What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-11-28 compared with 2022-03-31 · 1078 added, 726 removed, 51 unchanged (97% of the section changed)

Management’s Discussion and

Analysis of Financial Condition and Results of Operations.

You should read the following discussion and

analysis of our financial condition and results of our operations together with our consolidated financial statements and the notes thereto

appearing elsewhere in this report.

This discussion contains forward-looking statements reflecting our current expectations, whose actual

outcomes involve risks and uncertainties.

Actual results and the timing of events may differ materially from those stated in or implied

by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors,”

“Cautionary Statement regarding Forward-Looking Statements” and elsewhere in this report.

We are a developer of highly advanced and proprietary

precision hardware and software grow solutions for the indoor agriculture marketplace and provide equipment and solutions for extraction,

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

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

grow solution in the industry.

We believe our Agrify “Precision Elevated™” cultivation solution is vastly differentiated

from anything else on the market in that it combines our seamlessly integrated hardware and software offerings with a wide range of associated

services such as consulting, engineering, and construction to form what we believe is the most complete solution available from a single

The totality of our product mix and service capabilities forms an unrivaled ecosystem in what has historically been an extremely

fragmented market.

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

Agrify Corporation was incorporated in the state

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

Management’s Discussion and Analysis

of Financial Condition and Results of Operations.

You should read the following

discussion and analysis of our financial condition and results of our operations together with our consolidated financial statements and

the notes thereto appearing elsewhere in this report.

This discussion contains forward-looking statements reflecting our current expectations,

whose actual outcomes involve risks and uncertainties.

Actual results and the timing of events may differ materially from those stated

in or implied by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk

Factors,” “Cautionary Statement regarding Forward-Looking Statements” and elsewhere in this report.

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 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.

Our cultivation and extraction

solutions seamlessly combine our integrated hardware and software offerings with a broad range of associated services including consulting,

engineering, and construction and are designed to deliver the most complete commercial indoor farming solution available from a single

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

Agrify Corporation was incorporated

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

(or “Agrinamics”).

On September 16, 2019, Agrinamics amended its

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

The Company’s corporate office is located

in Billerica, Massachusetts.

On September 16, 2019,

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

Our corporate headquarters

are located in Troy, Michigan.

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

Colorado, Georgia, Massachusetts, Michigan, and Oregon.

Reverse Stock Split

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

reverse stock split.

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

all periods presented, unless otherwise indicated.

Fiscal 2021 Highlights

Acquisition of Precision and Cascade

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

we 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;

and each of the equity holders

of Sinclair named therein (collectively, the “Sinclair Members”).

On October 1, 2021, we consummated the transactions contemplated

by the Purchase Agreement.

Subject to the terms and conditions set forth

in the Purchase Agreement, (1) Sinclair transferred, to us, and we purchased (the “Interest Purchase”) from Sinclair, 100%

of the equity interests of Cascade Sciences, LLC, a Delaware limited liability company, such that immediately after the consummation of

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

a newly-formed wholly owned subsidiary of us, Precision Extraction NewCo, LLC.

The aggregate consideration for the Interest

Purchase and the Merger consisted of:

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

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

(b) the number of shares of our common stock, subject to adjustment, equal to the quotient of (i) $20 million divided by (ii) the

volume-weighted average price per share of our 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 our 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 us pursuant to the terms

of the Purchase Agreement, taking into account any Aggregate True-Up Payment in favor of the Sinclair Members, exceed $65 million.

In connection with the Aggregate True Up Payment, Precision and Cascade earned additional purchase consideration of $5.4 million during

fiscal year ending December 31, 2021.

Of the $5.4 million of additional consideration, $1.4 million was recognized as change in contingent

consideration in our consolidated statements of operations during the fourth quarter of 2021 due to the fact that the final revenue achievement

exceeded our original fair value estimate at the time of the acquisition.

Transaction and related costs, consisting primarily

of professional fees, directly related to the acquisition, totaled $4.0 million for the year ended December 31, 2021.

All transaction

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

The purchase price allocation for the business

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

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

The estimated fair value at acquisition is $49.9

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

Our initial fair value estimates related to the

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

Method, and Discounted Cash Flow Method.

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

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

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

We amortize our intangible assets assuming no

residual value over periods in which the economic benefit of these assets is consumed.

The amount of revenue of Precision and Cascade

included in our consolidated statement of operations from the acquisition date of October 1, 2021 to December 31, 2021 was approximately

$12.3 million.

Acquisition of PurePressure

On December 31, 2021, we entered into a Membership Interest

Purchase Agreement (the “Pure Purchase Agreement”) with PurePressure, LLC, a Colorado Limited liability company and the members

of PurePressure (collectively, the “Members”), Benjamin Britton as the Member Representative thereunder, and each of the Members.

Concurrently with the execution of the Pure Purchase Agreement, we 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 us (the

“Acquisition”).

The aggregate consideration for the Acquisition

consisted of:

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

(b) 329,179 shares of our common stock (the “Buyer Shares”);

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

Colorado, Georgia and Michigan.

Reverse Stock Splits

On January 12, 2021, we effected

a 1-for-1.581804 reverse stock split on our Common Stock.

On October 18, 2022, we effected

a 1-for-10 reverse stock split on our Common Stock.

On July 5 th , 2023,

we effected a 1-for-20 reverse stock split on our Common Stock.

All share and per information has been retroactively adjusted to give

effect to the reverse stock splits for all periods presented, unless otherwise indicated.

Recent Business Developments

Private Placement

January 25, 2022, we entered into a Securities Purchase Agreement (the “Securities Agreement”) with an institutional investor

and other accredited investors for the sale of 12,253 shares (the “SA Shares”) of our Common Stock, pre-funded warrants (the

“Pre-Funded Warrants”) to purchase up to an aggregate of 7,853 shares of Common Stock and warrants to purchase up to an aggregate

of 15,079 shares of Common Stock (the “Common Warrants” and, collectively with the Pre-Funded Warrants, the “SA

Warrants”), in a private placement offering.

The combined purchase price for one share of Common Stock (or one Pre-Funded Warrant)

and the accompanying fraction of a Common Warrant was $1,360.00 per share.

Subject to certain ownership

limitations, the SA Warrants became exercisable six months from issuance.

Each Pre-Funded Warrant is exercisable into one share of Common

Stock (as adjusted from time to time in accordance with the terms thereof).

Each Common Warrant is exercisable into one share of Common

Stock at a price per share of $1,496.00 (as adjusted from time to time in accordance with the terms thereof) and will expire on the fifth

anniversary of the initial exercise date.

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

in March 2022.

Raymond Chang, our Chairman

and Chief Executive Officer (“CEO”), and Stuart Wilcox, who previously served as 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 $1,380.00 per share.

The gross proceeds to us

from the private placement were approximately $27.3 million, before deducting the placement agent’s fees and other offering

Acquisition of Lab Society

On February 1, 2022, we entered

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

(“Lab Society”), Lab Society

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

as the Owner Representative

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

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

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

The aggregate consideration

for the Lab Society Acquisition consisted of $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness

of Lab Society at closing;

2,128 shares of Common Stock (the “Buyer Shares”);

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

to the extent earned.

We withheld 88,878 of the Buyer Shares issuable

to certain Members (the “Holdback Buyer Shares”) for the purpose of securing any post-closing adjustment owed to us and any

claim for indemnification or payment of damages to which we may be entitled under the Pure Purchase Agreement.

The Holdback Buyer Shares

shall be released following the twelve (12) month anniversary of the Closing Date in accordance with and subject to the conditions of

the Pure Purchase Agreement.

The Pure Purchase Agreement includes customary

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

The Members may become entitled to additional

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

fiscal years ending December 31, 2022 and December 31, 2023, of which 40% will be payable in cash and the remaining 60% will be payable

by issuing shares of our common stock (collectively, the “Earn-out Consideration”).

The purchase price allocation for the business

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

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

The estimated fair value at acquisition is $7.9 million

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

Our initial fair value estimates related to the

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

Method, and Discounted Cash Flow Method.

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

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

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

We amortize our intangible assets assuming no

residual value over periods in which the economic benefit of these assets is consumed.

No revenue from PurePressure was included in

our consolidated statement of operations as the transaction occurred on December 31, 2021.

We withheld 638 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.

During the third

quarter of 2022, 139 of the Holdback Lab Buyer Shares were forfeited after the finalization of the net working capital settlement.

remaining 499 Holdback Lab Buyer Shares were released following the twelve-month anniversary of the Closing Date in accordance with and

subject to the conditions of the Merger Agreement.

Additional information regarding our contingent consideration arrangements may

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

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

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.

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 September 30, 2022.

The reversal of this liability

of approximately $1.0 million, as required by Accounting Standards Codification (“ASC”) Topic 805 Business Combination (“ASC

805”), was recorded as a reduction in operating expenses during the second quarter of 2022.

The purchase price allocation

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

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

The estimated fair value at acquisition

is $7.9 million and may be adjusted upon further review of the values assigned to identifiable intangible assets and goodwill.

Our initial fair value estimates

related to the various identified intangible assets were determined under various valuation approaches including the Income Approach,

Relief-from-Royalty Method, and Discounted Cash Flow Method.

These valuation methods require management to project revenues, operating

expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine

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

During the three-month ended

June 30, 2022, we identified an 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 an impairment to the carrying value of our property and equipment and accordingly performed interim testing as of June 30, 2022.

Based on our interim testing, we noted that the entire carrying value of its goodwill and intangible assets should be impaired.

information regarding our interim testing on goodwill and intangible assets may be found in Note 7 – Goodwill and Intangible Assets,

Net, included in the notes to the consolidated financial statements.

Securities Purchase Agreement

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

(the “Investor”), we agreed to issue and sell to the Investor, in a private placement transaction, in exchange for the payment

by the Investor of $65 million, less applicable expenses as set forth in the Securities Purchase Agreement, a senior secured promissory

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

to purchase up to an aggregate of 34,406 shares of Common Stock.

August 2022 Securities Exchange Agreement

August 18, 2022, we reached an agreement with the Investor to amend its existing SPA Note and entered into a Securities Exchange Agreement

(the “August 2022 Exchange Agreement”).

Pursuant to the August 2022 Exchange Agreement, we partially paid $35.2 million along

with approximately $300 thousand in repayments for other fees under the SPA Note and exchanged the remaining balance of the SPA Note for

a the Exchange Note with an aggregate original principal amount of $35.0 million and a new warrant to purchase 71,139 shares of Common

Stock (the “Note Exchange Warrant”).

Additionally, we exchanged the SPA Warrant for a new warrant for the same number of underlying

shares but with a reduced exercise price (the “Modified Warrant” and, collectively with the Note Exchange Warrant, the “August

2022 Warrants”).

Additional information regarding our August 2022 Warrants may be found in Note

1 – Overview, Basis of Presentation and Significant Accounting Policies and Note 4 –

Fair Value Measures, included in the notes to the condensed consolidated financial statements.

Exchange Note is a senior secured obligation of ours and ranks senior to all indebtedness of ours.

The Exchange Note will mature on the

three-year anniversary of its issuance (the “Maturity Date”) and contains a 9.0% annualized interest rate, with interest

to be paid monthly, in cash, beginning September 1, 2022.

The principal amount of the Exchange Note will be payable on the Maturity

Date, provided that the holder will be entitled to a cash sweep of 20% of the proceeds received by us in connection with any equity financing,

which will reduce the outstanding principal amount under the Exchange Note.

any time, we may prepay all of the Exchange Note by redemption at a price equal to 102.5% of the then-outstanding principal amount under

the Note plus accrued but unpaid interest.

The holder will also have the option of requiring us to redeem the Exchange Note on the one-year

or two-year anniversaries of issuance at a price equal to the then-outstanding principal amount under the Exchange Note plus accrued but

unpaid interest, or if we undergo a fundamental change at a price equal to 102.5% of the then-outstanding principal amount under the Exchange

Note plus accrued but unpaid interest.

Exchange Note imposes certain customary affirmative and negative covenants upon us, as well as covenants that restrict us and our subsidiaries

from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, restrict the ability of us and

our subsidiaries from making certain investments, subject to specified exceptions, restrict the declaration of any dividends or other

distributions, subject to specified exceptions, requires us not to exceed maximum levels of allowable cash spend while the Exchange

Note is outstanding, and requires us to maintain minimum amounts of cash on hand.

If an event of default under the Exchange Note

occurs, the holder can elect to redeem the Exchange Note for cash equal to 115% of the then-outstanding principal amount of the Note (or

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

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

the date the Exchange Note is fully repaid, the holder has, subject to certain exceptions, the right to participate for up to 30% of any

offering of debt, equity (other than an offering of solely Common Stock), or equity-linked securities, including without limitation any

debt, preferred stock or other instrument or security, of us or our subsidiaries.

Modified Warrant has an exercise price of $430.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends

and similar transactions, will be exercisable on and after the six-month anniversary of issuance, 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 Modified Warrant (the “Modified Warrant Shares”), in which case the Modified

Warrant will also be exercisable on a cashless exercise basis at the holder’s election.

Note Exchange Warrant has an exercise price of $246.00 per share, subject to adjustment for stock splits, reverse stock splits, stock

dividends and similar transactions, was exercisable upon issuance, 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 Warrant (the “Note Exchange Warrant Shares” and, together with the Modified Warrant Shares, the “Exchange

Warrant Shares”), in which case the Note Exchange Warrant will also be exercisable on a cashless exercise basis at the holder’s

Until we completed a qualified equity financing of at least $15.0 million, which requirement was satisfied with sales under

the at-the-market continuous equity offering (“ATM” or “ATM Program”), the Note Exchange Warrant’s exercise

price would have been reduced to the extent we issued securities for a lower purchase price.

The Note Exchange Warrant also prohibited

us, until following the completion of such qualified equity financing, from issuing warrants with more favorable or preferential terms

and/or provisions.

August 2022 Warrants each provide that in no event will the number of shares of Common Stock issued upon exercise of such warrants result

in the holder’s beneficial ownership exceeding 4.99% of our shares of Common Stock outstanding at the time of exercise (which percentage

may be decreased or increased by the holder, but to no greater than 9.99%).

Additionally, the August 2022 Warrants could not be exercised

for more than an aggregate of 26,542 shares of Common Stock unless and until shareholder approval is obtained, which approval was obtained

on October 14, 2022.

March 2023 Securities Exchange Agreement

On March 8, 2023, we entered

into a second Securities Exchange Agreement with the Investor (the “March 2023 Exchange Agreement”), pursuant to which we

prepaid approximately $10.3 million in principal under the Exchange Note and exchanged $10.0 million in principal amount under the Exchange

Note for a new senior convertible note (the “Convertible Note” and, together with the Exchange Note, the “Notes”)

with an original principal amount of $10.0 million.

The Convertible Note will mature on August 19, 2025.

We also amended the Exchange

Note to remove covenants regarding minimum cash spend and cash on hand.

At The Marketing Offering

On October 18, 2022, we entered

into the ATM Program with Canaccord Genuity LLC (the “Agent”) pursuant to which we could issue and sell, from time to

time, shares of our Common Stock having an aggregate offering price of up to $50 million, depending on market demand, with the Agent acting

as an agent for sales.

The ATM Program allowed us to sell shares of Common Stock pursuant to specific parameters defined by us as well

as those defined by the SEC and the ATM Program agreement.

Beginning October 18, 2022 through December 31, 2022, we sold 306,628 shares

of Common Stock under the ATM at an average price of $50.85, resulting in gross proceeds of $15.6 million and net proceeds of $15.1 million

after commissions and fees to the Agent totaling $468 thousand.

Subsequent to December 31, 2022 through April 1, 2023, after which time

the ATM program was discontinued, we sold an additional 323,082 shares of Common Stock under the ATM at an average price of $4.93, resulting

in gross proceeds of $1.6 million and net proceeds of $1.6 million after commissions and fees to the Agent totaling $48 thousand.

the entire period from October 18, 2022 through April 1, 2023, we sold 629,710 shares of Common Stock under the ATM at an average price

of $27.29 per share, resulting in gross proceeds of $17.2 million, and net proceeds of $16.7 million after commissions and fees to the

Agent totaling $516 thousand.

$3.0 million of the proceeds under the ATM Program were used to repay amounts due to the Investor under

the Exchange Note.

We used the net proceeds generated from the ATM Program for working capital and general corporate purposes, including

repayment of indebtedness, funding its transformation initiatives and product category expansion efforts and capital expenditures.

Confidentially Marketed Public Offering

On December 16, 2022, we

entered into an underwriting agreement (the “Underwriting Agreement”) with Canaccord Genuity LLC as the underwriter, pursuant

to which we agreed to sell an aggregate of 594,232 shares of our Common Stock, and, in lieu of Common Stock to certain investors

that so chose, pre-funded warrants (the “Pre-Funded 2022 Warrants”) to purchase 75,000 shares of our Common Stock, and accompanying

warrants (the “December 2022 Warrants”) to purchase 1,338,462 shares of our Common Stock (the “Offering”).

combined public offering price for each share of Common Stock and accompanying two warrants was $13.00 per share, and the combined offering

price for each Pre-Funded Warrant and accompanying two warrants was $12.98 per share.

The December 2022 Warrants

may not be exercised by the holder to the extent that the holder, together with its affiliates, would beneficially own, after such exercise

more than 4.99% of the shares of our Common Stock then outstanding (subject to the right of the holder to increase or decrease such beneficial

ownership limitation upon notice to us, provided that such limitation cannot exceed 9.99%) .

The Pre-Funded 2022 Warrants

were classified as a component of permanent equity and the December 2022 Warrants were liability-classified and were recorded at the issuance

date using a relative fair value allocation method.

The Pre-Funded 2022 Warrants are equity-classified because they are freestanding financial

instruments that are legally detachable and separately exercisable from the equity instruments, are immediately exercisable, and permit

the holders to receive a fixed number of shares of common stock upon exercise.

In addition, such warrants do not provide any guarantee

of value or return.

The December 2022 Warrants are liability-classified as there is a volatility floor and these warrants are not indexed

to our Common Stock.

Raymond Chang, our Chairman

and CEO, participated in the Offering and purchased 115,385 shares of Common Stock and 230,769 warrants for an aggregate purchase price

of approximately $1.5 million.

We received aggregate gross

proceeds to us from the Offering of approximately $8.7 million including offering costs of approximately $0.5 million for broker fees

and legal expenses, for net proceeds of $8.2 million.

We intend to use the net proceeds from the Offering, together with its existing

cash resources, for working capital and general corporate purposes, which may include capital expenditures and repayment of debt.

Impact of coronavirus pandemic (“COVID-19”)

The extensive impact of the pandemic caused by

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

capital markets around the world.

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

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

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

To date, although all of our operations are functioning,

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

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

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

However, if this continues, it

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

will adversely affect our revenues and results of operations.

The extent to which COVID-19 and the related

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

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

by governmental authorities, central banks and other third parties (including new financial regulation and other regulatory reform) in

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

We continue to service our customers amid uncertainty

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

Convertible Promissory Notes

On January 11, 2021, our Board of Directors and

shareholders approved the amendment to the conversion formula of the Convertible Promissory Notes (the “Notes”) issued by

us on dates between August 2020 and November 2020.

Pursuant to the amendment, immediately prior to the consummation of a public transaction,

the outstanding principal amount of the Notes, together with all accrued and unpaid interest, shall convert into a number of fully paid

and non-assessable shares of common stock, at a conversion price of $7.72.

While the original conversion feature was bifurcated from

the host instrument, we determined that the amended conversion feature would not require bifurcation.

Since the accounting for the conversion

feature changed because of the amendment, we applied extinguishment accounting pursuant to its accounting policy.

Accordingly, 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 $19.7 million (inclusive of $13.1 million of principal, $7.1 million of derivative liabilities, less $587 thousand of

debt discount) and the recognition of the $17.0 million fair value of the new convertible notes (including the same principal amount

of $13.1 million, plus the $3.9 million fair value of the beneficial conversion feature).

On February 1, 2021, in conjunction with the closing of our

IPO, the Notes in the aggregate principal amount of $13.1 million were converted into 1,697,075 shares of common stock

at the election of us at a conversion price of $7.72 per share.

The extensive impact of the

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

as businesses and capital markets around the world.

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

counties, and other jurisdictions have imposed, and may impose in the future, various measures, including but not limited to, voluntary

and mandatory quarantines, stay-at-home orders, travel restrictions, limitations on gatherings of people, reduced operations, and

extended closures of businesses.

To date, although all of

our operations are functioning, COVID-19 has continued to cause some disruptions to our business, such as some temporary delays in the

delivery of our inventory.

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

the difficulties experienced by our suppliers have not yet materially impacted our ability to deliver products to our customers.

if this continues, it may negatively affect any inventory we may have and more significantly delay the delivery of merchandise to our

customers, which in turn will adversely affect our revenues and results of operations.

The extent to which COVID-19

and the related global economic crisis, affect our business, results of operations and financial condition, will depend on future developments

that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any recovery period, future actions

taken by governmental authorities, central banks and other third parties (including new financial regulation and other regulatory reform)

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

We continue to service our customers amid

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

Nasdaq Deficiency Notices

October 4, 2022, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock

Market, LLC (“Nasdaq”) notifying us that, for the last 30 consecutive business days, the bid price for our Common Stock had

closed below $1.00 per share, which is the minimum closing price required to maintain continued listing on The Nasdaq Capital Market under

Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”).

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had

180 calendar days to regain compliance with the Minimum Bid Requirement.

To regain compliance with the Minimum Bid Requirement, the closing

bid price of our Common Stock must be at least $1.00 per share for a minimum of 10 consecutive trading days during this 180-day compliance

period, unless the Staff exercises its discretion to extend the minimum trading day period pursuant to Nasdaq Listing Rule 5810(c)(3)(G).

On October 28, 2022, the Staff notified us that the closing bid price of our Common Stock was more than $1.00 for 10 consecutive trading

days, and that we therefore regained compliance with the Minimum Bid Requirement.

On January 19, 2023,

we received a new deficiency letter from the Staff of Nasdaq notifying us that, for the last 30 consecutive business days, the bid price

for our Common Stock had closed below $1.00 per share, which is the minimum closing price required to maintain a continued listing on

The Nasdaq Capital Market under the Minimum Bid Requirement.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have 180 calendar

days to regain compliance with the Minimum Bid Requirement.

To regain compliance with the Minimum Bid Requirement, the closing bid price

of our Common Stock must be at least $1.00 per share for a minimum of 10 consecutive trading days during this 180-day compliance

period, unless the Staff exercises its discretion to extend the minimum trading day period pursuant to Nasdaq Listing Rule 5810(c)(3)(G).

On July 19, 2023, we received a notice from Nasdaq confirming our recompliance with the minimum bid price rule.

On April 18, 2023, we received

a notice from Nasdaq (the “April Nasdaq Notice”) that we were noncompliance with Nasdaq Listing Rule 5250(c)(1) as a result

of our failure to file this Annual Report on Form 10-K (the “Form 10-K”) with the SEC by the required due date.

May 17, 2023, we received a second notice from Nasdaq (the “May Nasdaq Notice”) that we remained noncompliant with Nasdaq

Listing Rule 5250(c)(1) as a result of our failure to file our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the

“First Quarter Form 10-Q”) with the SEC by the required due date.

On August 16, 2023, we received

a third notice from Nasdaq that we remain noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of our failure to file our Quarterly

Report on Form 10-Q for the fiscal quarter ended June 30, 2023 (the “Second Quarter Form 10-Q”) with the SEC by the required

filing date (the “August Nasdaq Notice” and, together with the April Nasdaq Notice and the May Nasdaq Notice, the “Nasdaq

October 17, 2023, we received a Staff Delisting Determination (the “Staff Determination”) from the Listing Qualifications

Department of Nasdaq notifying us that we were not in compliance with Nasdaq’s continued listing requirements under the Listing

Rule as a result of our failure to file the First Quarter Form 10-Q, the Second Quarter Form 10-Q and the Form 10-K (collectively, the

“Delinquent Reports”) in a timely manner.

The Staff Determination has no immediate effect and will not immediately result

in the suspension of trading or delisting of our shares of common stock.

timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”), and the Panel scheduled a hearing for January 11,

In connection with the hearing request, we requested that the stay be extended through the hearing and the expiration of any additional

extension period granted by the Panel following the hearing.

In that regard, pursuant to the Nasdaq Listing Rules, the Panel has granted

this additional extension period.

However, there can be no assurance that we will be able to regain compliance by the end of any additional

extension period.

As disclosed in the Current

Report on Form 8-K filed on April 17, 2023, our audit committee concluded that, as a result of inadvertent errors in the accounting for

warrants previously issued by us, it was appropriate to restate our previously issued unaudited condensed consolidated interim financial

statements as of and for the quarterly periods ended March 31, 2022, June 30, 2022 and September 30, 2022 included in the Company’s

Quarterly Reports on Form 10-Q for such periods in amended quarterly reports for the affected periods.

As a result of such restatements,

we were unable to timely file the Form 10-K, the First Quarter Form 10-Q and the Second Quarter Form 10-Q without unreasonable effort

Mack Molding Modification

October 27, 2023, and with an effective date as of October 18, 2023, we entered into a Modification and Settlement Agreement (the “Modification

Agreement”) with Mack Molding Company (“Mack”).

Pursuant to the Modification Agreement, we agreed to settle an outstanding

dispute with Mack under the Supply Agreement between the parties dated December 7, 2020 (the “Supply Agreement”).

The Modification

Agreement requires us to make payments of $500,000 and $250,000 to Mack on or before November 1, 2023 and February 15, 2024, respectively.

Following the November 1, 2023 payment, we will be entitled to take possession of certain Vertical Farming Units (“VFUs”)

that were assembled under the Supply Agreement.

The Modification Agreement also requires us to purchase from Mack a minimum of 25 VFUs

per quarter for each quarter during 2024 and a minimum of 50 VFUs per quarter for the six quarters beginning with the first quarter of

We are required to pay a storage fee of $25,000 per month for VFUs subject to the Modification Agreement.

Additionally,

as part of the Modification Agreement, we agreed to issue to Mack a warrant to purchase 750,000 shares of common stock.

warrant has an exercise price of $4.00 per share, was exercisable upon issuance, has a term of three years from the date of issuance,

and is exercisable on a cash basis unless at the time of exercise there is no effective registration statement for the resale of the underlying

shares, in which case the warrant may be exercised on a cashless exercise basis at Mack’s election.

Warrant Issuance

October 27, 2023, we entered into a letter agreement with the Investor.

Pursuant to the agreement, we agreed to exchange $3.0 million

in principal and approximately $1.1 million in accrued but unpaid interest outstanding under the Exchange Note to purchase 2,809,669 shares

of common stock (the “Exchange Warrant”).

Additionally, we agreed to exchange the 375,629 shares of common stock held in abeyance

for the lender under the terms of a letter agreement between us and the Investor dated April 26, 2023 for a warrant to purchase 375,629

shares of common stock (the “Abeyance Warrant”).

warrant has an exercise price of $0.001 per share, was exercisable upon issuance, has a term of five years from the date of issuance and

is exercisable on a cash basis or on a cashless exercise basis at the holder’s election.

Exchange Warrant provides that in the event that Raymond Chang or his affiliates acquire securities from us, exercise convertible securities

or amend the terms of convertible securities at a purchase or conversion price lower than $1.46, then the number of shares of common stock

underlying Exchange Warrant will be increased to an amount equal to $3.0 million divided by such purchase or conversion price, subject

to proportional adjustment in the event the Exchange Warrant has been partially exercised.

Additionally, in the event that we have not

issued equity securities in exchange for gross proceeds of at least $3.0 million to Mr.

Chang or his affiliates (subject to certain offsets)

by the third calendar day after the date when we receive stockholder approval, then on December 26, 2023, the number of shares of common

stock underlying Exchange Warrant will be increased to an amount equal to $3.0 million divided by the Minimum Price as defined under Nasdaq

listing rules, subject to proportional adjustment in the event the Exchange Warrant has been partially exercised.

Letter Agreement requires us to issue equity securities to Mr.

Chang or his affiliates for aggregate gross proceeds of at least $3.0 million,

minus any funds advanced by Mr.

Chang to us since July 1, 2023.

October 27, 2023, CP Acquisitions LLC (the “New Lender”), an entity affiliated with and controlled by Raymond Chang, our Chief

Executive Officer, purchased the Exchange Note and the Convertible Note from the Investor .

In connection with the Note Purchase, the New Lender has agreed to waive any events of default under the acquired notes through December

31, 2023 and to enter into an agreement with us to extend the maturity date thereon to December 31, 2025.

Amendment and Secured Promissory Note

July 12, 2023, we issued an unsecured promissory note (the “Note”) in favor of GIC Acquisition, LLC (“GIC”), an

entity that is managed by Raymond Chang, our Chairman and Chief Executive Officer, with an original principal amount of up to $500,000.

On October 27, 2023, we and GIC amended and restated the Note (the “Restated Note”).

Pursuant to the terms of the Restated

Note, the Maturity Date was extended until December 31, 2023 and we granted a security interest in our assets that ranks junior to the

Exchange Note and the Convertible Note.

with the Restated Note, we issued a junior secured promissory note (the “Junior Secured Note”) to the New Lender.

to the Junior Secured Note, the New Lender will lend up to $3,000,000 to us.

The Junior Secured Note bears interest at a rate of 10% per

annum, will mature in full on December 31, 2023, and may be prepaid without any fee or penalty.

The Junior Secured Note is a secured obligation

that ranks junior to the Exchange Note and the Convertible Note.

Use of Estimates

The preparation of financial statements in accordance

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

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

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

The preparation of consolidated

financial statements in accordance with accounting principles generally accepted in the U.S.

(“GAAP”) requires management

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

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

Actual results could differ from those estimates.

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

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

Significant estimates include assumptions about collection of accounts and notes

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

of inventory, and useful life of fixed assets and intangible assets.

Financial Overview

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis

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

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

The preparation of financial statements in conformity

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

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

reported amounts of revenues and expenses during the reported period.

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

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

Actual results may differ materially from those

estimates or assumptions.

Our management’s discussion

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

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions

that affect the amounts reported in the consolidated financial statements and accompanying notes.

On an ongoing basis, we evaluate estimates,

which include estimates related to accruals, stock-based compensation expense, and reported amounts of revenues and expenses during the

reported period.

We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe

to be reasonable under the circumstances.

Actual results may differ materially from those estimates or assumptions.

Revenue Recognition

We generate revenue from the following sources:

(1) equipment

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

We recognize revenue from contracts with customers

using a five-step model, which is described below:

the customer contract;

performance obligations that are distinct;

the transaction price;

the transaction price to the distinct performance obligations;

revenue as the performance obligations are satisfied.

the customer contract

A customer contract is generally identified when

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

has commercial substance and collectability, and consideration is probable.

Specifically, we obtain written/electronic signatures on

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

Identify performance obligations that are

A performance obligation is a promise 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.

We generate revenue from

the following sources:

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

In accordance with ASC 606

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

● identify the customer contract;

● identify performance obligations

that are distinct;

● determine the transaction price;

The transaction price is the amount of consideration

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

on behalf of government agencies.

Allocate the transaction price to distinct

performance obligations

The transaction price is allocated to each performance

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

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

if they are distinct.

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

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

Recognize revenue as the performance obligations

are satisfied

Revenue is recognized when, or as, performance

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

● allocate the transaction price

to the distinct performance obligations;

● recognize revenue as the performance

obligations are satisfied.

Identify the customer contract

A customer contract is generally

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

the contract has commercial substance and collectability, and consideration is probable.

Specifically, we obtain written/electronic signatures

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

Identify performance

obligations that are distinct

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

The transaction price is

the amount of consideration to which we expect to be entitled in exchange for transferring goods or services to a customer, excluding

sales taxes that are collected on behalf of government agencies.

Allocate the transaction

price to distinct performance obligations

The transaction price is

allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services

being provided to the customer.

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

performance obligations separately, if they are distinct.

The standalone selling price reflects the price we would charge for a specific

piece of equipment or service if it was sold separately in similar circumstances and to similar customers.

Recognize revenue as

the performance obligations are satisfied

Revenue is recognized when,

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

Significant Judgments

We enter into contracts that can 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 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.

Judgment is required to determine the SSP for

each distinct performance obligation.

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

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

If the SSP is

not observable through past transactions, we estimate the SSP, taking into account available information such as market conditions, expected

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

We license our software as a SaaS type subscription

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

The full value of the contract is

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

We typically satisfy

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

for services sales as

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

We utilize the cost-plus margin method to determine

the SSP for equipment and buildout services.

It is based on the cost of the services from third parties, plus a reasonable markup that

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

The SSP for services in time and materials contracts

is determined by observable prices in standalone services arrangements.

Variable consideration in the form of royalties,

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

if additional information becomes available.

We enter into contracts that

may include various combinations of equipment, services and construction, which are generally capable of being distinct and accounted

for as separate performance obligations.

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

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.

Judgment is required to determine

the SSP for each distinct performance obligation.

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

and the methods of estimating SSP under the guidance of ASC 606-10-32-33.

If the SSP is not 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 Software-as-a-Service (“SaaS”) type subscription license, whereby

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

The full value of the contract is recognized ratably

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

We typically satisfy our performance

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

for services sales as services are rendered

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

We utilize the cost-plus

margin method to determine the SSP for equipment and build-out services.

This method is based on the cost of the services from third parties,

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

We determine the SSP for

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

We estimate variable consideration

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

of each reporting period if additional information becomes available.

Variable consideration is typically not subject to constraint.

Changes to variable consideration

were not material for the periods presented.

If contracts have payment terms that differ from

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

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

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

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

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

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

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

to variable consideration were not material for the periods presented.

If a contract has payment

terms that differ from the timing of revenue recognition, we will assess whether the transaction price for those contracts includes a

significant financing component.

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

financing component if we expect that at the contract inception, the period between when the entity transfers a promised good or service

to a customer and when the customer pays for that good or service, will be one year or less.

For those contracts in which the period exceeds

the one-year threshold, this assessment, as well as the quantitative estimate of the financing component and its relative significance,

requires judgment.

Accordingly, we impute interest on such contracts at an agreed-upon interest rate and will present the financing components

separately as financial income.

For the years ended December 31, 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

We have elected to treat shipping and handling

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

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

We have payment

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

time value of money.

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

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

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

the time value of money.

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

We receive payment from customers based on specified

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

There are no contract assets related

to performance under the contract.

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

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

We fulfil obligations under a contract with a customer

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

Accounts receivables are recorded when the customer

has been billed or the right to consideration is unconditional.

We recognize deferred revenue when consideration has been received or

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

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

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

Due to the nature of our

contracts, these reporting requirements are not applicable.

The majority of our remaining contracts meet certain exemptions as defined

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

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

We generally provide a one-year warranty on our

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

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

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

the loss is probable and can be reasonably estimated.

We receive payment from customers

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

There are no contract

assets related to performance under the contract.

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

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

We fulfill obligations under a contract with

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

Accounts receivables are recorded when

the customer has been billed or the right to consideration is unconditional.

We recognize deferred revenue when consideration has been

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

In accordance with ASC 606-10-50-13,

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

nature of our contracts, these reporting requirements are not applicable.

The majority of our remaining contracts meet certain exemptions

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

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

We generally provide a one-year

warranty on our products for materials and workmanship but may provide multiple-year warranties as negotiated, and will pass on the warranties

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

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

when the loss is probable and can be reasonably estimated.

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

1 unchanged sentence

Accounting for Business Combinations

We allocated the purchase price of acquired companies

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

upon their estimated fair values at the acquisition date.

These fair values are typically estimated with assistance from independent

valuation specialists.

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

the acquisition date with respect to intangible assets, contractual support obligations assumed, contingent consideration arrangements,

and pre-acquisition contingencies.

Although we believe the assumptions and estimates

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

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

Examples of critical estimates in valuing certain

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

future expected cash flows from software license sales, support agreements, consulting contracts,

other customer contracts, and acquired developed technologies;

expected costs to develop in-process research and development into commercially viable products

and estimated cash flows from the projects when completed;

the acquired company’s brand and competitive position, as well as assumptions about the period

of time the acquired brand will continue to be used in the combined company’s product portfolio;

cost of capital and discount rates;

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

will amortize.

The fair value estimates related to the various

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

and Discounted Cash Flow Method.

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

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

cost of capital to be used as a discount rate.

We allocated the purchase

price of acquired companies to the tangible and intangible assets acquired, including in-process research and development assets, and

liabilities assumed, based upon their estimated fair values at the acquisition date.

These fair values are typically estimated with assistance

from independent valuation specialists.

The purchase price allocation process requires us to make significant estimates and assumptions,

especially at the acquisition date with respect to intangible assets, contractual support obligations assumed, contingent consideration

arrangements, and pre-acquisition contingencies.

Although we believe the assumptions

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

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

Examples of critical estimates

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

● future expected cash flows

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

● expected costs to develop in-process

research and development into commercially viable products and estimated cash flows from the projects when completed;

● the acquired company’s

brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined

company’s product portfolio;

● cost of capital and discount

● estimating the useful lives

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

The fair value estimates

related to the various identified intangible assets were determined under various valuation approaches including the Income Approach,

Relief-from-Royalty Method, and Discounted Cash Flow Method.

These valuation methods require management to project revenues, operating

expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine

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

Goodwill and Intangible Assets

Amortization of acquired intangible assets is

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

of PurePressure, which also occurred in 2021.

As a result of these transactions, customer relationships, acquired technology, non-compete

agreements and trade name 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.

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.

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

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

of a significant decline in the Company’s stock price.

There have been no impairment charges recorded for fiscal 2020 and fiscal

We account for income taxes pursuant to the provisions

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

income taxes.

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

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

A valuation allowance

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

will not be realized.

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

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

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

of the position that would be ultimately sustained.

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

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

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

Amortization of acquired

intangible assets is the result of the acquisition of TriGrow Systems, LLC (“TriGrow”), which occurred in 2020, the acquisition

of Precision Extraction NewCo, LLC (“Precision”) and Cascade Sciences, LLC (“Cascade”) which occurred in 2021,

the acquisition of PurePressure, LLC (“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

at least annually in the fourth quarter of the year, or more frequently if events or changes

in circumstances indicate that the carrying amount of the goodwill may not be recoverable.

We have determined that were 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 ended

June 30, 2022, we identified an 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 an impairment to the carrying value of our property and equipment and accordingly performed interim testing as of June 30, 2022.

Based on our interim testing, we noted that the entire carrying value of our goodwill and intangible assets should be impaired.

information regarding our interim testing on goodwill and intangible assets may be found in Note 7 – Goodwill and Intangible Assets,

Net, included elsewhere in the notes to the consolidated financial statements.

Convertible Notes Payable

We evaluate our convertible

instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be

separately accounted for in accordance with ASC Topic 815 Derivatives and Hedging (“ASC 815”).

The accounting treatment of

derivative financial instruments requires that we identify and record certain embedded conversion options (“ECOs”), certain

variable-share settlement features, and any related freestanding instruments at their fair values as of the inception date of the agreement

and at fair value as of each subsequent balance sheet date.

Any change in fair value is recorded as non-operating, non-cash income or

expense for each reporting period at each balance sheet date.

We reassess the classification of our derivative instruments at each balance

If the classification changes as a result of events during the period, the contract is reclassified as of the date of the

event that caused the reclassification.

Bifurcated embedded conversion options, variable-share settlement features and any related freestanding

instruments are recorded as a discount to the host instrument which is amortized to interest expense over the life of the respective note

using the effective interest method.

If we determine that an instrument

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

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

We record a BCF as a 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.

Warrant Liabilities

We do not use derivative

instruments to hedge exposures to cash flow, market, or foreign currency risks.

We evaluate all of our financial instruments, including

issued private placement stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as

embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815.

for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms

and applicable authoritative guidance in ASC 480 and ASC 815.

Our assessment considers whether the warrants are freestanding financial

instruments pursuant to ASC 480, whether they meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all

of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our own Common Stock among

other conditions for equity classification.

issued or modified warrants that meet all of the criteria for equity classification, they are recorded as a component of additional paid-in

capital at the time of issuance.

For issued or modified warrants that are precluded from equity classification, they are recorded as a

liability at their initial fair value on the date of issuance and subject to remeasurement on each balance sheet date with changes in

the estimated fair value of the warrants to be recognized as an unrealized gain or loss in the condensed consolidated statements of operations.

Capitalization of Internal Software Development

We capitalize on certain

software engineering efforts related to the continued development of Agrify Insights™ cultivation software (“Agrify Insights™”)

under ASC 985-20.

Costs incurred during the application development phase are only capitalized once technical feasibility

has been established and the work performed will result in new or additional functionality.

The types of costs capitalized during

the application development phase include employee compensation, as well as consulting fees for third-party software developers working

on these projects.

Costs related to the research and development are expensed as incurred until technical feasibility is established

as well as post-implementation activities.

Internal-use software is amortized on a straight-line basis over the estimated useful life

of the asset, which ranges from two to five years.

We account for income taxes

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

to calculating deferred income taxes.

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

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

A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that

the net deferred asset will not be realized.

We follow the provisions

of ASC 740-10-25-5, “Basic Recognition Threshold.” When tax returns are filed, it is highly certain that some positions taken

would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position

taken or the amount of the position that would be ultimately sustained.

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

of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence,

management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals

or litigation processes, if any.

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.

We believe our tax positions are all highly

certain of being upheld upon examination.

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

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

with the applicable taxing authority.

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

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

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

We believe our tax positions are all

highly certain of being upheld upon examination.

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

We recognize the benefit of a tax position when

it is effectively settled.

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

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

ASC 740-10-25-10 clarifies

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

For tax positions considered

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

for Stock-Based Compensation

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

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

ASC Topic 718 focuses primarily

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

under our Stock Option Plans.

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

This model incorporates certain

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

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

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

and are fully transferable.

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

stock price volatility.

Because our stock options and warrants have characteristics different from those of our traded stock, and because

changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing

models do not necessarily provide a reliable single measure of the fair value of such stock options.

The risk-free interest rate is based

upon quoted market yields for United States Treasury debt securities with a term similar to the expected term.

The expected dividend

yield is based upon our history of having never issued a dividend and management’s current expectation of future action surrounding

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

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

The expected lives for such grants were based on the simplified

method for employees and directors.

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

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

If the actual forfeiture rate is higher than the

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

to the expense recognized in our financial statements.

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

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

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

from amounts recognized in the current period.

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

of Operations

of Years Ended December 31, 2021 and 2020

following table summarizes our results of operations for the years ended December 31, 2021 and 2020:

(Dollar amounts, excluding share and per share amounts, in thousands)

We recognize the benefit

of a tax position when it is effectively settled.

ASC 740-10-25-10, “Basic Recognition Threshold” provides guidance on how

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

ASC 740-10-25-10 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority.

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

Accounting for Stock-Based Compensation

We follow the provisions

of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”) which establishes standards surrounding the accounting for transactions

in which an entity exchanges our equity instruments for goods or services.

ASC 718 focuses primarily on accounting for transactions in

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

The fair value of each option

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

This model incorporates certain assumptions for inputs

including a risk-free market interest rate, expected dividend yield of the underlying Common Stock, expected option life, and expected

volatility in the market value of the underlying Common Stock.

The Black-Scholes option-pricing

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

In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.

Because our stock options and warrants have characteristics different from those of our traded stock, and because changes in the subjective

input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily

provide a reliable single measure of the fair value of such stock options.

The risk-free interest rate is based upon quoted market yields

for United States Treasury debt securities with a term similar to the expected term.

The expected dividend yield is based upon our history

of having never issued a dividend and management’s current expectation of future action surrounding dividends.

We calculate the

expected volatility of the stock price based on the corresponding volatility of our peer group stock price for a period consistent with

the underlying instrument’s expected term.

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

and directors.

In arriving at stock-based

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

Our forfeiture assumption

is based primarily on its turn-over historical experience.

If the actual forfeiture rate is higher than the estimated forfeiture rate,

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

our consolidated financial statements.

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

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

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

amounts recognized in the current period.

It is important that the

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

Results of Operations

We have incurred recurring

losses to date.

Our consolidated 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.

Our continuation as a going concern is dependent upon our ability to

obtain the necessary debt or equity financing to continue operations until we begin generating sufficient cash flows from operations to

meet our obligations.

If we are unable raise additional funds, we may be forced to cease operations.

Comparison of Years Ended December 31, 2022

The following table summarizes our results of

operations for the years ended December 31, 2022 and 2021:

(In thousands)

Revenue (including $2,417 and $31,439 from related parties, respectively)

Cost of goods sold

Selling, general and administrative

Gross (loss) profit

General and administrative

Selling and marketing

Research and development

Change in contingent consideration

Impairment of property and equipment

Impairment of goodwill and intangible assets

Total operating expenses

Loss from operations

Interest income (expense), net

Other expenses

Gain (loss) on extinguishment of notes payable

Interest (expense) income, net

Other expense, net

Change in fair value of warrant liability

Gain on forgiveness of PPP Loan

Change in fair value of derivative liabilities

Other income (expense), net

(Loss) gain on extinguishment of notes payable

Other income, net

Net loss before income taxes

Income tax provision

Income (loss) attributable to non-controlling interest

Income tax expense

(Income) loss attributable to non-controlling interests

Net loss attributable to Agrify Corporation

Net loss per share attributable to common stockholders – basic and diluted

Weighted average common shares outstanding – basic and diluted

goal is to provide our customers with a variety 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 in 2020 and 2021 are supplemented with environmental control products, grow lights, facility build-out services and extraction

continue to monitor and address the COVID-19 pandemic impacts on our supply chain.

Although the availability of various products is dependent

on our suppliers, their locations, and the extent to which they are impacted by the COVID-19 pandemic, we are proactively working with

manufacturers to meet the needs of our customers during the pandemic.

Product shortages have generally led to fluctuations in prices

globally, with corresponding impacts to sales and interim profits.

generate revenue from sales of cultivation solutions, including ancillary products and services, Agrify Insights software, facility

build-outs and extraction equipment and solutions.

We believe that our product mix form an integrated ecosystem which allows us to be

engaged with our potential customers from early stages of the grow cycle — first during the facility build-out, to the choice

of cultivation solutions, 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.

following table provides a breakdown of our revenue for the years ended December 31, 2021 and 2020:

(Dollar amounts in thousands)

Our goal is to provide our

customers with a variety of products to address their entire indoor agriculture needs.

Our core product offering includes our VFUs and

Agrify Integrated Grow Racks with our Agrify Insights™, which are supplemented with environmental control products, grow lights,

facility build-out services, and extraction equipment.

We generate revenue from

sales of cultivation solutions, including ancillary products and services, Agrify Insights™, facility build-outs, and extraction

equipment and solutions.

We believe that our product mix forms an integrated ecosystem that 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™ 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 of the process will generate sales

of additional solutions and services.

The following table provides a breakdown of our

revenue for the years ended December 31, 2022 and 2021:

(In thousands)

Cultivation solutions, including ancillary products and services

Agrify Insights software

Agrify Insights™

Facility build-outs

Extraction solutions

Revenues for the year ended December 31, 2021 and 2020 were

$59.9 million and $12.1 million, respectively, representing a year over year increase of $47.8 million.

The comparative increase in revenue

was generated primarily from facility build-outs, driven in large part by the current year introduction of our TTK Solution, an increase

in stand-alone VFU equipment sales and incremental revenue contribution associated with extraction-based equipment sales, resulting from

our October 1, 2021 acquisition of Precision and Cascade.

The Precision-Cascade Acquisition accounted for $12.3 million of our revenue

increase in 2021.

Total revenue

Revenues decreased by $1.6

million, or 3%, for the year ended December 31, 2022, as compared to the same period in 2021.

The comparative decrease in revenue was

primarily driven by a $13.1 million reduction in facility build-outs due to completion of one construction project and $7.0 million of

revenue for Bud & Mary’s that was deferred due to pending litigation.

Additionally, there was a $10.6 million decrease in cultivation

solutions due to the migration to a VFU leasing model.

This was partially offset by revenue generated by our extraction solutions sales

of equipment and services from our acquisition of Lab Society in 2022 and Precision, Cascade, and PurePressure in 2021, which contributed

$22.0 million.

Cost of Goods Sold

Cost of goods sold represents a combination of the following:

construction-related costs associated with our facility buildouts, internal and outsourced labor and material costs associated with the

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

sale or provision of other products and services.

The following table provides a breakdown of our cost of goods

sold for the years ended December 31, 2021 and 2020:

(Dollar amounts in thousands)

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

and parts costs associated with the sale or provision of other products and services.

The following table provides a breakdown of our

cost of goods sold for the years ended December 31, 2022 and 2021:

(In thousands)

Cultivation solutions, including ancillary products, and services

Agrify Insights software

Agrify Insights™

Facility build-outs

Extraction solutions

The year over year increase in cost of goods sold

is primarily associated with an increase in subcontractor construction costs related to our facility buildouts in 2021, including construction

costs associated with design and build projects under our TTK Solutions.

Additionally, an increase in equipment revenue in 2021, largely

attributable to the fourth quarter of 2021 addition of extraction equipment (which was associated with the Precision and Cascade acquisition)

served to increase the amount of internal and outsourced labor and materials costs recognized by the Company in 2021.

amounts in thousands)

Gross profit totaled $5.2 million, or 8.7% of total revenue

during the year ended December 31, 2021 compared to gross profit of $570 thousand, or 4.7% of total revenue during the year ended December

The comparative $4.7 million year over year improvement in gross profit, as well as the comparative improvement in gross profit

margin, are primarily attributable to two specific fourth quarter of 2021 items.

First, the Company completed a sale of older VFU equipment

models to a customer, which resulted in a gross margin well above the Company's historical gross margin performance range as it relates

to stand-alone VFU equipment sales.

Second, was the positive lift in gross profit (and gross profit margin) associated with our extraction

equipment revenue, which is expected to generate gross margin of approximately 30%, which is also well above the company's historical

gross margin performance.

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.

Selling, General and Administrative

(Dollar amounts in thousands )

Total cost of goods sold

Cost of goods sold increased

$35.4 million, or 65%, for the year ended December 31, 2022, as compared to the same period in 2021.

The year-over-year increase in cost

of goods sold is primarily associated with increased inventory reserves due to the overall decline in the market and obsolescence.

decline in facility build-outs was the result of the completion of one construction project and the cessation of construction on the Bud

and Mary’s project due to pending litigation.

Gross (Loss) Profit

(In thousands)

Gross (loss) profit

Gross loss totaled $31.8

million, or (54.6)%, of total revenue during the year ended December 31, 2022 compared to

a gross profit of $5.2 million, or 8.7% of total revenue during the year ended December 31, 2021.

comparative $37.0 million year-over-year decline in gross profit, as well as the comparative decline in gross profit margin, is primarily

attributable to reserves for inventory and facility build-outs.

The Bud & Mary’s project

was the main contributor to the gross margin decline in facility build-outs due to the pending litigation.

The gross profit decline was

partially offset by increased Extraction solutions revenue in 2022 .

Operating Expenses

(In thousands)

General and administrative

Selling, general and administrative expenses (“SG&A

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

associated with selling, marketing, executive and other administrative functions.

Other general and administrative expenses include, but

are not limited to, professional fees for legal, consulting, depreciation and amortization and accounting services, as well as facility

related costs.

SG&A Expenses increased by $25.1 million, or 256%, for the year

Selling and marketing

Research and development

Change in contingent consideration

Impairment of property and equipment

Impairment of goodwill and intangible assets

Total operating expenses

General and administrative

(“G&A”) expenses consist principally of salaries and related costs, including stock-based compensation and travel expenses,

for personnel associated with executive and other administrative functions.

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

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

G&A expenses increased by $42.5 million, or 138%, for the year

ended December 31, 2022, compared to the same period in 2021.

The increase is attributable mainly to payroll and related expenses

increases of $4.1 million, an increase in stock-based compensation of $3.6 million, an increase in investor relations and directors’

and officers’ insurance of $3.1 million, an increase in legal, accounting and other operating expenses of $2.3 million, an increase

in account receivable reserve for bad debt of $1.2 million, an increase in depreciation and amortization of $903 thousand, which primarily

reflects an increase in amortization associated with the identified intangible assets in the acquisition of Precision and Cascade.

Additionally,

the increase in SG&A Expense also includes a one-time investment banker termination fee of $2.4 million, direct acquisition costs

of $4.6 million and approximately $2.8 million related to incremental SG&A Expense associated with our fourth quarter 2021 acquisition

of Precision and Cascade, which amount excludes one-time expenses related to direct acquisition costs, depreciation and amortization.

and Development

(Dollar amounts in thousands)

and development

and development expenses consisted primarily of costs incurred for the development of our Agrify Insights software and next generation

The primary drivers of the year-over-year increase of G&A expenses were

largely attributable to an increase in trade and loan receivable allowances of $33.1 million, primarily related to our TTK projects, and

an increase of $6.3 million in employee related expenses and severance expense.

the second, third, and fourth quarters of 2022, we increased our loan receivable reserve by approximately $7.1 million, $14.7 million,

and $11.3 million, respectively.

The $7.1 million increase during the second quarter of 2022 was specifically related to Greenstone Holdings

(“Greenstone”).

Greenstone is a related party because one of our former Agrify Brands employees and our VP of Engineering

had a minority ownership.

We specifically established the loan reserve related to Greenstone based on our review of Greenstone’s

financial stability, which would impact collectability and is primarily the result of unfavorable market conditions within the Colorado

We wrote off the entire Greenstone loan receivable as of June 30, 2023.

Additional information regarding recent developments with

Greenstone may be found in Note 5 – Loans Receivable, included in the notes to the consolidated

financial statements.

The $14.7 million increase during the third quarter of 2022 specifically related to Bud & Mary’s.

We deemed it necessary to fully reserve Bud & Mary’s loan receivable balance due to the current litigation and the uncertainty

of the customer’s ability to repay the outstanding balance.

We believe the litigation is without merit and will continue to vigorously

defend ourselves.

The $11.3 million increase during the fourth quarter of 2022 related to three customer balances that were fully or partially

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 $5.2 million, or 124%, for the year ended December 31, 2022, compared to the same period in 2021.

The comparative period

increase was primarily related to our acquisition of Lab Society in 2022 and the acquisitions of Precision, Cascade, and PurePressure

in 2021, which contributed $3.7 million of increased selling and marketing expenses, an increase in payroll, severance, and related expenses

of $957 thousand, and an increase in advertising, trade shows, and other expenses of $558 thousand.

Research and development

(“R&D”) expenses consisted primarily of costs incurred for the development of our Agrify Insights™ and next-generation

VFUs, which includes:

1 unchanged sentence

including salaries, benefits, and travel;

expenses incurred by 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.

Research and development expense increased by $571 thousand,

or 17%, for the year ended December 31, 2021 compared to the same period in 2020.

The increase was due primarily attributable to

payroll and other employee-related expenses of approximately $1.6 million and an increase in materials and other items of $74 thousand.

These increases are partially offset by a decrease in consulting services of $1.1 million.

expect to continue to invest in future developments of our VFUs, Agrify Insights software and our extraction products.

As a percentage

of net revenue, research and development expenses were 6.6% of total revenue for the year ended December 31, 2021, compared to 27.7%

for the year ended December 31, 2020.

Although we continue to increase our investment in research and development activities, we expect

the expense to decrease as a percentage of revenue due to our revenue growth.

● subcontractor expenses incurred

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 expenses increased

by $4.3 million, or 108%, for the year ended December 31, 2022, compared to the same period in 2021.

The comparative period increase is

primarily related to our acquisition of Lab Society in 2022 and the acquisitions of Precision, Cascade, and PurePressure in 2021, which

increased research and development expenses by $1.8 million, an increase in consulting and other cost of $1.8 million, and an increase

in payroll, severance, and related expenses of $736 thousand.

As a percentage of net revenue, R&D expenses were 14.0% of total revenue

for the year ended December 31, 2022, compared to 6.6% for same period in 2021.

We expect to continue to

invest in future developments for our VFUs, Agrify Insights™, and extraction products.

Although we continue to invest in R&D

activities, we expect R&D expenses to decrease as a percentage of revenue as our revenue grows.

Change in contingent consideration

amounts in thousands)

in contingent consideration

Change in contingent consideration increased by $1.4 million,

or 100%, for the year ended December 31, 2021 compared to the same period in 2020.

The change in contingent consideration expense,

which was recognized by the Company during the fourth quarter of 2021, relates to a change in our originally estimated fair value of contingent

consideration to be earned by the former members of Precision and Cascade.

Financial Accounting Standards Board (“FASB”)

Accounting Standards Codification (“ASC”) Topic 805 (ASC 805), “Business Combinations” requires the Company to

determine an initial estimate as to the amount of potential contingent consideration to be earned as part of an acquisition as of the

date of the acquisition.

In connection with our Acquisition of Precision and Cascade, the former members could have earned up to a capped

amount of $15.0 million in additional consideration, based upon the achievement of certain revenue-based thresholds, ending December 31,

Based on fourth quarter of 2021 revenue performance,

the former members of Precision and Cascade earned additional contingent consideration of approximately $5.4 million.

This amount exceeded

the Company's initial fair value estimates by approximately $1.4 million.

As per the guidelines of ASC 805, the Company is required to

record this increase as an operating expense in the period of change and not as an increase to goodwill.

As of December 31, 2021, there

is no additional contingent consideration that can be earned by the former members of Precision and Cascade.

Similarly, the Company's December 31, 2021, acquisition

of PurePressure contains two consecutive twelve-month earnouts.

The potential additional contingent consideration that can be earned under

each of the two earnout periods is capped at $1.5 million per period.

The Company has made an initial estimate with respect to the probability

of achievement of the additional contingent consideration and recorded it as part of our initial purchase price accounting.

We will continue

to evaluate PurePressure's future performance against our initial assumptions and projections on a quarterly basis.

Any identified changes

to our original assumptions that result in a change in our overall expected earnout achievements will result in either an increase or

reduction in our future periodic operating expenses.

Income (Expense), Net

Year ended December 31,

(Dollar amounts in thousands)

Interest income (expense), net

Other expenses

Gain (loss) on extinguishment of notes payable

Contingent consideration

decreased $2.2 million for the year ended December 31, 2022, compared to an increase of $1.4 million for the same period in 2021.

change in contingent consideration, which was recognized by us during the second and third quarters of 2022, primarily related to the

reduction in the projected earn-out achievement associated with Lab Society’s and PurePressure’s first twelve-month earn-out

period, for which revenue projections were trending below our original earn-out estimates used in calculating the fair value of the contingent

consideration.

Impairment of property and equipment

Results from a 50% reserve on equipment to be

leased to Hannah Industries due to uncertainty of the project.

Impairment of goodwill and intangible assets

During the three months ended

June 30, 2022, we identified an 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 an impairment to the carrying value of our property and equipment and accordingly performed interim testing as of June 30, 2022.

Based on our interim testing,

we noted that the current carrying value of equity significantly exceeded the calculated fair value of equity, by an amount greater than

the aggregate value of our goodwill and intangible assets.

Accordingly, we concluded that the entire carrying value of our goodwill and

intangible assets were impaired, resulting in a second-quarter impairment charge of $69.9 million.

Additional information regarding our

interim impairment testing may be found in Note 7 – Goodwill and Intangible Assets, Net, included in the notes to the consolidated

financial statements.

Other Income, Net

(In thousands)

Interest (expense) income, net

Other expense, net

Change in fair value of warrant liability

Gain on forgiveness of PPP loan

Change in fair value of derivative liabilities

Interest income (expense), net increased by $555

thousand, or 115%, for the year ended December 31, 2021 compared to the same period in 2020.

The increase was due to the amortization

of debt discount related to the issuance of convertible promissory notes of $419 thousand for the year ended December 31, 2020, while

no amortization of debt discount occurred for the year ended December 31, 2021.

Other expenses decreased by $31 thousand, or 100%,

for the year ended December 31, 2021 compared to the same period in 2020.

Gain (loss) on extinguishment of notes payable

increased by $8.3 million, or 148%, for the year ended December 31, 2021 compared to the same period in 2020.

See Note 15 -

Convertible Promissory Notes included elsewhere in the notes to the consolidated financial statements.

Gain on forgiveness of PPP loan increased by $45

thousand, or 100%, for the year ended December 31, 2021 compared to the same period in 2020.

In September 2021, the loan for $44

thousand was 100% forgiven by the SBA.

As a result, we recorded a gain of $45 thousand on the forgiveness on the loan and the associated

accrued interest.

Change in fair value of derivative liabilities

increased by $2.9 million, or 100%, for the year ended December 31, 2021 compared to the same period in 2020.

The fair value of

the variable-share settlement features was computed to be $7.1 million, which resulted with a loss of $2.9 million for the year ended

December 31, 2020.

For the year ended December 31, 2021, no derivatives were outstanding.

Income Tax Provision

(Dollar amounts in thousands)

Income tax provision

We recorded an income tax provision

of $25 thousand in the year ended December 31, 2021 compared to no provision or benefit for income taxes in the year ago period.

has historically generated losses from operations and is currently in a cumulative loss position.

Accordingly, the Company has established

a full valuation allowance against the carrying value of its deferred tax assets.

(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.

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

limited liability company in which we are 60% majority owner and Valiant-America, LLC owns 40%.

Agrify Valiant LLC started its operations

during the second quarter of 2020.

On January 22, 2020, as part of the acquisition of TriGrow, we received TriGrow’s 75% interest

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

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

in the marketplace.

(Loss) gain on extinguishment of notes payable

Interest (expense) income, net

Interest expense was approximately

$8.8 million for the year ended December 31, 2022 compared to interest income of approximately $74 thousand for the same period in 2021.

The interest expense in 2022 is primarily attributable to modification of our debt facilities related to our SPA Note and Exchange Note.

Other expense, net

Other expense, net increased

by $1.3 million, or 4,345%, for the year ended December 31, 2022, compared to the same period in 2021.

Change in fair value of warrant liability

Change in fair value of warrant

liability was $51.5 million for the year ended December 31, 2022.

There was no change in fair value of warrant liability in 2021.

the year ended December 31, 2022, we recorded a non-cash gain of $51.5 million related to changes

in the valuation of our liability-classified warrants issued in August and December 2022, which was primarily driven by movements in our

Additional information regarding the fair value of our liability-classified

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

Gain on forgiveness of PPP loan

In September 2021, the PPP

loan for $45 thousand was forgiven by the U.S.

Small Business Administration.

As a result, we recorded a gain of $45 thousand on the forgiveness

of the loan and the associated accrued interest.

There was no associated forgiveness in the year ended December 31, 2022.

(Loss) gain on extinguishment of notes payable

on extinguishment of notes payable was $39.0 million for the year ended December 31, 2022, compared to a gain of $2.7 million for the

same period in 2021.

The loss on extinguishment of notes payable, which was recognized by us during the third quarter of 2022, related

to the extinguishment of the SPA Note dated March 14, 2022.

We recognized a loss on extinguishment of $39.0 million (inclusive of $13.1

million of unamortized warrants, $5.0 million for a default penalty on the principal amount, $2.3 million of unamortized issuance costs,

and $1.2 million for the incremental fair value of warrants modified in exchange of debt).

Additional information relating to our SPA

Note may be found in Note 9 – Debt, included in the notes to the consolidated financial statements.

The gain on extinguishment

of $2.7 million for the year ended December 31, 2021 related to the derecognition of the net carrying amount of extinguished debt of $19.7

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

of the $17.0 million fair value of a new convertible note (including the same principal amount of $13.1 million plus the $3.9 million

fair value of the beneficial conversion feature).

Additional information relating to our gain on extinguishment of notes payable may be

found in Note 11 – Convertible Promissory Notes, included in the notes to the consolidated financial statements.

Income Tax Expense

(In thousands)

Income tax expense

Effective tax rate

Income (Loss) Attributable to Non-Controlling

We consolidate the results

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

On December 8, 2019, we formed Agrify-Valiant,

LLC (“Agrify-Valiant”), a joint-venture limited liability company in which we are the 60% majority owner and Valiant-America,

LLC owns 40%.

Agrify-Valiant started its operations during the second quarter of 2020.

On October 27, 2022, we provided notice to Valiant-America

of our intention to begin the winding up of Agrify-Valiant.

On January 22, 2020, as part of the acquisition of TriGrow, we received TriGrow’s

75% interest in Agrify Brands, LLC (formerly TriGrow Brands, LLC), a licensor of an established portfolio of consumer brands that utilize

our grow technology.

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

products in the marketplace.

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

Accordingly, we are currently

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

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.

and Capital Resources

As of December 31, 2021, our principal sources

of liquidity were cash and cash equivalents and marketable securities totaling $56.5 million.

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 14, 2022,

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

Our current working capital needs are to support

accounts receivable growth, to fund construction and equipment financing commitments associated with our TTK Solutions, manage inventory

to meet demand forecasts and support operational growth.

Accordingly, we

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

Income (loss) attributable

to non-controlling interest represents the portion of profit (or loss) that is attributable to the 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.

Liquidity and Capital Resources

Operating Capital Requirements

We have incurred operating

losses since our inception and have negative cash flows from operations.

We have an accumulated deficit of approximately $247.1 million

as of December 31, 2022.

Our primary sources of liquidity are cash and cash equivalents, with additional liquidity accessible, subject

to market conditions and other factors, including limitations that may apply to us under applicable SEC regulations, from the capital

As of December 31, 2022,

we had $20.5 million of cash, cash equivalents, and restricted cash.

Our restricted cash and restricted marketable securities of $10.0

million is associated with the Exchange Note as of December 31, 2022.

Current liabilities were $70.6 million as of December 31, 2022.

On October 18, 2022, we

entered into the ATM Program with the Agent pursuant to which we could issue and sell, from time to time, shares of our Common Stock

having an aggregate offering price of up to $50 million, depending on market demand, with the Agent acting as an agent for sales.

ATM Program allowed us to sell shares of Common Stock pursuant to specific parameters defined by us as well as those defined by the SEC

and the ATM Program agreement.

Beginning October 18, 2022 through December 31, 2022, we sold 306,628 shares of Common Stock under the

ATM at an average price of $50.85, resulting in gross proceeds of $15.6 million and net proceeds of $15.1 million after commissions and

fees to the Agent totaling $468 thousand.

Subsequent to December 31, 2022 through April 1, 2023, after which time the ATM program was

discontinued, we sold an additional 323,082 shares of Common Stock under the ATM at an average price of $4.93, resulting in gross proceeds

of $1.6 million and net proceeds of $1.6 million after commissions and fees to the Agent totaling $48 thousand.

For the entire period

from October 18, 2022 through April 1, 2023, we sold 629,710 shares of Common Stock under the ATM at an average price of $27.29 per share,

resulting in gross proceeds of $17.2 million, and net proceeds of $16.7 million after commissions and fees to the Agent totaling $516

$3.0 million of the proceeds under the ATM Program were used to repay amounts due to the Investor under the Exchange Note.

We used the net proceeds generated from the ATM Program for working capital and general corporate purposes, including repayment of indebtedness,

funding its transformation initiatives and product category expansion efforts and capital expenditures.

Due to the late filing of this

Annual Report on Form 10-K, we are no longer eligible to utilize the registration statement on Form S-3 relating to the ATM Program,

and do not anticipate any further sales under the ATM Program in the foreseeable future.

Our 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

1 unchanged sentence

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.

may opportunistically raise debt capital, subject to market and other conditions.

Additionally, as part of our growth strategies, we

may also raise debt capital for strategic alternatives and general corporate purposes.

If additional financing is required from outside

sources, we may not be able to raise such capital on terms acceptable to us or at all.

If we are unable to raise additional capital when

desired, our business, operating results and financial condition may be adversely affected.

We entered into two Loan Agreements and Promissory

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

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

the financing requirements of our current and possible future TTK arrangements.

These arrangements require a significant amount of upfront

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

We do not intend to enter into any new TTK

Solutions for the foreseeable future, however, we have deployed this program with certain key customers.

We may opportunistically

raise debt capital, subject to market and other conditions.

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

for strategic alternatives and general corporate purposes.

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

to raise such capital on terms acceptable to us or at all.

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

results, and financial condition may be adversely affected.

These consolidated

financial statements have been prepared based on the assumption that we will continue as a going concern for the next twelve-months

from the date these consolidated financial statements are available to be issued.

However, we have incurred operating losses since

our inception and have negative cash flows from operations, and our significant operating losses raise substantial doubt about our

ability to continue as a going concern.

Our continuation as a going concern is dependent upon our ability to obtain the

necessary debt or equity financing to continue operations until we begin generating sufficient cash flows from operations to meet

our obligations.

If we are unable to raise additional funds, we may be forced to cease operations.

There is no assurance that

we will ever be profitable.

The consolidated financial statements do not include any adjustments to reflect the potential 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.

We entered into one Loan

Agreement and Promissory Note with Bank of America pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus

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

Small Business Administration.

We received total proceeds of approximately $823 thousand from the unsecured PPP Loans which are scheduled to mature during 2022 and 2025.

Subject to certain conditions, the PPP Loan may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act

In September 2021, the loan for $44 thousand was 100% forgiven by the SBA.

As a result, we recorded a gain of $45 thousand

on the forgiveness on the loan and the associated accrued interest.

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

Company’s 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 14, 2022.

The 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 Note on the first day of each calendar month starting on February 1, 2023 and extending through the maturity date of March

1, 2026 (the “Maturity Date”), at which time all remaining outstanding principal and accrued but unpaid interest will be due.

The Note will have a stated interest rate of 6.75% per annum, and we will be required to pay interest on March 1, June 1, September 1

and December 1 of each calendar year through and including the Maturity Date.

Following the one-year anniversary of the Note’s issuance,

we may, in lieu of paying interest in cash, pay such interest in kind, in which case interest on the Note will be calculated at the rate

of 8.75% per annum and will be added to the principal amount of the Note.

At any time following

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

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

The noteholder will also have

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

amount under the Note plus any accrued interest thereon.

following table presents the major components of net cash flows from and used in operating, investing and financing activities for the

years ended December 31, 2021, and 2020:

(Dollar amounts in Thousands)

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 thousand that commenced on August 7, 2022.

March 14, 2022, we entered into a Securities Purchase Agreement with an institutional investor.

The Purchase Agreement provides for the

issuance of the SPA Note in the aggregate amount of $65.0 million and a SPA Warrant to purchase up to an aggregate of 34,406 shares of

Common Stock, with the potential for two potential subsequent closings for notes with an original principal amount of $35.0 million each.

August 18, 2022, we entered into a Securities Exchange Agreement.

Pursuant to the August 2022 Exchange Agreement, we partially paid $35.2

million along with approximately $300 thousand in repayments for other fees under the SPA Note and exchanged the remaining balance of

the SPA Note for an Exchange Note with an aggregate original principal amount of $35.0 million and a Note Exchange Warrant to purchase

71,139 shares of Common Stock.

Additionally, we exchanged the SPA Warrant for a Modified Warrant for the same number of underlying shares

but with a reduced exercise price.

March 8, 2023, the Company entered into a new Securities Exchange Agreement.

Pursuant to the March 2023 Exchange Agreement, we prepaid

approximately $10.3 million in principal amount under the Exchange Note and exchanged $10.0 million in principal amount of the remaining

balance of the Exchange Note for a new senior secured convertible note (the “Convertible Note”).

Convertible Note is a senior secured obligation and will rank senior to all of our indebtedness.

The Convertible Note will mature on August

19, 2025 (the “Maturity Date”) and has a 9.0% annualized interest rate, with interest to be paid monthly, in cash.

The principal

amount of the Convertible Note will be payable on the maturity date, provided that the lender will be entitled to a cash sweep of 30%

of the proceeds of any at-the-market equity offering and 20% of the proceeds received by us in connection with any other equity financing,

which will reduce the outstanding principal amount under the Exchange Note.

On October 27, 2023, CP Acquisitions LLC, and entity affiliated

with and controlled by Raymond Chang, acquired the Exchange Note and the Convertible Note.

As of October 30, 2023, there was approximately

$6.7 million outstanding under the Exchange Note and $8.8 million outstanding under the Convertible Note.

any time, we may prepay all of the Exchange Note by redemption at a price equal to 102.5% of the then-outstanding principal amount under

the Note plus accrued but unpaid interest.

The holder will also have the option of requiring us to redeem the Exchange Note on the one-year

or two-year anniversaries of issuance at a price equal to the then-outstanding principal amount under the Exchange Note plus accrued but

unpaid interest, or if we undergo a fundamental change at a price equal to 102.5% of the then-outstanding principal amount under the Exchange

Note plus accrued but unpaid interest.

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 years ended December 31,

2022 and 2021:

(In thousands)

Net cash (used in) provided by:

2 unchanged sentences

Financing activities

Net increase in cash and cash

Flow from Operating Activities

For the year ended December 31, 2021, we incurred

a net loss of $32.5 million, which included non-cash expenses of $1.3 million related to depreciation and amortization, $5.6 million

in connection with the issuance and acceleration of stock options, stock-based payment of $176 thousand related to the HMH acquisition,

provision of $1.2 million for doubtful accounts, provision of inventory obsolescence of $942 thousand and $1.4 million resulting from

the change in fair value of contingent consideration associated with the acquisition of Precision and Cascade.

These items were partially offset by a gain attributed to non-controlling

interest in the amount of $140 thousand, a gain on forgiveness of PPP loan of $45 thousand and a gain of $2.7 million related to extinguishment

of notes payable.

Net cash was reduced by a $3.4 million increase in accounts receivable, a $6.6 million increase in prepaid inventory

due to demand forecast, a $3.3 million increase in deferred revenue, a $1.7 million increase in prepaid expenses and other receivables,

partially offset by an $8.3 million increase in accrued expenses and a $1.1 million increase in accounts payable.

For the year ended December 31, 2020, we incurred

a net loss of $21.6 million, which includes non-cash expenses of $5.6 million related to extinguishment of notes payable, $2.9 million

due to change in fair value of derivative liabilities, $407 thousand related to depreciation and amortization, $1.9 million in connection

with the issuance of stock options, non-cash interest expenses of $447 thousand related to the issuance of notes payable, a provision

of $54 thousand for doubtful accounts and $120 thousand from the disposal of fixed assets, partially offset by loss attributed to non-controlling

interest in the amount of $22 thousand.

Net cash was reduced by a $3.7 million increase in accounts receivable, a $2.9 million increase

in prepaid inventory due to demand forecast, a $2.2 million decrease in deferred revenue, partially offset by a $4.8 million increase

in accrued expenses, a $12 thousand decrease in prepaid expenses, and a $527 thousand decrease in accounts payable.

Flow from Investing Activities

Net cash used in investing activities primarily

relates net purchases of held to maturity marketable securities, cash paid associated with the Company’s 2021 acquisitions, 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 held to maturity 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 year ended December 31, 2021, net cash

used in investing activities was $104.7 million, which included cash outflows of $44.5 million in net purchases of held to maturity marketable

securities, $35.9 million paid in connection with our 2021 acquisitions of Precision and Cascade and PurePressure, $22.1 million related

to the issuance of TTK-related loans receivable, and $2.2 million of expenditures of property and equipment.

For the year ended December 31, 2020, net cash

used in investing activities was $1.2 million, which includes $1.1 million paid in connection with the acquisition of TriGrow and $136

thousand of purchases of property and equipment.

Flow from Financing Activities

For the year ended December 31, 2021, net cash

provided by financing activities was $138.8 million.

Net cash provided by financing activities was primarily driven by the Company’s

February 2021 public offering and a follow-on secondary public offering.

The Company received $57.0 million in net proceeds from our initial

public offering and $79.8 million in net proceeds from our secondary public offering.

Additionally, the Company received $2.1 million

in proceeds from the exercise of stock options and warrants.

Each of the above inflows of cash were offset by $148 thousand in payments

of financing leases.

For the year ended December 31, 2020, net cash

provided by financing activities was $23.9 million.

Sources of cash provided by financing activities were attributable to $13.1 million

in proceeds from the issuance of notes payable, $10.0 million in proceeds from the issuance of Series A Preferred Stock, and the receipt

of $823 thousand in PPP Loans under the CARES Act.

Quantitative and Qualitative Disclosures About Market Risk.

a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information

required by this Item.

Net increase in cash and cash equivalents

Cash Flows from Operating Activities

used in operating activities consists of net loss adjusted for non-cash benefits and expenses, and changes in operating assets and liabilities.

Net cash used in operating activities increased for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily

due to higher inventory purchases to meet demand, increased construction costs related to TTK Solutions, payments for employee-related

expenditures, and other working capital needs.

Cash Flows from Investing Activities

Cash used in investing activities

consists primarily of maturities and sales of investments in marketable securities.

Cash used in investing activities consists primarily

of purchases of marketable securities, cash paid associated with our 2022 and 2021 acquisitions, the issuance of loans receivable in connection

with our financing of construction and equipment under our TTK Solutions offering, and purchases of property and equipment.

Capital expenditures

are used to expand research, development, and testing capabilities and, to a lesser extent, to replace existing equipment.

Investing activities

used $1.2 million for the year ended December 31, 2022, compared to the use of $104.7 million for

the year ended December 31, 2021, primarily due to net cash of $34.3 million provided by purchases, sales, and maturities of marketable

securities in 2022, compared to net cash of $44.5 million used for purchases, sales, and maturities of marketable securities in 2021,

along with decreased cash paid for business combinations, partially offset by an increase in purchases of property and equipment .

Cash Flows from Financing Activities

provided by financing activities consists primarily of proceeds from the issuance of Common Stock, debt, and warrants in private placements

and proceeds from public offerings.

Cash used in financing activities consists primarily of repayment of our debt.

Net cash provided by

financing activities decreased for the year ended December 31, 2022, compared to the year ended December 31, 2021, largely due to the

repayment of debt.

Quantitative and Qualitative Disclosures

About Market Risk.

As a “smaller reporting

company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis