What changed in this filing

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Item 1. Financial Statements

2022-08-15 compared with 2022-05-16 · 1190 added, 825 removed, 1082 unchanged (65% of the section changed)

Financial Statements

AGRIFY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

March 31, 2022

December 31, 2021

CONSOLIDATED BALANCE SHEETS

thousands, except share and per share data)

Current assets:

2 unchanged sentences

Marketable securities

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

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

Accounts receivable, net of allowance for doubtful accounts of $ 2,740 and $ 1,415 at June 30, 2022 and December 31, 2021, respectively

Inventory, net of reserves of $ 1,871 and $ 942 at June 30, 2022 and December 31, 2021, respectively

Prepaid and refundable taxes

1 unchanged sentence

Total current assets

Non-Current Assets

Loan receivable

Loan receivable, net of allowance for doubtful accounts of $ 7,079 and $ 0 at June 30, 2022 and December 31, 2021, respectively

Property and equipment, net

10 unchanged sentences

Total current liabilities

Non-Current Liabilities

Other non-current liabilities

Operating lease liabilities, non-current

Deferred tax liabilities, net

Long-term debt

2 unchanged sentences

Stockholders’ equity:

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

Common Stock, $ 0.001 par value per share, 50,000,000 shares authorized, 26,591,430 and 22,207,103 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

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

5 unchanged sentences

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of

these condensed consolidated financial statements.

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

accompanying notes are an integral part of these condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

thousands, except share and per share data)

Three Months ended

Six Months ended

Revenue (including $ 1,140 , $ 10,895 , $ 2,411 and $ 16,413 from related parties, respectively)

2 unchanged sentences

General and administrative

Research and development

Selling and marketing

Research and development

Change in contingent consideration

Impairment of goodwill and intangible assets

Total operating expenses

Loss from operations

Interest income (expense), net

Interest (expense) income, net

Other expenses

Gain on extinguishment of notes payable

Other income (expense), net

Other (expense) income, net

Net loss before income taxes

Income tax benefit

Income (loss) attributable to non-controlling interest

Income attributable to non-controlling interests

Net loss attributable to Agrify Corporation

$ ( 102,283 )

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

Weighted-average common shares outstanding – basic

The accompanying notes are an integral part of

these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

(In thousands, except share data)

Weighted-average common shares outstanding – basic and diluted

accompanying notes are an integral part of these condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

thousands, except share data)

Preferred A Stock

11 unchanged sentences

Balance at March 31, 2021

Stock-based compensation

Exercise of options

Balance at June 30, 2021

Preferred A Stock

9 unchanged sentences

Balance at March 31, 2022

The accompanying notes are an integral part of

these condensed consolidated financial statements.

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Three Months ended

Stock-based compensation

Exercise of options

Exercise of warrants

Balance at June 30, 2022

accompanying notes are an integral part of these condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months ended

Cash flows from operating activities

2 unchanged sentences

Depreciation and amortization

Impairment on goodwill and intangible assets

Amortization of premium on investment securities

1 unchanged sentence

Interest on investment securities

Provision for doubtful accounts

Provision for slow-moving inventory

Debt issuance costs

3 unchanged sentences

Gain on extinguishment of notes payable, net

Early termination of lease

Income (loss) attributable to non-controlling interests

Loss from disposal of fixed assets

Change in fair value of contingent consideration

Income attributable to non-controlling interests

Changes in operating assets and liabilities, net of acquisitions:

1 unchanged sentence

Prepaid expenses and other current assets

Prepaid and refundable taxes

Right-of-use assets, net

8 unchanged sentences

Proceeds from the sale of securities

Issuance of loan receivable

Issuance of loan receivables

Cash paid for business combination, net of cash acquired

7 unchanged sentences

Proceeds from exercise of warrants

Short-term loan payable

Repayments of debt

Payments of financing leases

Net cash provided by financing activities

Net increase in cash, cash equivalents, and restricted cash

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

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

Net increase in cash and cash equivalents

Cash and cash equivalents at the beginning of period

Cash and cash equivalents at the end of period

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

2 unchanged sentences

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

The accompanying notes are an integral part of

these condensed consolidated financial statements.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Nature of Business and Basis of Presentation

Description of Business

Agrify Corporation (“Agrify” or

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

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

and hemp industries.

The Company was formed in the State of Nevada on June 6, 2016 as Agrinamics, Inc., and subsequently changed its

name to Agrify Corporation.

Supplemental disclosures of non-cash investing activities

Equipment sold for loan receivable to customer

accompanying notes are an integral part of these condensed consolidated financial statements.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1 — Overview, Basis of Presentation and Significant Accounting Policies

Agrify Corporation (“Agrify” or the “Company”)

is one of the most innovative providers of advanced cultivation and extraction solutions for the cannabis industry, bringing data, science,

and technology to the forefront of the market.

The Company’s proprietary micro-environment-controlled Agrify Vertical Farming Units

(or “VFUs”) enable cultivators to produce the highest quality products with what it believes to be an unmatched consistency,

yield, and Return on Investment (“ROI”) at scale.

The Company’s comprehensive extraction product line, which includes

hydrocarbon, ethanol, solventless, post-processing, and lab equipment, empowers producers to maximize the quantity and quality of extract

required for premium concentrates.

The Company believes it’s the only company with

an automated and fully integrated grow solution in the industry.

The Company’s cultivation and extraction solutions seamlessly combines

its 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 its

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

result, the Company believes it’s well situated to create a dominant market position in the indoor agriculture sector.

The Company was formed in the State of Nevada on June 6, 2016 as Agrinamics, Inc., and

subsequently changed its name to Agrify Corporation.

The Company is sometimes referred to herein by the words “we,” “us,”

“our,” and similar terminology.

The Company has nine wholly-owned subsidiaries, which

are collectively referred to as the “Subsidiaries”:

AGM Service Corp LLC (formerly AGM Service Corp Inc.);

TriGrow Systems, LLC (“TriGrow”, which acted as the Company’s exclusive distributor and which was acquired in January 2020 as TriGrow Systems, Inc.

and converted to TriGrow Systems, LLC in May 2020);

Company has nine wholly-owned subsidiaries, which are collectively referred to as the “Subsidiaries”:

AGM Service Corp LLC (formerly

AGM Service Corp Inc.);

TriGrow Systems, LLC (“TriGrow”, which

acted as the Company’s exclusive distributor and which was acquired in January 2020 as TriGrow Systems, Inc.

and converted

to TriGrow Systems, LLC in May 2020);

Ariafy Finance, LLC;

Harbor Mountain Holdings, LLC (“HMH”) (acquired in July 2020);

Cascade Sciences, LLC (“Cascade”) (which was acquired by the Company on October 1, 2021);

Precision Extraction NewCo, LLC (“Precision”) (which was a newly formed subsidiary in connection with October 1, 2021 acquisition of Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions and Cascade);

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

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

The Company also has ownership interests in the

following companies:

Teejan Podoponics International LLC (“TPI”) (the Company has owned 50% of TPI since December 2018);

Agrify-Valiant, LLC (“Agrify-Valiant”) (the Company owns 60% of Agrify-Valient, which was formed in December 2019);

Harbor Mountain Holdings,

LLC (“HMH”) (acquired in July 2020);

Cascade Sciences, LLC (“Cascade”)

(which was acquired by the Company on October 1, 2021);

Extraction NewCo, LLC (“Precision”) (which was a newly formed subsidiary in connection with the October 1, 2021

acquisition of Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions and Cascade);

PurePressure, LLC (“PurePressure”)

(which was acquired by the Company on December 31, 2021);

Lab Society NewCo, LLC (“Lab Society”)

(which was a newly formed subsidiary in connection with the February 1, 2022 acquisition of LS Holdings Corp).

Company also has ownership interests in the following companies:

Teejan Podoponics International

LLC (“TPI”) (the Company has owned 50% of TPI since December 2018);

Agrify-Valiant, LLC (“Agrify-Valiant”)

(the Company owns 60% of Agrify-Valient, which was formed in December 2019);

● Agrify Brands, LLC (“Agrify Brands”) (formerly TriGrow Brands, LLC) (the Company owns 75% of Agrify Brands, which ownership position was created as part of the January 2020 acquisition of TriGrow).

Reverse Stock Split

On January 12, 2021, the Company effected a 1-for-1.581804

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

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

unless otherwise indicated.

Initial Public Offering and Secondary Public Offering

On February 1, 2021, the Company closed its initial

public offering, or (“IPO”), of 6,210,000 shares of its Common Stock (inclusive of 810,000 shares of Common Stock from the

full exercise of the over-allotment option of shares granted to the underwriters).

The offer and sale of all of the shares in the IPO

were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File Nos.

January 12, 2021, the Company effected a 1-for-1.581804 reverse stock split (“Reverse Stock Split”) of its Common Stock,

$ 0.001 par value per share (“Common Stock”).

All share and per share information has been retroactively adjusted to give

effect to the Reverse Stock Split for all periods presented unless otherwise indicated.

Public Offering and Secondary Public Offering

February 1, 2021, the Company closed its initial public offering, or (“IPO”), of 6,210,000 shares of its Common Stock (inclusive

of 810,000 shares of Common Stock from the full exercise of the over-allotment option of shares granted to the underwriters).

and sale of all of the shares in the IPO were registered under the Securities Act of 1933, as amended, pursuant to a registration statement

on Form S-1 (File Nos.

333- 251616 and 333-252490), which was declared effective by the SEC on January 27, 2021.

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

as the underwriters.

In the IPO, Maxim Group

LLC and Roth Capital Partners acted as the underwriters.

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

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

After deducting underwriting discounts and commissions

of $ 4 million and offering expenses paid or payable by us of approximately $ 1 million, the net proceeds from the IPO were approximately

$ 57 million.

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

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

On February 19, 2021, the Company consummated a secondary

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

underwriting discounts and commissions.

On March 22, 2021, the Company closed on the sale of an additional 833,333 shares of Common Stock

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

The exercise of the over-allotment

option brought the total number of shares of Common Stock sold by the Company in connection with the February Offering to 6,388,888 shares

and the total net proceeds received in connection with the February Offering to approximately $ 80 million, after deducting underwriting

discounts and estimated offering expenses.

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

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

Coronavirus (“COVID-19”) Pandemic

The spread of COVID-19 beginning in the first quarter

of 2020 has caused significant volatility in U.S.

There is significant uncertainty around the breadth and duration of business

disruptions related to COVID-19, as well as its impact on the U.S.

To date, there has not been a material impact on the

Company’s business operations and financial performance.

The extent of the impact of COVID-19 on the Company’s operational

and financial performance, if any, will depend, in part, on the length and severity of these restrictions and on the Company’s ability

to conduct business in the ordinary course.

The Paycheck Protection Program

In May 2020, the Company received an unsecured Paycheck

Protection Program Loan (“PPP Loan”) from the Bank of America pursuant to the Paycheck Protection Program (the “PPP”)

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

The total gross

proceeds from the IPO were $ 62.1 million.

deducting underwriting discounts and commissions of $ 4 million and offering expenses paid or payable by us of approximately $ 1 million,

the net proceeds from the IPO were approximately $ 57 million.

The Company used the net proceeds from the IPO for its current working

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

February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) of 5,555,555 shares of its

Common Stock for a price of $ 13.50 per share, less certain underwriting discounts, and commissions.

On March 22, 2021, the Company closed

on the sale of an additional 833,333 shares of Common Stock on the same terms and conditions pursuant to the exercise of the underwriters’

over-allotment option.

The exercise of the over-allotment option brought the total number of shares of Common Stock sold by the Company

in connection with the February Offering to 6,388,888 shares and the total net proceeds received in connection with the February Offering

to approximately $ 80 million, after deducting underwriting discounts and estimated offering expenses.

The Company used the net proceeds

from the IPO for its current working capital needs, to support revenue growth, to increase inventory, to meet customer demand forecasts,

and to support operational growth.

Coronavirus (“COVID-19”) Pandemic Impact and Uncertainties

The COVID-19 pandemic has created significant public

health concerns as well as economic disruption, uncertainty, and volatility that may negatively affect its business operations and financial

As a result, if the pandemic or its effects persist or worsen, its accounting estimates and assumptions could be impacted in

subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant (although

the potential effects cannot be estimated at this time).

The Company has experienced minimal business interruption as a result of the

COVID-19 pandemic.

The COVID-19 pandemic to date has resulted in supply chain delays of its inventory, higher operating costs and increased

shipping costs, among other impacts.

As events surrounding the COVID-19 pandemic can change rapidly, the Company cannot predict how it

may disrupt its operations or the full extent of the disruption.

Paycheck Protection Program

In May 2020, the Company received an unsecured Paycheck Protection

Program Loan (“PPP Loan”) from the Bank of America pursuant to the Paycheck Protection Program (the “PPP”) under

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

Small Business Administration

1 unchanged sentence

The Company’s

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

Note 2 — Summary of Significant Accounting Policies

Preparation of Condensed Consolidated Financial Statements

The condensed consolidated financial statements included

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

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

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

described below.

The condensed consolidated financial statements

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

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

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

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

The condensed consolidated balance sheet as of

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

for the year ended December 31, 2021.

Certain information and disclosures normally included in annual consolidated financial statements

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

Because the condensed consolidated interim financial statements do

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

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

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

The results for interim periods are not necessarily indicative

of a full year’s results.

application for the forgiveness of the outstanding balance of the PPP Loan was denied by the SBA.

On June 23, 2022, the Company received

a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and bears interest at a rate of 1.00 % per year.

PPP loan is payable in 34 equal combined monthly principal and interest payments of approximately $ 24 thousand commencing August 7, 2022.

of Condensed Consolidated Financial Statements

condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted

in the United States of America (“GAAP”), and on the same basis as the audited consolidated financial statements included

in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and filed with the SEC (“Form 10-K”),

except for the recently adopted accounting pronouncements described below.

condensed consolidated financial statements included herein reflect all normal and recurring adjustments which, in the opinion of management,

are necessary for a fair presentation of the Company’s condensed consolidated statements of operations for the three and six months

ended June 30, 2022 and 2021, condensed consolidated statements of stockholders’ equity for the three and six months ended

June 30, 2022 and 2021, and the condensed consolidated cash flows for the six months ended June 30, 2022 and 2021.

condensed consolidated balance sheet as of December 31, 2021 is derived from the audited consolidated financial statements presented

in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Certain information and disclosures normally

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

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

set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included

in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 31, 2022.

for interim periods are not necessarily indicative of a full year’s results.

Basis of Presentation and Principles of Consolidation

2 unchanged sentences

have been prepared in accordance with GAAP and include the accounts of Agrify Corporation and its wholly-owned subsidiaries, as described

above in Note 1 – Nature of Business and Basis of Presentation, in accordance with the provisions required by the Consolidation

Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

Company includes results of operations of acquired companies from the date of acquisition.

All significant intercompany transactions and

balances are eliminated.

above in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies, in accordance with the provisions required

by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

The Company includes results of operations of acquired companies from the date of acquisition.

All significant intercompany transactions

and balances are eliminated.

Accounting for Less Than Wholly-Owned Subsidiaries

For the Company’s less than wholly-owned subsidiaries,

which include TPI, Agrify-Valiant, and Agrify Brands, the Company first analyzes whether these entities are a variable interest entity

(a “VIE”) in accordance with ASC Topic 810 Consolidation (“ASC 810”), and if so, whether the Company is the

primary beneficiary requiring consolidation.

A VIE is an entity that has (i) insufficient equity to permit it to finance its activities

without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial

The financial results of a VIE are consolidated by the primary beneficiary, which is the entity that has both the power to direct

the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right

to receive benefits from the entity that potentially could be significant to the entity.

Variable interests in a VIE are contractual,

ownership or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets.

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

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

in the VIE is consolidated.

Based on the Company’s analysis for these entities,

the Company has determined that Agrify-Valiant, LLC and Agrify Brands, LLC are each a VIE, and that the Company is the primary beneficiary.

While the Company owns 60 % of Agrify-Valiant, LLC’s equity interests and 75 % of Agrify Brands, LLC’s equity interests, the

remaining equity interests in Agrify-Valiant, LLC and Agrify Brands, LLC are owned by unrelated third parties, and the agreement with

For the Company’s less than wholly-owned

subsidiaries, which include TPI, Agrify-Valiant, and Agrify Brands, the Company first analyzes whether these entities are a variable interest

entity (a “VIE”) in accordance with ASC Topic 810 Consolidation (“ASC 810”), and if so, whether the Company

is the primary beneficiary requiring consolidation.

A VIE is an entity that has (i) insufficient equity to permit it to finance its

activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling

financial interest.

The financial results of a VIE are consolidated by the primary beneficiary, which is the entity that has both the

power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses

or the right to receive benefits from the entity that potentially could be significant to the entity.

Variable interests in a VIE are

contractual, ownership or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets.

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

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

interest in the VIE is consolidated.

Based on the Company’s analysis of these

entities, the Company has determined that Agrify-Valiant, LLC and Agrify Brands, LLC are each a VIE, and that the Company is the primary

While the Company owns 60 % of Agrify-Valiant, LLC’s equity interests and 75 % of Agrify Brands, LLC’s equity interests,

the remaining equity interests in Agrify-Valiant, LLC and Agrify Brands, LLC are owned by unrelated third parties, and the agreement with

these third parties provides the Company with greater voting rights.

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

Going Concern

In accordance with the Financial Accounting Standards

Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going

Concern”, the Company’s management evaluated whether there are conditions or events that raise substantial doubt about its

ability to continue as a going concern within one year after the financial statements’ issuance date.

The following matters raise

substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements

The Company has incurred operating losses since its inception and has

negative cash flows from operations.

The Company also has an accumulated deficit of $ 161.3 million as of June 30, 2022.

In addition, for

the quarter ending June 30, 2022, the Company will recognize significant impairment charges to the carrying value of its goodwill and

intangible assets and will be in default of certain financial debt covenants associated with its $ 65 million senior secured promissory

note (the “SPA Note”).

As a result of its default, the Company is actively working to restructure its existing SPA Note in

order to avoid having the note called by the lender.

If the lender were to call the debt instrument due to the default, the Company would

not have sufficient cash on hand as of June 30, 2022 to pay off the existing debt and default penalty amounts.

Cash on hand is approximately

$ 59.9 million, while the debt liability, including the potential default penalty, would be approximately $ 75.0 million as of June 30,

Subsequent to the end of the

second quarter of 2022, the Company reached an agreement in principle with its institutional lender to amend its existing SPA Note and

to modify certain financial covenants which, once complete, should give the Company additional flexibility to operate and meet its long-term

strategic goals while also allowing it to responsibly adjust to the many challenges currently facing the cannabis industry.

These financial statements have been prepared on a going concern basis,

which implies the Company believes these conditions raise substantial doubt about its ability to continue as a going concern within

the next twelve-months from the date these financial statements are available to be issued.

The Company’s continuation as a going

concern is dependent upon its ability to obtain necessary debt or equity financing to continue operations until the Company begins generating

sufficient cash flows from operations to meet its obligations.

There is no assurance that the Company will ever

be profitable.

The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and

classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as

a going concern.

Use of Estimates

11 unchanged sentences

Actual financial results could differ from those estimates.

The Company, and its Subsidiaries, fiscal year

ends on December 31, each year.

For the Company and its Subsidiaries, the fiscal year ends on December 31, each year.

Emerging Growth Company

4 unchanged sentences

emerging growth companies.

In addition, the JOBS Act provides that an “emerging growth company”

can use the extended transition period for complying with new or revised accounting standards.

In addition, the JOBS Act provides that an “emerging

growth company” can use the extended transition period for complying with new or revised accounting standards.

The Company will remain an “emerging growth

company” until the earliest to occur of:

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

● the issuance, in a three-year period, of more than $1.0 billion in non-convertible debt;

● the end of the fiscal year in which the market value of Common Stock

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

● reporting $1.0 billion or more

in annual gross revenues;

● the issuance, in a three-year

period, of more than $1.0 billion in non-convertible debt;

● the end of the fiscal year

in which the market value of Common Stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter;

● December 31, 2026.

As of June 30, 2022, the market value of Common

Stock held by non-affiliates did not exceed $700 million.

Reclassifications

Certain amounts in the Company’s prior period financial statements

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

In this Form 10-Q, the Company has reclassified

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

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

Certain amounts in the Company’s prior period

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

In this Form 10-Q,

the Company has reclassified selling, general and administrative expenses to two separate line items in the accompanying consolidated

statement of operations as general and administrative expenses and selling and marketing expenses for the three and six months ended June

30, 2022 and 2021.

Cash, Cash Equivalents, and Restricted Cash

Cash and cash equivalents

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

equivalents are carried at cost, which approximates fair value.

Restricted cash represents cash required to be held as collateral for

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

Accordingly, these balances contain restrictions as to

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

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

Cash and cash equivalents consist principally of cash and deposits

with maturities of three months or less as of June 30, 2022 and December 31, 2021.

All cash equivalents are carried at cost, which approximates

Restricted cash represents cash required to be held as collateral for the Company’s SPA Note.

Accordingly, these balances

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

information relating to the Company’s SPA Note may be found in Note 9 – Debt, included

elsewhere in the notes to the consolidated financial statements.

Marketable Securities

6 unchanged sentences

The fair value of

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

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

The Company considers current assets

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Financial instruments that potentially subject

the Company to a concentration of credit risk primarily consist of cash and accounts receivable.

The Company places its cash with financial

institutions in the United States.

The cash balances are insured by the FDIC up to $ 250 thousand per depositor with unlimited insurance

for funds in noninterest-bearing transaction accounts through March 31, 2022.

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

insured limits.

The Company has certain customers from whom revenue

individually represented 10 % or more of the Company’s total revenue, or whose accounts receivable balances individually represent

10 % or more of the Company’s total accounts receivable.

Refer to the following tables below.

For the three months ended March 31, 2022 and

the Company to a concentration of credit risk primarily consist of cash, cash equivalents, restricted cash, and accounts receivable.

equivalents primarily consist of money market funds with original maturities of three months or less, which are invested primarily with

financial institutions.

Cash deposits with financial institutions, including restricted cash, generally exceed federally insured

Management believes minimal credit risk exists with respect to these financial institutions and the Company has not experienced

any losses on such amounts.

below show customers who account for 10 % or more of the Company’s total revenues and 10 % or more of the Company’s accounts

receivable for the periods presented:

For the three months ended June 30, 2022 and 2021,

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

Three Months ended

March 31, 2022

June 30, 2022

Three Months ended

March 31, 2021

June 30, 2021

(In thousands)

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

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

Company Customer Number – 139

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

For the six months ended June 30, 2022 and 2021,

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

Six Months ended

June 30, 2022

Six Months ended

June 30, 2021

(In thousands)

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

Company Customer Number – 139

Company Customer Number – 136

* Customer revenue, as a percentage

of total revenue, was less than 10%

Accounts Receivable, Net

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

As of June 30, 2022 and December 31, 2021, the

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

March 31, 2022

June 30, 2022

December 31, 2021

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NEIA – Related Party

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

Company Customer Number - 126

* Customer accounts receivable

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

The Company values all of its inventories, which

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Furniture and fixtures

Research and development laboratory equipment

Research and development of laboratory equipment

Machinery and equipment

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Leasehold improvements

Lower of estimated useful life

or remaining lease term

Lower of estimated useful

life or remaining lease term

The estimated useful lives of the Company’s

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The Company charges maintenance and repairs

to expense as incurred.

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

to expenses as incurred.

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

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

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and depreciated once placed into service.

Goodwill is defined as the excess of cost over

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

Goodwill is tested for impairment annually,

and more frequently if events and circumstances indicate that the asset might be impaired.

The Company has determined that it is a single

reporting unit for the purpose of conducting the goodwill impairment assessment.

A goodwill impairment charge is recorded if the amount

by which the Company’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

Factors that could

lead to a future impairment include material uncertainties such as a significant reduction in projected revenues, a deterioration of projected

financial performance, future acquisitions and/or mergers, and/or a decline in the Company’s market value as a result of a significant

decline in the Company’s stock price.

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

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

Goodwill is defined as the excess of cost over the fair value of assets

acquired and liabilities assumed in a business combination.

Goodwill is tested for impairment annually, and more frequently if events

and circumstances indicate that the asset might be impaired.

The Company has determined that it is a single reporting unit for the purpose

of conducting the goodwill impairment assessment.

A goodwill impairment charge is recorded if the amount by which the Company’s

carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

Factors that could lead to a future impairment include

material uncertainties such as a significant reduction in projected revenues, a deterioration of projected financial performance, future

acquisitions and/or mergers, and/or a decline in the Company’s market value as a result of a significant decline in the Company’s

During the three-month period

ended June 30, 2022, the Company identified a potential impairment triggering event associated with both a sustained decline in the Company’s

stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole.

factors, the Company deemed that there may be an impairment to the carrying value of its long-lived assets and accordingly performed interim

testing to determine the proper fair value of its long-lived assets as of June 30, 2022.

Based on its interim testing, the Company noted that the carrying value of equity exceeded the calculated fair

value by an amount greater than the aggregate value of our goodwill and intangible assets.

Accordingly, the Company concluded that the

entire carrying value of its goodwill and intangible assets should be impaired, resulting in a second-quarter impairment charge of $69.9

Additional information regarding the Company’s

interim testing on goodwill may be found in Note 7 – Intangible Assets, Net and Goodwill, included elsewhere in the notes to the

consolidated financial statements.

Intangible Assets

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Capitalized website costs

In performing the review of the recoverability

of intangible assets, the Company considers several factors, including whether there have been significant changes in legal factors or

the overall business climate that could affect the underlying value of an asset.

The Company also considers whether there is an expectation

that the asset will be sold or disposed of before the end of its remaining estimated useful life.

If, as the result of examining any of

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

an impairment charge and reduces the carrying value of the asset to its estimated fair value.

In performing the review of the recoverability of intangible assets,

the Company considers several factors, including whether there have been significant changes in legal factors or the overall business

climate that could affect the underlying value of an asset.

The Company also considers whether there is an expectation that the asset

will be sold or disposed of before the end of its remaining estimated useful life.

If, as the result of examining any of these factors,

the Company concludes that the carrying value of the intangible asset exceeds its estimated fair value, the Company recognizes an impairment

charge and reduces the carrying value of the asset to its estimated fair value.

During the three-month period

ended June 30, 2022, the Company identified a potential impairment triggering event associated with both a sustained decline in the Company’s

stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole.

factors, the Company deemed that there may be an impairment to the carrying value of its long-lived assets and accordingly performed interim

testing to determine the proper fair value of its long-lived assets as of June 30, 2022.

Based on its interim testing,

the Company noted that the carrying value of equity exceeded the calculated fair value by an amount greater than the aggregate value of

our goodwill and intangible assets.

Accordingly, the Company concluded that the entire carrying value of its goodwill and intangible assets

should be impaired, resulting in a second-quarter impairment charge of $ 69.9 million.

Additional information regarding the Company’s

interim testing on intangible assets may be found in Note 7 – Intangible Assets, Net and Goodwill, included elsewhere in the notes

to the consolidated financial statements.

Convertible Notes Payable

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life of the respective note using the effective interest method.

If the Company determines that an instrument is

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

date fair value to the effective current conversion price of the instrument.

The Company records a BCF as debt discount which is amortized

to interest expense over the life of the respective note using the effective interest method.

BCFs that are contingent upon the occurrence

of a future event are recognized when the contingency is resolved.

If the Company determines that an instrument

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

the commitment date fair value to the effective current conversion price of the instrument.

The Company records a BCF as a debt

discount which is amortized to interest expense over the life of the respective note using the effective interest method.

are contingent upon the occurrence of a future event are recognized when the contingency is resolved.

Debt Issue Costs and Debt Discount

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debt discounts in connection with issuing of debt.

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

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

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

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

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

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

The Company’s right-of-use asset contracts

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The Company classifies stock-based compensation

expense in its consolidated statements of operations and comprehensive loss in the same manner in which the award’s recipient’s

payroll costs are classified.

expense in its consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified.

The Company estimates the fair value of each stock

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operating results.

For contingent consideration arrangements, the

Company recognizes a liability at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations.

Additional information regarding the Company’s contingent consideration arrangements may be found in Note 5 – Fair Value Measures,

included elsewhere in the notes to the consolidated financial statements.

For contingent consideration arrangements, the Company recognizes a

liability at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations.

Additional information

regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value Measures, included elsewhere

in the notes to the consolidated financial statements.

Revenue Recognition

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● identify the customer contract;

● identify performance obligations that are distinct;

● 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.

● allocate the transaction price

to the distinct performance obligations;

● recognize revenue as the performance

obligations are satisfied.

Identify the customer contract

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includes estimating the amount of variable consideration to be included in the transaction price, if any.

The Company then allocates

the transaction price to each performance obligation in the contract based on the SSP.

The corresponding revenue is recognized as the

related performance obligations are satisfied.

The Company then allocates the

transaction price to each performance obligation in the contract based on the SSP.

The corresponding revenue is recognized as the related

performance obligations are satisfied.

Judgment is required to determine the SSP for

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components separately as financial income.

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

Payment terms with customers typically require

payment 30 days from invoice date.

The Company’s agreements with its customers do not provide for any refunds for services or products

and therefore no specific reserve for such is maintained.

In the infrequent instances where customers raise a concern over delivered

products or services, the Company has endeavored to remedy the concern and all costs related to such matters have been insignificant

in all periods presented.

For the three months and six months ended June 30, 2022 and 2021, the Company did not have

any such financial income.

Payment terms with customers typically require payment 30 days

from the invoice date.

The Company’s agreements with its customers do not provide for any refunds for services or products and therefore

no specific reserve for such is maintained.

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

services, the Company has endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods

The Company has elected to treat shipping and

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Research and Development Costs

The Company expenses research and development

costs as incurred.

Research and development expenses include payroll, employee benefits and other expenses associated with product development.

The Company incurs research and development costs associated with the development and enhancement of both hardware and software products

associated with its cultivation and extraction equipment, as well as its SaaS-based software offering, Agrify Insights software.

The Company expenses research and development costs as incurred.

and development expenses include payroll, employee benefits and other expenses associated with product development.

The Company incurs

research and development costs associated with the development and enhancement of both hardware and software products associated with

its cultivation and extraction equipment, as well as its SaaS-based software offering, Agrify Insights™ cultivation software.

Capitalization of Internal Software Development Costs

The Company capitalizes certain software engineering

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

The Company capitalizes certain software engineering efforts related

to the continued development of Agrify Insights™ cultivation software under ASC 985-20.

Costs incurred during the application

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Equity Method Investments

Investments in affiliates which are 50 % or

less owned by the Company for which the Company exercises significant influence but does not have control are accounted for on the equity

The Company has investments in equity investments without readily determinable fair values, which represents investments in entities

where the Company does not have the ability to significantly influence the operations of the entities.

An assessment of whether or not the Company (as a holder of 50 % of

TPI) has the power to direct activities that most significantly impact TPI’s economic performance and to identify the party that

obtains the majority of the benefits of the investment was performed as of March 31, 2022 and December 31, 2021 and will be performed

as of each subsequent reporting date.

After each of these assessments, the Company concluded that the activities that most significantly

impact TPI’s economic performance are the growth, marketing, sale, and distribution of products using TPI’s technology and

IP, each of which are solely directed by TPI.

Based on our consideration of these assessments, the Company concluded that the Company’s

investment in TPI should be accounted for under the equity method.

Investments in affiliates that are 50 % or less owned by the Company

for which the Company exercises significant influence but does not have control are accounted for on the equity method.

The Company has

investments in equity investments without readily determinable fair values, which represents investments in entities where the Company

does not have the ability to significantly influence the operations of the entities.

An assessment of whether or not the Company (as

a holder of 50 % of TPI) has the power to direct activities that most significantly impact TPI’s economic performance and to identify

the party that obtains the majority of the benefits of the investment was performed as of June 30, 2022 and December 31, 2021 and will

be performed as of each subsequent reporting date.

After each of these assessments, the Company concluded that the activities that most

significantly impact TPI’s economic performance are the growth, marketing, sale, and distribution of products using TPI’s

technology and IP, each of which are solely directed by TPI.

Based on the consideration of these assessments, the Company concluded that

the Company’s investment in TPI should be accounted for under the equity method.

The carrying value of the Company’s investment

in TPI was $ 0 as of March 31, 2022 and December 31, 2021.

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

31, 2022 and March 31, 2021.

in TPI was $ 0 as of June 30, 2022 and December 31, 2021.

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

June 30, 2022 and June 30, 2021.

The Company accounts for income taxes pursuant

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the net deferred asset will not be realized.

The Company follows the provisions of ASC 740-10-25-5, “Basic

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

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

that would be ultimately sustained.

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

the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely

than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.

positions taken are not offset or aggregated with other positions.

Tax positions that meet the more-likely-than-not recognition threshold

are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable

taxing authority.

The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above

should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest

The Company follows the provisions of ASC 740-10-25-5,

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

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

of the position that would be ultimately sustained.

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

is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes

it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes,

Tax positions taken are not offset or aggregated with other positions.

Tax positions that meet the more-likely-than-not recognition

threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with

the applicable taxing authority.

The portion of the benefits associated with tax positions taken that exceeds the amount measured as described

above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest

and penalties that would be payable to the taxing authorities upon examination.

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

basic loss per share by dividing net loss available to Common Stockholders by the weighted-average number of common shares outstanding.

computes basic loss per share by dividing net loss available to Common Stockholders by the weighted-average number of common shares outstanding.

Net loss available to Common Stockholders represents net loss attributable to Common Stockholders reduced by the allocation of earnings

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As the Company has reported losses for all periods presented, all potentially dilutive securities

including stock options and warrants, are antidilutive and accordingly, basic net loss per share equals diluted net loss per share.

including stock options and warrants, are anti-dilutive and accordingly, basic net loss per share equals diluted net loss per share.

Net loss per share calculations for all periods

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number of Common Stock outstanding.

Note 3 — Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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

The Company does not believe that any

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

The Company does not believe that any other ASU

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

Note 2 — Revenue and Deferred Revenue

During the three months ended March 31, 2022 and

2021, the Company generated revenue from the following sources:

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

During the three and six months ended June 30,

2022 and 2021, the Company generated revenue from the following sources:

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

The Company sells its equipment and services to

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surface protection.

Construction contracts normally provide for payment upon completion

of specified work or units of work as identified in the contract.

Although there is considerable variation in the terms of these contracts,

they are primarily structured as time-and-material contracts.

The Company enters into time-and-materials contracts under which the Company

is paid for labor and equipment at negotiated hourly billing rates and other expenses, including materials, as incurred at rates agreed

to in the contract.

Construction contracts normally provide for payment

upon completion of specified work or units of work as identified in the contract.

Although there is considerable variation in the terms

of these contracts, they are primarily structured as time-and-material contracts.

The Company enters into time-and-materials contracts

under which the Company is paid for labor and equipment at negotiated hourly billing rates and other expenses, including materials, as

incurred at rates agreed to in the contract.

The Company uses three main sub-contractors to execute the construction contracts.

Disaggregation of Revenue —

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

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

Three Months ended

Six Months ended

(In thousands)

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of a contract that has an original expected duration of one year or less and (ii) the right to invoice practical expedient.

The Company generally provides a one-year warranty

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

the warranties it receives from its vendors, if any, which generally cover this one-year period.

In accordance with ASC 450-20-25, the

Company accrues for product warranties when the loss is probable and can be reasonably estimated.

The Company maintains a reserve for

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

The Company’s reserve for warranty returns is included

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

Company generally provides a one-year warranty on its products for materials and workmanship but may provide multiple year warranties

as negotiated, and generally transfers to its customers the warranties it receives from its vendors, if any, which generally cover this

one-year period.

In accordance with ASC 450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably

The Company maintains a reserve for warranty returns of $ 579 thousand and $ 398 thousand for June 30, 2022 and December 31,

2021, respectively.

The Company’s reserve for warranty returns is included in accrued expenses and other current liabilities in

its consolidated balance sheets.

Additional information regarding the Company’s warranty reserve may be found in Note

3 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements.

Deferred Revenue

Changes in the Company’s current deferred

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

revenue balance for the six months ended June 30, 2022 and the year ended December 31, 2021 were as follows:

(In thousands)

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Deferred revenue – end of period

Deferred revenue balances primarily consist of

customer deposits on our cultivation and extraction solutions equipment.

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

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

Deferred revenue balances primarily consist of customer deposits on

its cultivation and extraction solutions equipment.

As of June 30, 2022 and December 31, 2021, all of the Company’s deferred revenue

balances were reported as current liabilities in the accompanying consolidated balance sheets.

Note 3 – Supplemental Consolidated Balance Sheet Information

Accounts Receivable

Accounts receivable consisted of the following

as of June 30, 2022 and December 31, 2021:

(In thousands)

Accounts receivable, gross

Less allowance for doubtful accounts

Accounts receivable, net

NEIA, a related party, accounted for $ 2.4 million

and $ 3.5 million of the Company’s accounts receivable, net as of June 30, 2022 and December 31, 2021, respectively.

The changes in the allowance for doubtful accounts

consisted of the following:

(In thousands)

Six Months ended

Allowance for doubtful accounts - beginning of period

Provision for doubtful accounts

Other adjustments

Allowance for doubtful accounts - end of period

Bad debt expense was $ 1.6 million and $ 0 for the three months ended

June 30, 2022 and 2021, respectively, and $ 1.6 million and $ 0 for the six months ended June 30, 2022 and 2021, respectively.

Prepaid Expenses and Other Current Receivables

Prepaid expenses and other current receivables

consisted of the following as of June 30, 2022 and December 31, 2021:

(In thousands)

Prepaid insurance

Prepaid materials

Prepaid software

Prepaid expenses, other

Deferred costs

Deferred issuance costs, net

Other note receivables (1)

Other receivables, other

Total prepaid expenses and other current assets

(1) Other note receivables relate to the current portion of one of its

loan receivable balances related to the total turn-key solution (“TTK Solution”) program.

Property and Equipment, Net

Property and equipment, net consisted of the following

as of June 30, 2022 and December 31, 2021:

(In thousands)

Computer and office equipment

Furniture and fixtures

Leasehold improvements

Machinery and equipment

Research and development of laboratory equipment

Leased equipment at customer

Trade show assets

Total property and equipment, gross

Accumulated depreciation

Construction in progress

Total property and equipment, net

Depreciation expense for the three months ended

June 30, 2022 and 2021 was $ 438 thousand and $ 109 thousand, respectively, and $ 817 thousand and $ 199 thousand for the six months ended

June 30, 2022 and 2021, respectively.

Other Non-Current Assets

Other non-current assets consisted of the following

as of June 30, 2022 and December 31, 2021:

(In thousands)

Deferred debt issuance costs, non-current, net

Long-term deferred commissions expense

Security deposits

Total other non-current assets

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities

consisted of the following as of June 30, 2022 and December 31, 2021:

(In thousands)

Accrued acquisition liability (1)

Sales tax payable (2)

Accrued construction costs

Compensation related fees

Accrued professional fees

Accrued warranty costs

Accrued consulting fees

Accrued inventory purchases

Financing lease liabilities

Accrued non-income taxes

Other current liabilities

Total accrued expenses and other current liabilities

(1) Accrued acquisition liabilities include both the contingent consideration and the value of held back Common Stock associated with the 2022 acquisition of Lab Society and the 2021 acquisitions of Precision, Cascade and PurePressure.

(2) Sales tax payable primarily represents identified sales and use tax

liabilities arising from the acquisition of Precision and Cascade.

These amounts are included as part of the initial purchase price allocations

and are the subject matter of an indemnification claim under the Precision and Cascade acquisition agreement.

Warranty Accrual

The following table

summarizes the activity related to the Company’s accrued liability for estimated future warranty costs:

(In thousands)

Six Months ended

Warranty accrual – beginning of period

Liabilities accrued for warranties issued during period

Warranty accrual – end of period

Note 4 — Fair Value Measures

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

At March 31, 2022 and December 31, 2021,

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

March 31, 2022

At June 30, 2022 and December 31, 2021, the

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

June 30, 2022

December 31, 2021

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Contingent consideration

Total liabilities

Value of Financial Instruments

The Company has certain financial instruments which consist of cash

and cash equivalents, marketable securities, and contingent consideration.

Fair value information for each of these instruments is as

and cash equivalents, accounts receivable, accounts payable and deferred revenue liabilities fair values approximate their carrying values,

due to the expected duration of these instruments.

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

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

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

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

value of the deferred consideration approximated fair value, respectively.

As of March 31, 2022, the Company held investments

Fair Value of Financial Instruments

The Company has certain financial instruments

which consist of cash and cash equivalents, marketable securities, and contingent consideration.

Fair value information for each of these

instruments is as follows:

● Cash and cash equivalents,

accounts receivable, accounts payable and deferred revenue liabilities fair values approximate their carrying values, due to the expected

duration of these instruments.

● Marketable securities classified

as current held-to-maturity securities are recorded at amortized cost, which at June 30, 2022, approximated fair value.

● The Company’s deferred consideration was recorded in connection

with acquisitions during the first quarter of 2022 and fiscal 2021 using an estimated fair value discount at the time of the transaction.

As of June 30, 2022 and December 31, 2021, the carrying value of the deferred consideration approximated fair value, respectively.

Marketable Securities

As of June 30, 2022, the Company held investments

in mutual funds, municipal bonds and corporate bonds.

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next 12 months including, interest receivable on the long-term bonds.

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

The composition of the Company’s marketable

securities are as follows:

(In thousands)

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The amortized cost and estimated fair value of

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

marketable securities as of June 30, 2022, are as follows:

(In thousands)

Amortized cost

Unrealized loss

Estimated fair value

Current marketable securities

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Corporate bonds

Consideration

Contingent Consideration

The Company has classified its net liability for

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

and two acquisitions completed during fiscal 2021.

The fair value for the contingent consideration associated with these acquisitions

is within Level 3 of the fair value hierarchy because the associated fair value is determined using significant unobservable inputs,

which included the key assumptions to model future revenue, costs of goods sold and operating expense projections.

A description of the

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

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

The contingent

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

During the three months

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

the initial purchase price accounting.

contingent earn-out considerations to the sellers relating to one acquisition completed during the first quarter of 2022 and two acquisitions

completed during fiscal 2021.

The fair value for the contingent consideration associated with these acquisitions is within Level 3

of the fair value hierarchy because the associated fair value is determined using significant unobservable inputs, which included the

key assumptions to model future revenue, costs of goods sold and operating expense projections.

A description of the Company’s acquisitions

completed during the first quarter of 2022 and fiscal 2021 are included within Note 8 – Business Combinations, included elsewhere

in the notes to the consolidated financial statements.

(In thousands)

Three Months ended

Six Months ended

Contingent consideration – beginning of period

Accrued contingent consideration

Accretion of contingent consideration

Change in estimated fair value

Contingent consideration – end of period

The Company included contingent consideration

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

6 — Loan Receivable

A portion of the capital raised from the Company’s

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

The TTK Solution is industry’s

first end-to-end solution that provides access to capital for construction costs, equipment lease(s) to VFUs and other related operating

equipment, subscription to the Company’s Agrify Insights software, and business consultation services, which will enable the Company’s

customers to go to market faster and better.

The Company’s initial allowable investment

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

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

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

Of the five parties who have purchased the Agrify

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

The loan agreements entered into with customers

receiving the Agrify TTK Solution generally provide for loans ranging from approximately $ 200 thousand up to $ 13.5 million with maturity

dates of approximately two to three years after the completion of the construction projects.

Typically, the TTK Solution construction

loans have interest rates ranging from 12 % to 18 % per year.

The breakdown of loans receivable by Company as

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

The Company included contingent consideration within

accrued expenses and other current liabilities in its consolidated balance sheets as of June 30, 2022 and December 31, 2021, respectively.

See below for additional information related to

each acquisition’s contingent consideration.

Contingent Consideration – Lab Society

in its review of actual revenue performance as compared to its originally projected revenue estimates, noted that Lab Society’s

revenue trend is materially below the originally estimated revenue trends incorporated into the Company’s original fair value estimates

at the time of the acquisition.

As a result, the Company has reduced its fair value estimate of achievement for Lab Society’s first

earn-out period.

During the second quarter ended June 30, 2022, the Company reduced the estimated fair value of the contingent consideration

liability associated with Lab Society’s first earn-out period by approximately $ 1.0 million.

As required by ASC 805, the change

in contingent consideration was recorded as a reduction in operating expenses during the second quarter of 2022.

Contingent Consideration

– Precision and Cascade

The earn-out period for the potential contingent consideration to be

earned by the former members of Precision and Cascade concluded on December 31, 2021.

Company, during the second quarter of 2022, increased the amount of the contingent consideration earned by the former members of Precision

and Cascade by approximately $ 121 thousand, to reflect the final contingent consideration amount due.

This amount, as required by ASC

805, was recorded as an increase in operating expenses during the second quarter of 2022.

The Company has not yet paid the $ 5.6 million

in total contingent consideration to the members of Precision and Cascade as of June 30, 2022.

The Company expects to make payment on

the contingent consideration in August 2022.

Note 5 — Loan Receivable

A portion of the capital raised from the Company’s IPO has been

allocated to launch the Company’s TTK Solution program.

The TTK Solution is the industry’s first-of-its-kind program in which the

Company engages with qualified cannabis operators in the early phases of their business plans and provides critical support, typically

over a 10 -year period, which includes:

access to capital for construction costs, the design and build-out of their cultivation and extraction

facilities, state-of-the-art cultivation and extraction equipment, subscription to the Company’s Agrify Insights™ cultivation

software, process design, training, implementation, proven grow recipes, product formulations, data analytics, and consumer branding,

which will enable the Company’s customers to go to market faster and better.

During the quarter ended June 30, 2022, the Company established a reserve

of approximately $ 7.1 million specifically related to Greenstone Holdings (“Greenstone”).

The Company established the reserve

based upon its review of Greenstone’s financial stability, which would impact collectability, which is primarily the result of unfavorable

market conditions within the Colorado market.

The Company will continue to monitor the operations of Greenstone in an effort to collect

all outstanding receivables but due to the uncertain nature of Greenstone’s business at this time the Company has made the decision

to place a reserve against the receivables.

Greenstone is a related party as of June 30, 2022 and December 31, 2021.

The loan agreements entered into with customers receiving the TTK Solution

generally provide for loans with maturity dates of approximately two to three years after the completion of the construction projects.

Typically, the TTK Solution construction loans have interest rates ranging from 12 % to 18 % per year.

The breakdown of loans receivable by customer

as of June 30, 2022 and December 31, 2021 is as follows:

(In thousands)

Company A – Agrify TTK Solution

Greenstone Holdings – TTK Solution – Related Party

Company C – Agrify TTK Solution

Company D – Agrify TTK Solution

Company E – Agrify TTK Solution

Company F – Non-TTK Solution (1)

Company Customer Number 139 – TTK Solution

Greenstone – TTK Solution – Related Party

Company Customer Number 136 – TTK Solution

Company Customer Number 125 – TTK Solution

Company Customer Number 140 – TTK Solution

Company Customer Number 71 – Non-TTK Solution (1)

Other – Non-TTK Solutions

Greenstone – TTK Solution – Related Party – Allowance for doubtful accounts (2)

Total loan receivable

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

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

(1) The current portion of loan receivable are included within Note 3 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements.

(2) The Greenstone allowance for doubtful accounts balance consisted of

capital advances, accrued interest and VFUs sales.

See below for more detailed information about the Greenstone TTK Solution transaction

and the current reserve balance.

At this time, the Company is not aware of, nor has it identified any

risk or potential performance failure associated with any of its other TTK Solution arrangements with the noted exception of the Greenstone

TTK Solution, as described above.

The Company analyzed whether any of the above

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

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

As of March 31, 2022, two of the Company’s

employees own approximately 36.6 % of the equity of Greenstone Holdings, however, since the Company is not the primary beneficiary

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

7 — Accounts Receivable

Accounts receivable consisted of the following

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

(In thousands)

Accounts receivable, gross

Less allowance for doubtful accounts

Accounts receivable, net

NEIA, a related party, accounted for $ 1.3 million

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

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

(In thousands)

Three Months ended

Allowance for doubtful accounts - beginning of period

Provision for doubtful accounts

Other adjustments

Allowance for doubtful accounts - end of period

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

2022 and March 31, 2021.

8 — Inventory

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

As of June 30, 2022, two of the Company’s

employees own approximately 36.6 % of the equity of Greenstone, however, since the Company is not the primary beneficiary and does

not hold significant influence over Greenstone business decisions, the Company is not required to consolidate Greenstone.

Note 6 — Inventory

Inventories are stated at the lower of cost or

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

Inventory consisted of the following as of March

Inventory consisted of the following as of June

30, 2022 and December 31, 2021:

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Total inventory, net

Inventory Reserves

The Company establishes an inventory reserve for

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(In thousands)

Three Months ended

Six Months ended

Inventory reserves – beginning of period

Increase in inventory reserves

Inventory write-offs

Inventory reserves – end of period

Note 9 — Prepaid Expenses and Other Current Receivables

Prepaid expenses and other current receivables consisted of the following

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

(In thousands)

Prepaid insurance

Prepaid software

Prepaid expenses, other

Deferred costs

Deferred issuance costs, net

Other note receivables (1)

Other receivables, other

Total prepaid expenses and other current assets

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

10 — Property and Equipment, Net

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

Note 7 — Intangible Assets, Net and Goodwill

Intangible assets are initially recorded at fair

value and tested periodically for impairment.

Goodwill represents the excess of the purchase price over the fair value of identifiable

tangible and intangible assets acquired and liabilities assumed in a business combination and is tested at least annually for impairment.

The Company performs its goodwill impairment testing annually during the fourth quarter, or sooner if indicators or if circumstances were

to occur that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying amount.

would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to

exceed the total amount of goodwill.

The Company has concluded that there was an impairment

triggering event during the three months ended June 30, 2022 that required the Company to perform a detailed analysis of the current carrying

value of its goodwill and intangible assets.

For intangible asset and goodwill impairment testing purposes, the Company has one reporting

During the three-month period ended June 30, 2022,

the Company’s market capitalization fell below total net assets.

In addition, financial performance continued to weaken during the

quarter, which is contrary to prior experience.

Management reassessed business performance expectations, following persistent adverse

developments in equity markets, deterioration in the environment in which the Company operates, lower than expected sales, and an increase

in operating expenses.

These indicators, in the aggregate, required impairment testing for intangible assets and goodwill.

Based on the results of this testing, the Company determined that the

carrying values of the aggregate value of its goodwill and intangible assets were not recoverable.

The Company recorded impairment charges

during the second quarter of 2022, representing a full impairment of the carrying value of its goodwill and intangible assets.

recorded an impairment charge of approximately $ 69.9 million, representing the carrying values of intangible assets and goodwill, which

totaled $ 15.2 million and $ 54.7 million, respectively

Goodwill consisted of the following:

(In thousands)

Computer and office equipment

Furniture and fixtures

Leasehold improvements

Machinery and equipment

Research and development laboratory equipment

Leased equipment at customer

Trade show assets

Total property and equipment, gross

Accumulated depreciation

Construction in progress

Total property and equipment, net

Depreciation expense for the three months ended

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

11 — Intangible Assets, Net and Goodwill

The Company records intangible assets initially

at fair value and tests these values periodically for impairment.

Goodwill represents the excess of the purchase price over the fair value

of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination and is tested at least annually

for impairment.

The Company performs an impairment test of goodwill during the fourth quarter of each year or sooner if indicators of

potential impairment arise.

There were no such indicators in the three months ended March 31, 2022.

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

Six Months ended

Goodwill - beginning of period

Goodwill acquired during period

Goodwill impairment loss

Goodwill purchase accounting adjustment

Goodwill - end of period

Intangible assets, net as of June 30, 2022 was

Intangible Assets, Gross

Accumulated Amortization

Accumulated Amortization and Impairment

Intangible Assets, Net

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Acquired developed technology

Non-compete agreements

Capitalized website costs

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

Total intangible assets, net

Intangible assets, net as of December 31, 2021

was as follows:

Intangible Assets, Gross

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Acquired developed technology

Non-compete agreements

Capitalized website costs

Amortization expense recorded in general and administrative

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

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

Years ending December 31 (In thousands),

Remaining 2022

2027 and thereafter

consisted of the following:

(In thousands)

Three Months ended

Goodwill - beginning of period

Goodwill acquired during period

Goodwill purchase accounting adjustment

Goodwill - end of period

12 — Other Non-Current Assets

Other non-current assets consisted of the following

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

(In thousands)

Deferred debt issuance costs, non-current, net

Long-term deferred commissions expense

Security deposits

Total other non-current assets

Note 13 — Accrued

Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following

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

(In thousands)

Accrued acquisition liability (1)

Sales tax payable (2)

Accrued construction costs

Compensation related fees

Accrued professional fees

Accrued warranty expenses

Accrued consulting fees

Accrued inventory purchases

Financing lease liabilities

Accrued non-income taxes

Total accrued expenses and other current liabilities

(1) Accrued acquisition liabilities includes both the contingent consideration

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

and PurePressure.

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

amounts are included as part of our initial purchase price allocations and are the subject matter of an indemnification claim under the

Precision and Cascade acquisition agreement.

14 — Business Combination

of Lab Society

Total intangible assets, net

Amortization expense recorded in general and administrative in the

consolidated statements of operations were $ 1.4 million and $ 57 thousand for the three months ended June 30, 2022 and 2021, respectively,

and $ 703 thousand and $ 115 thousand for the six months ended June 30, 2022 and 2021, respectively.

Note 8 — Business Combination

Acquisition of Lab Society

On February 1, 2022,

the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lab Society, Lab Society NewCo, LLC,

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

Maibach Jr., as the Owner Representative

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

to acquire Lab Society.

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

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

the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lab Society, a newly-formed wholly-owned

subsidiary of the Company (“Merger Sub”), Michael S.

Maibach Jr., as the Owner Representative thereunder, and each of the

shareholders of Lab Society (collectively, the “Owners”), pursuant to which the Company agreed to acquire Lab Society.

with the execution of the Merger Agreement, the Company consummated the merger of Lab Society with and into Merger Sub, with Merger Sub

surviving such merger as a wholly-owned subsidiary of the Company (the “Lab Society Acquisition”).

The aggregate consideration

for the Lab Society Acquisition consisted of:

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

of Lab Society at closing;

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

indebtedness of Lab Society at closing;

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

and (c) the Earn-out Consideration (as

defined below), to the extent earned.

The Company withheld 127,682 of the Buyer Shares issuable to the Owners

(the “Holdback Lab Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim

for indemnification or payment of damages to which the Company may be entitled under the Merger Agreement.

The Holdback Lab Buyer Shares

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

The Merger Agreement

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

The Owners may become entitled

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

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

be payable by issuing shares of Common Stock.

and (c) the Earn-out Consideration

(as defined below), to the extent earned.

The Company withheld

127,682 of the Buyer Shares issuable to the Owners (the “Holdback Lab Buyer Shares”) for the purpose of securing any post-closing

adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the

Merger Agreement.

The Holdback Lab Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance

with and subject to the conditions of the Merger 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.

Additional information

regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value Measures, included elsewhere

in the notes to the consolidated financial statements.

Transaction and related costs, consisting primarily

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

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

of professional fees, directly related to the acquisition, totaled approximately $ 38 and $ 66 thousand for the three months and six months

ended June 30, 2022, respectively.

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

The Company has prepared purchase price allocations

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

Fair values still under review

as of March 31, 2022 include values assigned to identifiable intangible assets and goodwill.

The following table sets forth the components

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Finance lease liabilities, current

Finance lease liabilities, noncurrent

Finance lease liabilities, non-current

Operating lease liabilities, current

Operating lease liabilities, noncurrent

Operating lease liabilities, non-current

Acquired intangible assets

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as determine the weighted-average cost of capital to be used as a discount rate.

The Company amortizes its intangible assets assuming

no residual value over periods in which the economic benefit of these assets is consumed.

During the three-month period ended June 30, 2022, the Company identified a potential impairment triggering event

associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter

slowdown in the cannabis industry as a whole.

Due to these factors, the Company deemed that there may be an impairment to the carrying

value of its long-lived assets and accordingly performed interim testing to determine the proper fair value of its long-lived assets as

of June 30, 2022.

Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets

should be impaired.

Additional information regarding the Company’s

interim testing on goodwill and intangible assets may be found in Note 7 – Intangible Assets, Net and Goodwill, included elsewhere

in the notes to the consolidated financial statements.

The amount of revenue of Lab Society included

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

of Precision and Cascade

September 29, 2021 (the “Execution Date”), the Company entered into a Plan of Merger and Equity Purchase Agreement, as amended

by an amendment dated as of October 1, 2021 (as amended, the “Purchase Agreement”), with Sinclair Scientific, LLC, a Delaware

limited liability company (“Sinclair”), Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions, a

Michigan limited liability company (“Precision”);

and each of the equity holders of Sinclair named therein (collectively,

the “Sinclair Members”).

in the consolidated statement of operations from the acquisition date of February 1, 2022 to June 30, 2022 was $ 3.1 million.

Acquisition of Precision and Cascade

On September 29, 2021 (the “Execution Date”),

the Company entered into a Plan of Merger and Equity Purchase Agreement, as amended by an amendment dated as of October 1, 2021 (as amended,

the “Purchase Agreement”), with Sinclair Scientific, LLC, a Delaware limited liability company (“Sinclair”), Mass2Media,

LLC, Precision, a Michigan limited liability company;

and each of the equity holders of Sinclair named therein (collectively, the “Sinclair

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

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in the Purchase Agreement, (1) Sinclair transferred, to the Company, and the Company purchased (the “Interest Purchase”) from

Sinclair, 100 % of the equity interests of Cascade Sciences, LLC, a Delaware limited liability company (“Cascade”), such

that immediately after the consummation of such Interest Purchase, Cascade became a wholly-owned subsidiary of the Company, and (2) Precision

merged (the “Merger”) with and into a newly-formed wholly-owned subsidiary of the Company, Precision Extraction NewCo, LLC.

The aggregate consideration for the Interest

Purchase and the Merger consisted of:

(a) the sum of $ 30 million in cash, plus consideration payable to holders of outstanding Sinclair

equity awards, subject to certain adjustments for working capital, cash and indebtedness, payable in connection with the Interest Purchase;

(b) the number of shares of Common Stock, subject to adjustment, equal to the quotient of (i) $ 20.0 million divided by (ii) the

volume weighted-average price per share of Common Stock on The Nasdaq Capital Market for the 30 consecutive trading days ending on the

Execution Date (the “VWAP Price”), issuable in connection with the Merger;

and (c) the True-Up Buyer Shares, if any (as defined

below), issuable in connection with the Merger.

The Purchase Agreement includes customary post-closing

adjustments, representations and warranties and covenants of the parties.

The Sinclair Members may become entitled to additional shares

of Common Stock (the “True-Up Buyer Shares”) and cash (together with the True-Up Buyer Shares, the “Aggregate True-Up

Payment) based on the eligible net revenues (as defined in the Purchase Agreement) achieved by the Cascade and Precision businesses during

the fiscal year ending December 31, 2021.

However, in no event shall the aggregate purchase price paid by the Company pursuant to the

terms of the Purchase Agreement, taking into account any Aggregate True-Up Payment in favor of the Sinclair Members, exceed $ 65.0 million.

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

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

Sinclair, 100 % of the equity interests of Cascade, a Delaware limited liability company, such that immediately after the consummation

of such Interest Purchase, Cascade became a wholly-owned subsidiary of the Company, and (2) Precision merged (the “Merger”)

with and into a newly-formed wholly-owned subsidiary of the Company, Precision Extraction NewCo, LLC.

The aggregate consideration for the Interest Purchase

and the Merger consisted of:

(a) the sum of $ 30 million in cash, plus consideration payable to holders of outstanding Sinclair equity

awards, subject to certain adjustments for working capital, cash and indebtedness, payable in connection with the Interest Purchase;

the number of shares of Common Stock, subject to adjustment, equal to the quotient of (i) $ 20.0 million divided by (ii) the volume

weighted-average price per share of Common Stock on The Nasdaq Capital Market for the 30 consecutive trading days ending on the Execution

Date (the “VWAP Price”), issuable in connection with the Merger;

and (c) the True-Up Buyer Shares, if any (as defined below),

issuable in connection with the Merger.

The Purchase Agreement includes customary post-closing adjustments,

representations and warranties and covenants of the parties.

The Sinclair Members may become entitled to additional shares of Common Stock

(the “True-Up Buyer Shares”) and cash (together with the True-Up Buyer Shares, the “Aggregate True-Up Payment) based

on the eligible net revenues (as defined in the Purchase Agreement) achieved by the Cascade and Precision businesses during the fiscal

year ending December 31, 2021.

However, in no event shall the aggregate purchase price paid by the Company pursuant to the terms of the

Purchase Agreement, taking into account any Aggregate True-Up Payment in favor of the Sinclair Members, exceed $ 65.0 million.

of June 30, 2022, the fair value of the contingent earn-out consideration totaled $ 5.6 million based on Sinclair Members achieving certain

revenue targets.

Additional information regarding the Company’s contingent consideration arrangements may be found in Note

4 – Fair Value Measures and Note 19 – Subsequent Events, included elsewhere in the notes to the consolidated financial statements .

Transaction and related costs, consisting primarily

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

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

price allocation for the business combination has been prepared on a preliminary basis and changes to those allocations may occur as additional

information becomes available during the measurement period (up to one year from the acquisition date).

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

of professional fees, directly related to the acquisition, totaled approximately $25 thousand and $63 thousand for the three and six months

ended June 30, 2022, respectively.

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

administrative expenses.

The purchase price allocation for the business combination has been prepared on a preliminary basis and changes

to those allocations may occur as additional information becomes available during the measurement period (up to one year from the acquisition

The following table sets forth the components

and the allocation of the purchase price for the business combination:

(In thousands)

Purchase price consideration

Cash paid to Sinclair Members at close

Cash contributed to escrow accounts at close

Cash paid to Sinclair Members at the close

Cash contributed to escrow accounts at the close

Cash paid for excess net working capital

Stock issued at close

Stock issued at the close

Fair value of contingent consideration to be achieved

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Operating lease liabilities, current

Operating lease liabilities, noncurrent

Operating lease liabilities, non-current

Acquired intangible assets

Total purchase price

intangible assets consist of trade names, technology, non-compete agreements, and customer relationships.

The fair value of intangible

assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below:

Identified intangible assets consist of trade

names, technology, non-compete agreements, and customer relationships.

The fair value of intangible assets and the determination of their

respective useful lives were made in accordance with ASC 805 and are outlined in the table below:

(In thousands)

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the weighted-average cost of capital to be used as a discount rate.

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

of PurePressure

During the three-month period ended June 30, 2022, the Company identified a potential impairment triggering event

associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter

slowdown in the cannabis industry as a whole.

Due to these factors, the Company deemed that there may be an impairment to the carrying

value of its long-lived assets and accordingly performed interim testing to determine the proper fair value of its long-lived assets as

of June 30, 2022.

Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets

should be impaired.

Additional information regarding the Company’s

interim testing on goodwill and intangible assets may be found in Note 7 – Intangible Assets, Net and Goodwill, included elsewhere

in the notes to the consolidated financial statements.

Acquisition of PurePressure

On December 31, 2021, the Company entered into

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Concurrently with the execution of the Pure Purchase Agreement, the Company

consummated the acquisition of all the outstanding equity interests of PurePressure, such that immediately after the consummation of

such purchase, PurePressure became a wholly-owned subsidiary of the Company (the “Acquisition”).

consummated the acquisition of all the outstanding equity interests of PurePressure, such that immediately after the consummation of such

purchase, PurePressure became a wholly-owned subsidiary of the Company (the “Acquisition”).

The aggregate consideration for the Acquisition

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the conditions of the Pure Purchase Agreement.

The Pure Purchase Agreement includes customary

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

The Members may become entitled to additional consideration

with a value of up to $3.0 million based on the eligible net revenues achieved by the PurePressure business during the fiscal years ending

December 31, 2022 and December 31, 2023, of which 40% will be payable in cash and the remaining 60% will be payable by issuing shares

of Common Stock (collectively, the “Earn-out Consideration”).

The Pure Purchase Agreement includes customary post-closing adjustments,

representations and warranties and covenants of the parties.

The Members may become entitled to additional consideration with a value

of up to $3.0 million based on the eligible net revenues achieved by the PurePressure business during the fiscal years ending December

31, 2022 and December 31, 2023, of which 40% will be payable in cash and the remaining 60% will be payable by issuing shares of Common

Stock (collectively, the “Earn-out Consideration”).

Additional information regarding the Company’s contingent consideration

arrangements may be found in Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements.

Subject to certain customary limitations, (i) the Members will indemnify the Company and its affiliates, officers,

directors and other agents against certain losses related to, among other things, breaches of the Members’ and PurePressure’s

representations and warranties, indebtedness, transaction expenses, pre-closing taxes and the failure to perform covenants or obligations

under the Pure Purchase Agreement, and (ii) the Company will indemnify the Members and their respective affiliates, officers, directors

and other agents against certain losses related to, among other things, breaches of the Company’s representations and warranties

and the failure to perform covenants or obligations under the Pure Purchase Agreement.

Transaction and related costs, consisting primarily

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

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

of professional fees, directly related to the acquisition, totaled approximately $ 1 thousand and $ 563 thousand for the three and six months

ended June 30, 2022, respectively.

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

The purchase price allocation for the business

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

Fair values still under review as of March 31, 2022

include values assigned to identifiable intangible assets and goodwill.

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

The following table sets forth the components

and the allocation of the purchase price for the business combination:

(In thousands)

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Operating lease liabilities, current

Operating lease liabilities, noncurrent

Operating lease liabilities, non-current

Finance lease liabilities, current

Finance lease liabilities, noncurrent

Finance lease liabilities, non-current

Notes payable, current

Notes payable, noncurrent

Notes payable, non-current

Acquired intangible assets

Total purchase price

Identified intangible assets consist of

trade names, technology, and customer relationships.

The fair value of intangible assets and the determination of their respective useful

lives were made in accordance with ASC 805 and are outlined in the table below:

Identified intangible assets consist of trade

names, technology, and customer relationships.

The fair value of intangible assets and the determination of their respective useful lives

were made in accordance with ASC 805 and are outlined in the table below:

(In thousands)

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Total identified intangible assets

to certain customary limitations, (i) the Members will indemnify the Company and its affiliates, officers, directors and other agents

against certain losses related to, among other things, breaches of the Members’ and PurePressure’s representations and warranties,

indebtedness, transaction expenses, pre-closing taxes and the failure to perform covenants or obligations under the Pure Purchase Agreement,

and (ii) the Company will indemnify the Members and their respective affiliates, officers, directors and other agents against certain

losses related to, among other things, breaches of the Company’s representations and warranties and the failure to perform covenants

or obligations under the Pure Purchase Agreement.

During the three-month period ended June 30,

2022, the Company identified a potential impairment triggering event associated with both a sustained decline in the Company’s

stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole.

factors, the Company deemed that there may be an impairment to the carrying value of its long-lived assets and accordingly performed

interim testing to determine the proper fair value of its long-lived assets as of June 30, 2022.

Based on its interim testing, the Company

noted that the entire carrying value of its goodwill and intangible assets should be impaired.

Additional information regarding the Company’s

interim testing on goodwill and intangible assets may be found in Note 7 – Intangible Assets, Net and Goodwill, included elsewhere

in the notes to the consolidated financial statements.

Note 9 – Debt

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Long-term debt

(1) Other notes payable relates

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

(1) Other notes payable relate to

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

Securities Purchase Agreement

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

For the quarter ending June 30, 2022, the Company is in default of

certain of financial debt covenants associated with its SPA Note.

As a result of this default, the lender would have the ability to call

the balance of the note, along with a 115% penalty, amounting to a total repayment obligation of approximately $75.0 million ($65.0 million

in principal and $9.8 million of default penalty), plus increase the interest due on the outstanding unpaid balance(s) from 6.75% to 15%.

All amounts due would immediately become a current liability in the event the lender were to call the note.

If the lender were to call

the debt instrument due to the default, the Company would not have sufficient cash on hand as of June 30, 2022 to pay off the existing

debt and default penalty amounts.

As of June 30, 2022, cash (including restricted cash), cash equivalents and marketable securities totaled

approximately $ 59.9 million, which would be insufficient to cover the combined amount of debt liability, including the default penalty

Subsequent to the end of

the second quarter of 2022, the Company reached an agreement in principle with its institutional lender to amend its existing SPA Note

and to modify certain financial covenants which, once complete, should give the Company additional flexibility to operate and meet its

long-term strategic goals while also allowing it to responsibly adjust to the many challenges currently facing the cannabis industry.

Until the date the SPA

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

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

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

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

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The following table provides

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

a breakdown of the SPA Note balances as of June 30, 2022:

(In thousands)

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The following table summarizes

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

the short-term and long-term portions of the SPA Note as of June 30, 2022:

(In thousands)

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Net carrying amount

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

As of June 30, 2022,

future minimum principal payments were as follows:

Years ending December 31 (In thousands),

Remaining 2022

2026 and thereafter

Total future payments

Paycheck Protection Program Loan

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

Paycheck Protection Program Loans under the Coronavirus Aid,

Relief, and Economic Security Act

In May 2020, the Company entered into a PPP Loan

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

The Company received total proceeds of approximately

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

Subject to certain conditions, the PPP Loan may

be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP.

The Company’s submission to have

the remaining $ 779 thousand PPP Loan forgiven is currently being reviewed by the SBA.

If the remaining principal amount from the $ 779

thousand PPP Loan is not forgiven in full, the Company would be obligated to repay any principal amount not forgiven and interest accrued

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

the accompanying consolidated balance sheets.

The Company received total proceeds of approximately $ 779 thousand

from the unsecured PPP Loan, which was originally scheduled to mature on May 7, 2022 .

The Company’s submission to have the remaining

$ 779 thousand PPP Loan forgiven was denied by the SBA.

On June 23, 2022, the Company received a letter from Bank of America agreeing to

extend the maturity date to May 7, 2025 and bears interest at a rate of 1.00 % per year.

The PPP loan is payable in 34 equal combined monthly

principal and interest payments of approximately $ 24 thousand commencing August 7, 2022.

The breakdown of PPP Loan balances by current

and non-current as of June 30, 2022 and December 31, 2021 were as follows:

(In thousands)

Balance Sheet

PPP Loan, current

Long-term debt,

PPP Loan, non-current

Long-term debt

Total PPP Loan outstanding

PurePressure SBA Debt

As part of the acquisition of PurePressure, $ 159

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of the PurePressure acquisition.

Note 10 — Leases

The determination if any arrangement contained

a lease at its inception was done based on whether or not the Company has the right to control the asset during the contract period.

The lease term was determined assuming the exercise of options that were reasonably certain to occur.

Leases with a lease term of 12

months or less at inception were not reflected in the Company’s balance sheet and those lease costs are expensed on a straight-line

basis over the respective term.

Leases with a term greater than 12 months were reflected as non-current right-of-use assets and current

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

As the implicit interest rate in its leases was

generally not known, the Company’s used its incremental borrowing rate as the discount rate for purposes of determining the present

value of its lease liabilities.

At June 30, 2022 and December 31, 2021, the Company’s weighted-average discount rate utilized for

its leases was 7.35 % and 7.16 %, respectively.

When a contract contained lease and non-lease

elements, both were accounted as a single lease component.

The Company had several non-cancelable finance

leases for machinery and equipment.

The Company’s finance leases have remaining lease terms of one year to five years.

The Company had several non-cancelable operating

leases for corporate offices, warehouses, showrooms, research and development facilities and vehicles.

The Company’s leases have

remaining lease terms of one year to five years, some of which include options to extend.

Some leases include

payment for common area maintenance associated with the property.

Additional information on the Company’s

operating and financing lease activity is as follows:

Three Months ended

Six Months ended

(In thousands)

Operating lease cost

Finance lease cost:

Amortization of right-of-use assets

Interest on lease liabilities

Total lease cost

(In thousands)

Balance Sheet

Right-of-use assets, net

Right-of-use, net

Finance lease assets

Property and equipment, net

Total lease assets

Operating lease liabilities, current

Accrued expenses and other current liabilities

Operating lease liabilities, non-current

Other non-current liabilities

Total lease liabilities

Weighted-average remaining lease term – operating leases

Weighted-average remaining lease term – finance leases

Weighted-average discount rate – operating leases

Weighted-average discount rate – finance leases

Maturities of operating and finance lease liabilities

as of June 30, 2022 are as follows:

Years ending December 31 (In thousands),

Remaining 2022

Total minimum lease payments

Less imputed interest

Total lease liabilities

Note 11 — Convertible Promissory Notes

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of Common Stock at the election of the Company at a conversion price of $ 7.72 per share.

Note 17 — Capital Structure

On January 9, 2020, the Company increased its

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

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

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

Preferred Stock (“Series A Preferred Stock”).

A Convertible Preferred Stock

in the first quarter of 2020, the Company issued an aggregate of 60,000 shares of Series A Preferred Stock, for an aggregate purchase

price of $ 6.0 million.

In May 2020, the Company completed an offering of Series A Preferred Stock with the issuance of an additional

40,000 shares of Series A Preferred Stock for an aggregate purchase price of $ 4.0 million.

of Conversion Formulas

Note 12 — Stockholders’ Equity

On January 9, 2020, the Company increased its authorized number of

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

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

information regarding the Company’s amendment to the Articles of Incorporation may be found in Note 19 - Subsequent Events, included

elsewhere in the notes to the consolidated financial statements.

On January 9, 2020, the Company designated 100,000 shares of the 3,000,000

authorized shares of Preferred Stock, as Series A Convertible Preferred Stock (“Series A Preferred Stock”).

Series A Convertible Preferred Stock

Beginning in the first quarter of 2020, the Company

issued an aggregate of 60,000 shares of Series A Preferred Stock, for an aggregate purchase price of $ 6.0 million.

In May 2020, the Company

completed an offering of Series A Preferred Stock with the issuance of an additional 40,000 shares of Series A Preferred Stock for an

aggregate purchase price of $ 4.0 million.

Amendment of Conversion Formulas

On January 11, 2021, the Company’s Board

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After the amendment:

the Series A Preferred Stock is convertible, at any time after issuance or immediately prior to the closing of a public transaction, into Common Stock in an amount of shares equal to (i) the product of the Series A Preferred Stock original price plus accrued but unpaid dividends on the shares being converted, multiplied by the number of shares of Series A Preferred Stock being converted, divided by (ii) a conversion price of $7.72 per share (after the reverse split taking effect);

immediately prior to the consummation of a public transaction, the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest shall convert into a number of fully paid and non-assessable shares of Common Stock equal to the quotient of (i) the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest thereunder immediately prior to such public transaction divided by (ii) a conversion price of $7.72 (after the reverse split taking effect).

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

Public Offering

the Series A Preferred Stock is convertible, at any time after the issuance or immediately prior to the closing of a public transaction, into Common Stock in an amount of shares equal to (i) the product of the Series A Preferred Stock original price plus accrued but unpaid dividends on the shares being converted, multiplied by the number of shares of Series A Preferred Stock being converted, divided by (ii) a conversion price of $7.72 per share (after the reverse split taking effect);

immediately prior to the consummation

of a public transaction, the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest shall

convert into a number of fully paid and non-assessable shares of Common Stock equal to the quotient of (i) the outstanding principal

amount of the Convertible Notes together with all accrued and unpaid interest thereunder immediately prior to such public transaction

divided by (ii) a conversion price of $7.72 (after the reverse split taking effect).

On January 11, 2021, the Company’s shareholders

approved the amendment to the Series A Preferred Stock.

Initial Public Offering

On February 1, 2021, the Company completed an

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1,697,075 shares of Common Stock, respectively, at a conversion price of $7.72 per share.

Public Offering

Subsequent Public Offering

On February 19, 2021, the Company consummated

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deducting underwriting discounts and estimated offering expenses.

Private Placement

On January 25, 2022, the Company entered

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fully exercised such warrants in March 2022.

Raymond Chang, Chairman and Chief Executive Officer

of the Company, and Stuart Wilcox, a member of the Company’s Board of Directors, participated in the private placement on essentially

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

Raymond Chang, Chairman and Chief Executive Officer of the Company,

and Stuart Wilcox, who is currently our Chief Operating Officer, and at the time was a member of the Company’s Board of Directors,

participated in the private placement on essentially the same terms as other investors, except for having a combined purchase price of

$ 6.90 per share.

The gross proceeds to the Company from the private

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of Precision and Cascade.

Refer to Note 14 – Business Combinations, included elsewhere in

the notes to the consolidated financial statements.

Refer to Note 8 – Business Combinations, included elsewhere in the

notes to the consolidated financial statements.

On December 31, 2021, the Company issued an aggregate

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On February 1, 2022, the Company issued an aggregate

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

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

consolidated financial statements.

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

Refer to Note 8 – Business Combinations, included elsewhere in the notes to the consolidated

financial statements.

Note 13 — Stock-Based

Compensation and Employee Benefit Plans

2022 Omnibus Equity Incentive Plan

On December 18, 2020, the Company’s Board of Directors, and on

January 11, 2021, the Company’s stockholders, adopted and approved the 2020 Omnibus Equity Incentive Plan (the “2020 Plan”),

On April 29, 2022, the Company’s Board of Directors, and on June

8, 2022, the Company’s stockholders, adopted and approved the 2022 Omnibus Equity Incentive Plan (the “2022 Plan”),

which replaced the 2020 Stock Option Plan (the “2020 Plan”).

The 2020 Plan provides for the grant of stock options, SARs,

performance share awards, performance unit awards, distribution equivalent right awards, restricted stock awards, restricted stock unit

awards and unrestricted stock awards to non-employee directors, officers, employees and non-employee consultants of the Company or its

The aggregate number of shares of Common Stock that may be reserved and available for grant and issuance under the 2020 Plan

is 4,533,732 shares.

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

pursuant to an award.

If any award granted under the 2019 Plan or the 2020 Plan expires, is cancelled, or terminates unexercised or is

forfeited, the number of shares subject thereto is again available for grant under the 2020 Plan.

The 2020 Plan shall continue in effect,

unless sooner terminated, until the tenth anniversary of the date on which it is adopted by the Board of Directors.

The Company’s stock option compensation

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

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

The 2022 Plan provides for the grant of stock options, stock

appreciation right awards, performance share awards, restricted stock awards, restricted stock unit awards, other stock-based awards and

cash-based awards.

The aggregate number of shares of Common Stock that may be reserved and available for grant and issuance under the

2022 Plan is 5,296,647 shares, which includes the 2,000,000 shares authorized under the 2022 Plan, plus the rollover of 3,296,647 issued

and outstanding awards under the 2020 Plan.

Shares will be deemed to have been issued under the 2022 Plan solely to the extent actually

issued and delivered pursuant to an award.

If any award granted under the 2020 Plan or the 2022 Plan expires, is canceled, or terminates

unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2022 Plan.

The 2022 Plan shall

continue in effect, unless sooner terminated, until the tenth anniversary of the date on which it is adopted by the Board of Directors.

Stock-based Compensation

The Company’s

stock option compensation expense was $ 940 thousand and $ 931 thousand for the three months ended June 30, 2022 and 2021, respectively,

and $ 1.9 million and $ 3.1 million for the six months ended June 30, 2022 and 2021, respectively.

There was $3.4 million

of total unrecognized compensation cost related to unvested options granted under the Company’s options plans as of June 30, 2022.

This stock option expense will be recognized through 2025.

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value of the underlying Common Stock.

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

No stock options were granted during the six months ended June 30, 2022.

The following table summarizes the Company’s

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Forfeiture rate

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

and are fully transferable.

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

stock price volatility.

Because the Company’s stock options and warrants have characteristics different from those of its traded

stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion

the existing models do not necessarily provide a reliable single measure of the fair value of such stock options.

The risk-free interest

rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the expected term.

expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s current expectation

of future action surrounding dividends.

The Company calculates the expected volatility of the stock price based on the corresponding

volatility of the Company’s peer group stock price for a period consistent with the underlying instrument’s expected term.

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

The Black-Scholes option-pricing model was developed

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

In addition, option

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

Because the Company’s

stock options and warrants have characteristics different from those of its traded stock, and because changes in the subjective input

assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide

a reliable single measure of the fair value of such stock options.

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

United States Treasury debt securities with a term similar to the expected term.

The expected dividend yield is based upon the Company’s

history of having never issued a dividend and management’s current expectation of future action surrounding dividends.

calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price

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

The expected lives for such grants were based on the simplified

method for employees and directors.

In arriving at stock-based compensation expense,

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Stock Option Activity

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

As of June 30, 2022, there were 2,005,747 shares

of Common Stock available to be granted under the Company’s 2022 Plan.

The following table presents option activity under

the Company’s stock option plans for the three months ended March 31, 2022 and 2021:

the Company’s stock option plans for the six months ended June 30, 2022 and the year ended December 31, 2021:

(In thousands, except share and per share data)

Weighted-Average

Options outstanding at January 1, 2021

Options outstanding at March 31, 2021

Options outstanding at January 1, 2022

Options outstanding at March 31, 2022

Options vested and exercisable as of March 31, 2022

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

The following table summarizes information about

options vested and exercisable at March 31, 2022:

Options Vested and Exercisable

Weighted-Average

Remaining Contractual

Weighted-Average

Exercise Price

The following table summarizes information about

options expected to vest after March 31, 2022:

Options Vested and Expected to Vest

Weighted-Average

Remaining Contractual

Weighted-Average

Exercise Price

As of March 31, 2022, warrants to purchase

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

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

months ended March 31, 2022 and 2021:

Weighted-Average

Options outstanding at December 31, 2020

Options outstanding at December 31, 2021

Options outstanding at June 30, 2022

Options vested and exercisable as of June 30, 2022

Options vested and expected to vest as of June 30, 2022

2022 Employee Stock Purchase Plan

On April 29, 2022, the Company’s Board of Directors,

and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Employee Stock Purchase Plan ("ESPP").

The Company has initially reserved 500,000 shares of Common Stock for issuance under the ESPP.

On June 30, 2022, 500,000 shares

were available for future issuance.

Under the ESPP, eligible employees are granted options to purchase

shares of Common Stock at the lower of 85 % of the fair market value of the stock at the time of grant or 85 % of the fair market

value at the time of exercise.

Options to purchase shares are granted twice yearly on or about August 1 and February 1 and are exercisable

on or about the succeeding January 31 and July 31, respectively, of each year.

No participant may purchase more than $ 25,000 worth

of Common Stock annually.

No Common Stock was granted under the 2022 ESPP during the six months ended June 30, 2022.

Employee Benefit Plan

The Company maintains an employee’s savings

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

All full-time U.S.

become eligible to participate in the 401k Plan.

The Company’s contribution to the 401k Plan is discretionary.

During the three

and six months ended June 30, 2022 and 2021, the Company did not contribute to the 401k Plan.

Note 14 — Stock Warrants

The following table presents all warrant activity

of the Company for the six months ended June 30, 2022 and the year ended December 31, 2021:

Exercise Price

Warrants outstanding at December 31, 2020

Warrants outstanding at March 31, 2021

Warrants outstanding at December 31, 2021

( 1,627,542 )

Warrants outstanding at March 31, 2022

Warrants outstanding at June 30, 2022

The Company received proceeds from the exercise

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

Note 18 — Employee Benefit Plan

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

All full-time U.S.

employees become eligible to participate in the 401k Plan.

The Company’s contribution to the 401k

Plan is discretionary.

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

of warrants of less than $ 1 thousand for both the three months ended June 30, 2022 and June 30, 2021 ,

and $ 2 thousand and $ 5 thousand for the six months ended June 30, 2022 and 2021, respectively.

Note 15 — Income Taxes

The Company’s effective income tax rate

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

The provision for (benefit from) income

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

The difference between

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

statutory tax rate of 21 % was primarily due a valuation

allowance recorded against certain deferred tax assets.

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

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

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

The Company’s effective income tax rate was 0.1 % and 0.0 %

for the three months ended June 30, 2022 and 2021, respectively.

The income tax benefit was $( 62 ) thousand and $ 0 for the three months

ended June 30, 2022 and 2021, respectively.

The difference between the Company’s effective tax rates for the 2022 and 2021 periods

statutory tax rate of 21 % was primarily due to a valuation allowance recorded against certain deferred tax assets.

in income tax benefit for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to a

goodwill impairment charge recorded during the second quarter of 2022 which resulted in a $(62) thousand benefit related to the reversal

of the Company's deferred tax liability on indefinite-lived assets.

The Company’s effective income tax rate was 0.3 % and 0.0 %

for the six months ended June 30, 2022 and 2021, respectively.

The income tax benefit was $( 262 ) thousand and $ 0 for the six months

ended June 30, 2022 and 2021, respectively.

The difference between the Company’s effective tax rates for the 2022 and 2021 periods

statutory tax rate of 21 % was primarily due to a valuation allowance recorded against certain deferred tax assets.

in the income tax benefit for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily due to a

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

release of the Company's U.S.

valuation allowance as a result of the Lab Society acquisition.

Additionally, as a result of the goodwill

impairment charge recorded during the second quarter of 2022, the Company recognized a small benefit related to the reversal of its opening

deferred tax liability on indefinite-lived assets.

Note 16 — Net Loss Per Share

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

Net loss per share

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

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

Net loss per share,

assuming dilution, is calculated using the weighted-average number of common shares outstanding and the dilutive effect of all potentially

dilutive securities, including Common Stock equivalents and convertible securities.

Net loss per share, assuming dilution, is equal to

basic net loss per share because the effect of dilutive securities outstanding during the periods, including options and warrants computed

using the treasury stock method, is anti-dilutive.

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

Net loss per share calculations for all periods

have been adjusted to reflect the Company’s Reverse Stock Split.

Net loss per share was calculated based on the weighted-average

number of its Common Stock then outstanding.

Basic net loss per share is calculated using the

weighted-average number of Common Stock outstanding during the periods.

Net loss per share, assuming dilution, is calculated using the

weighted-average number of common shares outstanding and the dilutive effect of all potentially dilutive securities, including Common

Stock equivalents and convertible securities.

Net loss per share, assuming dilution, is equal to basic net loss per share because the

effect of dilutive securities outstanding during the periods, including options and warrants computed using the treasury stock method,

is anti-dilutive.

The components of basic and diluted net loss per

share were as follows:

Three Months ended

Six Months ended

(In thousands, except share and per share data)

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Accrued dividend attributable to Preferred A Stockholders

Net loss available for common shareholders

Net loss available for Common Stockholders

Weighted-average common shares outstanding – basic and diluted

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

of March 31, 2022 and 2021, the Company excluded the following securities from net loss per share as the effect of including them would

have been anti-dilutive.

The shares shown represent the number of shares of Common Stock which would be issued upon conversion in the

respective years shown below:

Three months ended

The Company’s

potential dilutive securities, which include stock options and warrants, have been excluded from the computation of diluted net loss per

share as the effect would be to reduce the net loss per share.

Therefore, the weighted-average number of common shares outstanding used

to calculate both basic and diluted net loss per share attributable to common stockholders is the same.

The Company excluded the

following potential common shares equivalents presented based on amounts outstanding at each period end, from the computation of diluted

net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive

Options outstanding

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Note 17 — Commitments and Contingencies

determination if any arrangement contained a lease at its inception was done based on whether or not the Company has the right to control

the asset during the contract period.

The lease term was determined assuming the exercise of options that were reasonably certain to

Leases with a lease term of 12 months or less at inception were not reflected in the Company’s balance sheet and those lease

costs are expensed on a straight-line basis over the respective term.

Leases with a term greater than 12 months were reflected as non-current

right-of-use assets and current and non-current lease liabilities in the Company’s consolidated balance sheets.

As the implicit interest rate in its leases was

generally not known, the Company’s used its incremental borrowing rate as the discount rate for purposes of determining the present

value of its lease liabilities.

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

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

Company had several non-cancellable finance leases for machinery and equipment.

The Company’s finance leases have remaining lease

terms of one year to five years.

Company had several non-cancellable operating leases for corporate offices, warehouses, showrooms, research and development facilities

and vehicles.

The Company’s leases have remaining lease terms of one year to five years, some of which

include options to extend.

Some leases include payment for common area maintenance associated with the property.

Additional information on the Company’s

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

of right-of-use assets

on lease liabilities

Weighted-average remaining lease term – operating leases

Weighted-average remaining lease term – finance leases

Weighted-average discount rate – operating leases

Weighted-average discount rate – finance leases

(In thousands)

Right-of-use assets, net

Operating lease liabilities, current

Operating lease liabilities, non-current

Total operating lease liabilities

Finance lease liabilities, current

Finance lease liabilities, non-current

Total finance lease liabilities

Maturities of operating and finance lease liabilities

as of March 31, 2022 are as follows:

Years ending December 31 (In thousands),

Remaining 2022

Total minimum lease payments

Less imputed interest

Total lease liabilities

Legal Proceedings

Legal Matters

Cooper and Weinstein Matter

On January 5, 2021, the Company received a demand

8 unchanged sentences

The demand letter also asserts various employment

claims, including but not limited to, statutory wage withholding violations, wrongful termination, breach of contract, breach of the duty

of good faith and fair dealing, fraud in the inducement, promissory estoppel, minority shareholder oppression, breach of fiduciary duty,

unjust enrichment, and violations of state and federal securities laws.

claims, including but not limited to, statutory wage withholding violations, wrongful termination, breach of contract, breach of the

duty of good faith and fair dealing, fraud in the inducement, promissory estoppel, minority shareholder oppression, breach of fiduciary

duty, unjust enrichment, and violations of state and federal securities laws.

On January 19, 2021, Messrs.

2 unchanged sentences

made in their demand letter based on the facts disclosed above.

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

amount to be determined.

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

an amount to be determined.

Cooper and Weinstein are also seeking relief in the form of reinstatement and Mr.

9 unchanged sentences

dismissing one claim with prejudice, dismissing a second claim with leave to amend, and permitting the remaining claims to proceed.

Additionally, on July 29, 2021, the Company filed

a separate arbitration in Boston, Massachusetts against Messrs.

Additionally, on July 29, 2021, the Company filed a separate arbitration

in Boston, Massachusetts against Messrs.

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

and Weinstein were liable for certain conduct during the time they were TriGrow employees, including breach of fiduciary duty, unjust

enrichment, usurpation of corporate opportunity, conversion, fraudulent concealment, and false representation.

Also on July 29, 2021,

the Company submitted a claim for indemnification to certain legacy TriGrow Systems, LLC.

Cooper and Weinstein were liable

for certain conduct during the time they were TriGrow employees, including breach of fiduciary duty, unjust enrichment, usurpation of

corporate opportunity, conversion, fraudulent concealment, and false representation.

Also on July 29, 2021, the Company submitted

a claim for indemnification to certain legacy TriGrow Systems, LLC.

shareholders.

The claim for indemnification

relates to conduct by Messrs.

The claim for indemnification relates to conduct

Cooper and Weinstein during the time they were TriGrow employees.

The Company does not believe these claims

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

During the second quarter of 2022, the Company and Messrs.

Cooper and Weinstein tentatively agreed to settle all claims and potential claims between themselves and any affiliated entities by the

Company to Messrs.

Cooper, Weinstein, and a related entity, subject to negotiation of a final settlement agreement, for approximately

$ 800 thousand, which has been accrued as a liability as of June 30, 2022.

United States Customs Seizure Matter

On June 28, 2022, the Company was notified by the United States Customs

and Border Protection (“CBP”) that they seized 123 cartons of horticulture grow lights appraised at approximately $ 623 thousand

at the Port of Savannah, Georgia based on CBP’s interpretation of certain importation laws which prohibit the importation of certain

goods that are subject to health and safety legal restrictions, including a prohibition on the importation of drug paraphernalia, in accordance

with 21 U.S.C.

The Company will dispute the seizure.

The Company does not believe these claims have any merit and intends

to vigorously defend its position.

Supply Agreement with Mack Molding Co.

3 unchanged sentences

In February 2021,

the Company placed a purchase order with Mack amounting to approximately $ 5.2 million towards initial production of VFUs during 2021.

the Company placed a purchase order with Mack amounting to approximately $ 5.2 million towards the initial production of VFUs during 2021.

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

1 unchanged sentence

The Company believes the supply agreement with Mack will provide the Company with increased scaling capabilities and the

ability to more efficiently meet the potential future demand of its customers.

ability to meet the potential future demand of its customers more efficiently.

The supply agreement contemplates that, following an introductory

6 unchanged sentences

Distribution Agreements with Related Party

On September 7, 2019, the Company entered into

a distribution agreement with Bluezone Products, Inc.

(“Bluezone”) for distribution rights to the Bluezone products with certain

exclusivity rights.

The agreement requires minimum purchases amounting to $ 480 thousand and $ 600 thousand for the first and second contract

anniversary years.

On September 7, 2019, the Company entered into a distribution agreement

with Bluezone Products, Inc.

(“Bluezone”) for distribution rights to the Bluezone products with certain exclusivity rights.

The agreement requires minimum purchases amounting to $ 480 thousand and $ 600 thousand for the first and second contract anniversary years.

The agreement auto-renews for successive one-year periods unless earlier terminated.

In March 2021, the Company notified

Bluezone of non-renewal of the agreement which means it ended on May 31, 2021.

The Company exceeded the minimum purchase amount for the

first year and purchased approximately $ 309 thousand of the committed $ 660 thousand second year purchases through December 31, 2021.

is a related party to the Company.

Committed Purchase Agreement with Greenstone Holdings

On December 29, 2021, Greenstone Holdings purchased

239 VFUs from the Company of which 60 VFUs were already in Greenstone Holdings possession under a lease agreement.

Under the lease agreement,

Greenstone Holdings owed Agrify a production service fee of $ 300 per pound of flower produced and contained an option to purchase the

equipment within the lease agreement.

The term of this agreement was for ten years , but it was terminated upon signing the purchase agreement

for the 239 VFUs.

There is no remaining obligation under the lease agreement.

The remaining 179 VFUs were shipped to Greenstone Holdings

storage facility on December 30, 2021 and December 31, 2021.

In March 2021, the Company notified Bluezone of the

non-renewal of the agreement which means it ended on May 31, 2021.

The Company exceeded the minimum purchase amount for the first year

and purchased approximately $ 309 thousand of the committed $ 660 thousand second-year purchases through December 31, 2021.

a related party to the Company.

Committed Purchase Agreement with Related

Party – Greenstone

On December 29, 2021, Greenstone purchased 239 VFUs from the Company

of which 60 VFUs were already in Greenstone possession under a lease agreement.

Under the lease agreement, Greenstone owed the Company

a production service fee of $ 300 per pound of flower produced and contained an option to purchase the equipment within the lease agreement.

The term of this agreement was for ten years , but it was terminated upon signing the purchase agreement for the 239 VFUs.

remaining obligation under the lease agreement.

The remaining 179 VFUs were shipped to Greenstone storage facility on December 30, 2021

and December 31, 2021.

Greenstone is a related party to the Company.

Additional information regarding recent developments with Greenstone

may be found in Note 5 – Loan Receivable, included elsewhere in the notes to the consolidated

financial statements.

Committed Purchase Agreement with Related

Party – Ora Pharm

In June 2022, the Company entered into an agreement

with Ora Pharm (“Ora”) pursuant to which Ora will purchase approximately $ 1.6 million in equipment from the Company, and Ora

may purchase software services from the Company in the future.

Wilcox is the Chairman of Ora.

Wilcox has not had an interest in

any transaction since the beginning of the Company’s last fiscal year, or any currently proposed transaction.

There are no family

relationships among any of the Company’s directors or executive officers and Mr.

Other Commitments and Contingencies

The Company is potentially subject to claims related

to various non-income taxes (such as sales, value-added, consumption, and similar taxes) from various tax authorities, including in jurisdictions

in which the Company already collects and remits such taxes.

If the relevant taxing authorities successfully pursue these claims, the

Company could be subject to additional tax liabilities.

Refer to Note 9 –

Debt, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum

debt payments.

Refer to Note 10 – Leases, included elsewhere in the notes to the consolidated financial statements for details

of the Company’s future minimum lease payments under operating and financing lease liabilities.

Refer to Note 15 –

Income Taxes, included elsewhere in the notes to the consolidated financial statements for information regarding income tax

contingencies.

Note 18 — Related Parties

1 unchanged sentence

are involved in other business activities and may, in the future, become involved in other business opportunities that become available.

The following table describes

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

The following table describes the net purchasing

(sales) activity with entities identified as related parties to the Company:

Three Months ended

Six Months ended

(In thousands)

1 unchanged sentence

Topline Performance Group

Greenstone Holdings

Valiant Americas, LLC

Living Greens Farm

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

The following table summarizes net related party

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

(1) Purchases from 4D for the six months ended June 30, 2021 include $ 384 thousand for a down payment on inventory orders.

The following table summarizes net related party receivable

(payable) as of June 30, 2022 and December 31, 2021:

(In thousands)

Cannae Policy Group

Greenstone Holdings

Greenstone (net of allowance for doubtful accounts of $ 7,079 and $ 0 at June 30, 2022 and December 31, 2021, respectively) (1)

Living Greens Farm (2)

Valiant Americas, LLC

Topline Performance Group

(1) The Greenstone allowance for doubtful accounts balance consisted of

capital advances, accrued interest and VFUs sales.

Additional information regarding recent developments with Greenstone may be found in

Note 5 – Loan Receivable, included elsewhere in the notes to the consolidated financial statements.

(2) The balance was fully reserved

at June 30, 2022 due to an ongoing dispute with the customer.

Note 19 — Subsequent Events

Appointment of Stuart Wilcox and Resignation of Thomas Massie as

Chief Operating Officer

On July 14, 2022, the Company’s Board of Directors

appointed Stuart Wilcox, a Board member, as Chief Operating Officer (“COO”), effective as of July 14, 2022.

will step down from the Company’s Board of Directors and succeed Thomas Massie, who resigned from his executive management positions

and from the Company’s Board of Directors effective as of July 8, 2022.

Massie’s resignation did not result from any disagreement

regarding the Company’s operations, policies or practices.

Appointment of Max Holtzman as Independent Board of Director

On July 14, 2022, the Board appointed Max Holtzman

as a member of the Board.

Holtzman will serve until the Company’s 2023 Annual Meeting of Stockholders and until his successor

is elected and qualified or his earlier resignation or removal.

Holtzman was also appointed as the chair of the Nominating and Corporate

Governance Committee and as a member of the Compensation Committee and the Mergers and Acquisitions Committee.

Appointment of Chris Benyo as Chief Revenue Officer

Chris Benyo, who currently serves as the Company’s

Senior Vice President and General Manager, has been promoted to the newly created role of Chief Revenue Officer (“CRO”).

Benyo will oversee all the Company’s revenue streams and growth efforts.

Amendments to Articles of Incorporation

On July 11, 2022, the Company filed Articles of

Amendment (the “Charter Amendment”) to its Articles of Incorporation with the Secretary of State for the State of Nevada.

The Charter Amendment increased the number of authorized shares of the Company’s Common Stock from 50,000,000 to 100,000,000 , and

correspondingly increased the total authorized shares of stock from 53,000,000 to 103,000,000 .

The Charter Amendment was approved by the

Company’s stockholders at the 2022 Annual Meeting of Stockholders on June 8, 2022 and became effective upon filing.

SPA Note Modification

Subsequent to the end of the second quarter of 2022,

the Company has reached an agreement in principle with its institutional lender to amend its existing SPA Note to modify certain financial

covenants which, once complete, should give the Company additional flexibility to operate and meet its long-term strategic goals while

also allowing it to responsibly adjust to the many challenges currently facing the cannabis industry.

Sinclair Post-Closing Adjustment Settlement Agreement

On August 10, 2022, the Company entered into a

post-closing adjustment settlement agreement (“Agreement”) with Sinclair.

The Agreement was entered into in connection with

the Purchase Agreement.

According to the Purchase Agreement, $2.5 million is held by the Escrow Agent as the Adjustment Escrow Amount,

$4.5 million is held by the Escrow Agent as the Indemnity Escrow Amount and 117,600 Buyer Shares are held by the Company as the Holdback

Buyer Shares.

In full settlement of the Aggregate True-up Payment, the Company and Sinclair Members, agree to the contingent consideration

total of $5.6 million, payable of $3.3 million in cash and 87,039 in Common Stock, all of which will be paid to the Sinclair Members,

the Company will receive $1.4 million from the Adjustment Escrow Amount, and the balance of the Adjustment Escrow Amount, which is $1.1

million, will be added to and become part of the Indemnity Escrow Amount.

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

What changed 10-Q

Item 1. Financial Statements