What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-16 · 581 added, 328 removed, 477 unchanged (66% of the section changed)

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

We are a developer of proprietary precision hardware

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

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

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

grow solution in the industry.

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

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

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

The totality of our product offerings

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

As a result, we believe

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

We are 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.

Our proprietary micro-environment-controlled Agrify Vertical Farming Units (or “VFUs”) enable cultivators to produce the highest

quality products with what we believe to be an unmatched consistency, yield, and Return on Investment (“ROI”) at scale.

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.

We believe we are the only company with an automated

and fully integrated grow solution in the industry.

Our cultivation and extraction solutions seamlessly combines our integrated hardware

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

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

The totality of our product offerings and

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

As a result, we believe we

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

Agrify Corporation was incorporated in the state

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The combined purchase price for one share of Common Stock (or one

Pre-Funded Warrant) and accompanying fraction of a Common Warrant was $6.80.

Pre-Funded Warrant) and the accompanying fraction of a Common Warrant was $6.80.

Subject to certain ownership limitations, the

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such warrants in March 2022.

Raymond Chang, our Chairman and Chief Executive

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

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

Raymond Chang, our Chairman and Chief Executive Officer, and Stuart

Wilcox, who is currently our Chief Operating Officer, and at the time was a member of our Board of Directors, participated in the private

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

The gross proceeds to us from the private placement were

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defined below), to the extent earned.

We withheld 127,682 of

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

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

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

of the Merger Agreement.

We withheld 127,682 of the Buyer Shares issuable to the Owners (the

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

or payment of damages to which we may be entitled under the Merger Agreement.

The Holdback Lab Buyer Shares shall be released following

the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions of the Merger Agreement.

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.

The Merger Agreement

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be payable by issuing shares of Common Stock.

Based upon the combined first and second quarter actual

revenue performance, Lab Society’s revenue trend is significantly below the originally estimated revenue trends incorporated into

our original fair value estimates at the time of the acquisition.

We have concluded Lab Society will not achieve any contingent earn-out

consideration in connection with its first earn-out period.

Accordingly, we reversed the current accrued contingent consideration liability

associated with Lab Society’s first earn-out period as of June 30, 2022.

The reversal of this liability of approximately $1.0 million,

as required by ASC 805, was recorded as a reduction in operating expenses during the second quarter of 2022.

The purchase price allocation for the business

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cost of capital to be used as a discount rate.

We amortize our intangible assets assuming no residual value over periods

in which the economic benefit of these assets is consumed.

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.

Securities Purchase Agreement

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

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

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

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

14, 2022, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with an accredited investor

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

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

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

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

of Common Stock.

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

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

We will be required to make amortization payments

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

Until the date

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

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

Each SPA Warrant

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

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

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

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

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

The Securities Purchase Agreement requires us to file resale registration

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

and any subsequent closings.

The SPA Warrant

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

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

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

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

For the quarter ending June

30, 2022, we defaulted on certain of financial debt covenants associated with our 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, we 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, we reached an agreement in principle with our institutional lender to amend the existing SPA Note and to modify

certain financial covenants which, once complete, should give us additional flexibility to operate and meet our long-term strategic

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

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

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

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

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

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

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

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

The Securities Purchase Agreement requires us to file resale

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

closing and any subsequent closings.

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

Investor’s beneficial ownership exceeding 4.99% of our shares outstanding at the time of exercise (which percentage may be

decreased or increased by the Investor, but to no greater than 9.99%, and provided that any increase above 4.99% will not be

effective until the sixty-first day after notice of such request by the Investor to increase its beneficial ownership limit has been delivered

The Securities

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Identify performance obligations that are

A performance obligation is a promise by us to provide

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

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

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

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

A performance obligation is a promise by us to

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

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

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

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

Determine the transaction price

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Significant Judgments

We enter into contracts that may include various combinations

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

We enter into contracts that may include various

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

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

Determining whether products

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

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

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

We then allocate the transaction price to each performance obligation

in the contract based on the SSP.

Determining whether

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

significant judgment.

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

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

We then allocate the transaction price to each performance

obligation in the contract based on the SSP.

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

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If the SSP is not

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

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

observable through past transactions, we estimate the SSP, considering available information such as market conditions, expected margins,

and internally approved pricing guidelines related to the performance obligations.

We license our software as a SaaS type subscription

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

We determine the SSP for services in time and materials

contracts by observable prices in standalone services arrangements.

We estimate variable consideration in the form of

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

We determine the SSP for services in time and

materials contracts by observable prices in standalone services arrangements.

We estimate variable consideration in the form

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

period if additional information becomes available.

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consideration were not material for the periods presented.

If a contract has payment terms that differ from the

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

If a contract has payment terms that differ from

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

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

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

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

Payment terms with customers typically require

payment 30 days from invoice date.

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

no specific reserve for such is maintained.

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

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

For the three and six months ended June 30, 2022 and 2021, we did not have any such financial income.

Payment terms with customers typically

require payment 30 days from the invoice date.

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

and therefore no specific reserve for such is maintained.

In the infrequent instances where customers raise a concern over

delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been

insignificant in all periods presented.

We have elected to treat shipping and handling

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

We generally provide a one-year warranty on our products

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

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

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

is probable and can be reasonably estimated.

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

liabilities in our consolidated balance sheets.

We generally provide a one-year warranty on our products for materials

and workmanship but may provide multiple-year warranties as negotiated, and will pass on the warranties from its vendors, if any, which

generally covers this one-year period.

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

can be reasonably estimated.

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

balance sheets.

Accounting for Business Combinations

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

The fair value estimates related to the various identified

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

Cash Flow Method.

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

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

used as a discount rate.

The fair value estimates related to the various

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

and Discounted Cash Flow Method.

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

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

to be used as a discount rate.

Goodwill and Intangible Assets

Amortization of acquired intangible assets

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

Amortization of acquired intangible assets is

the result of the acquisition of TriGrow, which occurred in 2020, the acquisition of Precision and Cascade which occurred in 2021, the

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

As a result of

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

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

We recognize the excess of the purchase price

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

Goodwill is not amortized but is tested for impairment annually on

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

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

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

amount of goodwill.

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

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

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

There have been no impairment charges recorded for

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

As a result of these

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

assets, and are amortized over their estimated useful lives.

We recognize the excess of the purchase price over the fair value of

identifiable net assets acquired as goodwill.

Goodwill is not amortized but is tested for impairment annually on December 2 or more frequently

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

We have determined it

is a single reporting unit for the purpose of conducting the goodwill impairment assessment.

A goodwill impairment charge is recorded

if the amount by which our carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

Factors that could lead

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

financial performance, future acquisitions and/or mergers, and a decline in our market value as a result of a significant decline

in our stock price.

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.

Capitalization of Internal Software Development Costs

We capitalize certain software engineering efforts

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

Costs incurred during the application development

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

additional functionality.

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

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

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

Costs incurred during the application

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

in new or additional functionality.

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

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

Costs related to the research and development are

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

The fair value of each option is estimated on the

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

The fair value of each option is estimated on

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

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

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Results of Operations

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

We have incurred recurring losses to date.

Our financial

statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating

to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue

in operation.

We expect we will require additional capital to meet

our long-term operating requirements.

We expect to raise additional capital through, among other things, the sale of equity or debt securities.

Comparison of the Three and Six Months Ended June 30, 2022 and

The following table summarizes our results of

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

operations for the three and six months ended June 30, 2022 and June 30, 2021:

Three Months ended

Six Months ended

(In thousands, except share and per share data)

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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

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of products to address their entire indoor agriculture needs.

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

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

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

We continue to monitor and address COVID-19 pandemic

impacts on our supply chain.

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

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

during the pandemic.

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

interim profits.

We generate revenue from sales of cultivation solutions,

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

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

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

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

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

Our core product offering includes our VFUs and Agrify Integrated Grow Racks

with our Agrify Insights™ cultivation software, which are supplemented with environmental control products, grow lights, facility

build-out services and extraction equipment.

We continue to monitor and address COVID-19 pandemic impacts on our

supply chain.

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

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

shortages have generally led to increases in prices globally, with significant impacts to sales and interim profits.

We generate revenue from sales of cultivation solutions, including

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

We believe that our product mix forms an integrated ecosystem which allows us to be engaged with our potential customers from the early

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

with our Agrify Insights™ cultivation software and finally, our extraction, post-processing and testing services to transform harvest

into a sellable product.

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

solutions and services.

The following table provides a breakdown of our

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

revenue for the three and six months ended June 30, 2022 and 2021:

Three Months ended

Six Months ended

(In thousands)

Cultivation solutions, including ancillary products and services

Agrify Insights software

Agrify Insights™ cultivation software

Facility build-outs

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Total revenue

Revenues increased by $7.5 million, or 64% for the three months ended

June 30, 2022, compared to the same period in 2021.

The comparative increase in revenue was generated primarily from extraction solutions

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

2021, which contributed $10.0 million in revenue for the three months ended June 30 2022.

Sales related to cultivation products decreased

by $759 thousand during the three months ended June 30, 2022 primarily due to the variability in the sales cycle associated with our VFU

In addition, comparative quarterly facility build-out revenue decreased by $1.7 million as a result of our legacy facility

build-out projects nearing completion.

Revenues increased by $26.5 million, or 141% for

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

The comparative increase in revenue was generated primarily

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

and PurePressure in 2021.

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

Additionally, design and build

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

the six months ended June 30, 2022, as compared to the same period in 2021.

The comparative increase in revenue was generated

primarily from extraction solutions sales of equipment and services from our acquisition of Lab Society in 2022 and acquisitions of

Precision, Cascade and PurePressure in 2021 which contributed $22.4 million in revenue for the six months ended June 30, 2022.

Additionally, facility build-out revenues increased by $4.7 million due to the continued build-out of facilities under our TTK

This was partially offset by a decrease in cultivation product and service sales of $613 thousand.

Cost of Goods Sold

Cost of goods sold represents a combination of the

Cost of goods sold represents a combination of

the following:

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

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The following table provides a breakdown of our

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

cost of goods sold for the three and six months ended June 30, 2022 and 2021:

Three Months ended

Six Months ended

(In thousands)

Cultivation solutions, including ancillary products and services

Agrify Insights software

Agrify Insights™ cultivation software

Facility build-outs

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Cost of goods sold increased by $6.4 million,

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

The comparative quarterly increase in cost

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

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

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

or 57%, for the three months ended June 30, 2022 compared to the same period in 2021.

The comparative quarterly increase in the cost

of goods sold is largely associated with the incremental expense associated with the sales of our extraction-related equipment, for which

there was no associated revenue or expense in the prior year quarterly period.

Costs associated with our extraction-related equipment

sales totaled $7.7 million in the three months ended June 30, 2022.

Additionally, our second quarter cost of goods sold amount for the

second quarter of 2022 includes $929 thousand of incremental expense associated with increases to our inventory reserves related to slow-moving

inventory, as well as $181 thousand of the incremental cost associated with increases to our warranty reserves.

Cost of goods sold increased by $20.7 million,

or 110%, for the six months ended June 30, 2022 compared to the same period in 2021.

The comparative quarterly increase in the cost of

goods sold is similarly associated with the introduction of our extraction-related equipment sales in the year-to-date 2022 fiscal period.

Costs associated with extraction equipment-related equipment sales accounted for $16.0 million of the comparative year-to-date fiscal

2022 increase in cost of goods sold.

Additionally, cost of goods sold related to facility build-outs increased by $4.8 million for the

six months ended June 30 2022, directly related to the comparative increase in subcontractor construction

costs associated with active design and build projects during the first half of the 2022 fiscal year.

Gross Profit (Loss)

Three Months ended

Three Months ended June 30,

Six Months ended

(In thousands)

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Gross profit totaled $1.6 million, or 8.3 %

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

during the three months ended March 31, 2021.

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

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

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

includes our TTK Solutions design and build revenue.

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

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

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

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

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

We anticipate that we will be able to improve

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

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

of total revenue during the three months ended June 30, 2022 compared to a gross profit of

$527 thousand, or 4.5% of total revenue during

the three months ended June 30, 2021.

The comparative $1.1 million second-quarter year-over-year improvement in gross profit, as well

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

in 2022, which contributes to higher gross profit and gross profit margins than those realized on our cultivation-related revenue,

which includes our TTK Solutions build-out revenue.

During the second quarter of 2022, we realized a gross profit margin of 23% associated

with our extraction solutions revenue, while we realized a gross loss of approximately (7)% on our facility build-outs and cultivation-related

Our gross profit and gross profit margins for the three-month period ended June 30, 2022, were negatively impacted as a result

of increases in inventory reserves and warranty reserves, which totaled $929 thousand and $181 thousand, respectively.

Absent these periodic

charges, reported gross profit margins would have been approximately 14.1% during the second quarter of 2022.

Gross profit totaled $5.8 million, or 12.7 %

of total revenue during the six months ended June 30, 2022 compared to a gross loss of ($13) thousand, or (0.1)% of total revenue

during the six months ended June 30, 2021.

The comparative $5.8 million year-over-year improvement

in gross profit, as well as the comparative improvement in gross profit margin, is similarly attributable to the introduction of our extraction

solutions revenue during the first six months of 2022.

No extraction solutions-related revenues were recognized during the first six months

Extraction solutions revenue contributes a higher gross profit and gross profit margins than those realized on our cultivation-related

revenue, which includes our TTK Solutions build-out revenue.

During the first six months of 2022, we realized a gross profit margin of

28% associated with our extraction solutions revenue, while we realized a gross loss of approximately (2)% on our cultivation-related

As with our second quarter of 2022, our gross profit and gross profit margin for the six months ended June 30, 2022 is also

adversely impacted by the inventory and warranty reserves described above.

General and Administrative

Three Months ended

Three Months ended June 30,

Six Months ended

(In thousands)

5 unchanged sentences

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

G&A expense increased by $15.0 million, or 341%, for the three

months ended June 30, 2022, compared to the same period in 2021.

The primary driver of the increase in comparative general and administrative

expense in the second quarter of 2022 is largely the result of an $8.6 million increase in trade and loan receivable allowances recorded

during the quarter.

During the second quarter of 2022, the Company increased its trade receivables reserve by approximately $1.5 million

and its loans receivable reserve by approximately $7.1 million, specifically related to Greenstone Holdings (“Greenstone”).

Both reserves were deemed necessary due to the current financial instability within the cannabis industry.

The Company specifically established

the loan reserve related to Greenstone based upon its review of Greenstone’s financial stability, which would impact collectability

and 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 loan receivable amounts.

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

Other year-over-year increases in the second quarter

of 2022 general and administrative expenses included $3.9 million of incremental G&A expenses related to our acquisition of Lab Society

in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021, an increase in wage and benefits-related expenses of $1.1 million,

an increase in facility and other related expenses of $936 thousand, an $800 thousand legal settlement accrual, an increase in directors’

and officers’ insurance of $182 thousand, an increase in investor relations of $133 thousand and an increase in depreciation and

amortization of $34 thousand.

G&A expense increased by $20.3 million, or

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

The increase is attributable to payroll and

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

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

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

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

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

229%, for the six months ended June 30, 2022, compared to the same period in 2021.

As described above, the primary drivers of the year-over-year

increase in the comparative six-month period G&A expenses are largely attributable to an increase in trade and loan receivable allowances

of $7.8 million and $6.9 million of incremental G&A expenses related to our acquisition of Lab Society in 2022 and acquisitions of

Precision, Cascade and PurePressure in 2021.

Other drivers of the comparative year-over-year increase in G&A expense include an increase

in payroll and related expenses increase of $2.4 million, an increase in acquisition-related expenses of $2.1 million, an increase in

facility and other related expenses of $1.2 million, an increase in investor relations of $339 thousand, an increase in directors’

and officers’ insurance of $310 thousand, and an increase in depreciation and amortization of $152 thousand.

These increases were

partially offset by a reduction in stock compensation expense of $892 thousand.

Selling and Marketing

Three Months ended

Six Months ended

(In thousands)

Selling and marketing

Selling and marketing expenses consist primarily of

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

Selling and marketing expenses increased by $1.6 million, or 198%,

for the three months ended June 30, 2022, compared to the same period in 2021.

The increase is attributable to our acquisition of Lab

Society in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021 of $802 thousand, an increase in travel and other expenses

of $321 thousand, an increase in payroll and related expenses of $278 thousand and an increase in advertising and trade show expenses

of $149 thousand.

Selling and marketing expenses increased by $3.0 million, or 216%,

for the six months ended June 30, 2022, compared to the same period in 2021.

The increase is attributable to our acquisition of Lab Society

in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021 of $2.2 million, an increase in payroll and related expenses of

$513 thousand, an increase in advertising and trade show expenses of $172 thousand and an increase in travel and other expenses of $97

Research and Development

Three Months ended

Six Months ended

(In thousands)

Research and development

Research and development (“R&D”) expenses

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

Research and development (“R&D”) expenses consisted

primarily of costs incurred for the development of our Agrify Insights™ cultivation software and next-generation generation VFUs,

which includes:

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

expenses incurred by the subcontractor under

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

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

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

R&D expense increased by $1.7 million, or

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

The increase is attributable to the personnel

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

and humidity environments.

We expect to continue to invest in future developments

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

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

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

Although we continue to

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

Selling and Marketing

215%, for the three months ended June 30, 2022, compared to the same period in 2021.

The increase in comparative period R&D expenses

is attributable to increases in wage and benefits-related expenses of $574 thousand, third-party consulting services of $529 thousand,

$467 thousand of incremental R&D expense related to the acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade

and PurePressure in 2021, and material and other costs of $94 thousand.

As a percentage of net revenue, R&D expenses were 12.6% of

total revenue for the three months ended June 30, 2022, compared to 6.6% for the three months ended June 30, 2021.

R&D expense increased by $2.9 million, or 173%, for the six months

ended June 30, 2022, compared to the same period in 2021.

The comparative periodic increase in R&D expense is attributable to third-party

consulting services of $988 thousand, increases in wage and benefits-related expenses of $801 thousand, $777 thousand of incremental R&D

expense related to the acquisition of Lab Society in 2022 and acquisitions of Precision, Cascade and PurePressure in 2021 and material

and other costs of $302.

As a percentage of net revenue, R&D expenses were 10% of total revenue for the six months ended June 30,

2022, compared to 8.8% for the six months ended June 30, 2021.

We expect to continue to invest in future developments of our VFUs,

Agrify Insights™ cultivation software and our extraction products.

Although we continue to increase our investment in R&D activities,

we expect R&D expenses to decrease as a percentage of revenue due to our revenue growth.

Change in contingent consideration

Three Months ended

Six Months ended

(In thousands)

Selling and marketing

Selling and marketing expenses consist primarily

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

Selling and marketing expenses increased by $1.5

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

The increase is attributable to payroll

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

in travel and other expenses of $155 thousand.

Change in contingent consideration

Change in contingent consideration decreased by

$(907) thousand, or 100%, for the three months and six months ended June 30, 2022, compared to the same periods in 2021.

in contingent consideration expense, which was recognized by us during the second quarter of 2022, primarily relates to the

reduction in the projected earn-out achievement associated with Lab Society’s first twelve-month earn-out period, for which

current revenue projections are trending below our original earn-out achievement fair value estimates.

During the second quarter of

2022, the Company reduced the current fair value estimate of contingent consideration to be earned by the former members of Lab

Society by approximately $(1.0) million.

This was partially offset by an increase of $121 thousand to the final contingent

consideration amount earned by the former members of Precision and Cascade.

As per the guidelines of ASC 805, we are required to

record subsequent changes to our original fair value estimates related to contingent consideration as an operating expense in the

period of change and not as an increase to goodwill.

Impairment of Goodwill and intangible assets

Three Months ended

Six Months ended

(In thousands)

Impairment of Goodwill and intangible assets

During the three months period ended June 30,

2022, the Company identified a potential impairment triggering event associated with both a sustained decline in our stock price and associated

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

Due to these factors, we deemed that

there was a need to perform a detailed analysis necessary to support the current carrying value of our long-lived assets, including our

goodwill and intangible assets, as of June 30, 2022.

Based on its interim testing, the Company noted

that the current carrying value of equity significantly exceeded the calculated fair value equity, 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 goodwill may be found in Note 7 – Intangible Assets, Net and Goodwill, included elsewhere in the notes to the

consolidated financial statements.

Other Income (Expense), Net

Three Months ended

Six Months ended

(In thousands)

Interest income (expense), net

Interest (expense) income, net

Other expenses

Gain on extinguishment of notes payable

Total other income (expense), net

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

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

The increase in interest income is attributable

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

Total other (expense) income, net

Interest (expense) income, net decreased by $(2.0)

million, or 3,604%, for the three months ended June 30, 2022 compared to the same period in 2021.

The decrease in interest (expense) income,

net primarily is attributable to an increase in interest expense, including the amortization of debt discount costs, of $(2.6) million

related to our SPA Note.

This partially was offset by interest income of $654 thousand from our TTK Solutions.

Interest (expense) income, net decreased by $(1.3)

million, or 5,513%, for the six months ended June 30, 2022 compared to the same period in 2021.

The decrease in interest (expense) income,

net primarily is attributable to an increase in interest expense, including the amortization of debt discount costs, of $(2.8) million

related to our SPA Note.

This partially was offset by interest income of $1.1 million from our TTK Solutions.

Other expenses of $0 for the three and six months

ended June 30, 2022, compared to $(63) thousand for the three and six months ended June 30, 2021 are attributable to the amortization

of premiums related to the held to maturity securities.

Gain on extinguishment of notes payable decreased

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

Provision for (benefit from) Income Taxes

by $(2.7) million, or 100%, for the six months ended June 30, 2022 compared to the same period in 2021.

We recognized a gain on extinguishment

of $2.7 million in connection with the derecognition of the net carrying amount of the extinguished debt of $19.6 million (inclusive of

$13.1 million of principal, $7.1 million of derivative liabilities, less $587 thousand of debt discount) and the recognition of the $16.9

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

of the beneficial conversion feature).

Additional information relating to the Company’s Gain on extinguishment of notes payable

may be found in Note 11 – Convertible Promissory Notes, included elsewhere in the notes to

the consolidated financial statements.

Income Tax Benefit

Three Months ended

Six Months ended

(In thousands)

Provision for (benefit from) income taxes

Income tax benefit

Effective tax rate

The change in the provision for (benefit from)

income taxes for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to a discrete

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

valuation allowance as a result of the Lab Society acquisition.

The change in the 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 our deferred tax liability on

indefinite-lived assets.

The change 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 our U.S.

valuation allowance as a result

of the Lab Society acquisition.

Income (Loss) Attributable to Non-Controlling Interest

We consolidate the results of operations of two less

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

We consolidate the results of operations of two

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

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

9 unchanged sentences

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

Loss attributable to non-controlling interest

Income (loss) attributable to non-controlling interest

represents the portion of profit (or loss) that are attributable to non-controlling interest calculated as a product of the net income

of the entity multiplied by the percentage of ownership held by the non-controlling interest.

Going Concern

We have incurred operating losses since our inception and have negative

cash flows from operations.

We also have an accumulated deficit of $161.3 million as of June 30, 2022.

In addition, for the quarter ending

June 30, 2022, we 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).

a result of its default, we are actively working to restructure our existing SPA Note in order to avoid having the note called by the

If the lender were to call the debt instrument due to the default, we 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, 2022.

Subsequent to the end of the second quarter of 2022,

we reached an agreement in principle with our institutional lender to amend our existing SPA Note and to modify certain financial covenants

which, once complete, should give us additional flexibility to operate and meet our long-term strategic goals while also allowing us 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 we believe these conditions raise substantial doubt about our 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 we 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 we be unable to continue as a going concern.

Liquidity and Capital Resources

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

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

We believe such amount,

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

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

Our current working capital needs

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

to meet demand forecasts and support operational growth.

Our long-term financial needs primarily include working capital requirements

and capital expenditures.

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

the financing requirements of our current and future TTK arrangements.

These arrangements require a significant amount of upfront capital

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

There are many factors that may negatively impact

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

from the issuance of our securities.

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

of our business strategy and general economic conditions.

As of June 30, 2022, our principal sources of

liquidity were cash and cash equivalents and marketable securities totaling $29.9 million and $30 million in restricted cash.

consideration of any debt restructuring, we believe we have sufficient cash on hand to continue operations for the next six to nine months.

We have, in each of the past two quarters, used a total of approximately $30.0 million to support our activities in each quarter.

current working capital needs are to support revenue growth, fund construction and equipment financing commitments associated with our

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

Our long-term financial needs primarily include

working capital requirements and capital expenditures.

We anticipate that we will allocate a significant portion of our current balance

of working capital to satisfy the financing requirements of our current and future TTK arrangements.

These arrangements require a significant

amount of upfront capital necessary to fund construction, associated with facility build-outs, and equipment.

There are many factors that

may negatively impact our available sources of funds in the future, including the ability to generate cash from operations, raise debt

capital and raise cash from the issuance of our securities.

The amount of cash generated from operations is dependent upon factors such

as the successful execution of our business strategy and general economic conditions.

We may opportunistically raise debt capital, subject

6 unchanged sentences

condition may be adversely affected.

We entered into one Loan Agreement and Promissory

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

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

We entered into one Loan Agreement and Promissory Note with Bank of

America pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act

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

Small Business Administration.

We received total proceeds of approximately

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

Subject to certain conditions, the PPP Loan may be

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

If the remaining principal amount is not

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

On March 14, 2022, we entered

into a Securities Purchase Agreement with an institutional investor.

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

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

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

The initial closing

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

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

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

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

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

The SPA Note has an interest rate of 6.75%

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

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

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

of the SPA Note.

At any time following the

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

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

The noteholder also

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

We received total proceeds of approximately $779 thousand

from the unsecured PPP Loan which was originally scheduled to mature in May 2022.

We applied for forgiveness on the $779 thousand of our

PPP Loan however was denied by the SBA.

On June 23, 2022, we 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 $24.0 thousand commencing August 7, 2022.

On March 14, 2022, we

entered into a Securities Purchase Agreement with an institutional investor.

The Purchase Agreement provides for the issuance of a senior

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

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

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

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

other indebtedness.

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

the first day of each calendar month starting on February 1, 2023 and extending through the maturity date of March 1, 2026 (the “Maturity

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

The SPA Note has an interest

rate of 6.75% per year, and we will be required to pay interest on March 1, June 1, September 1, and December 1 of each calendar year

through the Maturity Date.

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

cash, pay such interest in kind, in which case interest on the SPA Note will be calculated at the rate of 8.75% per year and will be added

to the principal amount of the SPA Note.

At any time following

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

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

The noteholder

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

principal amount under the SPA Note plus any accrued interest.

The following table presents the major components of net cash flows

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

the quarter ending June 30, 2022, we will be in default of certain of financial debt covenants associated with its SPA Note.

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, we 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 amount.

Subsequent to the end of the second quarter of 2022, we 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 us 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.

Summary Statement of Cash Flows

The following table presents the major components

of net cash flows from and used in operating, investing, and financing activities for the six months ended June 30, 2022, and 2021:

(In thousands)

3 unchanged sentences

Financing activities

Net increase in cash, cash equivalents, and restricted cash

Net increase in cash and cash equivalents

Cash Flow from Operating Activities

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

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

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

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

Net cash was reduced

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

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

liabilities and $2.7 million decrease in accounts payable.

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

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

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

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

For the six months ended June 30, 2022, we incurred

a net loss of $(102.2) million, which included non-cash expenses of impairment of goodwill and intangible assets of $69.9 million, a

provision of $8.6 million to accounts receivable allowance for doubtful accounts ($7.1 million for doubtful accounts related to Greenstone

TTK Solution), debt issuance costs and amortization of debt discount related to the SPA Note of $3.7 million, $2.2 million related to

depreciation and amortization, $1.9 million in connection with the issuance and acceleration of stock options, non-cash interest income

of $1.0 million related to TTK Solutions, a provision of slow-moving inventory of $929 thousand, a $(907) thousand change in fair value

of contingent consideration associated with the acquisition of Precision, Cascade and Lab Society and a gain attributed to non-controlling

interest in the amount of $4 thousand.

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

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

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

in accounts payable.

Net cash was reduced by a $20.2 million increase in inventory due to demand forecast, a $4.9 million

decrease in accounts payable, a $4.3 million increase in accounts receivable, a $4.0 million increase in accrued expenses and other current

liabilities, a $2.7 million increase in prepaid expenses, a $2.6 million decrease in deferred revenue and a $1.5 million increase in

other non-current assets.

six months ended June 30, 2021, we incurred a net loss of $(9.4) million, which included non-cash expenses of $313 thousand related to

depreciation and amortization, $3.1 million in connection with the issuance and acceleration of stock options, non-cash interest expenses

of $46 thousand related to leases, and gain attributed to non-controlling interest in the amount of $167 thousand.

Net cash was reduced

by an $11.1 million increase in accounts receivable, a $4.5 million increase in prepaid inventory due to demand forecast and a $2.7 million

increase in prepaid expenses, partially offset by a $12.8 million increase in accrued expenses ($11.1 million related to construction

Cash Flow from Investing Activities

Net cash used in investing activities primarily relates

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

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

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

The capital expenditures support growth

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

of existing equipment.

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

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

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

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

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

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

Net cash used in investing activities primarily

relates to net purchases of marketable securities, cash paid associated with our 2022 acquisition of Lab Society, the issuance of loans

receivable in connection with our financing of construction and equipment under its TTK Solutions offering, and purchases of property

and equipment, expenditures, and purchase of marketable securities.

The capital expenditures support growth and investment in property

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

For the six months ended June 30, 2022, net cash used in investing

activities was $(27.0) million, which included cash outflows of $20.4 million related to the issuance

of TTK-related loans receivable, $6.4 million of expenditures for property and equipment, $3.5 million paid in connection with our 2022

acquisitions of Lab Society and $3.4 million in net purchases of marketable securities.

six months ended June 30, 2021, net cash used in investing activities was $(51.9) million, which included cash outflows of $1.1 million

of leasehold improvements, purchasing computer equipment and small machinery, a $483 thousand issuance of loan receivable and $50.3 million

purchases of held to maturity securities.

Cash Flow from Financing Activities

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

provided by financing activities was $90.7 million.

Net cash provided by financing activities was

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

The Company received $65.0 million in net proceeds from our

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

in a private placement.

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

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

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

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

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

payments relating to financing leases.

For the six months ended June 30, 2022, net cash provided

by financing activities was $91.1 million.

Net cash provided by financing activities was primarily

driven by our two private placements during 2022.

We received $65.0 million in net proceeds from our issuance of Common Stock and warrants

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

$2.5 million of short-term notes payable associated with directors’ and officers’ insurance policy.

Additionally, we received

$21 thousand in proceeds from the exercise of stock options and warrants.

Each of the above inflows of cash was offset by $187 thousand

in payments relating to financing leases and by $2.0 million of debt repayments related to the insurance premium that was financed over

nine months and payments of other miscellaneous debt.

six months ended June 30, 2021, net cash provided by financing activities was $137.4 million.

Net cash provided by financing activities

was attributable to $57.0 million proceeds from our initial IPO, $80.0 million from our secondary public offering, both net of fees, and

proceeds from the exercise of options and warrants of $726 thousand, offset by $94 thousand payments of financing leases.

Off-Balance Sheet Arrangements

13 unchanged sentences

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

These estimates are based on our knowledge and understanding

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

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

of time and the occurrence of future events.

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

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

We have identified the following estimates

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

the fair value of

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

The significant accounting policies and estimates

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

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

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

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

the periods covered in this Quarterly Report.

These estimates are based on our knowledge and

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

Changes in these estimates will occur as a result

of the passage of time and the occurrence of future events.

Subsequent changes in these estimates may have a significant impact on

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

We have identified the

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

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

The significant accounting policies and estimates that have been adopted and followed in the preparation of our consolidated financial

statements are detailed in Note 2 - Summary of Significant Accounting Policies included in our 2021 Annual Report and Note 1 - Overview, Basis of Presentation and Significant Accounting Policies to our consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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

for the periods covered in this Quarterly Report.

Recently Issued Accounting Pronouncements Adopted

For more information on recently

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

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

For more information

on recently issued accounting pronouncements are included within Note 1 - Overview, Basis of Presentation

and Significant Accounting Policies, included elsewhere in the notes to consolidated financial statements covered under Part I,

Item 1 of this Quarterly Report on Form 10-Q.

New Accounting Pronouncements Not Yet Adopted

For more information on new

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

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

For more information on new accounting pronouncements not yet adopted are included within Note

1 - Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to consolidated financial

statements covered under Part I, Item 1 of this Quarterly Report on Form 10-Q.

Quantitative and Qualitative Disclosures

3 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis