What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-16 compared with 2021-11-12 · 755 added, 417 removed, 50 unchanged (96% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year

ended December 31, 2020 filed with the Securities and Exchange Commission on April 2, 2021 (the “Form 10-K”) and presumes

that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results

of Operations” and other information contained in such Form 10-K.

The following discussion and analysis also should be read together

with our financial statements and the notes to the financial statements included elsewhere in this Form 10-Q.

following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the

Private Securities Litigation Reform Act of 1995.

Such statements appear in a number of places in this Report, including, without limitation,

“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees

of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control.

Forward-looking

statements speak only as of the date of this quarterly report.

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

The information contained in this Quarterly

Report on Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31,

2021 filed with the Securities and Exchange Commission on March 31, 2022 (the “Form 10-K”) and presumes that readers have

access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

and other information contained in such Form 10-K.

The following discussion and analysis also should be read together with our financial

statements and the notes to the financial statements included elsewhere in this Quarterly Report on Form 10-Q.

The following discussion contains certain statements

that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis

of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks,

uncertainties and requirements that are difficult to predict or are beyond our control.

Forward-looking statements speak only as of the

date of this quarterly report.

You should not put undue reliance on any forward-looking statements.

strongly encourage investors to carefully read the factors described in our Form 10-K in the section entitled “Risk Factors”

in the Form 10-K for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking

We strongly encourage investors to

carefully read the factors described in our Annual Report on Form 10-K in the section entitled “Risk Factors” in the Annual

Report on Form 10-K for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking

We assume no responsibility to update the forward-looking statements contained in this Quarterly Report on Form 10-Q.

following should also be read in conjunction with the unaudited financial statements and notes thereto that appear elsewhere in this

as otherwise indicated herein or as the context otherwise requires, references in this quarterly report to “we,” “us,”

“our,” “Company,” and “Agrify” refer to Agrify Corporation, a Nevada corporation.

described elsewhere in this report, all share and per share amounts set forth below have been presented on a retroactive basis to reflect

a 1-for-1.581804 reverse stock split of our outstanding common stock implemented on January 12, 2021.

amounts are in thousands unless otherwise specified, except share and per share data.

are a developer of highly advanced and proprietary precision hardware and software grow solutions for the indoor agriculture marketplace

and provide equipment and solutions for extraction, post-processing, and testing for the cannabis and hemp industry.

We believe we are

the only company with an automated and fully integrated grow solution in the industry.

We believe our Agrify “Precision Elevated™”

cultivation solution is vastly differentiated from anything else on the market in that it combines our seamlessly integrated hardware

and software offerings with a wide range of associated services such as consulting, engineering, and construction to form what we believe

is the most complete solution available from a single provider.

The totality of our product mix and service capabilities forms an unrivaled

ecosystem in what has historically been an extremely fragmented market.

As a result, we believe we are well situated to create a dominant

market position in the indoor agriculture sector.

We have seven wholly-owned subsidiaries, AGM Service

Corp LLC (formerly AGM Service Corp Inc.), TriGrow Systems, LLC (“TriGrow”, which acted as our 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 our 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).

We also own 50% of Teejan Podponics International

LLC (“TPI”) since December 2018;

60% of Agrify-Valiant, LLC, formed in December 2019;

and 75% of Agrify Brands, LLC (formerly

TriGrow Brands, LLC, which was acquired as part of the January 2020 acquisition of TriGrow).

For further details about the January 2020

and July 2020 acquisitions please refer to our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S.

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

On February 1, 2021, we completed an initial public

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

and commissions.

On February 4, 2021, we 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.

In connection with the IPO, we granted the underwriters warrants

to purchase an aggregate of 186,300 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 (equal to 125% of the IPO price).

The exercise of the over-allotment option brought the

total number of shares of common stock sold by us in the IPO to 6,210,000 shares and the total net proceeds received by us to approximately

$57 million, after deducting underwriting discounts and commissions and estimated offering expenses.

On February 19, 2021, we consummated a secondary

public offering (the “February Offering”) of 5,555,555 shares of our common stock at a price of $13.50 per share, less certain

underwriting discounts and commissions.

On March 22, 2021, we closed on the sale of an additional 833,333 shares of common stock on the

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

In connection with the February Offering,

we granted the underwriters warrants to purchase an aggregate of 191,667 shares of common stock (equal to 3% of the aggregate number of

shares of common stock issued in the February Offering) at an exercise price of $16.875 per share (equal to 125% of the February Offering).

The exercise of the over-allotment option brought the total number of shares of common stock sold by us in the February Offering to 6,388,888

shares and the total net proceeds received by us to approximately $80 million, after deducting underwriting discounts and commissions

and estimated offering expenses.

On September 14, 2021, we entered into a letter

agreement and waiver (the “Letter Agreement”), to amend the terms of our underwriting agreement with the representative of

the underwriters in the IPO.

Pursuant to the Letter Agreement, the representative agreed to waive the right of first refusal included

in the underwriting agreement in consideration of (i) a cash payment to the representative of $2.4 million;

and (ii) the right to participate

as a co-manager with ten percent (10%) of the economics with respect to our next public offering of securities, payable in cash upon the

closing of such offering.

A Convertible Preferred Stock

in the first quarter of 2020, we issued an aggregate of 60,000 shares of our Series A Convertible Preferred Stock, or Series A Preferred

Stock, for an aggregate purchase price of $6 million.

In May 2020, we completed our offering of Series A Preferred with the issuance

of an additional 40,000 shares of Series A Preferred for an aggregate purchase price of $4 million.

All outstanding shares of Series

A Preferred Stock automatically converted immediately prior to the closing of our IPO into 1,373,038 shares of common stock at a conversion

price of $7.72 per share.

Coronavirus (“COVID-19”) Pandemic

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 risk.

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

The extent and

duration of the COVID-19 impact, on our operations and financial position 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.

We continue to service our customers amid uncertainty and

disruption linked to COVID-19 and are actively managing our business to respond to the impact.

preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management

to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and

liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

results could differ from those estimates.

Significant estimates include assumptions about collection of accounts and notes receivable,

the valuation and recognition of stock- based compensation expense, valuation allowance for deferred tax assets and useful life of fixed

assets and intangible assets.

Accounting Policies and Significant Judgments and Estimates

management’s discussion and analysis of our financial position and results of operations is based on our financial statements,

which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.

The preparation

of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the

financial statements and accompanying notes.

On an ongoing basis, we evaluate estimate, which include estimates related to accruals,

stock-based compensation expense, and reported amounts of revenues and expenses during the reported period.

We base our estimates on

historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances.

Actual results may differ materially from those estimates or assumptions.

accordance with Topic 606, we account for a customer contract when both parties have approved the contract and are committed to perform

their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial

substance, and it is probable that we will collect substantially all of the consideration to which we are entitled.

Revenue is recognized

when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer.

generate revenue from the following sources:

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

sell our equipment and services to customers under a combination of a contract and purchase order.

Equipment revenue includes sales from

proprietary products designed and engineered by us such as vertical farming units, 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.

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 for 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.

generally provide 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,

we accrue for product warranties when the loss is probable and can be reasonably estimated.

At September 30, 2021, we had no product

warranty accrual our de minimis historical financial warranty experience.

for Stock-Based Compensation

follow the provisions of ASC Topic 718, “Compensation — Stock Compensation.” ASC Topic 718 establishes standards surrounding

the accounting for transactions in which an entity exchanges its equity instruments for goods or services.

ASC Topic 718 focuses primarily

on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as options issued

under our Stock Option Plans.

fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model.

This model incorporates certain

assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option

life and expected volatility in the market value of the underlying common stock.

Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions

and are fully transferable.

In addition, option valuation models require the input of highly subjective assumptions including the expected

stock price volatility.

Because our stock options and warrants have characteristics different from those of 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 our history of having never issued a dividend and management’s current expectation of future action surrounding

We calculate the expected volatility of the stock price based on the corresponding volatility of our peer group stock price

for a period consistent with the underlying instrument’s expected term.

The expected lives for such grants were based on the simplified

method for employees and directors.

arriving at stock-based compensation expense, we estimate the number of stock-based awards that will be forfeited due to employee turnover.

Our forfeiture assumption is based primarily on its turn-over historical experience.

If the actual forfeiture rate is higher than the

estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease

to the expense recognized in our financial statements.

If the actual forfeiture rate is lower than the estimated forfeiture rate, then

an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized in our financial

The expense we recognize in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly

from amounts recognized in the current period.

is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed

following should also be read in conjunction with the unaudited financial statements and notes thereto that appear elsewhere in this report.

Except as otherwise indicated herein or as

the context otherwise requires, references in this quarterly report to “we,” “us,” “our,” “Company,”

and “Agrify” refer to Agrify Corporation, a Nevada corporation.

We are a developer of proprietary precision hardware

and software grow solutions for the indoor commercial agriculture industry and provides equipment and solutions for cultivation, extraction,

post-processing, and testing for the cannabis and hemp industries.

We believe we are the only company with an automated and fully integrated

grow solution in the industry.

Our Agrify “Precision Elevated™” cultivation solution seamlessly combines our integrated

hardware and software offerings with a broad range of associated services including consulting, engineering, and construction and is designed

to deliver the most complete commercial indoor farming solution available from a single provider.

The totality of our product offerings

and service capabilities forms an unrivaled ecosystem in what has historically been a highly fragmented market.

As a result, we believe

we are well situated to create a dominant market position in the indoor agriculture sector.

Agrify Corporation was incorporated in the state

of Nevada on June 6, 2016, originally incorporated as Agrinamics, Inc.

(or “Agrinamics”).

On September 16, 2019, Agrinamics

amended its articles of incorporation to reflect a name change to Agrify Corporation.

Our corporate headquarters are located in Billerica,

Massachusetts.

We also lease properties located within various geographic regions in which we conduct business, including Colorado, Georgia,

Massachusetts, Michigan, and Oregon.

Reverse Stock Split

On January 12, 2021, we effected a 1-for-1.581804

reverse stock split on our Common Stock.

All share and per share information has been retroactively adjusted to give effect to the reverse

stock split for all periods presented, unless otherwise indicated.

Recent Business Developments

Private Placement

On January 25, 2022,

we entered into a Securities Purchase Agreement (the “Securities Agreement”) with an institutional investor and other accredited

investors for the sale by us of (i) 2,450,350 shares (the “SA Shares”) of the our 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 is exercisable into one share of Common Stock at a price

per share of $0.001 (as adjusted from time to time in accordance with the terms thereof).

Each Common Warrant is exercisable into one

share of Common Stock at a price per share of $7.48 (as adjusted from time to time in accordance with the terms thereof) and will expire

on the fifth anniversary of the initial exercise date.

The institutional investor that received the Pre-Funded Warrants fully exercised

such warrants in March 2022.

Raymond Chang, our Chairman and Chief Executive

Officer, and Stuart Wilcox, a member of our Board of Directors, participated in the private placement on essentially the same terms as

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

The gross proceeds to us from the private placement were

approximately $27.3 million, before deducting the placement agent’s fees and other offering expenses, and excluding the proceeds,

if any, from the exercise of the SA Warrants.

Acquisition of Lab Society

On February 1, 2022,

we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with LS Holdings Corp.

(“Lab Society”),

Lab Society NewCo, LLC, a newly formed wholly-owned subsidiary of the Company (“Merger Sub”), Michael S.

Owner Representative thereunder, and each of the shareholders of Lab Society (collectively, the “Owners”), pursuant to which

we agreed to acquire Lab Society.

Concurrently with the execution of the Merger Agreement, we consummated the merger of Lab Society with

and into Merger Sub, with Merger Sub surviving such merger as a wholly-owned subsidiary of the Company (the “Lab Society Acquisition”).

The aggregate consideration

for the Lab Society Acquisition consisted of:

(a) $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness

of Lab Society at closing;

(b) 425,611 shares of Common Stock (the “Buyer Shares”);

and (c) the Earn-out Consideration (as

defined below), to the extent earned.

We 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 us and any claim for indemnification or payment of damages to which we may be entitled under the Merger Agreement.

Lab Buyer Shares shall be released following the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions

of the Merger Agreement.

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.

The purchase price allocation for the business

combination has been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available

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

The estimated fair value at acquisition is $7.9 million

and may be adjusted upon further review of the values assigned to identifiable intangible assets and goodwill.

Our initial fair value estimates related to the

various identified intangible assets were determined under various valuation approaches including the Income Approach, Relief-from-Royalty

Method, and Discounted Cash Flow Method.

These valuation methods require management to project revenues, operating expenses, working capital

investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average

cost of capital to be used as a discount rate.

We amortize our intangible assets assuming no residual value over periods

in which the economic benefit of these assets is consumed.

Securities Purchase Agreement

2022, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with an accredited investor (the

“Investor”), pursuant to which, among other things, we agreed to issue and sell to the Investor, in a private placement transaction

(the “Private Placement”), in exchange for the payment by the Investor of $65 million, less applicable expenses as set

forth in the Securities Purchase Agreement, (i) a senior secured promissory note in an aggregate principal amount of $65 million

(the “SPA Note”), and (ii) a warrant (the “SPA Warrant”) to purchase up to an aggregate of 6,881,108 shares

of Common Stock.

Historically,

for all periods prior to our IPO, the fair values of the shares of common stock underlying our share-based awards were determined on

each grant date by our board of directors.

Given the absence of a public trading market for our common stock, our board of directors

exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair

value of our common stock, including our stage of development;

the rights, preferences and privileges of our convertible preferred stock

relative to those of our common stock;

our financial condition and operating results, including our levels of available capital resources;

equity market conditions affecting comparable public companies;

market conditions;

and the lack of marketability of our

common stock.

Valuations of our common stock were prepared by an unrelated third-party valuation firm in accordance with the guidance

provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities

Issued as Compensation.

our valuation performed on March 20, 2020, and September 14, 2020, we used the income and market methods to estimate our enterprise value

under various financing scenarios based on the discounted cash flow approach and a market approach of comparable peer public companies.

The estimated enterprise value under each method was then allocated to the common stock, discount for lack of marketability was applied,

and the resulting value of common stock was probability-weighted across the various financing scenarios to determine the fair value of

common stock.

assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application

of management’s judgment.

As a result, if we had used different assumptions or estimates, the fair value of our common stock and

our stock-based compensation expense could have been materially different.

of Operations

of the Three and Nine Months Ended September 30, 2021 and 2020

following table summarizes our results of operations for the three and nine months ended September 30, 2021, as compared to the three

and nine months ended September 30, 2020:

will be a senior secured obligation of us and ranks senior to all indebtedness of us.

We will be required to make amortization payments

equal to 4.0% of the original principal amount of the SPA Note on the first day of each calendar month starting on February 1, 2023

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

and accrued but unpaid interest will be due.

The SPA Note has a stated interest rate of 6.75% per year, and we will be required to

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

the one-year anniversary of the SPA Note’s issuance, we may, in lieu of paying interest in cash, pay such interest in kind, in which

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

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

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

will also have the option of requiring us to redeem the SPA Note if we undergo a fundamental change at a price equal to 107% of the

then-outstanding principal amount under the SPA Note plus any accrued interest thereon.

The Securities

Purchase Agreement provides for up to two additional closings subject to certain conditions set forth in the Securities Purchase Agreement

and on substantially the same terms as the initial closing.

Each subsequent closing would result in the issuance of a senior secured note

with an original principal amount of $35.0 million and warrants to purchase shares of Common Stock equal to 65% of such principal

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

will impose certain customary affirmative and negative covenants upon us, as well as covenants that (i) restrict us and its

subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, (ii) restrict the

ability of us and its subsidiaries from making certain investments, subject to specified exceptions, (iii) restrict the declaration

of any dividends or other distributions, subject to specified exceptions, (iv) require us to maintain specified earnings and adjusted

EBITDA targets, and (v) require us to maintain minimum amounts of cash on hand.

If an event of default under the SPA Note occurs,

the Investor can elect to redeem the SPA Note for cash equal to 115% of the then-outstanding principal amount of the SPA Note (or such

lesser principal amount accelerated by the Investor), plus accrued and unpaid interest, including default interest, which accrues at a

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

Until the date

the SPA Note is fully repaid, the Investor will, subject to certain exceptions, have the right to participate for up to 30% of any

debt, Preferred Stock or equity-linked financing of us or its subsidiaries.

Each SPA Warrant

to be issued in the initial closing will have an exercise price of $6.75 per share, subject to adjustment for stock splits, reverse stock

splits, stock dividends and similar transactions, will be immediately exercisable, has a term of five and one-half years from the date

of issuance and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the

shares issuable upon exercise of the Warrant (the “SPA Warrant Shares”), in which case the SPA Warrant shall also be exercisable

on a cashless exercise basis at the Investor’s election.

The Securities Purchase Agreement requires us to file resale registration

statements with respect to the SPA Warrant Shares as soon as practicable and in any event within 45 days following the initial closing

and any subsequent closings.

The SPA Warrant

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

beneficial ownership exceeding 4.99% of our shares outstanding at the time of exercise (which percentage may be decreased or increased

by the Investor, but to no greater than 9.99%, and provided that any increase above 4.99% will not be effective until the sixty-first

day after notice of such request by the Investor to increase its beneficial ownership limit has been delivered to us).

The Securities

Purchase Agreement also contains customary representations and warranties of us and the Investor.

There is no material relationship between

us or its affiliates and the Investor other than in respect of the Securities Purchase Agreement, the SPA Note and the SPA Warrant.

Impact of coronavirus pandemic (“COVID-19”)

The extensive impact of the pandemic caused by

COVID-19 has resulted and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital

markets around the world.

In an effort to halt the outbreak of COVID-19, a number of countries, states, counties, and other jurisdictions

have imposed, and may impose in the future, various measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home

orders, travel restrictions, limitations on gatherings of people, reduced operations, and extended closures of businesses.

To date, although all of our operations are functioning,

COVID-19 has continued to cause some disruptions to our business, such as some temporary delays in the delivery of our inventory.

the ability of our suppliers to timely ship their goods has affected some of our deliveries, currently the difficulties experienced by

our suppliers have not yet materially impacted our ability to deliver products to our customers.

However, if this continues, it may negatively

affect any inventory we may have and more significantly delay the delivery of merchandise to our customers, which in turn will adversely

affect our revenues and results of operations.

The extent to which COVID-19 and the related global

economic crisis, affect our business, results of operations and financial condition, will depend on future developments that are highly

uncertain and cannot be predicted, including the scope and duration of the pandemic and any recovery period, future actions taken by governmental

authorities, central banks and other third parties (including new financial regulation and other regulatory reform) in response to the

pandemic, and the effects on our produce, clients, vendors and employees.

We continue to service our customers amid uncertainty and disruption

linked to COVID-19 and we are actively managing our business to respond to its impact.

Use of Estimates

The preparation of financial statements in accordance

with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the

reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements,

and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

estimates include assumptions about collection of accounts and notes receivable, the valuation and recognition of stock-based compensation

expense, valuation allowance for deferred tax assets and useful life of fixed assets and intangible assets.

Financial Overview

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis

of our financial position and results of operations is based on our financial statements, which have been prepared in accordance with

accounting principles generally accepted in the United States of America, or GAAP.

The preparation of financial statements in conformity

with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying

On an ongoing basis, we evaluate estimate, which include estimates related to accruals, stock-based compensation expense, and reported

amounts of revenues and expenses during the reported period.

We base our estimates on historical experience and other market-specific

or other relevant assumptions that we believe to be reasonable under the circumstances.

Actual results may differ materially from those

estimates or assumptions.

Revenue Recognition

We generate revenue from the following sources:

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

In accordance with ASC 606 “Revenue Recognition”,

we recognize revenue from contracts with customers using a five-step model, which is described below:

identify the customer contract;

identify performance obligations that are distinct;

determine the transaction price;

allocate the transaction price to the distinct performance obligations;

recognize revenue as the performance obligations are satisfied.

Identify the customer contract

A customer contract is generally identified when

there is approval and commitment from both use and its customer, the rights have been identified, payment terms are identified, the contract

has commercial substance and collectability, and consideration is probable.

Specifically, we obtain written/electronic signatures on contracts

and a purchase order, if said purchase orders are issued in the normal course of business by the customer.

Identify performance obligations that are

A performance obligation is a promise by us to provide

a distinct good or service or a series of distinct goods or services.

A good or service that is promised to a customer is distinct if

the customer can benefit from the good or service either on its own or together with other resources that are readily available to the

customer, and our promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

Determine the transaction price

The transaction price is the amount of consideration

to which we expect to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected

on behalf of government agencies.

Allocate the transaction price to distinct

performance obligations

The transaction price is allocated to each performance

obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer.

Our contracts typically contain multiple performance obligations, for which we account for individual performance obligations separately,

if they are distinct.

The standalone selling price reflects the price we would charge for a specific piece of equipment or service if

it was sold separately in similar circumstances and to similar customers.

Recognize revenue as the performance obligations

are satisfied

Revenue is recognized when, or as, performance

obligations are satisfied by transferring control of a promised product or service to a customer.

Significant Judgments

We enter into contracts that may include various combinations

of equipment, services and construction, which are generally capable of being distinct and accounted for as separate performance obligations.

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

Determining whether products

and services are considered distinct performance obligations that should be accounted for separately versus together may require significant

Once we determine the performance obligations, it determines the transaction price, which includes estimating the amount of

variable consideration to be included in the transaction price, if any.

We then allocate the transaction price to each performance obligation

in the contract based on the SSP.

The corresponding revenue is recognized as the related performance obligations are satisfied.

Judgment is required to determine the SSP for

each distinct performance obligation.

We determine SSP based on the price at which the performance obligation is sold separately and the

methods of estimating SSP under the guidance of Accounting Standards Codification (“ASC”) 606-10-32-33.

If the SSP is not

observable through past transactions, we estimate the SSP, taking into account available information such as market conditions, expected

margins, and internally approved pricing guidelines related to the performance obligations.

We license our software as a SaaS type subscription

license, whereby the customer only has a right to access the software over a specified time period.

The full value of the contract is

recognized ratably over the contractual term of the SaaS subscription, adjusted monthly if tiered pricing is relevant.

We typically satisfy

our performance obligations for equipment sales when equipment is made available for shipment to the customer;

for services sales as services

are rendered to the customer and for construction contracts both as services are rendered and when contract is completed.

We utilize the cost-plus margin method to determine

the SSP for equipment and build-out services.

This method is based on the cost of the services from third parties, plus a reasonable markup

that we believe is reflective of a market-based reseller margin.

We determine the SSP for services in time and materials

contracts by observable prices in standalone services arrangements.

We estimate variable consideration in the form of

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

period if additional information becomes available.

Variable consideration is typically not subject to constraint.

Changes to variable

consideration were not material for the periods presented.

If a contract has payment terms that differ from the

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

We have elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if we

expect that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when

the customer pays for that good or service, will be one year or less.

For those contracts in which the period exceeds the one-year threshold,

this assessment, as well as the quantitative estimate of the financing component and its relative significance, requires judgment.

we impute interest on such contracts at an agreed upon interest rate and will present the financing components separately as financial

For the three months ended March 31, 2022 and 2021, we did not have any such financial income.

Payment terms with customers typically require

payment 30 days from invoice date.

Our agreements with customers do not provide for any refunds for services or products and therefore

no specific reserve for such is maintained.

In the infrequent instances where customers raise a concern over delivered products or

services, we have endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented.

We have elected to treat shipping and handling

activities after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service.

Accordingly, we

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

We have payment terms

with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value

Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

We receive payment from customers based on specified

terms that are generally less than 30 days from the satisfaction of performance obligations.

There are no contract assets related

to performance under the contract.

The difference in the opening and closing balances of our deferred revenue primarily results from the

timing difference between our performance and the customer’s payment.

We fulfill obligations under a contract with a customer by

transferring products and services in exchange for consideration from the customer.

Accounts receivables are recorded when the customer

has been billed or the right to consideration is unconditional.

We recognize deferred revenue when consideration has been received or

an amount of consideration is due from the customer, and we have a future obligation to transfer certain proprietary products.

In accordance with ASC 606-10-50-13, we are required

to include disclosure on its remaining performance obligations as of the end of the current reporting period.

Due to the nature of our

contracts, these reporting requirements are not applicable.

The majority of our remaining contracts meet certain exemptions as defined

in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected

duration of one year or less and (ii) the right to invoice practical expedient.

We generally provide a one-year warranty on our products

for materials and workmanship but may provide multiple year warranties as negotiated, and will pass on the warranties from its vendors,

if any, which generally covers this one-year period.

In accordance with ASC 450-20-25, we accrue for product warranties when the loss

is probable and can be reasonably estimated.

The reserve for warranty returns is included in accrued expenses and other current

liabilities in our consolidated balance sheets.

Accounting for Business Combinations

We allocated the purchase price of acquired companies

to the tangible and intangible assets acquired, including in-process research and development assets, and liabilities assumed, based upon

their estimated fair values at the acquisition date.

These fair values are typically estimated with assistance from independent valuation

The purchase price allocation process requires us to make significant estimates and assumptions, especially at the acquisition

date with respect to intangible assets, contractual support obligations assumed, contingent consideration arrangements, and pre-acquisition

contingencies.

Although we believe the assumptions and estimates

we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained

from the management of the acquired companies and are inherently uncertain.

Examples of critical estimates in valuing certain

of the intangible assets we have acquired or may acquire in the future include but are not limited to:

future expected cash flows from software license sales, support agreements, consulting contracts, other customer contracts, and acquired developed technologies;

expected costs to develop in-process research and development into commercially viable products and estimated cash flows from the projects when completed;

the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio;

cost of capital and discount rates;

estimating the useful lives of acquired assets as well as the pattern or manner in which the assets will amortize.

The fair value estimates related to the various identified

intangible assets were determined under various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted

Cash Flow Method.

These valuation methods require management to project revenues, operating expenses, working capital investment, capital

spending and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be

used as a discount rate.

Goodwill and Intangible Assets

Amortization of acquired intangible assets

is the result of the acquisition of TriGrow, which occurred in 2020, the acquisition of Sinclair which occurred in 2021, the

acquisition of PurePressure, which also occurred in 2021, and the acquisition of Lab Society, which occurred in 2022.

As a result of

these transactions, customer relationships, acquired developed technology, non-compete agreements and trade names were identified as

intangible assets, and are amortized over their estimated useful lives.

We recognize the excess of the purchase price

over the fair value of identifiable net assets acquired as goodwill.

Goodwill is not amortized but is tested for impairment annually on

December 2 or more frequently if events or changes in circumstances indicate that the carrying amount of the goodwill may not be recoverable.

The Company has determined it is a single reporting unit for the purpose of conducting the goodwill impairment assessment.

impairment charge is recorded if the amount by which the Company’s carrying value exceeds its fair value, not to exceed the carrying

amount of goodwill.

Factors that could lead to a future impairment include material uncertainties such as a significant reduction in projected

revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in the Company’s

market value as a result of a significant decline in the Company’s stock price.

There have been no impairment charges recorded for

three months ended March 31, 2022 and 2021, respectively.

Capitalization of Internal Software Development Costs

We capitalize 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.

We account for income taxes pursuant to the provisions

of ASC Topic 740, “Income Taxes,” which requires, among other things, an asset and liability approach to calculating deferred

income taxes.

The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future

tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.

A valuation allowance

is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset

will not be realized.

We follow the provisions of ASC 740-10-25-5, “Basic

Recognition Threshold.” When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination

by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position

that would be ultimately sustained.

In accordance with the guidance of ASC 740-10-25-6, the benefit of a tax position is recognized in

the 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.

We believe our tax positions are all highly certain of

being upheld upon examination.

As such, we have not recorded a liability for unrecognized tax benefits.

We recognize the benefit of a tax position when

it is effectively settled.

ASC 740-10-25-10, “Basic Recognition Threshold” provides guidance on how an entity should determine

whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.

ASC 740-10-25-10 clarifies

that a tax position can be effectively settled upon the completion of an examination by a taxing authority.

For tax positions considered

effectively settled, we recognize the full amount of the tax benefit.

Accounting for Stock-Based Compensation

We follow the provisions of ASC Topic 718, “Compensation

— Stock Compensation.” ASC Topic 718 establishes standards surrounding the accounting for transactions in which an entity

exchanges its equity instruments for goods or services.

ASC Topic 718 focuses primarily on accounting for transactions in which an entity

obtains employee services in share-based payment transactions, such as options issued under our Stock Option Plans.

The fair value of each option is estimated on the

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

This model incorporates certain assumptions for inputs including a risk-free

market interest rate, expected dividend yield of the underlying Common Stock, expected option life, and expected volatility in the market

value of the underlying Common Stock.

The Black-Scholes option-pricing model was developed

for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.

In addition, option

valuation models require the input of highly subjective assumptions including the expected stock price volatility.

Because our stock options

and warrants have characteristics different from those of our traded stock, and because changes in the subjective input assumptions can

materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single

measure of the fair value of such stock options.

The risk-free interest rate is based upon quoted market yields for United States Treasury

debt securities with a term similar to the expected term.

The expected dividend yield is based upon our history of having never issued

a dividend and management’s current expectation of future action surrounding dividends.

We calculate the expected volatility of

the stock price based on the corresponding volatility of our peer group stock price for a period consistent with the underlying instrument’s

expected term.

The expected lives for such grants were based on the simplified method for employees and directors.

In arriving at stock-based compensation expense,

we estimate the number of stock-based awards that will be forfeited due to employee turnover.

Our forfeiture assumption is based primarily

on its turn-over historical experience.

If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment

will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in our financial statements.

If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture

rate, which will result in an increase to expense recognized in our financial statements.

The expense we recognize in future periods will

be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period.

It is important that the discussion of our operating

results that follows be read in conjunction with the critical accounting policies disclosed above.

Results of Operations

Comparison of the Three Months Ended March 31, 2022 and 2021

The following table summarizes our results of

operations for the three months ended March 31, 2022 and March 31, 2021:

Three Months ended

September 30,

Nine months ended

September 30,

(In thousands, except share and per share data)

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) gain 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

4 unchanged sentences

Our core product offering includes our Agrify Vertical Farming Units (or

AVFUs) and Agrify Integrated Grow Racks with our Agrify™ Insights software, which in 2020 and 2021 are supplemented with environmental

control products, grow lights, and facility build-out services.

We continue to monitor and address the COVID-19

pandemic impacts on our supply chain.

Although the availability of various products is dependent on our suppliers, their locations, and

the extent to which they are impacted by the COVID-19 pandemic, we are proactively working with manufacturers to meet the needs of our

customers during the pandemic.

Product shortages have generally led to fluctuations in prices globally, with corresponding impacts

to sales and interim profits.

We generate revenue from sales of cultivation

solutions, including ancillary products and services, Agrify™ Insights software and facility build-outs.

We believe that our product

mix form an integrated ecosystem which allows us to be engaged with our potential customers from early stages of the grow cycle —

first during the facility build-out, to the choice of cultivation solutions and then running the grow business with our Agrify™

Insights software.

We believe that delivery of each solution in the grow cycle will generate sales of additional solutions and services.

following table provides a breakdown of our revenue for the three and nine months ended September 30, 2021 and 2020:

“VFUs”) and Agrify Integrated Grow Racks with our Agrify Insights software, which are supplemented with environmental control

products, grow lights, facility build-out services and extraction equipment.

We continue to monitor and address COVID-19 pandemic

impacts on our supply chain.

Although the availability of various products is dependent on our suppliers, their locations, and the extent

to which they are impacted by the COVID-19 pandemic, we are proactively working with manufacturers to meet the needs of our customers

during the pandemic.

Product shortages have generally led to increases in prices globally, with significant impacts to sales and

interim profits.

We generate revenue from sales of cultivation solutions,

including ancillary products and services, Agrify Insights software, facility build-outs and extraction equipment and solutions.

that our product mix form an integrated ecosystem which allows us to be engaged with our potential customers from early stages of the

grow cycle — first during the facility build-out, to the choice of cultivation solutions, running the grow business with our

Agrify Insights software and finally, our extraction, post-processing and testing services to transform harvest into a sellable product.

We believe that delivery of each solution in the various stages in the process will generate sales of additional solutions and services.

The following table provides a breakdown of our

revenue for the three months ended March 31, 2022 and 2021:

Three Months ended

September 30,

Nine months ended

September 30,

(In thousands)

Cultivation solutions, including ancillary products and services

1 unchanged sentence

Facility build-outs

for the three months ended September 30, 2021 and 2020 was generated mainly from facility build outs and cultivation solutions, respectively.

For the three months ended September 30, 2021 and 2020, we sold 114 and 0 AVFUs, respectively.

for the nine months ended September 30, 2021 and 2020 was generated mainly from facility build outs and cultivation solutions, respectively.

For the nine months ended September 30, 2021 and 2020, we sold 136 and 179 AVFUs, respectively.

Cost of Revenues

Cost of goods sold include direct cost of parts

and outsourced assembly and installation services that are necessary for delivery of our products.

Extraction solutions

Total revenue

Revenues increased by $19.0 million, or 271% for

the three months ended March 31, 2022 compared to the same period in 2021.

The comparative increase in revenue was generated primarily

from extraction solutions sales of equipment and services from our acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade

and PurePressure in 2021.

Extraction division revenues totaled $12.4 million in the first quarter of 2022.

Additionally, design and build

revenues increased by $6.4 million due to the continued build-out of facilities under our TTK Solutions.

Cost of Goods Sold

Cost of goods sold represents a combination of the

construction-related costs associated with our facility build-outs, internal and outsourced labor and material costs associated

with the assembly of both cultivation equipment (primarily VFUs) and extraction equipment, as well as labor and parts costs associated

with the sale or provision of other products and services.

The following table provides a breakdown of our

cost of revenue for the three and nine months ended September 30, 2021 and 2020:

cost of goods sold for the three months ended March 31, 2022 and 2021:

Three Months ended

September 30,

Nine months ended

September 30,

(In thousands)

Cultivation solutions, including ancillary products and services

Agrify Insights software

Facility build-outs

During the first six months of 2020, we outsourced

the manufacturing of our AVFUs to HMH, which we acquired in July 2020.

Although the primary reason we acquired HMH was to expand our research,

development and testing capabilities, the acquisition will also provide us with internal capabilities to manufacture small quantities

of AVFUs and to reduce our cost of manufacturing.

In addition, in December 2020, we entered into a five-year supply agreement with Mack

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

In February 2021, we placed a purchase

order with Mack amounting to approximately $5.2 million towards initial production of AVFUs during 2021.

In June 2021, the Company increased

the purchase order with Mack to approximately $11.5 million towards production of AVFUs during 2021 and 2022.

We believe the supply agreement

with Mack will provide us with increased scaling capabilities and the ability to meet the potential future demand of our customers more

The supply agreement contemplates that, following an introductory period, we will negotiate a minimum percentage of our AVFU

requirements that we will purchase from Mack each year based on the agreed upon pricing formula.

The introductory period is not time-based

but rather refers to the production of an initial number of units after which the parties have rights to adjust pricing and negotiate

a certain minimum requirements percentage.

We believe this approach will result in both parties making a more informed decision with respect

to the pricing and other terms of the supply agreement with Mack.

Extraction solutions

Total cost of goods sold

Cost of goods sold increased by $14.3 million,

or 189%, for the three months ended March 31, 2022 compared to the same period in 2021.

The comparative quarterly increase in cost

of goods sold is associated with the increased amount of internal and outsourced labor and materials

costs for the extraction solutions sales, combined with an increase in subcontractor construction

costs related to our facility build-outs, including construction costs associated with design and build projects under our TTK Solutions.

Gross Profit (Loss)

Our gross profit (loss) represents total revenue

less the cost of goods sold, and gross margin percentage is gross profit (loss) expressed as a percentage of total revenue.

For the three

months ended September 30, 2021, our gross loss was $380 compared to a gross loss of $199 for the three months ended September

For the nine months ended September 30, 2021, our gross loss was $393 compared to a gross profit of $860 for the nine months

ended September 30, 2020.

Our gross profit (loss) margin percentage decreased

to (2.4%) for the three months ended September 30, 2021 compared to (7.1%) in the same period in 2020.

The decrease in gross loss was

primarily related to an increase in outside services for the production of AVFUs of $415, discount on the sale of AVFUs for $399, which

was partially offset by an increase in facility build outs that contributed $433 to gross profit.

Our gross profit (loss) margin percentage decreased

to (1.1%) for the nine months ended September 30, 2021 compared to a 11.1% increase in the same period in 2020.

The decrease in gross

profit was primarily related to (i) an increase in outside services in the production of AVFU’s during the quarter of $415 and other

product related increases of $523, (ii) the discount on the sale of AVFU’s sold during the quarter of $399, and (iii) revenue mix

that included higher revenue from facility build-outs which contributed $944 to gross profit.

Three Months ended

(In thousands)

Gross profit (loss)

Gross profit totaled $4.2 million, or 16 .0%

of total revenue during the three months ended March 31, 2022 compared to a gross loss of $(540) thousand, or (7.7)% of total revenue

during the three months ended March 31, 2021.

The comparative $4.7 million first-quarter year over year improvement in gross profit, as

well as the comparative improvement in gross profit margin, is primarily attributable to the introduction of extraction solutions revenue

in the first quarter of 2022, which contributes higher gross margins than those realized on our cultivation-related revenue, which

includes our TTK Solutions design and build revenue.

During the first quarter of 2022, we realized a gross profit margin of 33% associated

with our extraction solutions revenue, while we realized a gross profit margin of approximately 1% on our cultivation-related revenues.

On a forward-looking basis, with the full year benefit

of anticipated margin contribution associated with the extraction-related revenue contributions, the Company anticipates that gross margin

performance, aided by our extraction-related equipment sales, will be in a mid-teens range.

We anticipate that we will be able to improve

upon that expected gross profit margin performance once we are able to generate meaningful software and production fee revenues from our

TTK Solutions, which we currently expect to begin in the late third or early fourth quarter of 2022.

General and Administrative

Three Months ended

(In thousands)

General and administrative

General and administrative (“G&A”)

expenses consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses, associated

with executive and other administrative functions.

Other G&A expenses include, but are not limited to, professional fees for legal,

consulting, depreciation and amortization and accounting services, as well as facility-related costs.

G&A expense increased by $5.3 million, or

119%, for the three months ended March 31, 2022, compared to the same period in 2021.

The increase is attributable to payroll and

related expenses increase of $2.5 million, an increase in acquisition-related expenses of $1.3 million, an increase in facility and other

related expenses of $964 thousand, an increase in investor relations and directors’ and officers’ insurance of $592 thousand,

an increase in depreciation and amortization of $865 thousand, which primarily reflects an increase in amortization associated with the

identified intangible assets from our acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021.

These increases were partially offset by a reduction in stock compensation expense of $906 thousand.

Research and Development

Research and development expenses consisted primarily

of costs incurred for the development of our Agrify™ Insights software and next generation AVFUs, which includes:

● employee-related

expenses, including salaries, benefits, and travel;

incurred by subcontractor under agreements to provide engineering work related to the development of our next generation AVFUs;

related to our facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of

facilities, insurance and other supplies.

For the three months ended September 30, 2021

and 2020, research and development expenses were $827 and $449, respectively.

The increase of $378 is primarily attributable to increase

in employee-related expenses, including salaries, benefits, bonus, and stock-based compensation of $718.

The increase in expenses was

offset by the halted development of hardware solution for deployment of rapid grow solution of $141 in the third quarter of fiscal 2020

and expenses related to grant of stock options in the amount of $121.

For the nine months ended September 30, 2021 and

2020, research and development expenses were $2,483 and $2,392, respectively.

The increase of $91 is primarily attributable increase in

employee-related expenses, including salaries, benefits, bonus, and stock-based compensation of approximately $980 and an increase in

other costs amounting to $425.

The increase in expenses was offset by the halted development of hardware solution for deployment of rapid

grow solution of $813 during 2020 and a decrease in consulting fees of $392.

As a percentage of net revenue, research and development

expenses were 5.3% and 16%, respectively, from total revenue for the three months ended September 30, 2021 and 2020.

As a percentage of

net revenue, research and development expenses were 7.1% and 30.9%, respectively, from total revenue for the nine months ended September

30, 2021 and 2020 (or 7.1% and 20.4% when excluding the one-time halted cost).

Three Months ended

(In thousands)

Research and development

Research and development (“R&D”) expenses

consisted primarily of costs incurred for the development of our Agrify Insights software and next generation VFUs, which includes:

employee-related expenses, including salaries, benefits, and travel;

expenses incurred by the subcontractor under

agreements to provide engineering work related to the development of our next generation VFUs;

expenses related to our facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies.

R&D expense increased by $1.2 million, or

136%, for the three months ended March 31, 2022, compared to the same period in 2021.

The increase is attributable to the personnel

and facility costs associated with the continued development of our VFUs, specifically related to improving the individual unit cooling

and humidity environments.

We expect to continue to invest in future developments

of our AVFUs and Agrify™ Insights software.

In the coming years, we believe that research and development expenses measured as percentage

of revenue will decrease due to an increase in our total revenue.

Selling, General and Administrative Expenses

Selling, general and administrative expenses

consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses, in selling,

executive and other administrative functions.

Other general and administrative expenses include professional fees for legal, consulting

and accounting services as well as facility related costs.

For the three months ended September 30, 2021

and 2020, general and administrative expenses were $8,595 and $1,937, respectively.

The increase is attributable mainly to payroll and

related expenses of $1,356, stock-based compensation in the amount of $855, one time termination of financing in the amount of $2,400,

legal expenses of $438, insurance expenses of $735 and depreciation and amortization expenses of $157.

For the nine months ended September 30, 2021 and

2020, general and administrative expenses were $18,850 and $6,940, respectively.

The increase is attributable mainly to payroll and related

expenses of $2,726, stock-based compensation in the amount of $3,289, one time termination of financing $2,400, insurance expenses of

$1,843, legal expenses of $571, marketing and sales related expenses of $496 and depreciation and amortization expenses of $401.

of our VFUs, Agrify Insights software and our extraction products.

As a percentage of net revenue, R&D expenses were 8.0% of total

revenue for the three months ended March 31, 2022, compared to 12.6% for the three months ended March 31, 2021.

Although we continue to

increase our investment in R&D activities, we expect R&D expense to decrease as a percentage of revenue due to our revenue growth.

Selling and Marketing

Three Months ended

(In thousands)

Selling and marketing

Selling and marketing expenses consist primarily

of salaries and related costs of personnel, travel expenses, trade shows and advertising expenses.

Selling and marketing expenses increased by $1.5

million, or 239%, for the three months ended March 31, 2022, compared to the same period in 2021.

The increase is attributable to payroll

and related expenses increase of $1.2 million and an increase in advertising and trade show expenses of $152 thousand and an increase

in travel and other expenses of $155 thousand.

Other Income (Expense), Net

Interest income was $45 for the three months ended

September 30, 2021, compared to interest expense of $103 for the three months ended September 30, 2020, reflecting a change of $148.

income was $68 for the nine months ended September 30, 2021, compared to interest expense of $139 for the nine months ended September

30, 2020, reflecting a change of $207.

The increase in interest income is attributable mainly to interest from held to maturity securities.

Other expenses were $15 and $78 for the three

and nine months ended September 30, 2021, respectively, compared to null for the three and nine months ended September 30, 2020, are attributable

to interest expense related items.

Gain on extinguishment of notes payable was null

and $2,685 for the three and nine months ended September 30, 2021, respectively, compared to null for the three and nine months ended

September 30, 2020.

Three Months ended

(In thousands)

Interest income (expense), net

Gain on extinguishment of notes payable

Total other income (expense), net

Interest income (expense), net increased by $714 thousand,

or 2,231%, for the three months ended March 31, 2022 compared to the same period in 2021.

The increase in interest income is attributable

mainly to interest from marketable securities and interest income from TTK Solutions.

Gain on extinguishment of notes payable decreased

by $2.7 million, or 100%, for the three months ended March 31, 2022 compared to the same period in 2021.

Provision for (benefit from) Income Taxes

Three Months ended

(In thousands)

Provision for (benefit from) income taxes

Effective tax rate

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 $(200) thousand recorded during the first quarter of 2022, which is attributable to a non-recurring partial release

valuation allowance as a result of the Lab Society acquisition.

Income (Loss) Attributable to Non-Controlling Interest

We consolidate the results of operations of two

less than wholly-owned entities into our consolidated results of operations.

We consolidate the results of operations of two less

than wholly-owned entities into our consolidated results of operations.

On December 8, 2019, we formed Agrify Valiant LLC, a joint-venture

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in Agrify Brands, LLC (formerly TriGrow Brands, LLC), a licensor of an established portfolio of consumer brands that utilize our grow

The license of these brands is ancillary to the sale of our AVFUs and provides a means to differentiate customers’

products in the marketplace.

The license of these brands is ancillary to the sale of our VFUs and provides a means to differentiate customers’ products

in the marketplace.

It is not a material aspect of our business and we have not realized any royalty income.

Accordingly, we

are currently evaluating whether to continue this legacy business from an operational standpoint, as well as from a legal and regulatory

Accordingly, we are currently

evaluating whether to continue this legacy business from an operational standpoint, as well as from a legal and regulatory perspective.

Loss attributable to non-controlling interest

2 unchanged sentences

Liquidity and Capital Resources

Upon the closing of the February Offering, we

had approximately $139 million in cash and cash equivalents.

We believe such amount, together with cash flows from financing, will be

sufficient to support our planned operations for at least the next 12 months.

Our current working capital needs are to support accounts

receivable growth, manage inventory to meet demand forecasts and support operational growth.

Our long-term financial needs primarily include

working capital requirements and capital expenditures.

There are many factors that may negatively impact our available sources of funds

in the future, including the ability to generate cash from operations, raise debt capital and raise cash from the issuance of our securities.

The amount of cash generated from operations is dependent upon factors such as the successful execution of our business strategy and general

economic conditions.

We may opportunistically raise debt capital,

subject to market and other conditions.

Additionally, as part of our growth strategies, we may also raise debt capital for strategic

alternatives and general corporate purposes.

If additional financing is required from outside sources, we may not be able to raise such

capital on terms acceptable to us or at all.

If we are unable to raise additional capital when desired, our business, operating results

and financial condition may be adversely affected.

We entered into two Loan Agreements and

Promissory Notes (collectively the “PPP Loan”) with Bank of America pursuant to the Paycheck Protection Program (the

“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S.

As of March 31, 2022, our principal sources of liquidity

were cash and cash equivalents and marketable securities totaling $63.4 million and $30 million in restricted cash.

We believe such amount,

together with the proceeds from the private placement that closed on January 28, 2022 and the senior secured debt facility that closed

on March 24, 2022, will be sufficient to support our planned operations for at least the next 12 months.

Our current working capital needs

are to support revenue growth, to fund construction and equipment financing commitments associated with our TTK Solutions, manage inventory

to meet demand forecasts and support operational growth.

Our long-term financial needs primarily include working capital requirements

and capital expenditures.

We anticipate that we will allocate a significant portion of our current balance of working capital to satisfy

the financing requirements of our current and future TTK arrangements.

These arrangements require a significant amount of upfront capital

necessary to fund construction, associated with facility build-outs, and equipment.

There are many factors that may negatively impact

our available sources of funds in the future, including the ability to generate cash from operations, raise debt capital and raise cash

from the issuance of our securities.

The amount of cash generated from operations is dependent upon factors such as the successful execution

of our business strategy and general economic conditions.

We may opportunistically raise debt capital, subject

to market and other conditions.

Additionally, as part of our growth strategies, we may also raise debt capital for strategic alternatives

and general corporate purposes.

If additional financing is required from outside sources, we may not be able to raise such capital on

terms acceptable to us or at all.

If we are unable to raise additional capital when desired, our business, operating results and financial

condition may be adversely affected.

We entered into one Loan Agreement and Promissory

Note with Bank of America pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic

Security Act (“CARES Act”) administered by the U.S.

Small Business Administration.

We received total proceeds of approximately $823 from the unsecured PPP Loans which are scheduled to

mature during 2022 and 2025.

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.

We applied for the forgiveness of the PPP Loans during the third and fourth

quarters of 2021 for approximately $44.

If the remaining principal amount is not forgiven in full, we would be obligated to repay

any principal amount not forgiven and interest accrued thereon.

The following table presents the major components

of net cash flows (used in) and provided by operating, investing and financing activities for the nine months ended September 30, 2021,

September 30,

We received total proceeds of approximately

$779 thousand from the unsecured PPP Loan which is scheduled to mature in May 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.

If the remaining principal amount is not

forgiven in full, we would be obligated to repay any principal amount not forgiven and interest accrued thereon.

On March 14, 2022, we entered

into a Securities Purchase Agreement with an institutional investor.

The Purchase Agreement provides for of the issuance of a senior secured

note (the “SPA Note”) in the aggregate amount of $65 million and a warrant exercisable 6,881,108 shares of Common Stock, with

the potential for two potential subsequent closings for notes with an original principal amount of $35 million each.

The initial closing

pursuant to this debt facility occurred on March 24, 2022.

The SPA Note is a senior secured obligation and ranks senior to all other indebtedness.

We will be required to make amortization payments equal to 4.0% of the original principal amount of the SPA Note on the first day of each

calendar month starting on February 1, 2023 and extending through the maturity date of March 1, 2026 (the “Maturity Date”),

at which time all remaining outstanding principal and accrued but unpaid interest will be due.

The SPA Note has an interest rate of 6.75%

per year, and we will be required to pay interest on March 1, June 1, September 1, and December 1 of each calendar year through the Maturity

Following the one-year anniversary of the SPA Note’s issuance, we may, in lieu of paying interest in cash, pay such interest

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

of the SPA Note.

At any time following the

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

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

The noteholder also

has the option of requiring us to redeem the SPA Note if we undergo a fundamental change at a price equal to 107% of the then-outstanding

principal amount under the SPA Note plus any accrued interest.

The following table presents the major components of net cash flows

from and used in operating, investing, and financing activities for the three months ended March 31, 2022, and 2021:

(In thousands)

Net cash (used in) provided by:

2 unchanged sentences

Financing activities

Net increase in cash, cash equivalents, and restricted cash

Cash Flow from Operating Activities

For the nine months ended September 30, 2021, we incurred a net loss

of $19,204, which included non-cash expenses of $508 related to depreciation and amortization, $4,007 in connection with the issuance

and acceleration of stock options, stock-based payment of $176 related to HMH acquisition, non-cash interest expenses of $50 related to

loans, and gain attributed to non-controlling interest in the amount of $153.

Net cash was reduced by a $7,861 increase in accounts receivable,

a $5,227 increase in prepaid inventory due to demand forecast and a $3,523 increase in prepaid expenses, partially offset by a $7,367

increase in accrued expenses and other current liabilities and $7,906 increase in accounts payable.

For the nine months ended September 30,

2020, we realized net loss of $8,562, which included non-cash expenses of $261 related to depreciation and amortization, $803 in

connection with the issuance of stock options, non-cash interest expenses of $95 related to the issuance of notes payable and

$119 from the disposal of fixed assets, partially offset by loss attributed to non-controlling interest in the amount of $49.

cash was reduced by a $622 increase in accounts receivable, a $1,673 increase in prepaid inventory due to demand forecast, a $2,099 decrease

in deferred revenue, partially offset by $507 increase in accrued expenses, a $42 decrease in prepaid expenses, and a $455 increase in

accounts payable.

For the three months ended March 31, 2022, we incurred

a net loss of $(8.9) million, which included non-cash expenses of $1.1 million related to depreciation and amortization, $953 thousand

in connection with the issuance and acceleration of stock options, debt issuance costs of $2.7 million, non-cash interest income of $406

thousand related to TTK Solutions, and gain attributed to non-controlling interest in the amount of $1 thousand.

Net cash was reduced

by a $838 thousand increase in accounts receivable, a $2.4 million decrease in deferred revenue, a $16.4 million increase in inventory

due to demand forecast, and a $3.0 million increase in prepaid expenses, a $2.1 million increase in accrued expenses and other current

liabilities and $2.7 million decrease in accounts payable.

For the three months ended March 31, 2021, we incurred

a net loss of $(3.8) million, which includes non-cash expenses of $147 thousand related to depreciation and amortization, $2.1 million

in connection with the issuance and acceleration of stock options, non-cash interest expenses of $33 thousand related to leases and the

issuance of notes payable, partially offset by a gain of $2.7 million related to extinguishment of notes payable, loss attributed to non-controlling

interest in the amount of $(33) thousand.

Net cash was reduced by a $5.2 million increase in accounts receivable, a $3.3 million increase

in prepaid inventory due to demand forecast, a $2.2 million increase in prepaid expenses, and a $96 thousand increase in deferred revenue,

partially offset by a $7.4 million increase in accrued expenses ($6 million related to construction cots), and a $181 thousand increase

in accounts payable.

Cash Flow from Investing Activities

Net cash used in investing activities relates

to capital expenditures and purchase of held to maturity securities.

The capital expenditures support growth and investment in property

and equipment, to expand research, development and testing capabilities and, to a lesser extent, the replacement of existing equipment.

For the nine months ended September 30, 2021, net cash used in investing

activities was $84,683, which included $3,536 for leasehold improvements, purchasing computer equipment and small machinery, a $12,686

issuance of loan receivable and $68,461 purchases of held to maturity securities.

For the nine months ended September 30,

2020, net cash used in investing activities was $1,195, which included $1,092 paid in connection with the acquisition of TriGrow and $103

cash outflow for purchasing computer equipment and small machinery.

Net cash used in investing activities primarily relates

to net purchases of marketable securities, cash paid associated with the Company’s 2022 acquisition of Lab Society, the issuance

of loans receivable in connection with the Company’s financing of construction and equipment under its TTK Solutions offering, and

for purchases of property and equipment, expenditures, and purchase of marketable securities.

The capital expenditures support growth

and investment in property and equipment, to expand research, development, and testing capabilities and, to a lesser extent, the replacement

of existing equipment.

For the three months ended March 31, 2022, net cash

used in investing activities was $(13.4) million, which included cash outflows of $6.4 million in

net purchases of marketable securities, $3.5 million paid in connection with our 2022 acquisitions of Lab Society, $12.5 million related

to the issuance of TTK-related loans receivable, and $3.7 million of expenditures for property and equipment.

For the three months ended March 31, 2021, net cash

used in investing activities was $(142) thousand for leasehold improvements, purchasing computer equipment and small machinery.

Cash Flow from Financing Activities

For the nine months ended September 30, 2021, net cash provided by

financing activities was $138,875, attributable to $56,961 proceeds from our initial IPO, $79,839 from our secondary public offering,

both net of fees, and proceeds from the exercise of options and warrants of $2,229, offset by $154 payments of financing leases.

For the nine months ended September 30,

2020, net cash provided by financing activities was $16,670, primarily attributable to the $10,000 proceeds from the issuance of our

Series A Preferred Stock, $5,800 proceeds from the issuance of notes payable and the $823 PPP Loan under the CARES Act.

For the three months ended March 31, 2022, net cash

provided by financing activities was $90.7 million.

Net cash provided by financing activities was

primarily driven by the Company’s two private placements during 2022.

The Company received $65.0 million in net proceeds from our

issuance of Common Stock and warrants in a private placement, and $25.8 million in net proceeds from our issuance of debt and warrants

in a private placement.

Additionally, the Company received $11 thousand in proceeds from the exercise of stock options and warrants.

of the above inflows of cash was offset by $81 thousand in payments relating to financing leases.

For the three months ended March 31, 2021, net cash

provided by financing activities was $137 million, attributable to $57 million proceeds from our initial IPO, $80 million from our secondary

public offering, both net of fees, and proceeds from the exercise of options and warrants of $444 thousand, slightly offset by $47 thousand

payments relating to financing leases.

Off-Balance Sheet Arrangements

During the periods presented,

we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities

often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating

off-balance sheet arrangements or other contractually narrow or limited purposes.

We are therefore not exposed to the financing, liquidity,

market, or credit risk that could arise if we had engaged in those types of relationships.

Critical Accounting Policies and Estimates

Part I, Item, 2, "Management’s Discussion

and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements, which have been

prepared in accordance with GAAP.

The preparation of these consolidated financial statements requires management to make estimates

and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at

the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

results may differ from these estimates under different assumptions or conditions.

These estimates are based on our knowledge and understanding

of current conditions and actions that we may take in the future.

Changes in these estimates will occur as a result of the passage

of time and the occurrence of future events.

Subsequent changes in these estimates may have a significant impact on our financial

condition and results of operations and are recorded in the period in which they become known.

We have identified the following estimates

that, in our opinion, are subjective in nature, require the exercise of judgment and involve complex analysis:

the fair value of

derivative assets and liabilities, goodwill impairment assessment, revenue recognition and cost of goods sold.

The significant accounting policies and estimates

that have been adopted and followed in the preparation of our consolidated financial statements are detailed in Note 2 - Summary

of Significant Accounting Policies included in our 2021 Annual Report and Note 2 - Summary of Significant

Accounting Policies to our consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q .

been no changes in these policies and estimates that had a significant impact on the financial condition and results of operations for

the periods covered in this Quarterly Report.

Recently Issued Accounting Pronouncements Adopted

For more information on recently

issued accounting pronouncements are included within Note 3 – Recent Accounting Pronouncements,

included elsewhere in the notes to consolidated financial statements covered under Part I, Item 1 of this Quarterly Report on Form 10-Q.

New Accounting Pronouncements Not Yet Adopted

For more information on new

accounting pronouncements not yet adopted are included within Note 3 – Recent Accounting Pronouncements,

included elsewhere in the notes to consolidated financial statements covered under Part I, Item 1 in this Quarterly Report on Form 10-Q.

Quantitative and Qualitative Disclosures

About Market Risk.

As a “smaller reporting company”

as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

As a “smaller reporting company” as

defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

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 2. Management’s Discussion and Analysis