVID-19 on the Company’s operational and financial performance will depend in part, on the length and severity of these restrictions and on the Company’s ability to conduct business in the ordinary course. The Paycheck Protection Program In May and July 2020, the Company entered into two separate PPP Loans 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 (the “SBA”)(the “PPP Loans”). The Company received total proceeds of approximately $ 823 thousand from the unsecured PPP Loans, of which $ 44 thousand was forgiven in September 2021. The Company’s application related to the forgiveness of the remaining outstanding balance of PPP Loans is currently under review by the SBA. Note 2 — Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation Accounting for Wholly Owned Subsidiaries The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and include the accounts of Agrify Corporation and its wholly owned subsidiaries, as described above in Note 1 – Nature of Business and Basis of Presentation, in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The Company includes results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated. Accounting for Less Than Wholly Owned Subsidiaries For the Company’s less than wholly owned subsidiaries, which include TPI, Agrify-Valiant, and Agrify Brands, the Company first analyzes whether these entities are a variable interest entity (a “VIE”) in accordance with ASC Topic 810 Consolidation (“ASC 810”), and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets. The Company continuously re-assesses (i) whether the joint venture is a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If it is determined that the joint venture qualifies as a VIE and the Company is the primary beneficiary, it is consolidated. Based on the Company’s analysis for these entities, the Company has determined that Agrify-Valiant, LLC and Agrify Brands, LLC are each a VIE and that the Company is the primary beneficiary. While the Company owns 60 % of Agrify-Valiant, LLC’s equity interests and 75 % of Agrify Brands, LLC’s equity interests, the remaining equity interests in Agrify-Valiant, LLC and Agrify Brands, LLC are owned by unrelated third parties, and the agreement with these third parties provides the Company with greater voting rights. Accordingly, the Company consolidates the financial statements of Agrify-Valiant, LLC and Agrify Brands, LLC under the VIE rules and reflects the third parties’ interests in the consolidated financial statements as a non-controlling interest. The Company records this non-controlling interest at its initial fair value, adjusting the basis prospectively for the third parties’ share of the respective consolidated investments’ net income or loss or equity contributions and distributions. These non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holders based on its economic ownership percentage. The investment in 50 % of the shares of TPI is treated as an equity investment as the Company cannot exercise significant influence. F- 8 Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual of expenses. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates. Fiscal Year The Company, and its Subsidiaries, Fiscal Year ends on December 31, each year. Emerging Growth Company We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. In addition, the JOBS Act provides that an “emerging growth company” can use the extended transition period for complying with new or revised accounting standards. We will remain an “emerging growth company” until the earliest to occur of: ● our reporting $1.0 billion or more in annual gross revenues; ● our issuance, in a three-year period, of more than $1.0 billion in non-convertible debt; ● the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter; and ● December 31, 2026. Reclassifications Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. In this Annual Report on Form 10-K, we have reclassified our capitalized website costs so that they are included as part of our aggregate intangible assets, net in our consolidated balance sheets as of December 31, 2021 and 2020. Cash and Cash Equivalents Cash and cash equivalents consist principally of cash and deposits with maturities of three months or less as of December 31, 2021 and December 31, 2020. All cash equivalents are carried at cost, which approximates fair value. Marketable Securities The Company’s marketable security investments primarily include investments held in mutual funds, municipal bonds, and corporate bonds. The mutual funds are recorded at fair value in the accompanying consolidated balance sheets as part of cash and cash equivalents. The municipal and corporate bonds are considered held to maturity and are recorded at amortized cost in the accompanying consolidated balance sheet. The fair values of these investments were estimated using recently executed transactions and market price quotations. The Company considers current assets those investments which will mature within the next 12 months including interest receivable on the long-term bonds. Accounts Receivable, Net Accounts receivable, net primarily consists of amounts billed and currently due from customers. Accounts receivable balances are presented net of an allowance for credit losses, which is an estimate of amounts that may not be collectible. In determining the amount of the allowance at each reporting date, the Company makes judgments about general economic conditions, historical write-off experience and any specific risks identified in customer collection matters, including the aging of unpaid accounts receivable and changes in customer financial conditions. Account balances are written off after all means of collection are exhausted and the potential for non-recovery is determined to be probable. Adjustments to the allowance for credit losses are recorded as general and administrative expenses in the consolidated statements of operations. F- 9 Concentration of Credit Risk and Significant Customer Financial instruments that potentially subject the Company to concentration of credit risk primarily consist of cash and accounts receivable. The Company places its cash with financial institutions in the United States. The cash balances are insured by the FDIC up to $ 250 thousand per depositor with unlimited insurance for funds in noninterest-bearing transaction accounts through December 31, 2021. At times, the amounts in these accounts may exceed the federally insured limits. The Company has certain customers whose revenue individually represented 10 % or more of the Company’s total revenue, or whose accounts receivable balances individually represent 10 % or more of the Company’s total accounts receivable. Refer to the following table. The Company has certain customers whose revenue individually represented 10 % or more of the Company’s total revenue, or whose accounts receivable balances individually represent 10 % or more of the Company’s total accounts receivable. Refer to the following table. Revenue For the years ended December 31, 2021 and 2020, the Company’s customers that accounted for 10 % or more of the total revenue were as follows: 2021 2020 (Dollar Amounts in Thousands) Amount % of Total Revenue Amount % of Total Revenue New England Innovation Academy (“NEIA”) – Related Party $ 22,010 36.8 % $ 3,916 32.4 % Customer B * * $ 1,660 13.7 % Greenstone Holdings - Related Party $ 9,429 15.8 % * * Customer D * * $ 4,000 33.1 % * Customer revenue, as a percentage of total revenue was less than 10% Accounts Receivable, Net As of December 31, 2021 and 2020, the Company’s customers that accounted for 10 % or more of the total accounts receivable, net, were as follows: 2021 2020 (Dollar Amounts in Thousands) Amount % of Total Accounts Receivable Amount % of Total Accounts Receivable NEIA – Related Party $ 3,498 48.4 % $ 1,655 41.2 % Customer B $ 1,541 21.3 % $ 1,510 37.6 % Customer F * * $ 400 10 % * Customer accounts receivable balance, as a percentage of total accounts receivable balance, was less than 10% Inventories The Company values all of its inventories, which consist primarily of raw material hardware components, at the lower of cost or net realizable value with cost principally determined by the weighted average cost method on a first in first out basis. Write-offs of potentially slow moving or damaged inventory are recorded through specific identification of obsolete or damaged material. Physical inventories are taken at least once annually for all inventory locations. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are recognized using the straight-line method over the estimated useful life of each asset, as follows: Estimated Useful Life (Years) Computer and office equipment 2 to 3 Furniture and fixtures 2 Software 3 Vehicles 5 Research and development laboratory equipment 5 Machinery and equipment 3 to 5 Leased equipment at customer 5 to 13 Trade show assets 3 to 5 Leasehold improvements Lower of estimated useful life or remaining lease term F- 10 Estimated useful lives are periodically assessed to determine if changes are appropriate. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost of these assets and related accumulated depreciation or amortization are eliminated from the consolidated balance sheet and any resulting gains or losses are included in the consolidated statement of operations in the period of disposal. Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service. Goodwill Goodwill is defined as the excess of cost over the fair value of assets acquired and liabilities assumed in a business combination. Goodwill is tested for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired. The Company has 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 the Company’s 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 the Company’s market value as a result of a significant decline in the Company’s stock price. There have been no impairment charges recorded for fiscal 2021 and fiscal 2020. Intangible Assets The Company initially records intangible assets at their estimated fair values and reviews these assets periodically for impairment. Identifiable intangible assets, which consist principally of customer-related assets, acquired and/or developed technology, non-compete agreements, and trade names, are reported net of accumulated amortization and are being amortized over their estimated useful lives at amortization rates that are proportional to each asset’s estimated economic benefit. The Company’s intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. The Company reviews the carrying value of these intangible assets annually, or more frequently if indicators of impairment are present. The finite-lived useful lives are as follows: Trade names 5 to 7 years Acquired developed technology 5 to 8 years Non-compete agreements 5 years Customer relationships 5 to 8 years Capitalized website costs 3 to 5 years In performing the review of the recoverability intangible assets, the Company considers several factors, including whether there have been significant changes in legal factors or the overall business climate that could affect the underlying value of an asset. The Company also considers whether there is an expectation that the asset will be sold or disposed of before the end of its originally estimated useful life. If, as a result of examining any of these factors, the Company concludes that the carrying value of intangible asset exceeds its estimated fair value, an impairment charge will be recognized and reduce the carrying value of the asset to its estimated fair value. Convertible Notes Payable The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with Accounting Standards Codification Topic 815 of the FASB. The accounting treatment of derivative financial instruments requires that the Company record certain embedded conversion options (“ECOs”), certain variable-share settlement features and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Bifurcated embedded conversion options, variable-share settlement features and any related freestanding instruments are recorded as a discount to the host instrument which is amortized to interest expense over the life of the respective note using the effective interest method. If the instrument is determined to not be a derivative liability, the Company then evaluates for the existence of a beneficial conversion feature (“BCF”) by comparing the commitment date fair value to the effective conversion price of the instrument. The Company records a BCF as debt discount which is amortized to interest expense over the life of the respective note using the effective interest method. BCFs that are contingent upon the occurrence of a future event are recognized when the contingency is resolved. Leases The Company determines at the inception of a contract if such arrangement is or contains a lease. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company classifies leases at the lease commencement date as operating or finance leases and records a right-of-use asset and a lease liability on the consolidated balance sheet for all leases with an initial lease term of greater than 12 months. Leases with an initial term of 12 months or less are not recorded on the balance sheet, but payments are recognized as expense on a straight-line basis over the lease term. The Company’s contracts may contain both lease and non-lease components. Non-lease components may include maintenance, utilities, and other operating costs. The Company combines the lease and non-lease components of fixed costs in its lease arrangements as a single lease component. Variable costs, such as utilities or maintenance costs, are not included in the measurement of right-of-use assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs. F- 11 Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term. The Company determines the present value of future lease payments by using its estimated secured incremental borrowing rate for that lease term as the interest rate implicit in the lease is not readily determinable. The Company estimates its secured incremental borrowing rate for each lease based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. Certain of the Company’s leases include options to extend or terminate the lease. The amounts determined for the Company’s right-of-use assets and lease liabilities generally do not assume that renewal options or early-termination provisions, if any, are exercised, unless it is reasonably certain that the Company will exercise such options. Deferred Revenue Deferred revenue includes amounts collected or billed in excess of revenue recognized. Deferred revenue is recognized as revenue as the related performance obligations are satisfied. Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as a current liability and the remaining portion is recorded as a noncurrent liability on the consolidated balance sheet. Fair Value of Financial Instruments The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses. The estimated fair value of the accounts receivable and accounts payable approximates their carrying value due to the short-term nature of these instruments. Stock-Based Compensation The Company measures all stock options and other stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Historically, the Company has issued stock options to employees, directors and consultants with only service-based vesting conditions and records the expense for these awards using the straight-line method. The Company classifies stock-based compensation expense in its consolidated statements of operations and comprehensive loss in the same manner in which the award’s recipient’s payroll costs are classified. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company historically had been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of similar publicly traded companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. Business Combinations The Company accounts for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed. Significant judgments are used in determining fair values of assets acquired and liabilities assumed, as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company's current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within the Company's operating results. For contingent consideration arrangements, a liability is recognized at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations. 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 consolidated financial statements. F- 12 Revenue Recognition Overview The Company generates revenue from the following sources: (1) equipment sales, (2) services sales and (3) construction contracts. The Company recognizes 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 the Company and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability, and consideration is probable. Specifically, the Company obtains 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 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 a company’s 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 the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies. 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. The Company’s contracts typically contain multiple performance obligations, for which the Company accounts for individual performance obligations separately, if they are distinct. The standalone selling price reflects the price the Company would charge for a specific piece of equipment or service if it was sold separately in similar circumstances and to similar customers. F- 13 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 The Company into enters contracts that can 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 the Company determines 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. The Company then allocates 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. The Company determines 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, the Company estimates the SSP, taking into account available information such as market conditions, expected margins, and internally approved pricing guidelines related to the performance obligations. The Company licenses its 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. The Company typically satisfies its 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. The Company utilizes the cost-plus margin method to determine the SSP for equipment and buildout services. It is based on the cost of the services from third parties, plus a reasonable markup that the Company believes is reflective of a market-based reseller margin. The SSP for services in time and materials contracts is determined by observable prices in standalone services arrangements. 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 contracts have payment terms that differ from the timing of revenue recognition, the Company will assess whether the transaction price for those contracts include a significant financing component. The Company has elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if the Company expects 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, the Company imputes interest on such contracts at an agreed upon interest rate and will present the financing components separately as financial income. For the years ended December 31, 2021 and 2020, the Company did not have any such financial income. Payment terms with customers typically require payment 30 days from invoice date. The Company’s agreements with its 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, the Company has endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented. F- 14 The Company has 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, the Company will accrue all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. The Company has 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 the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company receives 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 the Company’s deferred revenue primarily results from the timing difference between the Company’s performance and the customer’s payment. The Company fulfils 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. The Company recognizes deferred revenue when consideration has been received or an amount of consideration is due from the customer, and the Company has a future obligation to transfer certain proprietary products. In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable. The majority of the Company’s 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. The Company generally provides a one-year warranty on its 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, the Company accrues 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 the Company’s consolidated balance sheets. Research and Development Costs The Company expenses research and development costs as incurred. Research and development expenses include payroll, employee benefits and other expenses associated with product development. The Company incurs research and development costs associated with the development and enhancement of both hardware and software products associated with its cultivation and extraction equipment, as well as its SaaS-based software offering, Agrify Insights. Shipping and Handling Charges The Company incurs costs related to shipping and handling of its manufactured products. These costs are expensed as incurred as a component of cost of sales. Shipping and handling charges related to the receipt of raw materials are also incurred, which are recorded as a cost of the related inventory. Equity Method Investments Investments in affiliates which are 50 % or less owned by the Company for which the Company exercises significant influence but does not have control are accounted for on the equity method. The Company has investments in equity investments without readily determinable fair values, which represents investments in entities where the Company does not have the ability to significantly influence the operations of the entities. An assessment of whether or not the Company (as a holder of 50 % of TPI) has the power to direct activities that most significantly impact TPI’s economic performance and to identify the party that obtains the majority of the benefits of the investment was performed as of December 31, 2021 and December 31, 2020, and will be performed as of each subsequent reporting date. After each of these assessments, the Company concluded that the activities that most significantly impact TPI’s economic performance are the growth, marketing, sale, and distribution of products using TPI’s technology and IP, each of which are solely directed by TPI. Based on our consideration of these assessments, the Company concluded that the Company’s investment in TPI should be accounted for under the equity method. The carrying value of the Company’s investment in TPI was $ 0 as of December 31, 2021 and December 31, 2020. The Company did not recognize revenue from TPI for the years ended December 31, 2021 and 2020. F- 15 Income Taxes The Company accounts 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. The Company follows 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 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. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of December 31, 2021, tax years 2016 through 2021 remain open for IRS audit. The Company has received no notice of audit from the IRS for any of the open tax years. The Company recognizes 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, the Company recognizes the full amount of the tax benefit. For the period ended December 31, 2021, the Company recorded a deferred tax liability of approximately $ 25 thousand, comprised of its change in deferred tax liability during the year related to its indefinite lived intangible asset balance. The indefinite lived intangibles are not all available as a source of income and thus are not fully available to offset the Company's deferred tax assets. As of December 31, 2021, the Company has federal and state net operating loss (NOL) carryforwards of approximately $ 52.2 million and $ 28.9 million, respectively. The Company has not yet filed its 2018, 2019, 2020 and 2021 federal and state tax returns. There was no federal income tax expense for the years ended December 31, 2021 and 2020 due to the Company’s net losses. The Company has not yet filed its 2018, 2019, 2020 and 2021 federal and state tax returns. Net Loss Per Share Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Net loss available to common stockholders represents net loss attributable to common stockholders reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities as the holders of the participating securities do not have a contractual obligation to share in any losses. Diluted loss per share adjusts basic loss per share for the potentially dilutive impact of stock options and warrants. As the Company has reported losses for all periods presented, all potentially dilutive securities including stock options and warrants, are antidilutive and accordingly, basic net loss per share equals diluted net loss per share. Net loss per share calculations for all periods have been adjusted to reflect the reverse stock split effected on January 12, 2021. Net loss per share was calculated based on the weighted average number of common stock outstanding. F- 16 Note 3 — Accounting Pronouncements Recently Adopted Accounting Pronouncements In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard requires capitalized costs to be amortized on a straight-line basis generally over the term of the arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements. The Company adopted this standard effective January 1, 2020, using a prospective approach. The adoption of this new standard did not have a material impact on the Company’s consolidated financial statements. Subsequent impact will depend on the magnitude of implementation costs to be incurred. Implementation costs capitalized subsequent to adoption will be recognized in operating expenses in the statements of operations over the non-cancelable period of the hosting arrangement plus any renewal periods reasonably certain to be taken. Pending Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities and accounts receivable. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. ASU 2016-13 is effective in the first quarter of fiscal 2024. The Company is currently evaluating if this guidance will have a material effect to its consolidated financial statements. In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in ASU No. 2020-06 simplify the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exceptions for contracts in an entity’s own equity. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the impact of the new standard on its consolidated financial statements and related disclosures. In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 606): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with U.S. GAAP. The amendment in this update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendment in this update. The Company is evaluating the potential impact of this adoption on its consolidated financial statements and related disclosures. All other Accounting Standards Updates issued but not yet effective are not expected to have a material effect on the Company’s future financial statements. F- 17 Note 4 — Revenue and Deferred Revenue Revenue During the years ended December 31, 2021 and 2020, the Company generated revenue from the following sources: (1) equipment sales, (2) services sales and (3) construction contracts. The Company sells its equipment and services to customers under a combination of a contract and purchase order. Equipment revenue includes sales from proprietary products designed and engineered by the Company such as Agrify Vertical Farming Units (“VFUs”), container farms, integrated grow racks, and LED grow lights, and non-proprietary products designed, engineered, and manufactured by third parties such as air cleaning systems and pesticide-free surface protection. Construction contracts normally provide for payment upon completion of specified work or units of work as identified in the contract. Although there is considerable variation in the terms of these contracts, they are primarily structured as time-and-material contracts. The Company enters time-and-materials contracts under which the Company is paid for labor and equipment at negotiated hourly billing rates and other expenses, including materials, as incurred at rates agreed to in the contract. The Company uses two main sub-contractors to execute the construction contracts. Disaggregation of Revenue — The following table provides revenue disaggregated by timing of revenue recognition: Year ended December 31, (Dollar Amounts in Thousands) 2021 2020 Transferred at a point in time $ 23,624 $ 4,907 Transferred over time 36,235 7,180 $ 59,859 $ 12,087 In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable. The majority of the Company’s 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. The Company generally provides a one-year warranty on its 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, the Company accrues for product warranties when the loss is probable and can be reasonably estimated. As of December 31, 2021, the Company maintains a reserve for warranty returns of $ 398 thousand. No warranty reserve was recorded by the Company as of December 31, 2020. The reserve for warranty returns is included in accrued expenses and other current liabilities in the Company’s consolidated balance sheets. Deferred Revenue Significant changes in the Company’s current deferred revenue balance for the years ended December 31, 2021 and 2020: Year ended December 31, (Dollar Amounts in Thousands) 2021 2020 Total current deferred revenue, beginning of period $ 152 $ — Additions 3,758 152 Interest income on deferred revenue 4 — Recognized ( 142 ) — Total current deferred revenue, end of period $ 3,772 $ 152 Deferred revenue balances primarily consist of customer deposits on our cultivation and extraction solutions equipment. As of December 31, 2021 and 2020, all of our deferred revenue balances were reported as current liabilities in the accompanying consolidated balance sheets. F- 18 Note 5 — Fair Value Measures Fair Values of Assets and Liabilities The Company measures fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows: Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets. Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active. Level 3: Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions about how market participants would price the asset or liability. Valuation techniques for assets and liabilities include methodologies such as the market approach, the income approach, or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain. At December 31, 2021 and December 31, 2020, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows: December 31, 2021 December 31, 2020 Fair Value Measurements Using Input Types Fair Value Measurements Using Input Types (Dollar Amounts in Thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets Mutual funds (included in cash and cash equivalents) $ 178 $ — $ — $ 178 $ — $ — $ — $ — Held to maturity securities Municipal bonds 9,961 — — 9,961 — — — — Corporate bonds 34,589 — — 34,589 — — — — Total held to maturity securities $ 44,728 $ — $ — $ 44,728 $ — $ — $ — $ — Liabilities Notes payables, net of discount $ — $ — $ — $ — $ — $ — $ 12,493 $ 12,493 Derivative liabilities — — — — — — 7,141 7,141 Contingent consideration — — 6,137 6,137 — — — — Total liabilities $ — $ — $ 6, 137 $ 6, 137 $ — $ — $ 19,634 $ 19,634 Fair Value of Financial Instruments The Company has certain financial instruments which consist of cash and cash equivalents, marketable securities, accounts receivable, loan receivable, accounts payable, notes payable, derivative liabilities, deferred revenue, and long-term debt. Fair value information for each of these instruments is as follows: ● Cash and cash equivalents, accounts receivable, accounts payable and deferred revenue liabilities fair values approximate their carrying values, due to the expected duration of these instruments. ● Marketable securities classified as held to maturity securities are recorded at amortized cost, which as of December 31, 2021, approximated fair value. F- 19 ● The Company had certain derivative instruments accounted for at fair value. The Company held a convertible promissory note with a preferential conversion feature which qualifies as a derivative instrument. The fair value assumptions consider the nature of the conversion feature and the expected timeline to a qualifying conversion event. ● The Company’s deferred consideration was recorded in connection with acquisitions during the year ending December 31, 2021 using an estimated fair value discount at the time of the transaction. As of December 31, 2021, the carrying value of the deferred consideration approximated fair value. Marketable Securities As of December 31, 2021, the Company held investments consisting of mutual funds, municipal bonds, and corporate bonds. The mutual funds are recorded at fair value in the accompanying consolidated balance sheet as part of cash and cash equivalents. The municipal and corporate bonds are considered held to maturity and are recorded at amortized cost in the accompanying consolidated balance sheet. The fair values of these investments were estimated using recently executed transactions and market price quotations. The Company considers current assets those investments which will mature within the next 12 months including interest receivable on the long-term bonds. The composition of the Company’s marketable securities are as follows: (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Current marketable securities: Municipal bonds $ 9,961 $ — Corporate bonds 34,589 — Total current marketable securities $ 44,550 $ — The amortized cost and estimated fair value of held to maturity securities as of December 31, 2021, are as follows: (Dollar Amounts in Thousands) Amortized cost Unrealized loss Estimated fair value Current marketable securities (due within 1 year) Municipal bonds $ 9,961 $ ( 9 ) $ 9,952 Corporate bonds 34,589 ( 72 ) 34,517 $ 44,550 $ ( 81 ) $ 44,469 F- 20 Contingent Consideration The Company has classified its net liability for contingent earnout considerations relating to the two acquisitions completed in Fiscal 2021. The fair value for the contingent consideration associated with these acquisitions is within Level 3 of the fair value hierarchy because the associated fair value is determined using significant unobservable inputs, which included the key assumptions to model future revenue, costs of goods sold and operating expense projections. A description of the Company’s acquisitions completed in Fiscal 2021 is included within Note 13 – Business Combinations included elsewhere in the notes to the consolidated financial statements. The contingent earnout payments for each acquisition are based on the achievement of certain revenue thresholds. During the fourth quarter of 2021, the fair value of the contingent earnout consideration increased by $ 1.4 million due to the actual revenue achievement for the period ended December 31, 2021, being greater than the initially projected revenue achievement incorporated into our initial purchase price allocation. This amount, as required by ASC 805, was recorded as part of our operating expenses in the fourth quarter of 2021. (Dollar Amounts in Thousands) December 31, 2021 Contingent consideration – beginning of year $ — Accrued contingent consideration 4,725 Change in estimated fair value 1,412 Contingent consideration – end of year $ 6,137 Contingent consideration is included within accrued expense in the consolidated balance sheets as of December 31, 2021. Note 6 — Loan Receivable A portion of the capital raised from the Company’s 2021 public offering has been allocated to launch Agrify’s total turn-key solution (“TTK Solution”) program, the industry’s first end-to-end solution for the Company’s customers that provides access to capital for construction costs, equipment lease(s) to VFUs and other related operating equipment, subscription to the Company’s Agrify Insights software, and business consultation services, which will enable the Company’s customers to go to market sooner. The Company’s initial allowable investment in the Agrify TTK Solution engagements is currently capped at $ 50.0 million, as approved by the Company’s Board of Directors. As of December 31, 2021, the Company has committed $20.3 million to the Agrify TTK Solution for five customers under contract and the remainder $ 1.9 million is related to non-TTK Solutions contracts. Of the five customers under the Agrify TTK Solution, Greenstone Holdings is a related party. The loan agreements entered into with customers receiving the Agrify TTK Solution generally provide for loans ranging from approximately $ 200 thousand up to $ 13.5 million with maturity dates of approximately two to three years after the completion of the construction projects. Typically, the TTK Solution construction loans have interest rates ranging from 12 % to 18 % per annum. The breakdown of loans receivable as of December 31, 2021 and December 31, 2020 is as follows: (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Company A – TTK Solution $ 5,542 $ — Greenstone Holdings – TTK Solution – Related Party 11,177 — Company C – TTK Solution 2,439 — Company D – TTK Solution 1,105 — Company E – TTK Solution 46 — Non-TTK Solutions 1,946 — Loan receivable $ 22,255 $ — The Company analyzed whether any of the above customers are a variable interest entity (a “VIE”) in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. Based on the Company’s analysis, the Company has determined that Greenstone Holdings is a VIE. As of December 31, 2021, two of the Company’s employees own approximately 36.6 % of the equity of Greenstone Holdings, however, since the Company is not the primary beneficiary of Greenstone Holdings, the Company is not required to consolidate Greenstone Holdings. F- 21 Note 7 — Accounts Receivable Accounts Receivable consisted of the following as of December 31, 2021 and December 31, 2020: (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Accounts receivable, gross $ 8,637 $ 4,068 Less allowance for doubtful accounts ( 1,415 ) ( 54 ) Accounts receivable, net $ 7,222 $ 4,014 NEIA, a related party, accounted for $ 3.5 million and $ 1.7 million of accounts receivable, net as of December 31, 2021 and December 31, 2020, respectively. The changes in the allowance for doubtful accounts consisted of the following: Fiscal Year (Dollar Amounts in Thousands) 2021 2020 Balance as of the beginning of the year $ 54 $ — Provision for doubtful accounts 1,187 54 Other adjustments 174 — Balance as of the end of the year $ 1,415 $ 54 Bad debt expense was $ 1.2 million and $ 54 thousand, for the year ended December 31, 2021 and 2020, respectively. Note 8 — Inventory Inventories are stated at the lower of cost or net realizable value with cost principally determined by the weighted average cost method on a first in first out basis. Such costs include the acquisition cost for raw materials and operating supplies. The Company’s standard payment terms with suppliers may require making payments in advance of delivery of the Company’s products. The prepaid inventory is short-term, non-bearing interest that is applied to the purchase of products once it is delivered. The Company reserves for slow-moving inventory and inventory that is being evaluated under the Company’s quality control process. The reserves are based upon management’s expected method of disposition. Inventory consisted of the following as of December 31, 2021 and December 31, 2020: (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Raw materials $ 6,393 $ 4,337 Prepaid inventory 2,237 833 Finished goods 12,810 — Gross inventory 21,440 5,170 Inventory reserves ( 942 ) — Total inventory, net $ 20,498 $ 5,170 Inventory Reserves The Company establishes inventory reserves for obsolete, slow moving and defective items. Inventory reserves for obsolete, slow moving or defective items are calculated as the difference between the cost of inventory and its estimated net realizable value. Changes in inventory reserve are as follows: (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Inventory reserves – beginning of the year $ — $ — Increase in inventory reserves 942 — Inventory write-offs — — Inventory reserves – end of year $ 942 $ — F- 22 Note 9 — Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following as of December 31, 2021 and December 31, 2020: (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Prepaid insurance $ 492 $ — Prepaid software 173 48 Prepaid expenses, other 541 148 Deferred costs 353 — Other note receivables (1) 807 — Other receivables, other 86 168 Prepaid expenses and other current assets $ 2,452 $ 364 (1) Other note receivables relates to the current portion of one of our TTK Solutions loan receivable balances. Note 10 — Property and Equipment, Net Property and equipment, net consisted of the following as of December 31, 2021 and December 31, 2020: (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Computer and office equipment $ 473 $ 128 Furniture and fixtures 385 16 Leasehold improvements 841 10 Machinery and equipment 898 868 Software 174 — Vehicles 143 62 Research and development laboratory equipment 163 — Leased equipment at customer 619 — Trade show assets 80 — Total property and equipment, gross 3,776 1,084 Accumulated depreciation ( 780 ) ( 211 ) Construction in progress 3,236 — Property and equipment, net $ 6,232 $ 873 Depreciation expense for the years ended December 31, 2021 and 2020 was $ 655 thousand and $ 188 thousand, respectively. During the year ended December 31, 2021, the Company retired $ 119 thousand of fixed assets, with an accompanying accumulated depreciation of $ 84 thousand, resulting in a loss on disposal of $ 36 thousand. Note 11 — Intangible Assets and Goodwill Intangible assets are initially recorded at fair value and tested periodically for impairment. Goodwill represents the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination and is tested at least annually for impairment. The Company performs an impairment test of goodwill during the fourth quarter of each year or sooner if indicators of potential impairment arise. There were no such indicators in the years ended December 31, 2021 and December 31, 2020. F- 23 Intangible assets were as follows: Intangible Assets, Gross Accumulated Amortization Intangible Assets, Net (Dollar Amounts in Thousands) January 1, 2021 Additions and retirements, net December 31, 2021 January 1, 2021 Expense and retirements, net December 31, 2021 January 1, 2021 December 31, 2021 Trade names $ 930 $ 1,488 $ 2,418 $ ( 88 ) $ ( 139 ) $ ( 227 ) $ 842 $ 2,191 Customer Relationships 850 5,326 6,176 ( 89 ) ( 213 ) ( 302 ) 761 5,874 Acquired developed Technology — 4,911 4,911 — ( 191 ) ( 191 ) — 4,720 Non-compete — 1,202 1,202 — ( 60 ) ( 60 ) — 1,142 Capitalized website costs 139 106 245 ( 48 ) ( 52 ) ( 100 ) 91 145 Total $ 1,919 $ 13,033 $ 14,952 $ ( 225 ) $ ( 655 ) $ ( 880 ) $ 1,694 $ 14,072 Amortization expenses recorded in selling, general and administrative in the consolidated statements of operations were $ 655 thousand and $ 218 thousand for the years ended December 31, 2021 and 2020, respectively. Estimated future amortization expense on finite-lived intangible assets is as follows: Years Ending December 31 (Dollar Amounts in Thousands), Amount 2022 $ 2,444 2023 2,409 2024 2,401 2025 2,375 2026 2,124 2027 and thereafter 2,319 Total $ 14,072 The changes in goodwill are as follows: (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Balance, beginning of period $ 632 $ — Goodwill additions 49,458 632 Balance, end of period $ 50,090 $ 632 There was no goodwill impairment identified for the years ended December 31, 2021 and December 31, 2020, respectively. F- 24 Note 12 — Accrued Expenses and Other Current Liabilities Accrued expenses consisted of the following as of December 31, 2021 and December 31, 2020: (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Accrued acquisition liability (1) $ 9,198 $ — Sales tax payable (2) 5,290 — Accrued construction costs 8,803 4,468 Compensation related fees 3,491 225 Accrued professional fees 1,104 1,135 Accrued warranty expenses 398 — Accrued consulting fees 75 97 Accrued inventory purchases 201 164 Financing lease liabilities 156 148 Accrued non-income taxes 48 — Other current liabilities — 313 Total accrued expenses and other current liabilities $ 28,764 $ 6,550 (1) Accrued acquisition liabilities includes both the contingent consideration and the value of held back stock associated with the 2021 acquisitions of Precision and Cascade and PurePressure. (2) Sales tax payable primarily represents identified sales and use tax liabilities arising from our acquisition of Precision and Cascade. These amounts are included as part of our initial purchase price allocations and are the subject matter of an indemnification claim under the Precision and Cascade acquisition agreement. Note 13 — Business Combination Acquisition of Precision and Cascade On September 29, 2021 (the “Execution Date”), the Company entered into a Plan of Merger and Equity Purchase Agreement, as amended by an amendment dated as of October 1, 2021 (as amended, the “Purchase Agreement”), with Sinclair Scientific, LLC, a Delaware limited liability company (“Sinclair”), Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions, a Michigan limited liability company (“Precision”); and each of the equity holders of Sinclair named therein (collectively, the “Sinclair Members”). On October 1, 2021, the Company consummated the transactions contemplated by the Purchase Agreement. Subject to the terms and conditions set forth in the Purchase Agreement, (1) Sinclair transferred, to the Company, and the Company purchased (the “Interest Purchase”) from Sinclair, 100 % of the equity interests of Cascade Sciences, LLC, a Delaware limited liability company (“Cascade”), such that immediately after the consummation of such Interest Purchase, Cascade became a wholly owned subsidiary of the Company, and (2) Precision merged (the “Merger”) with and into a newly-formed wholly owned subsidiary of the Company, Precision Extraction NewCo, LLC. The aggregate consideration for the Interest Purchase and the Merger consisted of: (a) the sum of $ 30 million, plus consideration payable to holders of outstanding Sinclair equity awards, subject to certain adjustments for working capital, cash and indebtedness, payable in connection with the Interest Purchase; (b) the number of shares of the Company’s common stock, subject to adjustment, equal to the quotient of (i) $ 20.0 million divided by (ii) the volume-weighted average price per share of the Company’s common stock on The Nasdaq Capital Market for the 30 consecutive trading days ending on the Execution Date (the “VWAP Price”), issuable in connection with the Merger; and (c) the True-Up Buyer Shares, if any (as defined below), issuable in connection with the Merger. The Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Sinclair Members may become entitled to additional shares of the Company’s common stock (the “True-Up Buyer Shares”) and cash (together with the True-Up Buyer Shares, the “Aggregate True-Up Payment) based on the eligible net revenues (as defined in the Purchase Agreement) achieved by the Cascade and Precision businesses during the fiscal year ending December 31, 2021. However, in no event shall the aggregate purchase price paid by the Company pursuant to the terms of the Purchase Agreement, taking into account any Aggregate True-Up Payment in favor of the Sinclair Members, exceed $ 65.0 million. Transaction and related costs, consisting primarily of professional fees, directly related to the acquisition, totaled $ 4.0 million for the year ended December 31, 2021. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses. 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). Fair values still under review as of December 31, 2021 include values assigned to identifiable intangible assets and goodwill. F- 25 The following table sets forth the components and the allocation of the purchase price for the business combination: (Dollar Amounts in Thousands) Purchase price consideration: Cash paid to Sinclair Members at close $ 23,000 Cash contributed to escrow accounts at close 7,000 Cash paid for excess net working capital 1,430 Stock issued at close 14,535 Fair value of contingent consideration to be achieved 3,953 Fair value of total consideration transferred 49,918 Total purchase price, net of cash acquired $ 48,630 Fair value allocation of purchase price: Cash and cash equivalents $ 1,288 Accounts receivable 897 Inventory 6,761 Prepaid and other assets 1,736 Property and equipment, net 970 Operating lease right of use assets 730 Capitalized web costs, net 2 Accounts payable and accrued expenses ( 9,196 ) Deferred revenue ( 5,419 ) Long-term debt ( 1,961 ) Operating lease liabilities, current ( 392 ) Operating lease liabilities, noncurrent ( 362 ) Acquired intangible assets 9,889 Goodwill 44,975 Total purchase price $ 49,918 Identified intangible assets consist of trade names, technology, non-compete agreements, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below: (Dollar Amounts in Thousands) Asset Value Useful Life Identified intangible assets: Trade names $ 1,260 6 to 7 years Acquired developed technology 3,818 5 years Non-compete agreements 1,202 5 years Customer relationships 3,609 7 to 8 years Total identified intangible assets $ 9,889 The Company’s 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. F- 26 The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed. The amount of revenue of Precision and Cascade included in the consolidated statement of operations from the acquisition date of October 1, 2021 to December 31, 2021 was $ 12.3 million. The following pro forma financial information summarizes the combined results of operations for the Company, Precision and Cascade, as though the acquisition of Precision and Cascade occurred on January 1, 2020. The unaudited pro forma financial information was as follows: Year ended December 31, (Dollar Amounts in Thousands) 2021 2020 Revenue, net $ 90,821 $ 52,723 Net loss before non-controlling interest ( 35,783 ) ( 25,571 ) Income (loss) attributable to non-controlling interest 140 ( 22 ) Net loss $ ( 35,923 ) $ ( 25,549 ) The pro forma financial information for all periods presented above has been calculated after adjusting the results of Precision and Cascade to reflect the business combination accounting effects resulting from these acquisitions, including acquisition costs and the amortization expense from acquired intangible assets as though the acquisition occurred on January 1, 2020. The historical consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2020. Acquisition of PurePressure On December 31, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Pure Purchase Agreement”) with PurePressure, LLC, a Colorado Limited liability company (“PurePressure”) and the members of PurePressure (collectively, the “Members”), Benjamin Britton as the Member Representative thereunder, and each of the Members. Concurrently with the execution of the Pure Purchase Agreement, the Company consummated the acquisition of all the outstanding equity interests of PurePressure, such that immediately after the consummation of such purchase, PurePressure became a wholly owned subsidiary of the Company (the “Acquisition”). The aggregate consideration for the Acquisition consisted of: (a) $ 4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness of PurePressure at closing; (b) 329,179 shares of the Company’s common stock (the “Buyer Shares”); and (c) the Earn-out Consideration (as defined below), to the extent earned. F- 27 The Company withheld 88,878 of the Buyer Shares issuable to certain Members (the “Holdback Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Pure Purchase Agreement. The Holdback Buyer Shares shall be released following the twelve (12) month anniversary of the Closing Date in accordance with and subject to the conditions of the Pure Purchase Agreement. The Pure Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Members may become entitled to additional consideration with a value of up to $3.0 million based on the eligible net revenues achieved by the PurePressure business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 40% will be payable in cash and the remaining 60% will be payable by issuing shares of the Company’s common stock (collectively, the “Earn-out Consideration”). 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). Fair values still under review as of December 31, 2021 include values assigned to identifiable intangible assets and goodwill. The following table sets forth the components and the allocation of the purchase price for the business combination: (Dollar Amounts in Thousands) Purchase price consideration: Estimated closing proceeds $ 3,613 Indebtedness paid 320 Transaction expenses 115 Closing buyer shares 2,211 Holdback buyer shares 654 Earn-out consideration 707 Estimated working capital adjustments 330 Fair value of total consideration transferred 7,950 Total purchase price, net of cash acquired $ 7,647 Fair value allocation of purchase price: Cash and cash equivalents $ 303 Accounts receivable, net 48 Inventory 1,537 Property and equipment, net 219 Right of use assets, net 191 Prepaid expenses and other receivables 61 Other non-current assets 16 Accounts payable and accrued expenses ( 706 ) Deferred revenue ( 762 ) Operating lease liabilities, current ( 117 ) Operating lease liabilities, noncurrent ( 74 ) Finance lease liabilities, current ( 4 ) Finance lease liabilities, noncurrent ( 10 ) Notes payable, current ( 260 ) Notes payable, noncurrent ( 12 ) Acquired intangible assets 3,037 Goodwill 4,483 Total purchase price $ 7,950 F- 28 Identified intangible assets consist of trade names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below: (Dollar Amounts in Thousands) Asset Value Useful Life Identified intangible assets: Trade name $ 227 5 years Acquired developed technology 1,093 8 years Customer relationships 1,717 5 years Total identified intangible assets $ 3,037 Subject to certain customary limitations, (i) the Members will indemnify the Company and its affiliates, officers, directors and other agents against certain losses related to, among other things, breaches of the Members’ and PurePressure’s representations and warranties, indebtedness, transaction expenses, pre-closing taxes and the failure to perform covenants or obligations under the Pure Purchase Agreement, and (ii) the Company will indemnify the Members and their respective affiliates, officers, directors and other agents against certain losses related to, among other things, breaches of the Company’s representations and warranties and the failure to perform covenants or obligations under the Pure Purchase Agreement. Acquisition of TriGrow On January 22, 2020, the Company completed the acquisition of all outstanding shares of TriGrow. TriGrow is an integrator and distributor of the Company’s premium indoor grow solutions for the indoor controlled agriculture marketplace. As part of the acquisition, the Company received TriGrow’s 75 % interest in Agrify Brands, LLC (formerly TriGrow Brands, LLC), a licensor and marketing supporter of established portfolio of consumer brands that utilize the Company’s growing technology. In consideration of TriGrow’s shares, the Company issued to TriGrow’s shareholders 595,552 shares of Agrify common stock. In addition, the closing conditions included the assumption of TriGrow’s outstanding obligation to invest $ 1.1 million (the “Funding Amount”) in a form of a so called “profit interest” investment in CCI Finance, LLC (“CCI”). The Company satisfied this obligation and made payment of the Funding Amount on January 24, 2020 pursuant to a Profits Interest Agreement with CCI. Under the Profits Interest Agreement, in return for the Company’s investment of the Funding Amount, CCI is obligated to share with the Company 28.5 % of the net revenue generated from its equipment lease agreement with its customer, payable at least annually by CCI to the Company. The revenue sharing percentage is reduced from 28.5 % to 20 % once the Company has received payments equaling an 18 % Internal Rate of Return on the Funding Amount (the “Preferred Return”) prior to the fifth anniversary of the agreement. The revenue sharing terminates upon the later of five years, or the Company’s attainment of the Preferred Return. To date, no revenue has been generated and shared with the Company under this agreement. As part of the acquisition of TriGrow, the Company made available 121,539 shares of its common stock for issuance to certain executives of TriGrow upon TriGrow’s and/or the Company’s receipt of $ 10.0 million of accumulative purchase orders for TriGrow and/or the Company’s equipment, products, and services, for the period from November 21, 2019 through June 30, 2020 as a result of the efforts of the TriGrow executives. Such common stock of the Company is to be distributed by the Company to certain executives of the surviving corporation responsible for achievement of such milestone, in the Company’s sole discretion. The Company concluded the earn-out, if materialized, will be considered as post combination services. Additionally, the Company concluded that the value associated with the earn-out to be de minimis. No earn-out was ever earned. The purchase price for this business combination was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair value assigned to identifiable intangible assets acquired was determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by the Company. Transaction and related costs, consisting primarily of professional fees, directly related to the acquisition, totaled $ 45 thousand for the year ended December 31, 2020. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses. F- 29 The following table sets forth the components and the allocation of the purchase price for the business combination: (Dollar Amounts in Thousands) Components of Purchase Price: Obligation to invest cash in profit interest $ 1,140 Capital stock consideration 1,356 Noncontrolling Interest 207 Total purchase price $ 2,703 Allocation of Purchase Price: Net tangible assets, including cash acquired of $ 44 $ 543 Identifiable intangible assets: Brand rights 930 Customer relationships 850 Total identifiable intangible assets 1,780 Goodwill 380 Total purchase price allocation $ 2,703 Trade names and Customer relationships were assigned estimated useful lives of ten years and nine years , respectively, the weighted average of which is approximately 9.5 years. The amount of revenue of TriGrow included in the Company’s consolidated statement of operations from the acquisition date of January 22, 2020 to December 31, 2020 was $ 4.0 million. Acquisition of Harbor Mountain Holdings, LLC In July 2020, the Company acquired all the outstanding equity interests of HMH, located in the Atlanta, GA area, that has been producing and assembling many of the Company’s products. As part of the acquisition, the Company waived net receivable owed amounting to $ 214 thousand and assumed lease liabilities for existing equipment and premises. On September 20, 2021, the Company issued an aggregate of 8,000 shares of common stock to an executive of HMH for achieving certain milestones from the acquisition date through March 31, 2021. The common shares were valued at $ 176 thousand based on the Company’s Stock Price at closing September 20, 2021. The value of the shares is included in research and development in the condensed consolidated statements of operations. The purchase price for this business combination was allocated by management to the tangible and intangible assets acquired and liabilities assumed based on their book value which estimated their fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. Transaction and related costs, consisting primarily of professional fees, directly related to the acquisition, totaled $ 35 thousand for the year ended December 31, 2020. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses. F- 30 The following table sets forth the components and the allocation of the purchase price for the business combination: (Dollar Amounts in Thousands) Components of Purchase Price: Waiver of net receivable owed to Agrify $ 214 Total purchase price $ 214 Allocation of Purchase Price: Net tangible assets (liabilities): Cash $ 4 Property and Equipment 817 Accounts payable ( 187 ) Accrued expenses ( 23 ) Financing lease liabilities ( 649 ) Net tangible liabilities ( 38 ) Goodwill 252 Total purchase price allocation $ 214 The amount of revenue of HMH included in the Company’s consolidated statement of operations from the acquisition date of July 22, 2020 to December 31, 2020 was $ 0 . The following pro forma financial information summarizes the combined results of operations for us, TriGrow and HMH, as though the acquisition of TriGrow and HMH occurred on January 1, 2020. The unaudited pro forma financial information was as follows: Year ended December 31, (Dollar Amounts in Thousands) 2020 Revenue, net $ 12,121 Net loss before non-controlling interest $ ( 22,743 ) Loss attributable to non-controlling interest 65 Net loss $ ( 22,678 ) The pro forma financial information for all periods presented above has been calculated after adjusting the results of TriGrow and HMH to reflect the business combination accounting effects resulting from these acquisitions, including acquisition costs and the amortization expense from acquired intangible assets as though the acquisition occurred on January 1, 2020. The historical consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2020. F- 31 Note 14 — Debt Paycheck Protection Program Loans under the Coronavirus Aid, Relief, and Economic Security Act In May and July 2020, the Company entered into two separate PPP Loans with Bank of America pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act administered by the U.S. Small Business Administration (“SBA”). The Company received total proceeds of approximately $ 779 thousand and $ 44 thousand from the unsecured PPP Loans, which are scheduled to mature on May 7, 2022 and July 27, 2025, respectively. Subject to certain conditions, the PPP Loan may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP. In September 2021, the PPP Loan in the amount of $ 44 thousand was 100 % forgiven by the SBA. As a result, the Company recorded a gain of $ 45 thousand on the forgiveness on the loan and the associated accrued interest. The Company’s submission to have the remaining $ 779 thousand PPP Loan forgiven is currently being reviewed by the SBA. If the remaining principal amount from the $ 779 thousand PPP Loan is not forgiven in full, the Company would be obligated to repay any principal amount not forgiven and interest accrued thereon. PurePressure SBA Debt As part of the acquisition of PurePressure, $ 159 thousand of debt remained outstanding from SBA loan as of December 31, 2021. This debt has subsequently been paid as a part of the PurePressure acquisition. . Note 15 — Convertible Promissory Notes On January 11, 2021, the Company’s Board of Directors and shareholders approved the amendment to the conversion formula of the Convertible Promissory Notes (the “Notes”) issued by the Company on dates between August 2020 and November 2020. Pursuant to the amendment, immediately prior to the consummation of a public transaction, the outstanding principal amount of the Notes, together with all accrued and unpaid interest, shall convert into a number of fully paid and non-assessable shares of common stock, at a conversion price of $ 7.72 . While the original conversion feature was bifurcated from the host instrument, the Company determined that the amended conversion feature would not require bifurcation. Since the accounting for the conversion feature changed because of the amendment, the Company applied extinguishment accounting pursuant to its accounting policy. During the year ended December 31, 2020, the Company recognized an aggregate loss on extinguishment of $ 5.6 million for the difference between the net carrying amount of the extinguished debt of $ 10.0 million (inclusive of $ 11.8 million of principal, $ 4.2 million of debt discount and $ 2.4 million of derivative liabilities) and the reacquisition price of the debt in the same aggregate principal amount of $ 11.8 million, plus the fair value of the new notes’ conversion features of an aggregate of $ 3.9 million. During the year ended December 31, 2021, the Company recognized a gain on extinguishment of $ 2.7 million in connection with the derecognition of the net carrying amount of the extinguished debt of $ 19.7 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 $ 17.0 million fair value of the new convertible notes (including the same principal amount of $ 13.1 million plus the $ 3.9 million fair value of the beneficial conversion feature). On February 1, 2021, in conjunction with the closing of the Company’s IPO, the Notes in the aggregate principal amount of $ 13.1 million were converted into 1,697,075 shares of common stock at the election of the Company at a conversion price of $ 7.72 per share. Note 16 — Derivative Liabilities During the year ended December 31, 2020, the Company recorded Level 3 derivative liabilities that were measured at fair value at issuance in the aggregate amount of $ 2.8 million related to the variable-share settlement features of certain convertible notes payable. During the year ended December 31, 2020, the Company modified the conversion terms of certain notes which resulted in the recognition of an additional $ 1.4 million of Level 3 derivative liabilities, with a corresponding debit to loss on extinguishment. See Note 15 — Convertible Promissory Notes included elsewhere in the notes to the consolidated financial statements. On December 31, 2020, the Company recomputed the fair value of the variable-share settlement features recorded as derivative liabilities to be $ 7.1 million. The Company recorded a loss of $ 2.9 million on the change in fair value of these derivative liabilities during the year ended December 31, 2020. The variable-share settlement features were valued using a combination of a discounted cash flow and a Black-Scholes valuation technique. At issuance, the significant unobservable inputs used in the discounted cash flow were a discount rate of approximately 20 % and a probability of a Public Transaction occurring of 56 %. The Black-Scholes assumptions were as follows: Volatility 40 % Risk-free interest rate 0.09 % – 0.16 % Dividend yield 0.00 % Expected term (years) 0.75 – 1.75 Forfeiture rate 0.00 % F- 32 As of December 31, 2020, the significant unobservable inputs used in the discounted cash flow were a discount rate of approximately 20 % and a probability of a Public Transaction occurring of 90 %. The Black-Scholes assumptions were as follows: Volatility 40 % Risk-free interest rate 0.09 % – 0.16 % Dividend yield 0.00 % Expected term (years) 0.66 – 1.75 Forfeiture rate 0.00 % Note 17 — Capital Structure On January 9, 2020, the Company increased its authorized number of shares to 53,000,000 , consisting of: 50,000,000 shares of common stock, par value $ 0.001 per share, and 3,000,000 shares of preferred stock, par value $ 0.001 per share. At that time, it also designated 100,000 shares of the 3,000,000 authorized shares of preferred stock, par value $ 0.001 per share, as Series A Convertible Preferred Stock (“Series A Preferred Stock”). Series A Convertible Preferred Stock Beginning in the first quarter of 2020, the Company issued an aggregate of 60,000 shares of Series A Preferred Stock, for an aggregate purchase price of $ 6.0 million. In May 2020, the Company completed an offering of Series A Preferred Stock with the issuance of an additional 40,000 shares of Series A Preferred Stock for an aggregate purchase price of $ 4.0 million. Amendment of Conversion Formulas On January 11, 2021, the Company’s Board of Directors approved the amendment to the conversion formula of the Series A Preferred Stock and Notes. After the amendment: 1. the Series A Preferred Stock is convertible, at any time after issuance or immediately prior to the closing of a public transaction, into common stock in an amount of shares equal to (i) the product of the Series A Preferred Stock original price plus accrued but unpaid dividends on the shares being converted, multiplied by the number of shares of Series A Preferred Stock being converted, divided by (ii) a conversion price of $7.72 per share (after the reverse split taking effect); and 2. immediately prior to the consummation of a public transaction, the outstanding principal amount of the Notes together with all accrued and unpaid interest shall convert into a number of fully paid and non-assessable shares of common stock equal to the quotient of (i) the outstanding principal amount of the Notes together with all accrued and unpaid interest thereunder immediately prior to such public transaction divided by (ii) a conversion price of $7.72 (after the reverse split taking effect). On January 11, 2021, the Company’s shareholders approved the amendment to the Series A Preferred Stock. Initial Public Offering On February 1, 2021, the Company completed an initial public offering (“IPO”) for the sale of 5,400,000 shares of common stock at a price of $ 10.00 per share. The Company also granted the underwriters: (a) a 45-day option to purchase up to 810,000 additional shares of common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the IPO, and (b) warrants to purchase 162,000 shares of common stock (equal to 3 % of the aggregate number of shares of common stock issued in the IPO) at an exercise price of $ 12.50 per share (which is equal to 125 % of the IPO price). Subsequently, the underwriters exercised the over-allotment option, and on February 4, 2021, the Company closed on the sale of an additional 810,000 shares of common stock for a price of $ 10.00 per share and granted to the underwriters warrants to purchase 24,300 additional shares of common stock (equal to 3 % of the amount of shares issued as part of the exercised of the over-allotment option) at an exercise price of $ 12.50 per share. The exercise of the over-allotment option brought the total number of shares of common stock sold by the Company in connection with the IPO to 6,210,000 shares and the total net proceeds received in connection with the IPO to approximately $ 57.0 million, after deducting underwriting discounts and estimated offering expenses. Immediately prior to the closing of the Company’s IPO, all outstanding shares of Series A Preferred Stock and Notes were converted into 1,373,038 shares of common stock and 1,697,075 shares of common stock, respectively, at a conversion price of $ 7.72 per share. F- 33 Subsequent Public Offering On February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) for the sale of 5,555,555 shares of common stock for a price of $ 13.50 per share. The Company also granted the underwriters: (a) a 45-day option to purchase up to 833,333 additional shares of common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the February Offering, and (b) warrants to purchase 166,667 shares of common stock (equal to 3 % of the aggregate number of shares of common stock issued in the February Offering) at an exercise price of $ 16.875 per share (which is equal to 125 % of the February Offering). Subsequently, the underwriters exercised the over-allotment option, and on March 22, 2021, the Company closed on the sale of an additional 833,333 shares of common stock for a price of $ 13.50 per share and granted to the underwriters warrants to purchase 25,000 additional shares of common stock (equal to 3 % of the amount of shares issued as part of the exercised of the over-allotment option) at an exercise price of $ 16.875 per share. The exercise of the over-allotment option brought the total number of shares of common stock sold by the Company in connection with the February Offering to 6,388,888 shares and the total net proceeds received in connection with the February Offering to approximately $ 80 million, after deducting underwriting discounts and estimated offering expenses. Underwriter Termination On September 14, 2021, the Company entered into a letter agreement and waiver (the “Letter Agreement”), to amend the terms of its underwriting agreement with the representative of the underwriters in the IPO. Pursuant to the Letter Agreement, the representative agreed to waive the right of first refusal included in the underwriting agreement in consideration of (i) a cash payment to the representative of $ 2.4 million and (ii) the right to participate as a co-manager with ten percent ( 10 %) of the economics with respect to the Company’s next public offering of securities, payable in cash upon the closing of such offering. Stock Subscriptions Receivable The outstanding balance of the stock subscription was paid in January 2020. Issuance of Common Stock in Connection with Acquisitions On September 20, 2021, as part of the acquisition of HMH, the Company issued an aggregate of 8,000 shares of common stock to an executive of HMH for achieving certain milestones from the acquisition date through March 31, 2021. The common shares were valued at $ 176 thousand based on the Company’s closing stock price on September 20, 2021. The value of the shares is included in research and development in the condensed consolidated statements of operations. Refer to Note 13 – Business Combinations included elsewhere in the notes to the consolidated financial statements. On October 1, 2021, the Company issued an aggregate of 666,403 shares of its common stock to the Precision and Cascade shareholders in connection with the Company’s acquisition of Precision and Cascade. Refer to Note 13 – Business Combinations included elsewhere in the notes to the consolidated financial statements. On December 31, 2021, the Company issued an aggregate of 240,301 shares of its common stock to the PurePressure shareholders in connection with the Company’s acquisition of PurePressure. Refer to Note 13 – Business Combinations included elsewhere in the notes to the consolidated financial statements. Stock Option Plan On September 4, 2019, the Company adopted and approved the 2019 Stock Option Plan (the “2019 Plan”) which provided for the issuance of 1,743,744 shares of its common stock. On August 10, 2020 and October 8, 2020, the Company’s board of directors and stockholders, respectively, approved an increase to the maximum number of shares of common stock authorized for issuance over the term of the 2019 Plan from 1,743,744 shares to 3,355,083 shares. As of December 31, 2021, there are no shares available to be granted under the 2019 Plan. Prior to the consummation of the Company’s IPO, the Company cancelled the 2019 Plan and converted the outstanding stock options to the 2020 Plan, as more fully described below. Under the 2019 Plan, the standard vesting schedule provided that 25 % of the options vest 12 months following issuance and the balance vests in 36 equal monthly installments thereafter. However, the Company’s board of directors was permitted to provide for alternative or accelerated vesting schedules in approving each stock option grant. In many cases, the Company’s Board of Directors included an accelerated vesting schedule under which 50 % of the stock options granted vest immediately prior to a change of control transaction or the Company’s first underwritten public offering. 2020 Omnibus Equity Incentive Plan On December 18, 2020, the Company’s Board of Directors, and on January 11, 2021, the Company’s stockholders, adopted and approved the 2020 Omnibus Equity Incentive Plan (the “2020 Plan”), which replaced the 2019 Plan. The 2020 Plan provides for the grant of stock options, SARs, performance share awards, performance unit awards, distribution equivalent right awards, restricted stock awards, restricted stock unit awards and unrestricted stock awards to non-employee directors, officers, employees and non-employee consultants of the Company or its affiliates. The aggregate number of shares of common stock that may be reserved and available for grant and issuance under the 2020 Plan is 4,533,732 shares. Shares will be deemed to have been issued under the 2020 Plan solely to the extent actually issued and delivered pursuant to an award. If any award granted under the 2019 Plan or the 2020 Plan expires, is cancelled, or terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2020 Plan. The 2020 Plan shall continue in effect, unless sooner terminated, until the tenth (10 th ) anniversary of the date on which it is adopted by the Board of Directors. F- 34 Stock-based Compensation The Company’s stock option compensation expense was $ 5.6 million and $ 1.9 million for the years ended December 31, 2021 and 2020, respectively, and there was $ 3.7 million of total unrecognized compensation cost related to unvested options granted under the Company’s options plans as of December 31, 2021. This stock option expense will be recognized through 2025. 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 following table summarizes the Company’s assumptions used in the valuation of options granted during the year ended December 31, 2021: Volatility 40 % Risk-free interest rate 1.10 % – 1.63 % Dividend yield 0.00 % 0% Expected life (years) 10 Forfeiture rate 0.00 % The following table summarizes the Company’s assumptions used in the valuation of options granted during the year ended December 31, 2020: Volatility 40 % – 60 % Risk-free interest rate 0.37 % – 0.78 % Dividend yield 0.00 % 0% Expected life (years) 5 – 10 Forfeiture rate 0.00 % 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 the Company’s stock options and warrants have characteristics different from those of its 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 the Company’s history of having never issued a dividend and management’s current expectation of future action surrounding dividends. The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s 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, the Company estimates the number of stock-based awards that will be forfeited due to employee turnover. The Company’s 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 the Company’s 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 the Company’s financial statements. The expense the Company recognizes in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period. F- 35 Stock Option Activity As of December 31, 2021, there were 311,823 shares available to be granted under the Company’s 2020 Plan. The following table presents option activity under the Company’s stock option plans for the years ended December 31, 2020 and 2021: (Dollar Amounts, Excluding Exercise Price, in Thousands) Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value Options outstanding at December 31, 2019 493,102 $ 3.16 $ — Granted 3,433,941 3.49 Exercised — — Forfeited/Expired/Cancelled ( 793,934 ) 3.20 Options outstanding at December 31, 2020 3,133,109 $ 3.51 $ — Granted 1,520,017 12.13 Exercised ( 657,620 ) 3.23 Forfeited/Expired/Cancelled ( 431,217 ) 3.98 Options outstanding at December 31, 2021 3,564,289 $ 7.18 $ 12,527 Options vested and exercisable as of December 31, 2021 1,841,558 $ 5.20 Options vested and expected to vest as of December 31, 2021 3,340,131 $ 7.04 The following table summarizes information about options vested and exercisable at December 31, 2021: Options Vested and Exercisable Price ($) Number of Options Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price $ 2.28 790,497 8.39 $ 2.28 $ 4.86 755,402 8.81 $ 4.86 $ 13.84-$14.49 295,659 9.14 $ 13.86 The following table summarizes information about options expected to vest after December 31, 2021: Options Vested to Expected to Vest Price ($) Number of Options Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price $ 2.28 1,023,122 8.39 $ 2.28 $ 4.86 1,084,119 8.82 $ 4.86 $ 7.68-$9.20 234,070 9.35 $ 7.96 $ 13.84-$18.61 998,820 9.16 $ 14.05 Warrants As of December 31, 2021, warrants to purchase 271,844 shares of common stock were outstanding. The following table presents the Company’s warrant activity for the years ended December 31, 2021 and 2020: Number of Warrants Weighted Average Exercise Price Warrants outstanding at December 31, 2019 — $ — Granted 828,171 0.02 Exercised — — Warrants outstanding at December 31, 2020 828,171 $ 0.02 Granted 377,968 0.02 Exercised ( 934,295 ) 0.02 Warrants outstanding at December 31, 2021 271,844 $ 0.02 The Company received proceeds from the exercise of warrants of $ 8 thousand during the year ended December 31, 2021. No warrants were exercised during the year ended December 31, 2020. F- 36 Subsequent to December 31, 2021, the Company completed a private placement of our common stock and entered into a securities purchase agreement. Both of these arrangements include warrant issuance provisions. On January 25, 2022, the Company issued a total of 4,586,389 warrants in connection with the private placement entered into with an institutional investor and other accredited investors. The warrant issuance included 1,570,644 pre-funded warrants, with an exercise price of $ 0.001 , and 3,015,745 warrants with exercise prices ranging between $ 6.80 and $ 6.90 . On March 23, 2022, the Company issued a total of 6,881,108 warrants in connection with its entrance into a securities purchase agreement with an accredited investor. The warrants issued have an exercise price of $ 6.75 . Refer to Note 23 – Subsequent Events included elsewhere in the notes to the consolidated financial statements. Note 18 — Employee Benefit Plan The Company maintains an employee’s savings and retirement plan under Section 401(k) of the Internal Revenue Code (the “401k Plan”). All full-time U.S. employees become eligible to participate in the 401k Plan. The Company’s contribution to the 401k Plan is discretionary. During the years ended December 31, 2021 and 2020, the Company did not contribute to the 401k Plan. Note 19 — Income Taxes On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into law. U.S. GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date. The CARES Act includes changes to the tax provisions that benefits business entities and makes certain technical corrections to the 2017 Tax Cuts and Jobs Act. The tax relief measures for businesses include a five-year net operating loss carryback, suspension of the annual deduction limitation of 80 % of taxable income from net operating losses generated in a tax year beginning after December 31, 2017, changes to the deductibility of interest, acceleration of alternative minimum tax credit refunds, payroll tax relief, and a technical correction to allow accelerated deductions for qualified improvement property. The CARES Act also provides other non-tax benefits to assist those impacted by the COVID-19 pandemic. The Company evaluated the impact of the CARES Act and determined that its adoption did not have a material impact to the income tax provision for the years ended December 31, 2021 or December 31, 2020, respectively. For the period ended December 31, 2021, the Company recorded a tax provision of approximately $ 25 thousand, comprised of its change in deferred tax liability during the year related to its indefinite lived intangible asset balance. The indefinite lived intangibles are not all available as a source of income and thus are not fully available to offset the Company’s deferred tax assets. As of December 31, 2021, the Company has federal and state net operating loss carryforwards of approximately $ 52.2 million and $ 28.9 million, respectively. The Company has not yet filed its federal and state tax returns for 2018, 2019, or 2020. The net operating loss carryforwards for United States income taxes may be available to reduce future years’ taxable income. Management believes that the realization of the benefits from these losses appears not more than likely due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100 % valuation allowance on its net operating loss carryforward deferred tax assets to reduce the assets to zero. Management will review this valuation allowance periodically and make adjustments as necessary. The following table summarizes the significant differences between the U.S. Federal statutory tax rate and the Company’s effective tax rate for financial statement purposes for the years ended December 31, 2021 and 2020: December 31, 2021 2020 US Federal statutory tax rate 21.00 % 21.00 % State taxes 3.8 % 3.0 % Permanent differences and other 0.1 % 0.0 % Debt extinguishment 1.7 % ( 5.5 )% Derivative liabilities 0.0 % ( 2.8 )% Debt discount 0.0 % ( 6.3 )% Prior period adjustments to opening deferred tax 2.2 % 0.0 % Stock-based compensation ( 2.4 )% 0.0 % Change in valuation allowance ( 26.4 )% ( 9.4 )% 0.00 % 0.00 % The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2021 and 2020 are summarized as follows: December 31, (Dollar Amounts in Thousands) 2021 2020 Net operating loss carryforward $ 12,565 $ 4,324 Accruals, reserves, and other 2,529 — Stock-based compensation 491 — Research and development tax credit carryforward 571 — Lease liability 333 — Total deferred tax assets 16,489 4,324 Valuation allowance ( 13,852 ) ( 3,077 ) Net deferred tax assets $ 2,637 $ 1,247 Fixed assets ( 144 ) ( 24 ) Intangible assets ( 1,888 ) 26 Debt discount — ( 1,249 ) Right of use asset ( 323 ) — Deferred commissions ( 307 ) — Total deferred tax liabilities $ ( 2,662 ) $ — Net deferred tax liabilities $ ( 25 ) $ — F- 37 The Company recognizes federal and state deferred tax assets or liabilities based on the Company’s estimate of future tax effects attributable to temporary differences and carryovers. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. The Company considers projected future taxable income and planning strategies in making this assessment. As of December 31, 2021, as a result of a three-year cumulative loss and recent events, the Company concluded that a full valuation allowance was necessary to offset its deferred tax assets. The Company also has indefinite lived intangibles and goodwill which generate a deferred tax liability that is not available to fully offset its deferred tax assets due to uncertainty as to when the deferred tax liability will reverse as a source of taxable income. As a result, the Company is in a net deferred tax liability position as of December 31, 2021. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal. The Company will continue to evaluate its deferred tax balances to determine any assets that are more likely than not to be realized. As of December 31, 2021, the Company had federal and state income tax net operating loss carryovers $ 52.2 million and $ 28.9 million, respectively. Of the federal balance, approximately $ 675 thousand will expire if not utilized by 2037 and $ 51.5 million carry forward indefinitely but are only available to offset 80 % of taxable income per year. As of December 31, 2021, the Company also had federal research credits of approximately $ 571 thousand that will expire if not utilized by 2041. The utilization of the Company’s net operating loss carryforwards and research tax credit carryovers could be subject to annual limitations under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state tax provisions due to ownership change limitations that may have occurred previously or that could occur in the future. These ownership changes limit the amount of net operating loss carryforwards and other deferred tax assets that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percent points over a three-year period. The Company has not conducted an analysis of an ownership change under section 382. To the extent that a study is completed, and an ownership change is deemed to occur, the Company’s net operating losses and tax credits could be limited. The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2016 through 2021 corporate income tax returns are subject to Internal Revenue Service examination. In addition, to the extent that tax attributes are utilized in future years to offset taxable income or income taxes, the IRS and state taxing authorities have the ability to examine the years in which those attributes were generated and adjust the attributes. Note 20 — Net Loss Per Share Net loss per share calculations for all periods have been adjusted to reflect the reverse stock split effected on January 12, 2021. Net loss per share was calculated based on the weighted average number of common stock then outstanding. Basic net loss per share is calculated using the weighted-average number of common shares outstanding during the periods. Net loss per share, assuming dilution, is calculated using the weighted-average number of common shares outstanding and the dilutive effect of all potentially dilutive securities, including common stock equivalents and convertible securities. Net loss per share, assuming dilution, is equal to basic net loss per share because the effect of dilutive securities outstanding during the periods, including options and warrants computed using the treasury stock method, is anti-dilutive. The components of basic and diluted net loss per share were as follows: Year ended December 31, (Dollar Amounts, Excluding Per Share Amounts, in Thousands) 2021 2020 Numerator: Net loss attributable to Agrify Corporation $ ( 32,465 ) $ ( 21,617 ) Accrued dividend attributable to Preferred A Stockholders ( 61 ) ( 583 ) Net loss available for common shareholders $ ( 32,526 ) $ ( 22,200 ) Denominator: Weighted-average common shares outstanding – basic and diluted 19,090,932 4,175,867 Net loss per share attributable to common stockholders – basic and diluted $ ( 1.69 ) $ ( 5.32 ) As of December 31, 2021 and 2020, the Company excluded the following securities from net loss per share as the effect of including them would have been anti-dilutive. The shares shown represent the number of shares of common stock which would be issued upon conversion in the respective years shown below: Year ended December 31, 2021 2020 Options outstanding 3,564,289 3,133,109 Warrants outstanding 271,844 828,173 3,836,133 3,961,282 F- 38 Note 21 — Commitments and Contingencies Leases The determination if any arrangement contained a lease at its inception was done based on whether or not the Company has the right to control the asset during the contract period. The lease term was determined assuming the exercise of options that were reasonably certain to occur. Leases with a lease term of 12 months or less at inception were not reflected in the Company’s balance sheet and those lease costs are expensed on a straight-line basis over the respective term. Leases with a term greater than 12 months were reflected as non-current right-of-use assets and current and non-current lease liabilities in the Company’s consolidated balance sheets. As the implicit interest rate in its leases was generally not known, the Company’s used its incremental borrowing rate as the discount rate for purposes of determining the present value of its lease liabilities. At December 31, 2021, the Company’s weighted average discount rate utilized for its leases was 7.16 %. When a contract contained lease and non-lease elements, both were accounted as a single lease component. The Company had several non-cancellable finance leases for machinery and equipment. The Company’s finance leases have remaining lease terms of one year to five years. The Company had several non-cancellable operating leases for corporate offices, warehouses, showrooms, research and development facilities and vehicles. The Company’s leases have remaining lease terms of one year to five years, some of which include options to extend. Some leases include payment for common area maintenance associated with the property. Additional information of the Company’s lease activity, for the years ended December 31, 2021 and 2020, is as follows: (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Operating lease cost $ 396 $ — Finance lease cost: Amortization of right-of-use assets 179 75 Interest on lease liabilities 42 22 Short-term lease cost — 240 Total lease cost $ 617 $ 337 Weighted-average remaining lease term – finance leases 3.11 years 3.95 years Weighted-average remaining lease term – operating leases 2.36 years — Weighted-average discount rate – finance leases 8.03 % 8.11 % Weighted-average discount rate – operating leases 6.29 % — % (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Right-of-use assets, net $ 1,859 $ 544 Operating lease liabilities, current 814 — Operating lease liabilities, non- current 704 — Total operating lease liabilities $ 1,518 $ — Finance lease liabilities, current $ 156 $ 148 Finance lease liabilities, non- current 293 434 Total finance lease liabilities $ 449 $ 582 F- 39 Maturities of operating and finance lease liabilities as of December 31, 2021 are as follows: (Dollar Amounts in Thousands) Operating leases Finance leases For the year ending December 31, 2022 $ 833 $ 186 2023 471 159 2024 171 97 2025 107 51 2026 63 15 Total minimum lease payments 1,645 508 Less imputed interest ( 127 ) ( 59 ) Total lease liabilities $ 1,518 $ 449 Legal Proceedings On January 5, 2021, the Company received a demand letter from Nicholas Cooper and Richard Weinstein (two of the Company’s former employees) and one of Mr. Cooper’s affiliated entities, asserting that Messrs. Cooper and Weinstein were entitled to compensation arising out of their employment by the Company, and their partial ownership of TriGrow Systems, LLC. The demand letter asserts that the former employees are due certain sales commissions under their applicable bonus plan, equity earn-outs based on certain sales targets, and various equity purchases through the Company’s employee stock ownership plan. The demand letter also asserts various employment claims, including but not limited to, statutory wage withholding violations, wrongful termination, breach of contract, breach of the duty of good faith and fair dealing, fraud in the inducement, promissory estoppel, minority shareholder oppression, breach of fiduciary duty, unjust enrichment, and violations of state and federal securities laws. On January 19, 2021, Messrs. Cooper and Weinstein filed a lawsuit against the Company in the United States District Court for the Western District of Washington, alleging the same claims made in their demand letter based on the facts disclosed above. The plaintiffs are seeking relief in the form of monetary damages in an amount to be determined. Messrs. Cooper and Weinstein are also seeking relief in the form of reinstatement and Mr. Weinstein is seeking rescission of his Release of Claims Agreement. On March 10, 2021, the Company moved to dismiss all Cooper and Weinstein’s claims, asserting that the claims failed to allege legal grounds for relief. On May 12, 2021, a Magistrate issued a preliminary Report and Recommendation, which recommended dismissal of certain of Cooper and Weinstein’s claims, and recommended others for additional factual discovery. On July 27, 2021, a District Judge entered an order partially adopting the Report and Recommendation, dismissing one claim with prejudice, dismissing a second claim with leave to amend, and permitting the remaining claims to proceed. Additionally, on July 29, 2021, the Company filed a separate arbitration in Boston, Massachusetts against Cooper and Weinstein, in which the Company alleges that Cooper and Weinstein were liable for certain conduct during the time they were TriGrow employees, including breach of fiduciary duty, unjust enrichment, usurpation of corporate opportunity, conversion, fraudulent concealment, and false representation. Also on July 29, 2021, the Company submitted a claim for indemnification to certain legacy TriGrow Systems, LLC. shareholders. The claim for indemnification relates to conduct by Cooper and Weinstein during the time they were TriGrow employees. The Company does not believe these claims have any merit and intend to vigorously defend against them. Supply Agreement with Mack Molding Co. In December 2020, the Company entered into a five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack will become a key supplier of VFUs. In February 2021, the Company placed a purchase order with Mack amounting to approximately $ 5.2 million towards initial production of VFUs during 2021. In September 2021, the Company increased the purchase order with Mack to approximately $ 11.5 million towards production of VFUs during 2021 and 2022. The Company believes the supply agreement with Mack will provide the Company with increased scaling capabilities and the ability to more efficiently meet the potential future demand of its customers. The supply agreement contemplates that, following an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack each year based on the agreed upon pricing formula. The introductory period is not time-based but rather refers to the production of an initial number of units after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage. The Company believes this approach will result in both parties making a more informed decision with respect to the pricing and other terms of the supply agreement with Mack. Distribution Agreements with Related Parties On September 7, 2019, the Company entered into a distribution agreement with Bluezone for distribution rights to the Bluezone products with certain exclusivity rights. The agreement requires minimum purchases amounting to $ 480 thousand and $ 600 thousand for the first and second contract anniversary years. The agreement auto renews for successive one-year periods unless earlier terminated. In March 2021, the Company notified Bluezone of non-renewal of the agreement which means it ended on May 31, 2021. The Company exceeded the minimum purchase amount for the first year and purchased approximately $ 309 thousand of the committed $ 660 thousand second year purchases through December 31, 2021. Bluezone is a related party to the Company. F- 40 On March 9, 2020, the Company entered into a distribution agreement with Enozo Technologies Inc. (“Enozo”), for an initial term of five years with auto renewal for successive one-year periods unless earlier terminated. The agreement contains the following minimum purchases to retain exclusive distributor status for one of the Company’s products: for the period from the contract date until December 31, 2021 for $ 375 thousand, for the year ended December 31, 2022 for $ 750 thousand, and for the year ended December 31, 2023 for $ 1.1 million, which amount may increase by 3 % for the later years. The Company had $ 40 thousand in purchases of Enozo product for the year ended December 31, 2021, compared to $ 38 thousand for the year ended December 31, 2020. Enozo is a related party to the Company. Committed Purchase Agreement with Related Parties 4D Bios, Inc. On September 18, 2021, the Company entered into an amended purchase agreement with 4D Bios, Inc. (“4D”) to secure purchases of horticultural equipment. The original agreement required minimum purchases of between $ 577 dollars and $ 607 dollars per unit of 4D products until December 31, 2020. The amended agreement requires minimum purchases of $ 582 dollars per unit with a final payment of approximately $ 864 thousand paid to 4D. 4D is a related party to the Company. For the year ended December 31, 2020, the Company’s purchase commitment totaled $ 1.9 million. The Company settled all outstanding commitments, leaving no open committed purchases as of December 31, 2021. Greenstone Holdings On December 29, 2021, Greenstone Holdings purchased 239 VFUs from the Company of which 60 VFUs were already in Greenstone Holdings possession under a lease agreement. Under the lease agreement, Greenstone Holdings owed Agrify a production service fee of $ 300 per pound of flower produced and contained an option to purchase the equipment within the lease agreement. The term of this agreement was for ten years but was terminated upon signing the purchase agreement for the 239 VFUs. The remaining 179 VFUs were shipped to Greenstone Holdings storage facility on December 30, 2021 and December 31, 2021. Note 22 — Related Parties Some of the officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available. The following table describes the net purchasing (sales) activity with entities identified as related parties to the Company: Year ended December 31, (Dollar Amounts in Thousands) 2021 2020 Bluezone $ 309 $ 694 4D Bios (1) 1,312 1,128 Enozo 40 123 Cannae Policy Group 50 — Topline Performance Solutions 11 — Valiant Americas, LLC. 6,048 7,085 Cannaquip 209 — NEIA ( 22,010 ) ( 3,916 ) Greenstone Holdings ( 9,429 ) ( 9 ) Living Green Farm $ ( 58 ) $ — (1) Purchases from 4D for the year ended December 31, 2020 includes $ 480 thousand related to a down payment on inventory orders. The following table summarizes net related party (payable) receivable as of December 31, 2021 and December 31, 2020: (Dollar Amounts in Thousands) December 31, 2021 December 31, 2020 Bluezone $ — $ 7 Cannae Policy Group ( 8 ) — Cannaquip ( 21 ) — Greenstone Holdings 11,177 — Living Green Farm 34 — NEIA 3,500 1,665 Valiant Americas, LLC. $ ( 922 ) $ 4,246 F- 41 Note 23 — Subsequent Events Private Placement On January 25, 2022, the Company entered into a Securities Purchase Agreement (the “Securities Agreement”) with an institutional investor and other accredited investors for the sale by the Company of (i) 2,450,350 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to an aggregate of 1,570,644 shares of Common Stock and (iii) warrants to purchase up to an aggregate of 3,015,745 shares of Common Stock (the “Common Warrants” and, collectively with the Pre-Funded Warrants, the “Warrants”), in a private placement offering. The combined purchase price for one share of Common Stock (or one Pre-Funded Warrant) and accompanying fraction of a Common Warrant was $6.80. Subject to certain ownership limitations, the 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 $ 0.001 (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 $ 7.48 (as adjusted from time to time in accordance with the terms thereof) and will expire on the fifth anniversary of the initial exercise date. Raymond Chang, Chairman and Chief Executive Officer of the Company, and Stuart Wilcox, a member of the Company’s Board of Directors, participated in the private placement on the same terms as other investors except for a combined purchase price of $ 6.90 . The gross proceeds to the Company 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 Warrants. Acquisition of Lab Society; Purchase Consideration On February 1, 2022, the Company 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 the Company agreed to acquire Lab Society. Concurrently with the execution of the Merger Agreement, the Company 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) 425,611 shares of the Company’s common stock (the “Buyer Shares”); and (c) the Earn-out Consideration (as defined below), to the extent earned. The Company withheld 127,682 of the Buyer Shares issuable to the Owners (the “Holdback Lab Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Merger Agreement. The Holdback Lab Buyer Shares shall be released following the twelve (12) month anniversary of the Closing Date in accordance with and subject to the conditions of the Merger Agreement. 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 the Company’s common stock. F- 42 Securities Purchase Agreement On March 14, 2022, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with an accredited investor (the “Investor”), pursuant to which, among other things, the Company 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 “Note”), and (ii) a warrant (the “Warrant”) to purchase up to an aggregate of 6,881,108 shares of common stock of the Company, par value $ 0.001 per share (“Common Stock”). The Note will be a senior secured obligation of the Company and ranks senior to all indebtedness of the Company. The Company will be required to make amortization payments equal to 4.0 % of the original principal amount of the 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 Note will have a stated interest rate of 6.75 % per annum, and the Company 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 Note’s issuance, the Company may, in lieu of paying interest in cash, pay such interest in kind, in which case interest on the Note will be calculated at the rate of 8.75 % per annum and will be added to the principal amount of the Note. At any time following the one-year anniversary of the Note’s issuance, the Company may prepay all (but not less than all) of the Note by redemption at a price equal to 106.75 % of the then-outstanding principal amount under the Note plus accrued but unpaid interest. The Investor will also have the option of requiring the Company to redeem the Note if the Company undergoes a fundamental change at a price equal to 107 % of the then-outstanding principal amount under the 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 the Common Stock on the trading day immediately prior to such subsequent closing. The Note will impose certain customary affirmative and negative covenants upon the Company, as well as covenants that (i) restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, (ii) restrict the ability of the Company 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 the Company to maintain specified earnings and adjusted EBITDA targets, and (v) require the Company to maintain minimum amounts of cash on hand. If an event of default under the Note occurs, the Investor can elect to redeem the Note for cash equal to 115% of the then-outstanding principal amount of the Note (or such lesser principal amount accelerated by the Investor), plus accrued and unpaid interest, including default interest, which accrues at a rate per annum equal to 15% from the date of a default or event of default. Until the date the 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 the Company or its subsidiaries. Each Warrant to be issued in the initial closing will have an exercise price of $6.75 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 “Warrant Shares”), in which case the Warrant shall also be exercisable on a cashless exercise basis at the Investor’s election. The Securities Purchase Agreement requires the Company to file resale registration statements with respect to the Warrant Shares as soon as practicable and in any event within 45 days following the initial closing and any subsequent closings. The Warrant will provide that in no event will the number of shares of Common Stock issued upon exercise of the Warrant result in the Investor’s beneficial ownership exceeding 4.99 % of the Company’s 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 (61st) day after notice of such request by the Investor to increase its beneficial ownership limit has been delivered to the Company). The Securities Purchase Agreement also contains customary representations and warranties of the Company and the Investor. There is no material relationship between the Company or its affiliates and the Investor other than in respect of the Securities Purchase Agreement, the Note and the Warrant. F-43