What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-16 compared with 2021-11-12 · 1614 added, 761 removed, 293 unchanged (89% of the section changed)

3 unchanged sentences

(In thousands, except share and per share data)

September 30,

March 31, 2022

December 31, 2021

Current Assets

Cash and cash equivalents

Restricted cash

Marketable securities

Accounts receivable, net of allowance for doubtful accounts of $ 228 and $ 54 , as of September 30, 2021 and December 31, 2020, respectively.

Deferred IPO costs

Prepaid expenses and other receivables

Accounts receivable, net of allowance for doubtful accounts of $ 1,415 and $ 1,415 at March 31, 2022 and December 31, 2021, respectively

Inventory, net of reserves of $ 942 and $ 942 at March 31, 2022 and December 31, 2021, respectively

Prepaid and refundable taxes

Prepaid expenses and other current assets

Total Current Assets

Non-current marketable securities

Non-Current Assets

Loan receivable

Property and equipment, net

Operating lease right-of-use assets

Intangible assets acquired through business combination, net

Capitalized website costs, net

Right-of-use, net

Intangible assets, net

Other non-current assets

Liabilities and Stockholders’ Equity

2 unchanged sentences

Accrued expenses and other current liabilities

Notes payable, net of debt discount of $ 0 and $ 4,777 as of September 30, 2021 and December 31, 2020, respectively

Derivative liabilities

Operating lease liabilities, current

Long-term debt, current

Deferred revenue

Total Current Liabilities

Non-Current Liabilities

Other non-current liabilities

Operating lease liabilities

Operating lease liabilities, non-current

Deferred tax liabilities, net

Long-term debt

2 unchanged sentences

Stockholders’ Equity

Common stock, 50,000,000 shares, $ 0.001 par value authorized as of September 30, 2021 and December 31, 2020, respectively;

21,261,383 and 4,211,677 shares issued at September 30, 2021 and December 31, 2020, respectively

Preferred stock 2,895,000 shares, $ 0.001 par value authorized as of September 30, 2021 and December 31, 2020, respectively;

0 shares issued as of September 30, 2021 and December 31, 2020, respectively

Preferred A stock 105,000 shares, $ 0.001 par value authorized as of September 30, 2021 and December 31, 2020, respectively;

0 and 100,000 shares issued at September 30, 2021 and December 31, 2020, respectively

Common Stock, $ 0.001 par value per share, 50,000,000 shares authorized, 26,542,890 and 22,207,103 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

Preferred Stock, $ 0.001 par value per share, 2,895,000 shares authorized, no shares issued or outstanding

Preferred A Stock, $ 0.001 par value per share, 105,000 shares authorized, no shares issued or outstanding

Additional paid-in capital

Accumulated deficit

Total Stockholders’ Equity (Deficit)

Total Stockholders’ Equity

Non-Controlling Interests

6 unchanged sentences

Three Months ended

September 30,

Nine months ended

September 30,

(In thousands)

Revenue (including $ 1,271 and $ 5,518 from related parties, respectively)

Cost of goods sold

Gross (loss) profit

OPERATING EXPENSES

Gross profit (loss)

General and administrative

Research and development

Selling, general and administrative expenses

Selling and marketing

Total operating expenses

Operating loss

OTHER INCOME (EXPENSE), NET

Loss from operations

Interest income (expense), net

Other expenses

Gain on extinguishment of notes payable

Other income (expense), net

Net loss before non-controlling interest

(Loss) income attributable to non-controlling interest

Net loss before income taxes

Income tax benefit

Income (loss) attributable to non-controlling interest

Net loss attributable to Agrify Corporation

Net loss per share attributable to Common Stockholders – basic and diluted

Weighted average common shares outstanding – basic and diluted

Weighted-average common shares outstanding – basic

The accompanying notes are an integral part of

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

(In thousands, except share amounts)

and Nine months ended September 30, 2020

Stockholders’

January 1, 2020

of Preferred A Stock

in Agrify Valiant

of TriGrow Systems

June 30, 2020

issued and recorded as debt discount in connection with notes payable issuances

September 30, 2020

and Nine months ended September 30, 2021

(In thousands, except share data)

Preferred A Stock

Stockholders’

Balance, January 1,

Balance at January 1, 2021

Stock-based compensation

Beneficial conversion feature associated

with amended Convertible Promissory Notes

Beneficial conversion feature associated with amended Convertible Promissory Notes

Conversion of Convertible Notes

Issuance of common stock – Initial

Public Offering (“IPO”), net of fees

Issuance of common stock – Secondary

public offering, net of fees

Issuance of Common Stock – Initial Public Offering (“IPO”), net of fees

Issuance of Common Stock – Secondary public offering, net of fees

Conversion of Preferred A Stock

1 unchanged sentence

Exercise of warrants

Balance at March 31, 2021

Preferred A Stock

Stockholders’

Balance at January 1, 2022

Stock-based compensation

Issuance of common shares in connection

with acquisition

Issuance of Common Stock and warrants in private placement

Issuance of debt and warrants in private placement

Acquisition of Lab Society

Exercise of options

Exercise of warrants

September 30, 2021

Balance at March 31, 2022

The accompanying notes are an integral part of

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended

September 30,

(In thousands)

Three Months ended

Cash flows from operating activities

2 unchanged sentences

Depreciation and amortization

Amortization of premium on investments

Interest on held to maturity bonds

Amortization of premium on investment securities

Amortization of debt discount

Interest on investment securities

Debt issuance costs

Deferred income taxes

Compensation in connection with the issuance of stock options

Issuance of common shares in connection with acquisition

Non-cash interest expense

Non-cash interest (income) expense

Gain on extinguishment of notes payable, net

Loss from disposal of fixed assets

Early termination of lease

Income (loss) attributable to non-controlling interests

1 unchanged sentence

Accounts receivable

Prepaid expenses and other receivables

Prepaid expenses and other current assets

Right of use assets, net

Other non-current assets

Accounts payable

Accrued expenses and other current liabilities

Operating lease liabilities

Deferred revenue

Deferred (expense) revenue, net

Net cash used in operating activities

1 unchanged sentence

Purchases of property and equipment

Purchase of held to maturity securities

Purchase of securities

Proceeds from the sale of securities

Issuance of loan receivable

2 unchanged sentences

Cash flows from financing activities

Proceeds from issuance of Preferred A Stock

Proceeds from issuance of Common Stock and warrants in private placement

Proceeds from issuance of debt and warrants in private placement, net of fees

Proceeds from IPO, net of fees

3 unchanged sentences

Payments of financing leases

Minority interest in Valiant

Proceeds from PPP Loan

Proceeds from financing leases

Proceeds from notes payable

Proceeds from issuance of common stock

Net cash provided by financing activities

Net increase in cash

Cash and cash equivalents – Beginning of period

Cash and cash equivalents – End of period

Supplemental disclosures of non-cash investing and financing activities:

Equipment sold for loan receivable to customer

Warrants issued and recorded as debt discount in connection with notes payable issuances

Bifurcated embedded conversion options recorded as derivative liabilities and debt discount

Net increase in cash, cash equivalents, and restricted cash

Cash, cash equivalents, and restricted cash at the beginning of period

Cash, cash equivalents, and restricted cash at the end of period

Cash, cash equivalents, and restricted cash at end of period

Cash and cash equivalents

Restricted cash

Total cash, cash equivalents, and restricted cash at the end of period

The accompanying notes are an integral part of

2 unchanged sentences

NOTES TO CONDENSED 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 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 has seven wholly-owned 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.

Agrify Corporation (“Agrify” or

the “Company”) is a developer of proprietary precision hardware and software grow solutions for the commercial indoor

agriculture industry and provides equipment and solutions for cultivation, extraction, post-processing, and testing for the cannabis

and hemp industries.

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 nine 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);

Harbor Mountain Holdings, LLC (“HMH”, which assembled and produced many of the Company’s products and which was acquired

in July 2020), Ariafy Finance, LLC, Agxion, LLC, Cascade Sciences, LLC (which was acquired as part of the Precision-Cascade Acquisition)

and Precision Extraction NewCo, LLC (which is a newly formed subsidiary in connection with the Precision-Cascade Acquisition).

also owns 50 % of Teejan Podponics International LLC (“TPI”) since December 2018;

60 % of Agrify-Valiant, LLC, formed in December

and 75 % of Agrify Brands, LLC (formerly TriGrow Brands, LLC, which was part of the January 2020 acquisition of TriGrow).

details about the January 2020 and July 2020 acquisitions, please refer to the Company’s Annual Report on Form 10-K for the year

ended December 31, 2020 filed with the U.S.

Securities and Exchange Commission (“SEC”) on April 2, 2021.

See also Note 18, Subsequent Event for more information

regarding the Precision-Cascade Acquisition.

Ariafy Finance, 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);

PurePressure, LLC (“PurePressure”) (which was acquired by the Company on December 31, 2021);

Lab Society NewCo, LLC (“Lab Society”) (which was a newly formed subsidiary in connection with February 1, 2022 acquisition of LS Holdings Corp).

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);

● 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).

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.

Public Offerings

On February 1, 2021, the Company consummated its

initial public offering (“IPO”) of 5,400,000 shares of common stock at a price of $ 10.00 per share, less certain underwriting

discounts and commissions.

On February 4, 2021, the Company closed on the sale of an additional 810,000 shares of common stock on the

same terms and conditions pursuant to the exercise of the underwriters’ over-allotment option.

On February 19, 2021, the Company 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, the Company 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.

— Capital Structure for additional details.

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 $ 2,400 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.

reverse stock split (“Reverse Stock Split”) of its Common Stock, $0.001 par value per share (“Common Stock”).

All share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented,

unless otherwise indicated.

Initial Public Offering and Secondary Public Offering

On February 1, 2021, the Company closed its initial

public offering, or (“IPO”), of 6,210,000 shares of its 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.

and 333-252490), which was declared effective by the SEC on January 27, 2021.

In the IPO, Maxim Group LLC and Roth Capital Partners acted

as the underwriters.

The IPO price for shares of Common Stock was $ 10.00 per share.

The total gross proceeds from the IPO were $ 62.1 million.

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 IPO were approximately

$ 57 million.

The Company used the net proceeds from the IPO for its current working capital needs, to support revenue growth, to increase

inventory to meet customer demand forecasts, and to support operational growth.

On February 19, 2021, the Company consummated a secondary

public offering (the “February Offering”) of 5,555,555 shares of its Common Stock for a price of $ 13.50 per share, less certain

underwriting discounts and commissions.

On March 22, 2021, the Company 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 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.

The Company used the net proceeds from the IPO for its current working capital needs, to support

revenue growth, to increase inventory, to meet customer demand forecasts, and to support operational growth.

Coronavirus (“COVID-19”) Pandemic

The coronavirus was first

identified in people in late 2019.

COVID-19 spread rapidly throughout the world and, in March 2020, the World Health Organization characterized

COVID-19 as a pandemic.

COVID-19 is a pandemic of respiratory disease spreading from person-to-person that poses a serious public health

It has significantly disrupted supply chains and businesses around the world.

The extent and duration of the COVID-19 impact, on

the operations and financial position of the Company and on the global economy, is uncertain.

Uncertainty remains regarding the length

of time it will take for the COVID-19 pandemic to subside, including the time it will take for vaccines to be broadly distributed and

accepted in the United States and the rest of the world, and the effectiveness of such vaccines in slowing or stopping the spread of COVID-19

and mitigating the economic effects of the pandemic.

The Company continues to service its customers amid uncertainty and disruption linked

to COVID-19 and is actively managing its business to respond to the impact.

The spread of COVID-19 beginning in the first quarter

of 2020 has caused significant volatility in U.S.

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.

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, if any, 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 2020, the Company received an unsecured Paycheck

Protection Program Loan (“PPP Loan”) from the 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 Company received total loan proceeds of approximately $ 779 thousand from the PPP Loan.

The Company’s

application for the forgiveness of the outstanding balance of PPP Loan is currently under review by the SBA.

Note 2 — Summary of Significant Accounting Policies

Preparation of Condensed Consolidated Financial Statements

The condensed consolidated financial statements

included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)

The condensed consolidated financial statements included

herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”),

and on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K

for the year ended December 31, 2020 filed with the SEC, except for the recently adopted accounting pronouncements described below.

The condensed consolidated statements of operations and stockholders’

equity for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and

2020, and the condensed consolidated balance sheet as of September 30, 2021, are not audited but reflect all adjustments that are of a

normal recurring nature and that are considered necessary for a fair presentation of the results for the periods shown.

The condensed

consolidated balance sheet as of December 31, 2020 is derived from the audited consolidated financial statements presented in the Company’s

Annual Report on Form 10-K for the year ended December 31, 2020.

Certain information and disclosures normally included in annual

consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC.

Because the condensed consolidated

interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements,

they should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual

Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on April 2, 2021.

The results for interim periods are not

necessarily indicative of a full year’s results.

for the year ended December 31, 2021 and filed with the SEC (“Form 10-K”), except for the recently adopted accounting pronouncements

described below.

The condensed consolidated financial statements

included herein reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation

of the Company’s condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021, condensed

consolidated statements of stockholders’ equity for the three months ended March 31, 2022 and 2021, and the condensed consolidated

cash flows for the three months ended March 31, 2022 and 2021.

The condensed consolidated balance sheet as of

December 31, 2021 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K

for the year ended December 31, 2021.

Certain information and disclosures normally included in annual consolidated financial statements

have been omitted pursuant to the rules and regulations of the SEC.

Because the condensed consolidated interim financial statements do

not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in

conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for

the year ended December 31, 2021 filed with the SEC on March 31, 2022.

The results for interim periods are not necessarily indicative

of a full year’s results.

Basis of Presentation and Principles of Consolidation

Accounting for Wholly-Owned Subsidiaries

The accompanying consolidated financial statements include the accounts

of Agrify Corporation and its wholly-owned subsidiaries, AGM Service Corp LLC, TriGrow Systems, LLC, Harbor Mountain Holdings, LLC, Ariafy

Finance, LLC, and Agxion, LLC, 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 Joint-Venture Subsidiary

For the Company’s less than wholly-owned

subsidiaries, Agrify-Valiant, LLC, Agrify Brands, LLC, and Teejan Podponics International LLC, the Company first analyzes whether these

entities are a variable interest entity (a “VIE”) in accordance with 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

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

The accompanying consolidated financial statements

have been prepared in accordance with 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”).

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

The financial results of a VIE 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.

continuously re-assesses (i) whether the joint venture is a VIE, and (ii) if the Company is the primary beneficiary of the VIE.

is determined that the joint venture qualifies as a VIE and the Company is the primary beneficiary, the Company’s financial interest

in the VIE 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.

Accordingly, the Company consolidates its interest in 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.

The investment in 50 % of the shares of TPI is treated as an equity investment as the Company cannot exercise significant influence.

Use of Estimates

6 unchanged sentences

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.

and other market-specific, other relevant factors that it believes to be reasonable under the circumstances and management’s judgement.

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 financial results could differ from those estimates.

The Company, and its Subsidiaries, fiscal year

ends on December 31 of each year.

ends on December 31, each year.

Emerging Growth Company

The Company qualifies 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, the Company

is permitted to, and intends to, rely on exemptions from certain disclosure requirements that are applicable to 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.

The Company will remain an “emerging growth

company” until the earliest to occur of:

● reporting $1.0 billion or more in annual gross revenues;

● the 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 Common Stock

held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter;

● December 31, 2026.

Reclassifications

Certain amounts in the Company’s prior period financial statements

have been reclassified to conform to the presentation of the current period financial statements.

In this Form 10-Q, the Company has reclassified

selling, general and administrative expenses to two separate line items in the accompanying consolidated statement of operations as general

and administrative expenses and selling and marketing expenses for the three months ended March 31, 2022 and 2021.

Cash, Cash Equivalents, and Restricted Cash

Cash and cash equivalents

Cash and cash equivalents consist principally

of cash and deposits with maturities of three months or less as of September 30, 2021 and December 31, 2020.

Goodwill is defined as the excess of cost over

the fair value of assets acquired and liabilities assumed in a business combination.

The Company tests goodwill at the reporting unit

level annually as of November 2 or on an as needed basis, for indicators of impairment at each reporting unit that has recorded goodwill.

In performing the test, the Company either uses a qualitative assessment or a single step quantitative approach.

Under the qualitative

approach the Company considers a number of factors, including the amount by which the previous quantitative test’s fair value exceeded

the carrying value of the reporting units, actual performance as compared to internal forecasts used in the previous quantitative test,

an evaluation of discount rates, and an evaluation of current economic factors for both the worldwide economy and specifically the oil

and gas industry, and any significant changes in customer and supplier relationships.

The Company weighs these factors to determine if

it is more likely than not that the fair value of the reporting unit exceeds its carrying value.

If after performing a qualitative assessment,

indicators are present, or the Company identifies factors that cause the Company to believe it is appropriate to perform a more precise

calculation of fair value, the Company would move beyond the qualitative assessment and perform a quantitative impairment test.

Under the quantitative impairment test, the Company

performs a comparison of the reporting unit’s carrying value to its fair value.

The Company estimates the fair value of a reporting

unit based upon future net discounted cash flows (Level 3 measurement).

In calculating these estimates, the Company develops a discounted

cash flow model based on forecasted operating results, discount rates, and growth rates, which contemplate business, market and overall

economic conditions.

Further, the discount rates used require estimates of the cost of equity and debt financing.

The estimates of fair

value of these reporting units could change if actual operating results or discount rates vary from these estimates.

The Company performed

sensitivity analyses on the fair values resulting from the discounted cash flows valuation utilizing more conservative assumptions that

reflect reasonably likely future changes in the discount rates and perpetual growth rate in each of the reporting units.

Based upon the

Company’s 2020 annual impairment testing analyses, including the consideration of reasonably likely adverse changes in assumptions

described above, the Company determined that there have been no goodwill impairments to date.

consist principally of cash and deposits with maturities of three months or less as of March 31, 2022 and December 31, 2021.

equivalents are carried at cost, which approximates fair value.

Restricted cash represents cash required to be held as collateral for

the Company’s senior secured promissory note (the “SPA Note”).

Accordingly, these balances contain restrictions as to

their availability and usage and are classified as restricted cash in the consolidated balance sheets.

to Note 15 – Debt, included elsewhere in the notes to the consolidated financial statements.

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

to be held-to-maturity securities and are recorded at amortized cost in the accompanying consolidated balance sheets.

The fair value of

these investments were estimated using recently executed transactions and market price quotations.

The Company considers current assets

to be 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 for goods and services that are billed and currently due from customers.

Accounts receivable balances are presented net of an

allowance for credit losses, which is an estimate of billed amounts that may not be collectible.

In determining the amount of the allowance

at each reporting date, management 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.

Accounts receivable 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.

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 to a 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 per depositor with unlimited insurance for

funds in noninterest-bearing transaction accounts through September 30, 2021.

At times, the amounts in these accounts may exceed the

federally insured limits.

The Company has certain customers whose revenue

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 March 31, 2022.

At times, the amounts in these accounts may exceed the federally

insured limits.

The Company has certain customers from whom 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.

For the three months and nine months ended September 30, 2021, five

customers accounted for 94.4 % and three customers accounted for 78.4 % of revenue, respectively.

For the three months and nine months ended

September 30, 2020, three customers accounted for 91 % and 77.8 % of revenue, respectively.

At September 30, 2021 and 2020, two customers

accounted for 84.6 % and one customer accounted for 78.4 % of accounts receivable, respectively.

Refer to the following tables below.

For the three months ended March 31, 2022 and

2021, the Company’s customers that accounted for 10 % or more of the total revenue were as follows:

Three Months ended

March 31, 2022

Three Months ended

March 31, 2021

(In thousands)

New England Innovation Academy (“NEIA”) – Related Party

revenue, as a percentage of total revenue was less than 10 %

Accounts Receivable, Net

As of March 31, 2022 and December 31, 2021, the

Company’s customers that accounted for 10 % or more of the total accounts receivable, net, were as follows:

March 31, 2022

December 31, 2021

(In thousands)

NEIA – Related Party

accounts receivable balance, as a percentage of total accounts receivable balance, was less than 10 %

The Company values all of its inventories, which

consist primarily of significant 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.

The company takes physical inventory at least once annually

at 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

Furniture and fixtures

Research and development laboratory equipment

Machinery and equipment

Leased equipment at customer

Trade show assets

Leasehold improvements

Lower of estimated useful life

or remaining lease term

The estimated useful lives of the Company’s

property and equipment are periodically assessed to determine if changes are appropriate.

The Company charges maintenance and repairs

to expense as incurred.

When the Company retires or disposes assets, the carrying cost of these assets and related accumulated depreciation

or amortization are eliminated from the consolidated balance sheet and any resulting gain or loss are included in the consolidated statement

of operations in the period of retirement or disposal.

Costs for capital assets not yet placed into service are capitalized as construction-in-progress

and depreciated once placed into service.

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 that 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/or a decline in the Company’s market value as a result of a significant

decline in the Company’s stock price.

Based upon the Company’s 2021 annual impairment testing analyses, including the consideration

of reasonably likely adverse changes in assumptions described above, the Company determined that there are no goodwill impairments

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 acquired customer related acquired 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:

Acquired developed technology

Non-compete agreements

Customer relationships

Capitalized website costs

In performing the review of the recoverability

of 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 remaining estimated useful life.

If, as the result of examining any of

these factors, the Company concludes that the carrying value of intangible asset exceeds its estimated fair value, the Company recognizes

an impairment charge and reduces 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 ASC Topic 815 Derivatives and Hedging (“ASC815”).

The accounting treatment of derivative

financial instruments requires that the Company identify and 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 Company determines that an instrument is

not a derivative liability, it then evaluates whether there is a beneficial conversion feature (“BCF”), by comparing the commitment

date fair value to the effective current 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.

Debt Issue Costs and Debt Discount

The Company may record debt issuance costs and/or

debt discounts in connection with issuing of debt.

The Company may cover these costs by paying cash or issuing or equity (such as warrants).

These costs are amortized to interest expense over the expected life of the debt.

If a conversion of the underlying debt occurs, a proportionate

share of the unamortized amounts is immediately expensed.

Issue Discount

For certain convertible debt issued by the Company,

it may provide the debt holder with an original issue discount.

The Company would record the original issue discount to debt discount,

reducing the face amount of the note, and is then amortized to interest expense over the life of the debt.

The Company determines at the inception of a right-of-use

asset 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 its consolidated balance sheet for all leases

with an initial lease term of greater than 12 months.

A lease with an initial term of 12 months or less is not recorded on the balance

sheet, but related payments are recognized as expense on a straight-line basis over the lease term.

The Company’s right-of-use asset contracts

may contain both lease and non-lease components.

Non-lease components may include maintenance, utilities, and other operating costs.

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.

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

Certain of the Company’s right-of-use asset

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 that it can recognize.

The Company recognizes deferred revenue as revenue as the related performance

obligation is satisfied.

The Company records deferred revenue that will be recognized during the succeeding twelve-month period

as a current 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

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 Company estimates the fair value of each stock

option grant on the date of grant using the Black-Scholes option-pricing model.

Before the IPO, the Company was a private company and

therefore 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.

The Company’s management exercises significant

judgments in determining the fair value of assets acquired and liabilities assumed, as well as intangibles and their estimated useful

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 the fair value of assets and liabilities made after the end of the measurement period are recorded within the Company’s

operating results.

For contingent consideration arrangements, the

Company recognizes a liability 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.

Revenue Recognition

The Company generates revenue from the following

(1) equipment sales, (2) providing services and (3) construction contracts.

In accordance with ASC 606 “Revenue Recognition”,

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;

● 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

A performance obligation is a promise by the Company

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.

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 enters into contracts that may include

various combinations of equipment, services and construction, which are generally capable of being distinct and accounted for as separate

performance obligations.

Contracts with customers often include promises to transfer multiple products and services to a customer.

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 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 build-out services.

This method 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 Company determines the SSP for services in

time and materials contracts by observable prices in standalone services arrangements.

The Company estimates variable consideration in

the form of royalties, revenue share, monthly fees, and service credits at contract inception and updated at the end of each reporting

period if additional information becomes available.

Variable consideration is typically not subject to constraint.

Changes to variable

consideration were not material for the periods presented.

If a contract has payment terms that differ from

the timing of revenue recognition, the Company will assess whether the transaction price for those contracts include a significant financing

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 three months ended March 31, 2022 and 2021, the Company did not have any such financial

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.

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.

the Company will accrue all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment.

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 fulfills

obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer.

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

1 unchanged sentence

costs as incurred.

During the three and nine months ended September 30, 2020, the Company expensed $ 34 and $ 739 , respectively, related

to the development of hardware solution for deployment of the rapid grow solution.

During the three months ended September 30, 2020, the

Company expensed additional costs of $ 107 related to the research and development facility.

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 software.

Capitalization of Internal Software Development Costs

The Company capitalizes certain software engineering

efforts related to the continued development of Agrify Insights software under ASC 985-20.

Costs incurred during the application

development phase are only capitalized once technical feasibility has been established and the work performed will result

in new or additional functionality.

The types of costs capitalized during the application development phase include employee compensation,

as well as consulting fees for third-party software developers working on these projects.

Costs related to the research and development are

expensed as incurred until technical feasibility is established as well as post-implementation activities.

Internal-use software is amortized

on a straight-line basis over the estimated useful life of the asset, which ranges from two to five years.

Shipping and Handling Charges

1 unchanged sentence

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.

Note 3 — Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued Accounting

Standard Update (“ASU”) No.

2016-13, Financial Instruments — Credit Losses (Topic 326) —

Measurement of Credit Losses on Financial Instruments.

This new standard requires entities to measure expected credit losses for

certain financial assets held at the reporting date using a current expected credit loss model, which is based on historical

experience, adjusted for current conditions and reasonable and supportable forecasts.

The Company’s financial instruments

within the scope of this guidance primarily includes accounts receivable, loans, held-to-maturity debt securities, and net

investments in leases.

In November 2019, the FASB issued ASU No.

2019-10, changing effective dates for the new standards to give

implementation relief to certain types of entities.

The Company is required to adopt the new standards no later than January 1, 2023

according to ASU 2019-10, with early adoption allowed.

The adoption of this new accounting guidance had no impact on the

Company’s consolidated financial position.

In August 2018, the FASB issued ASU No.

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.

Note 4 — Revenue Recognition

The Company generates revenue from the following

These costs are expensed as incurred as a component of cost of goods sold.

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

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 March 31, 2022 and December 31, 2021 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 March 31, 2022 and December 31, 2021.

The Company did not recognize revenue from TPI for the three months ended March

31, 2022 and March 31, 2021.

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.

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.

31, 2022, 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.

Net Loss Per Share

The Company presents basic and diluted net loss

per share attributable to Common Stockholders in conformity with the two-class method required for participating securities.

basic loss per share 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.

Note 3 — Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In August 2020, the FASB issued Accounting

Standards Update (“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.

adoption of this new accounting guidance had no impact on the Company’s consolidated financial position.

Pending Accounting Pronouncements

In June 2016, the FASB issued 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 the potential impact of this adoption 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.

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

The Company is currently evaluating the potential impact of this adoption on its consolidated financial statements and related

The Company does not believe that any

other ASU issued but not yet effective, if adopted, will have a material effect on the Company’s future financial

Note 4 — Revenue and Deferred Revenue

During the three months ended March 31, 2022 and

2021, the Company generated revenue from the following sources:

(1) equipment sales, (2) services sales and (3) construction contracts.

2 unchanged sentences

Equipment revenue includes sales from proprietary products designed and

engineered by the Company such as Agrify Vertical Farming Units (“AVFUs”), container farms, integrated grow racks, and LED

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 fixed-price contracts, under which the Company agrees to do the entire project for

a fixed amount.

The Company also 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.

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 into 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 three main sub-contractors to execute the construction contracts.

Disaggregation of Revenue —

The following table provides revenue disaggregated by timing of revenue recognition:

The following table provides the Company’s revenue disaggregated by timing of revenue recognition:

Three Months ended

September 30,

Nine Months ended

September 30,

(In thousands)

Transferred at a point in time

Transferred over time

Total revenue

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, because 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.

At September 30, 2021, the Company has no product warranty accrual

given the Company’s de minimis historical financial warranty experience.

Note 5 — Fair Value

on its products for materials and workmanship but may provide multiple year warranties as negotiated, and generally transfers to its customers

the warranties it receives from its vendors, if any, which generally cover 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 Company maintains a reserve for

warranty returns of $ 398 thousand for both March 31, 2022 and December 31, 2021.

The Company’s reserve for warranty returns is included

in accrued expenses and other current liabilities in its consolidated balance sheets.

Deferred Revenue

Changes in the Company’s current deferred

revenue balance for the three months ended March 31, 2022 and the year ended December 31, 2021 were as follows:

(In thousands)

Deferred revenue – beginning of period

Interest income on deferred revenue

Deferred revenue – end of period

Deferred revenue balances primarily consist of

customer deposits on our cultivation and extraction solutions equipment.

As of March 31, 2022 and December 31, 2021, all of the Company’s

deferred revenue balances were reported as current liabilities in our accompanying consolidated balance sheets.

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:

Observable inputs such as quoted

prices for identical assets or liabilities in active markets.

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.

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.

In accordance with ASC Topic 820 “Fair Value

Measurement”, 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,

Observable inputs such as quoted prices for identical assets or liabilities in active markets.

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.

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

3 unchanged sentences

that observable inputs are not available or cost-effective to obtain.

At September 30, 2021 and December 31, 2020, the Company’s

assets and liabilities measured at fair value on a recurring basis were as follows:

September 30, 2021

At March 31, 2022 and December 31, 2021,

the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:

March 31, 2022

December 31, 2021

1 unchanged sentence

Fair Value Measurements Using Input Types

(In thousands)

Mutual funds (included in cash and cash equivalents)

Held to maturity securities-current

Municipal bonds

Corporate bonds

Total held to maturity securities- current

Held to maturity securities-non-current

Corporate bonds

Total held to maturity securities- non -current

Loan receivable

Notes payables, net of discount

Derivative liabilities

Long term debt

Contingent consideration

Total liabilities

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, both current and non-current, are recorded at amortized cost, which at September 30, 2021, approximated

● Loan receivable is recorded at amounts borrowed, which at September 30, 2021, approximated fair value.

● 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 has borrowings of $ 833 and $ 829 as of September 30, 2021

and December 31, 2020, respectively.

The fair value of these borrowings, which are classified as Level 3, approximates their carrying

value at September 30, 2021 as the instrument carries a fixed rate of interest.

Marketable Securities

As of September 30, 2021, the Company held investments in 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 remaining investments are considered non-current assets that the Company intends to hold

longer than 12 months.

The composition of the Company’s cash and

cash equivalents and marketable securities are as follows:

September 30,

Cash and cash equivalents:

Cash deposits

Total cash and cash equivalents

Value of Financial Instruments

The Company has certain financial instruments which consist of cash

and cash equivalents, marketable securities, and contingent consideration.

Fair value information for each of these instruments is as

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 current held-to-maturity securities are recorded at amortized cost, which at March 31, 2022, approximated fair value.

Company’s deferred consideration was recorded in connection with acquisitions during the three months ended March 31, 2022 and

fiscal 2021 using an estimated fair value discount at the time of the transaction.

As of March 31, 2022 and December 31, 2021, the carrying

value of the deferred consideration approximated fair value, respectively.

As of March 31, 2022, the Company held investments

in mutual funds, municipal bonds and corporate bonds.

The Company records mutual funds 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 securities 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.

composition of the Company’s marketable securities are as follows:

(In thousands)

Current marketable securities:

1 unchanged sentence

Corporate bonds

Total current marketable securities

Non-current marketable securities:

Corporate bonds

Total non-current marketable securities

The amortized cost and estimated fair value of held-to-maturity securities

as of September 30, 2021, are as follows:

The amortized cost and estimated fair value of

marketable securities as of March 31, 2022, are as follows:

(In thousands)

Amortized cost

1 unchanged sentence

Estimated fair value

Current marketable securities (due within 1 year)

Current marketable securities:

Municipal bonds

Corporate bonds

Non-current marketable securities (due in 1 year through 5 years)

Corporate bonds

Note 6 — Loan Receivable

Consideration

The Company has classified its net liability for

contingent earn-out considerations to the sellers relating to one acquisition completed during the three months ended March 31, 2022,

and two acquisitions completed during 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 during the three months ended March 31, 2022 and fiscal 2021 are included within Note 14 –

Business Combinations, included elsewhere in the notes to the consolidated financial statements.

The contingent

earn-out payments to the sellers for each acquisition are based on the achievement of certain revenue thresholds.

During the three months

ended March 31, 2022, the Company accrued $ 1.4 million relating to the Lab Society acquisition for contingent consideration recorded from

the initial purchase price accounting.

(In thousands)

Three Months ended

Contingent consideration – beginning of period

Accrued contingent consideration

Change in estimated fair value

Contingent consideration – end of period

The Company included contingent consideration

within accrued expense and other current liabilities in its consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.

6 — Loan Receivable

A portion of the capital raised from the Company’s

2021 public offering has been allocated to launch Agrify’s total turnkey (the “Agrify 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 AVFUs 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 investment in the

Agrify TTK Solution is currently capped at $ 50 million as approved by the Company’s Board of Directors.

As of September 30, 2021,

the Company has committed $ 9,933 to the Agrify TTK Solution for five customers under contract and $ 3,159 to one customer under a non-TTK

IPO has been allocated to launch Agrify’s total turn-key solution (“TTK Solution”) program.

The TTK Solution is industry’s

first end-to-end solution 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 faster and better.

The Company’s initial allowable investment

in the TTK Solution engagements is currently capped at $ 50.0 million, as approved by the Company’s Board of Directors.

31, 2022 and December 31, 2021, the Company has committed $ 32.9 million to the Agrify TTK Solution for five customers under contract and

$ 20.3 million to the Agrify TTK Solution for five customers under contract, respectively.

Of the five parties who have purchased the Agrify

TTK Solution to date, Greenstone Holdings is a related party as of March 31, 2022 and December 31, 2021.

The loan agreements entered into with customers

receiving the Agrify TTK Solution generally provide for loans ranging from approximately $ 200 up to $ 13,500 with maturity dates of approximately

two to three years after the commencement of the first commercial harvest of cannabis from the AVFUs and an interest rate of approximately

20 % per annum.

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 year.

The breakdown of loans receivable by Company as

of September 30, 2021 and December 31, 2020 is as follows:

September 30,

of March 31, 2022 and December 31, 2021 is as follows:

(In thousands)

Company A – Agrify TTK Solution

Company B – Agrify TTK Solution

Greenstone Holdings – TTK Solution – Related Party

Company C – Agrify TTK Solution

2 unchanged sentences

Company F – Non-TTK Solution (1)

Other – Non-TTK Solutions

Total loan receivable

(1) Current portion of loan receivable are included within Note 9 –

Prepaid Expenses and Other Current Receivables, included elsewhere in the notes to the consolidated financial statements.

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 Company B is a VIE.

the Company’s employees own 36.6 % of Company B equity but since the Company is not the primary beneficiary of Company B, the

Company is not required to consolidate Company B.

Note 7 — Prepaid Expenses and Other Receivables

Prepaid Expenses and Other Receivables consisted

of the following as of September 30, 2021 and December 31, 2020:

September 30,

Prepaid materials

customers are a VIE in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation.

on the Company’s analysis, the Company has determined that Greenstone Holdings is a VIE.

As of March 31, 2022, 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

and does not hold significant influence over Greenstone Holdings business decisions, the Company is not required to consolidate Greenstone

7 — Accounts Receivable

Accounts receivable consisted of the following

as of March 31, 2022 and December 31, 2021:

(In thousands)

Accounts receivable, gross

Less allowance for doubtful accounts

Accounts receivable, net

NEIA, a related party, accounted for $ 1.3 million

and $ 3.5 million of the Company’s accounts receivable, net as of March 31, 2022 and December 31, 2021, respectively.

changes in the allowance for doubtful accounts consisted of the following:

(In thousands)

Three Months ended

Allowance for doubtful accounts - beginning of period

Provision for doubtful accounts

Other adjustments

Allowance for doubtful accounts - end of period

Bad debt expense was nil for both the three months ended March 31,

2022 and March 31, 2021.

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.

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 Company’s prepaid inventory is a short-term, non-interest-bearing

asset that is applied to the purchase of products once they are delivered.

Inventory consisted of the following as of March

31, 2022 and December 31, 2021:

(In thousands)

Raw materials

Prepaid inventory

Finished goods

Inventory, gross

Inventory reserves

Total inventory, net

The Company establishes an inventory reserve for

obsolete, slow moving, and defective inventory.

The Company calculates inventory reserves for obsolete, slow moving, or defective items

as the difference between the cost of inventory and its estimated net realizable value.

The reserves are based upon management’s

expected method of disposition.

Changes in the Company’s inventory reserve

are as follows:

(In thousands)

Three Months ended

Inventory reserves – beginning of period

Increase in inventory reserves

Inventory write-offs

Inventory reserves – end of period

Note 9 — Prepaid Expenses and Other Current Receivables

Prepaid expenses and other current receivables consisted of the following

as of March 31, 2022 and December 31, 2021:

(In thousands)

Prepaid insurance

Prepaid marketing

Prepaid software

Prepaid expenses

Other receivables

Note 8 — Property and Equipment, Net

Property and equipment, net consisted of the

following as of September 30, 2021 and December 31, 2020:

September 30,

Prepaid expenses, other

Deferred costs

Deferred issuance costs, net

Other note receivables (1)

Other receivables, other

Total prepaid expenses and other current assets

note receivables relate to the current portion of one of our TTK Solutions loan receivable balances.

10 — Property and Equipment, Net

and equipment, net consisted of the following as of March 31, 2022 and December 31, 2021:

(In thousands)

Computer and office equipment

2 unchanged sentences

Machinery and equipment

Research and development laboratory equipment

Leased equipment at customer

Trade show assets

Total property and equipment, gross

1 unchanged sentence

Construction in progress

Property and equipment, net

Total property and equipment, net

Depreciation expense for the three months ended

September 30, 2021 and 2020 was $ 139 and $ 62 , respectively, and $ 337 and $ 100 during the nine months ended September 30, 2021 and 2020,

respectively.

Note 9 — Capitalized Website Costs, Net

Investments in the Company’s website are amortized over their

estimated useful lives of 3 years.

As of September 30, 2021 and December 31, 2020, amortizable website cost was $ 139 , and accumulated

amortization was $ 79 and $ 48 , respectively.

Amortization expense was $ 10 and $ 12 for the three months ended September 30, 2021 and 2020,

respectively, and $ 31 and $ 32 for the nine months ended September 30, 2021 and 2020, respectively.

Note 10 — Intangible Assets and Goodwill

Acquired 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

There were no such indicators in the three and nine months ended September 30, 2021.

The breakdown of acquisition-related intangible

assets as of September 30, 2021 was as follows:

Relationships

September 30, 2021

March 31, 2022 and 2021 was $ 379 thousand and $ 90 thousand, respectively.

11 — Intangible Assets, Net and Goodwill

The Company records intangible assets initially

at fair value and tests these values 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 three months ended March 31, 2022.

assets, net as of March 31, 2022 was as follows:

Intangible Assets, Gross

Accumulated Amortization

The breakdown of acquisition-related intangible

assets as of December 31, 2020 was as follows:

Relationships

December 31, 2020

Intangible Assets, Net

(In thousands)

Customer Relationships

Acquired developed Technology

Capitalized website costs

assets, net as of December 31, 2021 was as follows:

Intangible Assets, Gross

Accumulated Amortization

Amortization expenses recorded in selling, general and administrative

in the condensed consolidated statements of operations were $ 47 and $ 46 for the three months ended September 30, 2021 and 2020, respectively,

and $ 141 and $ 129 during the nine months ended September 30, 2021 and 2020, respectively.

Estimated amortization expense for the remainder

of 2021 and subsequent years for acquired intangible assets:

Years Ending December 31,

Intangible Assets, Net

(In thousands)

Customer Relationships

Acquired developed Technology

Capitalized website costs

Amortization expense recorded in general and administrative

in the consolidated statements of operations were $ 673 thousand and $ 58 thousand for the three months ended March 31, 2022 and 2021, respectively.

amortization expense for the remainder of 2022 and subsequent years for acquired intangible assets:

Years ending December 31 (In thousands),

Remaining 2022

2027 and thereafter

Goodwill balance as of September

30, 2021 and December 31, 2020 was $ 632 .

Note 11 — Accrued Expenses and Other Current Liabilities

Accrued expenses consisted of the following as

of September 30, 2021 and December 31, 2020:

September 30,

consisted of the following:

(In thousands)

Three Months ended

Goodwill - beginning of period

Goodwill acquired during period

Goodwill purchase accounting adjustment

Goodwill - end of period

12 — Other Non-Current Assets

Other non-current assets consisted of the following

as of March 31, 2022 and December 31, 2021:

(In thousands)

Deferred debt issuance costs, non-current, net

Long-term deferred commissions expense

Security deposits

Total other non-current assets

Note 13 — Accrued

Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following

as of March 31, 2022 and December 31, 2021:

(In thousands)

Accrued acquisition liability (1)

Sales tax payable (2)

Accrued construction costs

Compensation related fees

Accrued professional fees

Accrued warranty expenses

Accrued consulting fees

Compensation related fees

Financing lease liabilities

Operating lease liabilities

Accrued inventory purchases

Other current liabilities

Financing lease liabilities

Accrued non-income taxes

Total accrued expenses and other current liabilities

(1) Accrued acquisition liabilities includes both the contingent consideration

and the value of held back Common Stock associated with the 2022 acquisition of Lab Society and the 2021 acquisitions of Precision, Cascade

and PurePressure.

tax payable primarily represents identified sales and use tax liabilities arising from our acquisition of Precision and Cascade.

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.

14 — Business Combination

of Lab Society

On February 1, 2022,

the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with 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 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

will be released following the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions of the Merger

The Merger Agreement

includes customary post-closing adjustments, representations and warranties and covenants of the parties.

The Owners may become entitled

to additional consideration with a value of up to $ 3.5 million based on the eligible net revenues achieved by the Lab Society business

during the fiscal years ending December 31, 2022 and December 31, 2023, of which 50% will be payable in cash and the remaining 50% will

be payable by issuing shares of Common Stock.

Transaction and related costs, consisting primarily

of professional fees, directly related to the acquisition, totaled approximately $ 28 thousand for the three months ended March 31, 2022.

All transaction and related costs were expensed as incurred and are included in general and administrative expenses.

The Company has prepared purchase price allocations

for the business combination with Lab Society on a preliminary basis.

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 March 31, 2022 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:

(In thousands)

Purchase price consideration:

Estimated closing proceeds

Transaction expenses

Closing buyer shares

Holdback buyer shares

Earn-out consideration

Estimated working capital adjustment

Fair value of total consideration transferred

Total purchase price, net of cash acquired

Fair value allocation of purchase price:

Cash and cash equivalents

Accounts receivable

Prepaid expenses and other current receivables

Right of use assets, net

Property and equipment, net

Prepaid and refundable taxes

Accounts payable, accrued expenses, and other current liabilities

Deferred revenue

Deferred tax liability

Finance lease liabilities, current

Finance lease liabilities, noncurrent

Operating lease liabilities, current

Operating lease liabilities, noncurrent

Acquired intangible assets

Total purchase price

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:

(In thousands)

Identified intangible assets:

Acquired developed technology

Customer relationships

Total identified intangible assets

The Company’s initial fair value estimates

related to the various identified intangible assets of Lab Society 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.

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 Lab Society included

in the consolidated statement of operations from the acquisition date of February 1, 2022 to March 31, 2022 was $ 1.5 million.

of Precision and Cascade

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 in cash, 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 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 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 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.

During the fourth quarter of 2021, the fair value of the contingent earn-out consideration totaled

$ 5.4 million based on Sinclair Members achieving certain revenue targets.

Transaction and related costs, consisting primarily

of professional fees, directly related to the acquisition, totaled approximately $ 38 thousand for the three months ended March 31, 2022.

All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.

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 measurement period (up to one year from the acquisition date).

following table sets forth the components and the allocation of the purchase price for the business combination:

(In thousands)

Purchase price consideration:

Cash paid to Sinclair Members at close

Cash contributed to escrow accounts at close

Cash paid for excess net working capital

Stock issued at close

Fair value of contingent consideration to be achieved

Fair value of total consideration transferred

Total purchase price, net of cash acquired

Fair value allocation of purchase price:

Cash and cash equivalents

Accounts receivable

Prepaid expenses and other current receivables

Property and equipment, net

Right of use assets, net

Capitalized web costs, net

Accounts payable and accrued expenses

Deferred revenue

Long-term debt

Operating lease liabilities, current

Operating lease liabilities, noncurrent

Acquired intangible assets

Total purchase price

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:

(In thousands)

Identified intangible assets:

Acquired developed technology

Non-compete agreements

Customer relationships

Total identified intangible assets

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.

Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed.

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 Common Stock (the “Buyer Shares”);

and (c) the Earn-out Consideration (as defined below), to the extent

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 will be released following the twelve-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 Common Stock (collectively, the “Earn-out Consideration”).

Transaction and related costs, consisting primarily

of professional fees, directly related to the acquisition, totaled approximately $ 562 thousand for the three months ended March 31, 2022.

All transaction and related costs were expensed as incurred and are included in 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 March 31, 2022

include values assigned to identifiable intangible assets and goodwill.

following table sets forth the components and the allocation of the purchase price for the business combination:

(In thousands)

Purchase price consideration:

Estimated closing proceeds

Indebtedness paid

Transaction expenses

Closing buyer shares

Holdback buyer shares

Earn-out consideration

Estimated working capital adjustments

Fair value of total consideration transferred

Total purchase price, net of cash acquired

Fair value allocation of purchase price:

Cash and cash equivalents

Accounts receivable, net

Property and equipment, net

Right of use assets, net

Prepaid expenses and other current receivables

Other non-current assets

Accounts payable and accrued expenses

Deferred revenue

Operating lease liabilities, current

Operating lease liabilities, noncurrent

Finance lease liabilities, current

Finance lease liabilities, noncurrent

Notes payable, current

Notes payable, noncurrent

Acquired intangible assets

Total purchase price

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:

(In thousands)

Identified intangible assets:

Acquired developed technology

Customer relationships

Total identified intangible assets

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.

Note 15 – Debt

The Company’s debt consisted of:

Note payable – SPA Note

Other notes payable (1)

unamortized debt discount

Total debt, net of debt discount

current portion, net of current unamortized debt discount

Long-term debt

(1) Other notes payable relates

to one-year insurance premium that was financed over nine-months.

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 the Company agreed to issue and sell to the Investor, in a private placement transaction, in

exchange for the payment by the Investor of $65 million, less applicable expenses, as set forth in the Securities Purchase Agreement,

(i) a SPA Note in an aggregate principal amount of $65 million, and (ii) a warrant (the “SPA Warrant”) to purchase

up to an aggregate of 6,881,108 shares of Common Stock.

The SPA Note is 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 SPA Note on the first day of each calendar month starting on February 1,

2023 and extending through the maturity date of March 1, 2026 (the “Maturity Date”), at which time all remaining outstanding

principal and accrued but unpaid interest will be due.

The SPA Note has a stated interest rate of 6.75% per year, and the Company is required

to pay interest on March 1, June 1, September 1, and December 1 of each calendar year through the Maturity Date.

Following the one-year

anniversary of the SPA Note’s issuance, the Company may, in lieu of paying interest in cash, pay such interest in kind, in which

case interest on the SPA Note will be calculated at the rate of 8.75 % per year and will be added to the principal amount of the SPA Note.

At any time following

the one-year anniversary of the SPA Note’s issuance, the Company may prepay all (but not less than all) of the SPA Note by redemption

at a price equal to 106.75 % of the then-outstanding principal amount under the SPA Note, plus accrued but unpaid interest.

will also have the option of requiring the Company to redeem the SPA Note if the Company undergoes a fundamental change at a price equal

to 107 % of the then-outstanding principal amount under the SPA Note, plus any accrued interest.

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 for up to 65 % of such principal amount

divided by the closing price of Common Stock on the trading day immediately prior to such subsequent closing.

The SPA Note imposes

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 SPA Note occurs, the Investor can elect to redeem the SPA Note for cash equal to 115 % of the then-outstanding principal amount

of the SPA Note (or such lesser principal amount accelerated by the Investor), plus accrued and unpaid interest, including default interest,

which accrues at a rate per year equal to 15 % from the date of a default or event of default.

Until the date the SPA

Note is fully repaid, the Investor has, subject to certain exceptions, the right to participate for up to 30 % of any debt, Preferred Stock

or equity-linked financing of the Company or its subsidiaries.

Each SPA Warrant issued

in the initial closing has an exercise price of $ 6.75 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends

and similar transactions, is immediately exercisable, has a term of five and one-half years from the date of issuance and is exercisable

on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the

SPA Warrant (the “SPA Warrant Shares”), in which case the SPA Warrant is also 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 SPA Warrant Shares as soon as practicable and in any event within 45 days following the initial closing and any subsequent closings.

The SPA Warrant provides

that in no event will the number of shares of Common Stock issued upon exercise of the SPA Warrant result in the Investor’s beneficial

ownership exceeding 4.99% of 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

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 SPA Note and the SPA Warrant.

The following table provides

a breakdown of the note payable balances as of March 31, 2022:

(In thousands)

Direct issuance costs

Accrued interest expense

Notes payable, discount

Net carrying amount

The following table summarizes

short-term and long-term portion of the SPA Note as of March 31, 2022:

(In thousands)

Direct issuance costs

Unamortized discount

Net carrying amount

As of March 31, 2022, future minimum payments were as follows:

Years ending December 31 (In thousands),

Remaining 2022

Total future payments

Paycheck Protection Program Loan

Protection Program Loans under the Coronavirus Aid, Relief, and Economic Security Act

In May 2020, the Company entered into a PPP Loan

with Bank of America pursuant to the PPP under the CARES Act administered by the SBA.

The Company received total proceeds of approximately

$ 779 thousand from the unsecured PPP Loan, which is scheduled to mature on May 7, 2022.

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.

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

As of March 31, 2022 and December 31, 2021, all of our PPP Loan balances were reported as current portion of long-term debt in

the accompanying consolidated balance sheets.

As part of the acquisition of PurePressure, $ 159

thousand of debt remained outstanding from a standard SBA loan as of December 31, 2021.

This debt has subsequently been paid as a part

of the PurePressure acquisition.

Note 16 — 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 .

of Directors and shareholders approved the amendment to the conversion formula of the Convertible Promissory Notes (the “Convertible

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 Convertible 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

2 unchanged sentences

for the conversion feature changed because of the amendment, the Company applied extinguishment accounting pursuant to its accounting

Accordingly, the Company recognized a gain on extinguishment of $ 2,685 in connection with the derecognition of the net carrying

amount of the extinguished debt of $ 19,654 (inclusive of $ 13,100 of principal, $ 7,141 of derivative liabilities, less $ 587 of debt discount)

and the recognition of the $ 16,969 fair value of the new convertible notes (including the same principal amount of $ 13,100 plus the $ 3,869

Accordingly, 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 $ 19.6 million

(inclusive of $ 13.1 million of principal, $ 7.1 million of derivative liabilities, less $ 587 thousand of debt discount) and the recognition

of the $ 16.9 million fair value of the new convertible notes (including the same principal amount of $ 13.1 million plus the $ 3.8 million

fair value of the beneficial conversion feature).

On February 1, 2021, in conjunction with the

closing of the Company’s IPO, the Notes in the aggregate principal amount of $ 13,100 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.

On February 1, 2021, in conjunction with the closing

of the Company’s IPO, the Convertible 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 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 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 million.

Amendment of Conversion Formulas

authorized number of shares of Common Stock to 53,000,000 , consisting of:

50,000,000 shares of Common Stock, and 3,000,000 shares of Preferred

At that time, it also designated 100,000 shares of the 3,000,000 authorized shares of Preferred Stock, as Series A Convertible

Preferred Stock (“Series A Preferred Stock”).

A Convertible Preferred Stock

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.

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.

of Directors approved the amendment to the conversion formula of the Series A Preferred Stock and Convertible Notes.

After the amendment:

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

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

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);

immediately prior to the consummation of a public transaction, the outstanding principal amount of the Convertible 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 Convertible 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).

January 11, 2021, the Company’s shareholders approved the amendment to the Series A Preferred Stock.

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.

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 million, after deducting underwriting discounts and estimated offering expenses.

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:

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.

Issuance of Common Stock in Connection with the Acquisition of HMH

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 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.

Subsequent Public Offering

IPO, all outstanding shares of Series A Preferred Stock and Convertible 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.

Public Offering

On February 19, 2021, the Company consummated

10 unchanged sentences

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.

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

As of September 30, 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 these stock options to the 2020 Plan, as more fully described below.

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.

to 6,388,888 shares and the total net proceeds received in connection with the February Offering to approximately $ 80.0 million, after

deducting underwriting discounts and estimated offering expenses.

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 “SA Shares”) of 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 “SA

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

SA Warrants are exercisable six months from issuance.

Each Pre-Funded Warrant was 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.

The institutional investor that received the Pre-Funded Warrants

fully exercised such warrants in March 2022.

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 essentially

the same terms as other investors, except for having a combined purchase price of $ 6.90 per share.

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 SA Warrants.

Issuance of Common Stock in

Connection with Acquisitions

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 14 – 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 14 – Business Combinations, included elsewhere in the notes to the consolidated

financial statements.

On February 1, 2022, the Company issued an aggregate

of 297,929 shares of its Common Stock to the Lab Society shareholders in connection with the Company’s acquisition of Lab

Refer to Note 14 – Business Combinations, included elsewhere in the notes to the

consolidated financial statements.

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 will be deemed to have been issued under the 2020 Plan solely to the extent actually issued and delivered pursuant to

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.

On January 24, 2021, the Company’s Board

of Directors approved grants of options to purchase an aggregate of 144,360 shares of common stock to its directors.

The options will

expire 10 years from the date of grant and have an exercise price per share of $4.86.

25% of the options vest 12 months following issuance

and the balance vests in 36 equal monthly installments thereafter.

On February 17, 2021, the Company’s Board

of Directors approved grants of options to purchase an aggregate of 1,050,000 shares of common stock to its directors and employees.

The options will expire 10 years from the date of grant and have an exercise price per share of $13.84.

The options vest in 36 equal

monthly installments from the date of grant.

On February 18, 2021, the Company’s Board

of Directors approved grants of options to purchase an aggregate of 10,000 shares of common stock to members of the Company’s Board

The options will expire 10 years from the date of grant and have an exercise price per share of $14.49.

The options were

fully vested on the date of grant.

On May 16, 2021, the Company’s Board of

Directors approved grants of options to purchase an aggregate of 219,083 shares of common stock to its employees.

The options will expire

10 years from the date of grant and have an exercise price per share of $7.68.

33.3% of the options vest 12 months following issuance

and the balance vests in 24 equal monthly installments thereafter.

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 Stock Option Plan (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

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 anniversary of the date on which it is adopted by the Board of Directors.

The Company’s stock option compensation

expense was $ 941 and $ 200 for the three months ended September 30, 2021 and 2020, respectively, and $ 4,007 and $ 803 for the nine months

ended September 30, 2021 and 2020, respectively.

There was $ 8,696 of total unrecognized compensation cost related to unvested options

granted under the Company’s options plans as of September 30, 2021.

expense was $ 953 thousand and $ 2.1 million for the three months ended March 31, 2022 and 2021, respectively, and there was $ 3.4 million

of total unrecognized compensation cost related to unvested options granted under the Company’s options plans as of March 31, 2022.

This stock option expense will be recognized through 2025.

4 unchanged sentences

value of the underlying Common Stock.

No stock options were granted during the three months ended March 31, 2022.

The following table summarizes the Company’s

assumptions used in the valuation of options granted during the nine months ended September 30, 2021:

assumptions used in the valuation of options granted during the year ended December 31, 2021:

Risk-free interest rate

3 unchanged sentences

Forfeiture rate

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.

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.

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.

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,

1 unchanged sentence

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

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.

As of September 30, 2021, there were 404,041 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 nine months ended September 30, 2021 and 2020:

assumption is based primarily on its employee turnover 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.

Stock Option Activity

As of March 31, 2022, there were 516,033 shares

of Common Stock 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 three months ended March 31, 2022 and 2021:

(In thousands, except share and per share data)

Weighted-Average

Options outstanding at January 1, 2021

Options outstanding at September 30, 2020

Options outstanding at March 31, 2021

Options outstanding at January 1, 2022

Options outstanding at September 30, 2021

Options vested and exercisable as of September 30, 2020

Options vested and exercisable as of September 30, 2021

Options outstanding at March 31, 2022

Options vested and exercisable as of March 31, 2022

Options vested and expected to vest as of March 31, 2022

The following table summarizes information about

options vested and exercisable at September 30, 2021:

options vested and exercisable at March 31, 2022:

Options Vested and Exercisable

4 unchanged sentences

The following table summarizes information about

options expected to vest after September 30, 2021:

expected to vest

options expected to vest after March 31, 2022:

Options Vested and Expected to Vest

Weighted-Average

Remaining Contractual

Weighted-Average

Exercise Price

As of March 31, 2022, warrants to purchase

10,156,052 shares of Common Stock were outstanding.

The following table presents the Company’s warrant activity for the three

months ended March 31, 2022 and 2021:

Weighted-Average

Exercise Price

Warrants outstanding at December 31, 2020

Warrants outstanding at March 31, 2021

Warrants outstanding at December 31, 2021

( 1,583,288 )

Warrants outstanding at March 31, 2022

The Company received proceeds from the exercise

of warrants of less than $ 1 thousand and $ 5 thousand during the three months ended March 31, 2022 and March 31, 2021, respectively.

Note 18 — Employee Benefit Plan

The Company maintains an employee’s savings

and retirement plan under Section 401(k) of the Internal Revenue Code.

Company maintains an employee’s savings and retirement plan under Section 401(k) of the Internal Revenue Code (the “401k

All full-time U.S.

employees become eligible to participate

The Company’s contribution to the plan is discretionary and during the three and nine months ended September 30, 2021

and 2020, the Company did not contribute to the plan.

employees become eligible to participate in the 401k Plan.

The Company’s contribution to the 401k

Plan is discretionary.

During the three months ended March 31, 2022 and 2021, the Company did not contribute to the 401k Plan.

Note 19 — Income Taxes

The Company’s effective income tax rate

was 2.0 % and 0.0 % for the three months ended March 31, 2022 and 2021, respectively.

The provision for (benefit from) income

taxes was approximately $( 200 ) thousand and $0 for the three months ended March 31, 2022 and 2021, respectively.

The difference between

the Company’s effective tax rates for the 2022 and 2021 periods and the U.S.

statutory tax rate of 21 % was primarily due a valuation

allowance recorded against certain deferred tax assets.

The change in the provision for (benefit from) income taxes for the three months

ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to a discrete income tax benefit of approximately

$( 200 ) thousand recorded during the first quarter of 2022, which is attributable to a non-recurring partial release of the Company's U.S.

valuation allowance as a result of the Lab Society acquisition.

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:

loss per share calculations for all periods have been adjusted to reflect the Company’s Reverse Stock Split.

Net loss per share

was calculated based on the weighted-average number of its Common Stock then outstanding.

net loss per share is calculated using the weighted-average number of Common Stock 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.

components of basic and diluted net loss per share were as follows:

Three Months ended

September 30,

Nine Months ended

September 30,

(In thousands, except share and per share data)

Net loss attributable to Agrify Corporation

3 unchanged sentences

Net loss per share attributable to Common Stockholders – basic and diluted

As of September 30, 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.

shares shown represent the number of shares of common stock which would be issued upon conversion in the respective years shown

September 30,

of March 31, 2022 and 2021, 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:

Three months ended

Options outstanding

1 unchanged sentence

Note 21 — Commitments and Contingencies

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.

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 (ROU) assets and current

and non-current lease liabilities in the Company’s consolidated balance sheets.

Current lease liabilities were classified as a component

of accrued expenses and other current liabilities.

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

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

1 unchanged sentence

value of its lease liabilities.

At September 30, 2021, the Company’s weighted average discount rate utilized for its leases was

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.

During the six months ended June 30, 2021, the Company entered into several leases for premises in

Georgia and one office space lease in Billerica, Massachusetts.

Those leases had terms of more than a year and were accounted as operating

On February 5, 2021, the Company executed a

sixty-three-month lease for office spaces in Billerica, MA.

The Company spent $ 205 on leasehold improvements and began occupying the

space beginning June 1, 2021, which is when the lease commenced.

The minimum lease liability for the initial lease term amounts

to $ 530 (base lease and other operating fees).

The Company has an option to extend the initial lease term by an additional five-year

Additional information of the Company’s

lease activity, for the three and nine months ended September 30, 2021 and 2020, is as follows:

Three Months ended

September 30,

Nine Months ended

September 30,

Operating lease cost

Finance lease cost:

Amortization of right-of-use assets

Interest on lease liabilities

Short-term lease cost

Total lease cost

September 30,

At March 31, 2022, the Company’s weighted-average discount rate utilized for its leases was 7.32 %.

a contract contained lease and non-lease elements, both were accounted as a single lease component.

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.

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 on the Company’s

lease activity, for the three months ended March 31, 2022 and 2021, is as follows:

of right-of-use assets

on lease liabilities

Weighted-average remaining lease term – operating leases

2 unchanged sentences

Weighted-average discount rate – finance leases

September 30,

(In thousands)

Right-of-use assets, net

5 unchanged sentences

Total finance lease liabilities

As of September 30, 2021, the maturities of lease

liabilities under non-cancellable finance leases were as follows:

For the year ending December 31,

Maturities of operating and finance lease liabilities

as of March 31, 2022 are as follows:

Years ending December 31 (In thousands),

Remaining 2022

Total minimum lease payments

7 unchanged sentences

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.

their partial ownership of TriGrow Systems, LLC which had been acquired by the Company.

The demand letter asserts that Messrs.

and Weinstein 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.

2 unchanged sentences

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.

The plaintiffs are seeking relief in the form of monetary damages in an

amount to be determined.

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.

The Company does not believe these claims

have any merit and intend to vigorously defend against them.

rescission of his previously executed Release of Claims Agreement.

On March 10, 2021, the Company moved to dismiss all Messrs.

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 Messrs.

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.

a separate arbitration in Boston, Massachusetts against Messrs.

Cooper and Weinstein, in which the Company alleges that Messrs.

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 claim for indemnification

relates to conduct by Messrs.

Cooper and Weinstein during the time they were TriGrow employees.

The Company does not believe these claims

have any merit, and intends to vigorously defend its position.

Supply Agreement with Mack Molding Co.

1 unchanged sentence

supply agreement with Mack Molding Co.

(“Mack”) pursuant to which Mack will become a key supplier of AVFUs.

(“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 AVFUs during 2021.

In September 2021, the Company increased the purchase order with Mack to approximately $ 11.5 million towards production of AVFUs during

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.

2 unchanged sentences

The supply agreement contemplates that, following an introductory

period, the Company will negotiate a minimum percentage of the AVFU requirements that the Company will purchase from Mack each year based

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.

3 unchanged sentences

this approach will result in both parties making a more informed decision with respect to the pricing and other terms of the supply agreement

Agreements with Related Parties

September 7, 2019, the Company entered into a distribution agreement with Bluezone Products, Inc.

(“Bluezone”) for distribution

rights to the Bluezone products with certain exclusivity rights.

The agreement requires minimum purchases amounting to $ 480 and $ 600

for the first and second contract anniversary years.

Distribution Agreements with Related Party

On September 7, 2019, the Company entered into

a distribution agreement with Bluezone Products, Inc.

(“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 $ 532 of the committed $ 660 second year purchases through September

Bluezone is a related party to the Company.

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 , for the year ended December 31, 2022 for $ 750 , and for the year ended December 31, 2023 for $ 1,125 , which

amount may increase by 3 % for the later years.

The Company had $40 purchases of Enozo product during the nine months ended September

30, 2021, compared to null for the nine months ended September 30, 2020.

Enozo is a related party to the Company.

Committed Purchase Agreement with Related Party

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 and $ 607 per unit of 4D products until

December 31, 2020.

The amended agreement requires minimum purchases of $ 582 per unit with a final payment of approximately $ 864 paid

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 September

Related Parties

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.

following table describes the net purchasing (sales) activity with entities identified as related parties to the Company:

September 30,

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.

is a related party to the Company.

Committed Purchase Agreement with 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 it was terminated upon signing the purchase agreement

for the 239 VFUs.

There is no remaining obligation under the lease agreement.

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:

Three Months ended

(In thousands)

Cannae Policy Group

Topline Performance Group

Greenstone Holdings

Valiant Americas, LLC

Living Greens Farm

following table summarizes net related party (payable) receivable as of September 30, 2021 and December 31, 2020:

September 30,

(1) Purchases from 4D for the three months ended March 31, 2021 include $ 384 thousand for a down payment on inventory orders.

The following table summarizes net related party

(payable) receivable as of March 31, 2022 and December 31, 2021:

(In thousands)

Cannae Policy Group

Greenstone Holdings

Living Greens Farm

Valiant Americas, LLC

Subsequent Event

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 “Members”).

On October 1, 2021, the Company consummated the transactions contemplated by the Purchase Agreement (the

“Precision-Cascade Acquisition”).

of Cascade and Precision;

Purchase Consideration

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 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.

Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties.

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 Members, exceed $ 65 million.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements