What changed in this filing

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Item 1. Financial Statements

2023-11-28 compared with 2022-11-14 · 2118 added, 2050 removed, 274 unchanged (94% of the section changed)

Financial Statements

CORPORATION AND SUBSIDIARIES

AGRIFY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

thousands, except share and per share data)

September 30,

(In thousands, except share and per share data)

Current assets:

2 unchanged sentences

Marketable securities

Accounts receivable, net of allowance for doubtful accounts of $ 3,125 and $ 1,415 at September 30, 2022 and December 31, 2021, respectively

Inventory, net of reserves of $ 1,909 and $ 942 at September 30, 2022 and December 31, 2021, respectively

Prepaid and refundable taxes

Accounts receivable, net of allowance for doubtful accounts of $ 4,490 and $ 4,605 at March 31, 2023 and December 31, 2022, respectively

Inventory, net of reserves of $ 32,422 and $ 32,759 at March 31, 2023 and December 31, 2022, respectively

Prepaid expenses and other current assets

Total current assets

Loan receivable, net of allowance for doubtful accounts of $ 21,770 and $ 0 at September 30, 2022 and December 31, 2021, respectively

Loan receivable net of allowance for doubtful accounts of $ 28,562 and $ 33,050 at March 31, 2023 and December 31, 2022, respectively

Property and equipment, net

Right-of-use, net

Intangible assets, net

Right-of-use assets, net

Other non-current assets

7 unchanged sentences

Total current liabilities

Other non-current liabilities

Warrant liabilities

1 unchanged sentence

Long-term debt

Other non-current liabilities

Total liabilities

1 unchanged sentence

Stockholders’ equity:

Common Stock, $ 0.001 par value per share, 100,000,000 and 50,000,000

shares authorized at September 30, 2022 and December 31, 2021, respectively, 2,691,008 and 2,220,710 shares issued and outstanding

at September 30, 2022 and December 31, 2021, respectively (1)

Common Stock, $ 0.001 par value per share, 10,000,000 and 5,000,000 shares authorized at March 31, 2023 and December 31, 2022, respectively, 1,364,263 and 1,038,298 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively (1)

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

2 unchanged sentences

Accumulated deficit

Total stockholders’ equity

Total stockholders’ deficit

Non-controlling interests

Total liabilities and stockholders’ equity

(1) Periods presented have been adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021 and the 1-for-10 reverse stock split on October 18, 2022.

Additional information regarding the reverse stock splits may be found in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies , included elsewhere in the notes to the condensed consolidated financial statements.

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

CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Operations

thousands, except share and per share data)

Three Months Ended

September 30,

Nine Months Ended

September 30,

(1) Periods presented have been adjusted to reflect the 1-for-20

reverse stock split on July 5, 2023.

Additional information regarding the reverse stock splits may be found in Note

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

The accompanying notes are an integral part of

these condensed consolidated financial statements.

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

Three months ended March 31,

Revenue (including $ 46 and $ 863 from related parties, respectively)

Cost of goods sold

Gross (loss) profit

General and administrative

2 unchanged sentences

Change in contingent consideration

Impairment of goodwill and intangible assets

Total operating expenses

1 unchanged sentence

Interest (expense) income, net

Change in fair value of warrant liabilities

Other income (expense)

Change in fair value of warrant liability

(Loss) gain on extinguishment of notes payable

Other (expense) income, net

Net loss before income taxes

Loss on extinguishment of notes payable

Other income (expense), net

Net (loss) income before income taxes

Income tax benefit

Income (loss) attributable to non-controlling interests

Net loss attributable to Agrify Corporation

$ ( 148,551 )

Net loss per share attributable to Common Stockholders – basic and diluted (1)

Weighted-average common shares outstanding – basic and diluted (1)

(1) Periods presented have been adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021 and the 1-for-10 reverse stock split on October 18, 2022.

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

CORPORATION AND SUBSIDIARIES

Net (loss) income

Income attributable to non-controlling interest

Net (loss) income attributable to Agrify Corporation

Net (loss) income per share attributable to Common Stockholders – basic

Net (loss) income per share attributable to Common Stockholders – diluted

Weighted average common shares outstanding - basic (1)

Weighted average common shares outstanding - diluted (1)

(1) Periods presented have been adjusted to reflect the 1-for-20

reverse stock split on July 5, 2023.

Additional information regarding the reverse stock splits may be found in Note

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

The accompanying notes are an integral part of

these condensed consolidated financial statements.

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

thousands, except share data)

Stockholders’

January 1, 2021

conversion feature associated with amended Convertible Promissory Notes

of Convertible Notes

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

of Common Stock – Secondary public offering, net of fees

of Preferred A Stock

Exercise of options

Exercise of warrants

at June 30, 2021

of common shares in connection with acquisition

Exercise of options

Exercise of warrants

at September 30, 2021

(In thousands, except share data)

Preferred A Stock

4 unchanged sentences

Issuance of Common Stock and warrants in private placement

Issuance of debt and warrants in private placement

Acquisition of Lab Society

1 unchanged sentence

Exercise of warrants

Balance at June 30, 2022

$ ( 161,258 )

Balance at March 31, 2022

Preferred A Stock

Stockholders’

Balance at January 1, 2023

Stock-based compensation

Issuance of common shares in connection with acquisition

Reclass of warrant liability

Exercise of warrants

Issuance of restricted stock units

Balance at September 30, 2022

Issuance of Common Stock through an “at the market” offering, net of fees

Issuance of Common Stock to Pure Pressure

Vesting of restricted stock units

Proceeds from Employee Stock Purchase Plan Shares

Balance March 31, 2023

$ ( 257,475 )

(1) Periods presented have been adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021 and the 1-for-10 reverse stock split on October 18, 2022.

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

CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Cash Flows

Nine Months Ended

September 30,

The accompanying notes are an integral part of

these condensed consolidated financial statements.

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

For the three months ended March 31,

Cash flows from operating activities:

Net loss attributable to Agrify Corporation

$ ( 148,551 )

Net (loss) income attributable to Agrify Corporation

Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities:

Depreciation and amortization

Impairment on goodwill and intangible assets

Loss (gain) on extinguishment of notes payable, net

Change in fair value of warrant liability

Amortization of premium on investment securities

1 unchanged sentence

Interest on investment securities

Provision for doubtful accounts

Provision for slow-moving inventory

Debt issuance costs paid

Debt issuance costs amortized

Amortization of issuance costs

Deferred income taxes

Compensation in connection with the issuance of stock options

Issuance of common shares in connection with acquisition

Non-cash interest (income) expense

Loss from disposal of fixed assets

Change in fair value of contingent consideration

Stock based compensation expense

Non-cash interest income

Change in fair value of warrant liabilities

Loss on extinguishment of notes payable, net

Early termination of lease

Income attributable to non-controlling interests

2 unchanged sentences

Prepaid expenses and other current assets

Prepaid and refundable taxes

Right of use assets, net

2 unchanged sentences

Accrued expenses and other current liabilities

Deferred revenue, net

Operating lease liabilities

Deferred revenue

Net cash used in operating activities

2 unchanged sentences

Purchase of securities

Proceeds from the sale of securities

Issuance of loan receivables

Proceeds from sale of securities

Issuance of loan

Cash paid for business combination, net of cash acquired

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Proceeds from issuance of debt and warrants in private placement

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

Proceeds from IPO, net of fees

Proceeds from Secondary public offering, net of fees

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

Proceeds from “at the market” Program, net

Proceeds from Employee Stock Option Plan shares

Proceeds from exercise of options

Proceeds from exercise of warrants

Proceeds from short-term loan payable

Repayment of debt and warrants in private placement

Repayments of notes payable, other

Repayment of notes payable, other

Repayment of debt in private placement

Payments on insurance financing loan

Payments on other financing loans

Payments of financing leases

Net cash provided by financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at the beginning of period

Cash and cash equivalents at the end of period

Net cash (used in) provided by financing activities

Net (decreased) increase in cash, cash equivalents, and restricted cash

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

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

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

2 unchanged sentences

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

Supplemental disclosures of non-cash investing activities

Equipment sold for loan receivable to customer

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

CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

1 — Overview, Basis of Presentation and Significant Accounting Policies

Agrify Corporation (“Agrify” or the

“Company”) is one of the most innovative providers of advanced cultivation and extraction solutions for the cannabis industry,

bringing data, science, and technology to the forefront of the market.

The Company’s proprietary micro-environment-controlled Agrify

Vertical Farming Units (or “VFUs”) enable cultivators to produce the highest quality products with what it believes to be

an unmatched consistency, yield, and Return on Investment at scale.

The Company’s comprehensive extraction product line, which includes

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

required for premium concentrates.

The Company believes it is the only company with

an automated and fully integrated grow solution in the industry.

The Company’s cultivation and extraction solutions seamlessly combines

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

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

The totality of its

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

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

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

The Company is sometimes referred to herein by the words “we,” “us,” “our,” and similar terminology.

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

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

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

as TriGrow Systems, Inc.

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

Finance, LLC;

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

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

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

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

PurePressure,

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

Society NewCo, LLC (“Lab Society”) (which was a newly formed subsidiary in connection with the February 1, 2022 acquisition

of LS Holdings Corp).

Company also has ownership interests in the following companies:

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

Agrify-Valiant,

LLC (“Agrify-Valiant”) (the Company is 60% majority owner and Valiant-America, LLC owns 40%, which was formed in December

Subsequent to September 30, 2022, On October 27, 2022, the Company provided notice to Valiant-America, LLC of our intention to

begin winding up of Agrify-Valiant);

Brands, LLC (“Agrify Brands”) (formerly TriGrow Brands, LLC) (the Company owns 75% of Agrify Brands, which ownership

position was created as part of the January 2020 acquisition of TriGrow).

January 12, 2021, the Company effected a 1-for-1.581804 reverse stock split of its Common Stock, $ 0.001 par value per share (“Common

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.

On October 18, 2022, the Company effected a 1-for-10

reverse stock split of its Common Stock.

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

stock split for all periods presented unless otherwise indicated.

No fractional shares of Common Stock were issued

as a result of these reverse stock splits.

Any fractional shares in connection with these reverse stock splits were rounded up to the

nearest whole share and no stockholders received cash in lieu of fractional shares.

The reverse stock splits had no impact on the number

of shares of Common Stock that the Company is authorized to issue pursuant to its articles of incorporation or on the par value per share

of the Common Stock.

Proportional adjustments were made to the number of shares of Common Stock

issuable upon exercise or conversion of the Company's outstanding stock options and warrants,

the exercise price or conversion price (as applicable) of the Company’s outstanding stock options and warrants, and the number of

shares reserved for issuance under the Company’s equity incentive plan.

All share and per share information included in this

Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the impact of these reverse stock splits.

Public Offering and Secondary Public Offering

On February 1, 2021, the Company closed its initial

public offering, or (“IPO”), of 621,000 shares of its Common Stock (inclusive of 81,000 shares of Common Stock from the full

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

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

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

333- 251616 and 333-252490),

which was declared effective by the Securities Exchange Commission (“SEC”) on January 27, 2021.

In the IPO, Maxim Group LLC

and Roth Capital Partners acted as the underwriters.

The IPO price for shares of Common Stock was $ 100.00 per share.

The total gross proceeds

from the IPO were $ 62.1 million.

After deducting underwriting discounts and commissions of $ 4 million and

offering expenses paid or payable by us of approximately $ 1 million, the net proceeds from the IPO were approximately $ 57 million.

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

customer demand forecasts, and support operational growth.

February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) of 555,556 shares of its

Common Stock for a price of $ 135.00 per share, less certain underwriting discounts, and commissions.

On March 22, 2021, the Company closed

on the sale of an additional 83,333 shares of Common Stock on the same terms and conditions pursuant to the exercise of the underwriters’

over-allotment option.

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

in connection with the February Offering to 638,889 shares and the total net proceeds received in connection with the February Offering

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

The Company used the net proceeds

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

support operational growth.

(“COVID-19”) Pandemic Impact and Uncertainties

COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility that may

negatively affect its business operations and financial results.

As a result, if the pandemic or its effects persist or worsen, its accounting

estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably

possible such changes could be significant (although the potential effects cannot be estimated at this time).

The Company has experienced

minimal business interruption as a result of the COVID-19 pandemic.

The COVID-19 pandemic to date has resulted in supply chain delays

of its inventory, higher operating costs and increased shipping costs, among other impacts.

As events surrounding the COVID-19 pandemic

can change rapidly, the Company cannot predict how it may disrupt its operations or the full extent of the disruption.

Paycheck Protection Program

May 2020, the Company received an unsecured Paycheck Protection Program Loan (“PPP Loan”) from the Bank of America pursuant

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

Act”), administered by the U.S.

Supplemental disclosures of non-cash flow information

Initial fair value of warrants

Financing of prepaid insurance

The accompanying notes are an integral part of

these condensed consolidated financial statements.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 1 — Overview, Basis of Presentation

and Significant Accounting Policies

Description of Business

Agrify Corporation (“Agrify”

or the “Company”) is a leading provider of innovative cultivation and extraction solutions for the cannabis industry, bringing

data, science, and technology to the forefront of the market.

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

Farming Units (or “VFUs”) enable cultivators to produce the highest quality products with what we believe to be unmatched

consistency, yield, and return investment at scale.

The Company’s comprehensive extraction product line, which includes hydrocarbon,

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

for premium concentrates.

The Company believes it is

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

The Company’s cultivation and extraction

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

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

The totality of its product offerings and service capabilities forms an unrivaled ecosystem in what has historically been a

highly fragmented market.

As a result, the Company believes it is well-positioned to capture market share and create a dominant market

position in the indoor cannabis sector.

The Company was formed in

the State of Nevada on June 6, 2016 as Agrinamics, Inc., and subsequently changed its name to Agrify Corporation.

The Company is sometimes

referred to herein by the words “we,” “us,” “our,” and similar terminology.

The Company has nine wholly-owned

subsidiaries, which are collectively referred to as the “Subsidiaries” and the Company also has ownership interests in certain

(Please refer to Exhibit 23.1 for further details)

Reverse Stock Splits

On October 18, 2022, the

Company effected a 1-for-10 reverse stock split of its Common Stock.

All share and per share information has been retroactively adjusted

to give effect to the reverse stock split for all periods presented unless otherwise indicated.

On July 5, 2023, the Company

effected a 1-for-20 reverse stock split of its Common Stock, All share and per share information has been retroactively adjusted to give

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

No fractional shares of Common

Stock were issued as a result of these reverse stock splits.

Any fractional shares in connection with these reverse stock splits were

rounded up to the nearest whole share and no stockholders received cash in lieu of fractional shares.

The reverse stock splits had no

impact on the number of shares of Common Stock that the Company is authorized to issue pursuant to its articles of incorporation or on

the par value per share of the Common Stock.

Proportional adjustments were made to the number of shares of Common Stock issuable upon

exercise or conversion of the Company’s outstanding stock options and warrants, the exercise price or conversion price (as applicable)

of the Company’s outstanding stock options and warrants, and the number of shares reserved for issuance under the Company’s

equity incentive plan.

All share and per share information included in this Quarterly Report on Form 10-Q has been retroactively adjusted

to reflect the impact of these reverse stock splits.

Confidentially Marketed Public Offering

On December 16, 2022, the

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

pursuant to which the Company agreed to issue and sell an aggregate of 594,232 shares of its 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 the Company’s

Common Stock (the “Offering”).

The shares of Common Stock (or Pre-Funded 2022 Warrants) and the accompanying December 2022

Warrants will be issued separately but can only be purchased together in this Offering.

Additional information regarding the Company’s

December 2022 Warrants may be found in Note 4 – Fair Value Measures and Note 10 – Stockholders’ Equity, included elsewhere

in the notes to the consolidated financial statements.

The aggregate gross proceeds

to the Company from the Offering were 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.

The Company has used 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.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Nasdaq Deficiency Notice

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

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

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

In accordance with

Nasdaq Listing Rule 5810(c)(3)(A), the Company had 180 calendar days to regain compliance with the Minimum Bid Requirement.

compliance with the Minimum Bid Requirement, the closing bid price of the Company’s 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 exercised 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 the Company that

the closing bid price for its Common Stock was more than $ 1.00 for 10 consecutive trading days, and that the Company therefore regained

compliance with the Minimum Bid Requirement.

On January 19, 2023, the

Company received a new deficiency letter from the Staff of Nasdaq notifying the Company that, for the previous 30 consecutive business

days, the bid price for its 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) ,

the Company 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 the Company’s 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, the Company received a notice from Nasdaq confirming its recompliance with the minimum

bid price rule.

As disclosed in the Current

Report on Form 8-K filed on April 17, 2023, the Company’s audit committee concluded that, as a result of inadvertent errors in the

accounting for warrants previously issued by the Company, it was appropriate to restate the Company’s 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

As a result of such restatements, the Company was unable to timely file the 2022 Form 10-K, the First Quarter 2023 Form 10-Q

and the Second Quarter 2023 Form 10-Q without unreasonable effort or expense.

On April 18, 2023, the Company

received a notice from Nasdaq (the “April Nasdaq Notice”) that it was noncompliant with Nasdaq Listing Rule 5250(c)(1) as

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

May 17, 2023, the Company received a second notice from Nasdaq (the “May Nasdaq Notice”)

that it remained noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of its failure to file its 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, the Company

received a third notice from Nasdaq that it remain noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of its failure to file

its 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 Notices”).

Nasdaq granted the Company an exception until October 16, 2023, to file its 2022 Form 10-K and First and Second Quarter 2023 Forms 10-Q.

The Nasdaq Notice had no immediate effect on the listing of the Company’s common stock on The Nasdaq Stock Market LLC.

On October 17, 2023, the

Company received a Staff Delisting Determination (the “Staff Determination”) from the Listing Qualifications Department of

Nasdaq notifying the Company that it was not in compliance with Nasdaq’s continued listing requirements under the Listing Rule as

a result of its 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 Company timely requested

a hearing before the Nasdaq Hearings Panel (the “Panel”), and the Panel scheduled a hearing for January 11, 2024.

In connection

with the hearing request, the Company 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 granted the additional

extension period.

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

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

The Paycheck Protection Program

In May 2020, the Company

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

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

Small Business Administration (the “SBA”).

The Company received total loan proceeds

of approximately $ 779 thousand from the PPP Loan.

The SBA denied the Company’s application for the forgiveness of the outstanding

balance of the PPP Loan.

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

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

The PPP loan is payable in 34 equal combined monthly principal and interest

payments of approximately $ 24 thousand that commenced on August 7, 2022.

of Condensed Consolidated Financial Statements

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

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

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

except for the recently adopted accounting pronouncements described below.

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

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

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

ended September 30, 2022 and 2021, and the condensed consolidated cash flows for the nine months ended September 30, 2022 and

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

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

Certain information and disclosures normally

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

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

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

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

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

of Presentation and Principles of Consolidation

for Wholly-Owned Subsidiaries

accompanying consolidated financial statements have been prepared in accordance with GAAP and include the accounts of Agrify Corporation

and its wholly-owned subsidiaries, as described above in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies,

in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”)

Accounting Standards Codification (“ASC”).

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

of acquisition.

All significant intercompany transactions and balances are eliminated.

for Less Than Wholly-Owned Subsidiaries

For the Company’s less than wholly-owned

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

entity (a “VIE”) in accordance with ASC Topic 810 Consolidation (“ASC810”), and if so, whether the Company

is the primary beneficiary requiring consolidation.

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

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

financial interest.

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

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

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

Variable interests in a VIE are

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

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

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

interest in the VIE is consolidated.

Based on the Company’s analysis of these

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

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

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

provides the Company with greater voting rights.

Accordingly, the Company consolidates its interest in the financial statements of Agrify-Valiant

and Agrify Brands under the VIE rules and reflects the third parties’ interests in the consolidated financial statements as a non-controlling

The Company records this non-controlling interest at its initial fair value, adjusting the basis prospectively for the third

parties’ share of the respective consolidated investments’ net income or loss or equity contributions and distributions.

non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity.

Income and losses are

allocated to the non-controlling interest holders based on its economic ownership percentage.

The investment in 50 % of the shares of TPI

is treated as an equity investment as the Company cannot exercise significant influence.

In accordance with the FASB Accounting Standards

Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern”, the Company’s management

evaluated whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within

one year after the financial statements’ issuance date.

The Company received total loan proceeds of approximately $ 779 thousand

from the PPP Loan.

On February 18, 2022, the Company applied for forgiveness of the outstanding balance of the PPP Loan and the application

was denied by the SBA on March 18,2022.

However, on June 23, 2022, the Company received a letter from Bank of America agreeing to extend

the maturity date to May 7, 2025 and the loan will bear 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.

Basis of Presentation and Principles of Consolidation

Accounting for Wholly-Owned

The accompanying consolidated

financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)

and include the accounts of Agrify Corporation and its wholly-owned subsidiaries, as described above, in accordance with the provisions

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

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

All significant intercompany

transactions and balances are eliminated.

Accounting for Less

Than Wholly-Owned Subsidiaries

For the Company’s less

than wholly-owned subsidiaries, which include, Agrify-Valiant LLC (“Agrify-Valiant”), and Agrify Brands, LLC (“Agrify

Brands”), the Company first analyzes whether these entities are a variable interest entity (a “VIE”) in accordance with

ASC Topic 810, Consolidation (“ASC 810”), and if so, whether the Company is the primary beneficiary requiring consolidation.

A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support

or (ii) equity holders that lack the characteristics of a controlling financial interest.

The financial results of a VIE are consolidated

by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s

economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant

to the entity.

Variable interests in a VIE are contractual, ownership or other financial interests in a VIE that change with changes in

the fair value of the VIE’s net assets.

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

the Company is the primary beneficiary of the VIE.

If it is determined that the joint-venture qualifies as a VIE and the Company is the

primary beneficiary, the Company’s financial interest in the VIE is consolidated.

Based on the Company’s

analysis of these entities, the Company has determined that Agrify-Valiant and Agrify Brands are each a VIE, and that the Company is the

primary beneficiary.

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

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

third parties provides the Company with greater voting rights.

Accordingly, the Company consolidates its interest in the financial statements

of Agrify-Valiant and Agrify Brands under the VIE rules and reflects the third parties’ interests in the consolidated financial

statements as a non-controlling interest.

The Company records this non-controlling interest at its initial fair value, adjusting the basis

prospectively for the third parties’ share of the respective consolidated investments’ net income or loss or equity contributions

and distributions.

These non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity.

Income and losses are allocated to the non-controlling interest holders based on its economic ownership percentage.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Going Concern

In accordance with the FASB

Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern”, the Company’s

management evaluated whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern

within one year after the financial statements’ issuance date.

The following matters raise substantial doubt about the Company’s

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

The Company has incurred operating losses since

its inception and has negative cash flows from operations.

The Company also has an accumulated deficit of $ 207.5 million as of September

The Company's primary sources of liquidity are its cash and cash equivalents and marketable securities, with additional liquidity

accessible, subject to market conditions and other factors, including limitations that may apply to the Company under applicable SEC regulations,

from the capital markets, including under its at-the-market continuous equity offering (“ATM” or ATM Program”).

As of September 30, 2022, the Company had $ 12.5

million of cash, cash equivalents, marketable securities and restricted cash.

The Company’s restricted cash is associated with its

new senior secured note (the “Exchange Note”) was $ 10.0 million as of September 30, 2022.

Current liabilities were $ 41.5 million

as of September 30, 2022.

Additional information regarding the Company’s Exchange Note may be found in Note 9 – Debt, included

elsewhere in the notes to the consolidated financial statements.

Subsequent to the end of the third quarter of

2022, the Company entered into an agreement for the ATM Program with Canaccord Genuity LLC (the “Agent”), pursuant to

which the Company may issue and sell, from time to time, shares of its 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 allows for quick and agile sales of Common Stock to interested

investors and provides an opportunity to raise additional capital for working capital requirements or to fund strategic opportunities

that may present themselves from time to time.

The Company has used, and intends to continue to use, the $ 15.1 million in net proceeds

generated from the ATM Program as of November 7, 2022 for working capital and general corporate purposes, including repayment of indebtedness,

funding the Company’s transformation initiatives and product category expansion efforts and capital expenditures.

As of November

7, 2022, the Company had $ 34.4 million of remaining availability for future issuances of Common Stock under the ATM Program.

The Company has incurred

operating losses since its inception, has negative cash flows from operations and a working capital deficiency.

The Company also has an

accumulated deficit of $ 257 million as of March 31, 2023.

The Company’s primary sources of liquidity are its cash and cash equivalents

and marketable securities, with additional liquidity accessible, subject to market conditions and other factors, including limitations

that may apply to the Company under applicable SEC regulations, from the capital markets, including under its at-the-market continuous

equity offering (“ATM” or “ATM Program”).

As of March 31, 2023, the

Company had $ 1.5 million of cash, cash equivalents, and marketable securities.

The Company had no restricted cash as of March 31, 2023.

As of December 31, 2022, the Company’s restricted cash balance of $ 10.0 million was associated with its new senior secured note

(the “Exchange Note”).

Current liabilities were $ 58.0 million as of March 31, 2023.

Additional information regarding the Company’s

ATM Program and proceeds received subsequent to September 30, 2022, may be found in Note 19 – Subsequent Events, included elsewhere

in the notes to the consolidated financial statements.

These financial statements have been prepared

on a going concern basis, which implies the Company believes these conditions raise substantial doubt about its ability to continue

as a going concern within the next twelve months from the date these financial statements are available to be issued.

The Company’s

continuation as a going concern is dependent upon its ability to obtain the necessary debt or equity financing to continue operations

until the Company begins generating sufficient cash flows from operations to meet its obligations.

There is no assurance that the Company will ever

be profitable.

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

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

a going concern.

Exchange Note may be found in Note 8 – Debt, included elsewhere in the notes to the consolidated financial statements.

On October 18, 2022, the

Company entered into the ATM Program with Canaccord Genuity LLC (the “Agent”) pursuant to which it may issue and sell, from

time to time, shares of its 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 the Company to sell shares of Common Stock pursuant to specific parameters

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

In 2022, the Company 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 $ 15.1 million

after commissions and fees to the Agent totaling $ 468 thousand and legal fees totaling $ 75 thousand.

As of April 1, 2023, after which

time the ATM program was discontinued, the Company 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.

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

The Company 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, the Company is no longer eligible to utilize the registration statement on Form S-3 relating

to the ATM Program.

Use of Estimates

The preparation of the Company’s consolidated

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

assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and

the reported amounts of expenses during the reporting period.

Significant estimates and assumptions reflected in these consolidated financial

statements include, but are not limited to, the accrual of expenses.

The Company bases its estimates on historical experience, known trends

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

On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience.

Changes in estimates

are recorded in the period in which they become known.

Actual financial results could differ from those estimates.

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

Growth Company

Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, (“JOBS

As a result, the Company is permitted to, and intends to, rely on exemptions from certain disclosure requirements that are

applicable to companies that are not emerging growth companies.

addition, the JOBS Act provides that an “emerging growth company” can use the extended transition period for complying with

new or revised accounting standards.

Company will remain an “emerging growth company” until the earliest to occur of:

$1.0 billion or more in annual gross revenues;

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

end of the fiscal year in which the market value of Common Stock held by non-affiliates exceeds $700 million on the last business

day of our second fiscal quarter;

of June 30, 2022, the market value of Common Stock held by non-affiliates did not exceed $700 million.

The preparation of the Company’s

consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported

amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements,

and the reported amounts of expenses during the reporting period.

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.

The Company bases its estimates on historical experience,

known trends and other market-specific information, other relevant factors that it believes to be reasonable under the circumstances,

and management’s judgement.

On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts,

and experience.

Changes in estimates are recorded in the period in which they become known.

Actual financial results could differ from

those estimates.

Reclassifications

Certain amounts in the Company’s prior period financial statements

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

In this Form 10-Q, the Company has reclassified

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

and administrative expenses and selling and marketing expenses for the three and nine months ended September 30, 2022 and 2021.

In addition, the Company effected a 1-for-10 reverse stock split of its Common Stock on October 18, 2022.

share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented unless

otherwise indicated.

The shares of Common Stock retained a par

value of $ 0.001 per share.

Accordingly, the stockholders’ deficit reflects the reverse stock split by reclassifying from “Common

Stock” to “additional paid-in capital” an amount equal to the par value of the decreased shares resulting from the reverse

Cash Equivalents, and Restricted Cash

and cash equivalents consist principally of cash and deposits with maturities of three months or less as of September 30, 2022 and December

All cash equivalents are carried at cost, which approximates fair value.

Restricted cash represents cash required to be held

as collateral for the Company’s Exchange Note.

Accordingly, these balances contain restrictions as to their availability and usage

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

Additional information relating to the Company’s Exchange

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

The Company’s marketable security investments primarily include

investments held in mutual funds, municipal bonds, and corporate bonds.

The mutual funds are recorded at fair value in the accompanying

consolidated balance sheets as part of cash and cash equivalents.

The municipal and corporate bonds are considered to be held-to-maturity

securities and are recorded at amortized cost in the accompanying consolidated balance sheets.

The fair value of these investments was

estimated using recently executed transactions and market price quotations.

The Company considers current assets to be those investments

that will mature within the next 12 months, including interest receivable on long-term bonds.

Receivable, Net

receivable, net, primarily consists of amounts for goods and services that are billed and currently due from customers.

Accounts receivable

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

determining the amount of the allowance at each reporting date, management makes judgments about general economic conditions, historical

write-off experience, and any specific risks identified in customer collection matters, including the aging of unpaid accounts receivable

and changes in customer financial conditions.

Accounts receivable balances are written off after all means of collection are exhausted

and the potential for non-recovery is determined to be probable.

Adjustments to the allowance for credit losses are recorded as general

and administrative expenses in the consolidated statements of operations.

Concentration

of Credit Risk and Significant Customer

Certain amounts in the Company’s

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

this Form 10-Q, the Company has reclassified selling, general and administrative expenses to two separate line items in the accompanying

consolidated statements of operations as general and administrative expenses and selling and marketing expenses for the three months ended

March 31, 2023 and 2022.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

In addition, the Company

effected a 1-for-10 reverse stock split of its Common Stock on October 18, 2022 and a 1-for-20 reverse stock split of its Common Stock

on July 5, 2023.

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.

The shares of Common Stock retained a par value of $ 0.001 per share.

Accordingly, the Stockholders’

equity section of the Consolidated Balance Sheet reflects the reverse stock split by reclassifying from “Common Stock” to

“Additional paid-in capital” an amount equal to the par value of the decreased shares resulting from the reverse stock split.

Cash, Cash Equivalents, and Restricted Cash

Cash and cash equivalents

consist principally of cash and deposits with maturities of three months or less as of March 31, 2023 and December 31, 2022.

equivalents are carried at cost, which approximates fair value.

Restricted cash represents cash required to be held as collateral for

the Company’s Exchange Note.

Accordingly, these balances contain restrictions as to their availability and usage and are classified

as restricted cash in the consolidated balance sheets.

Additional information relating to the Company’s Exchange Note may be found

in Note 8 – Debt, included elsewhere in the notes to the consolidated financial statements .

Marketable Securities

The Company’s marketable

security investments primarily include investments held in mutual funds, municipal bonds, and corporate bonds.

The mutual funds are recorded

at fair value in the accompanying consolidated balance sheets as part of cash and cash equivalents.

The municipal and corporate bonds

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

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

The Company considers

current assets to be those investments that will mature within the next 12 months, including interest receivable on long-term bonds.

Accounts Receivable, Net

Accounts receivable, net,

primarily consists of amounts for goods and services that are billed and currently due from customers.

Accounts receivable balances are

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

In determining the

amount of the allowance at each reporting date, management makes judgments about general economic conditions, historical write-off experience,

and any specific risks identified in customer collection matters, including the aging of unpaid accounts receivable and changes in customer

financial conditions.

Accounts receivable balances are written off after all means of collection are exhausted and the potential for non-recovery

is determined to be probable.

Adjustments to the allowance for credit losses are recorded as general and administrative expenses in the

consolidated statements of operations.

Concentration of Credit Risk and Significant

instruments that potentially subject the Company to a concentration of credit risk primarily consist of cash, cash equivalents, restricted

cash, and accounts receivable.

Cash equivalents primarily consist of money market funds with original

maturities of three months or less, which are invested primarily with U.S.

cash, marketable securities, and accounts receivable.

Cash equivalents primarily consist of money market funds with original maturities

of three months or less, which are invested primarily with U.S.

financial institutions.

Cash deposits with financial institutions,

including restricted cash, generally exceed federally insured limits.

Management believes minimal credit risk exists with respect to

these financial institutions and the Company has not experienced any losses on such amounts.

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

accounts receivable for the periods presented:

the three months ended September 30, 2022 and 2021, the Company’s customers that accounted for 10 % or more of the total revenue

were as follows:

Cash deposits with financial institutions, including

restricted cash, generally exceed federally insured limits.

Management believes minimal credit risk exists with respect to these financial

institutions and the Company has not experienced any losses on such amounts.

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

receivable for the periods presented:

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the three months ended

March 31, 2023 and 2022, the Company’s customers that accounted for 10 % or more of the total revenue were as follows:

Three months ended

September 30, 2022

March 31, 2023

Three months ended

September 30, 2021

(In thousands)

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

Greenstone Holdings (“Greenstone”) – Related Party

Company Customer Number – 71

Company Customer Number – 136

Company Customer Number – 139

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

the nine months ended September 30, 2022 and 2021, the Company’s customers that accounted for 10 % or more of the total revenue

were as follows:

Nine Months Ended

September 30, 2022

Nine Months Ended

September 30, 2021

March 31, 2022

(In thousands)

NEIA – Related Party

Company Customer Number – 71

Company Customer Number – 136

Company Customer Number – 139

% of Total Revenue

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

Receivable, Net

of September 30, 2022 and December 31, 2021, the Company’s customers that accounted for 10 % or more of the total accounts receivable,

net, were as follows:

September 30, 2022

December 31, 2021

Accounts Receivable,

As of March 31, 2023 and

December 31, 2022, the Company’s customers that accounted for 10 % or more of the total accounts receivable, net, were as follows:

As of March 31, 2023

As of December 31, 2022

(In thousands)

NEIA – Related Party

Company Customer Number - 126

Company Customer Number - 15989

% of Total Accounts Receivable

Company Customer Number – 15095

1 unchanged sentence

Company Customer Number - 16491

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

Company values all of its inventories, which consist primarily of significant raw material hardware components, at the lower of cost

or net realizable value, with cost principally determined by the weighted-average cost method on a First-In, First-Out basis.

of potentially slow-moving or damaged inventory are recorded through specific identification of obsolete or damaged material.

takes physical inventory at least once annually at all inventory locations.

and Equipment

and equipment are stated at cost less accumulated depreciation and amortization.

Depreciation and amortization expenses are recognized

using the straight-line method over the estimated useful life of each asset, as follows:

Estimated Useful

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

The Company values all its

inventories, which consist primarily of significant raw material hardware components, at the lower of cost or net realizable value, with

cost principally determined by the weighted-average cost method on a first-in, first-out basis.

Write-offs of potentially slow-moving

or damaged inventory are recorded through specific identification of obsolete or damaged material.

The Company takes physical inventory

at least once annually at all inventory locations.

Property and Equipment

Property and equipment are

stated at cost less accumulated depreciation and amortization.

Depreciation and amortization expenses are recognized using the straight-line

method over the estimated useful life of each asset, as follows:

Estimated Useful Life (Years)

Computer and office equipment

2 unchanged sentences

Machinery and equipment

Leased equipment at customer

Leased equipment

Trade show assets

Leasehold improvements

Lower of estimated useful

life or remaining lease term

The estimated useful lives of the Company’s property and equipment

are periodically assessed to determine if changes are appropriate.

The Company charges maintenance and repairs to expenses as incurred.

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

are eliminated from the consolidated balance sheet and any resulting gain or loss are included in the consolidated statements of operations

in the period of retirement or disposal.

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

and depreciated once placed into service.

is defined as the excess of cost over the fair value of assets acquired and liabilities assumed in a business combination.

tested for impairment annually, and more frequently if events and circumstances indicate that the asset might be impaired.

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

A goodwill impairment

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

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

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

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

During the three-month period ended June 30,

2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price

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

Lower of estimated useful life or remaining lease term

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

The estimated useful lives

of the Company’s property and equipment are periodically assessed to determine if changes are appropriate.

The Company charges maintenance

and repairs to expense as incurred.

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

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

statements of operations in the period of retirement or disposal.

Costs for capital assets

not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service.

During construction,

costs are accumulated in a construction-in-progress account, with no depreciation.

Upon completion, costs are transferred to the appropriate

asset account, and depreciation begins when the asset is placed into service.

Goodwill is defined as the

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

Goodwill is tested for impairment

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

The Company has determined that it

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

A goodwill impairment charge is recorded

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

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

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

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

During the quarter ended

June 30, 2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock

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

Due to these factors,

the Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing

as of June 30, 2022.

Based on its interim testing, the Company noted that the carrying value

of equity exceeded the calculated fair value by an amount greater than the aggregate value of our goodwill and intangible assets.

the Company concluded that the entire carrying value of its goodwill and intangible assets should be impaired, resulting in a second-quarter

the Company deemed that there was an impairment to the carrying value of its property and equipment and accordingly performed interim

testing as of June 30, 2022.

Based on its interim testing,

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

our goodwill.

Accordingly, the Company concluded that the entire carrying value of its goodwill was impaired, resulting in a second-quarter

impairment charge of $ 54.7 million.

1 unchanged sentence

7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

Company initially records intangible assets at their estimated fair values and reviews these assets periodically for impairment.

intangible assets, which consist principally of acquired customer-related acquired assets, acquired and/or developed technology, non-compete

agreements, and trade names, are reported net of accumulated amortization, and are being amortized over their estimated useful lives

at amortization rates that are proportional to each asset’s estimated economic benefit.

The Company’s intangible assets are

amortized on a straight-line basis over the estimated useful lives of the assets.

The Company reviews the carrying value of these intangible

assets annually, or more frequently if indicators of impairment are present.

finite-lived useful lives are as follows:

Intangible Assets

The Company initially records

intangible assets at their estimated fair values and reviews these assets periodically for impairment.

Identifiable intangible assets,

which consist principally of customer-related acquired assets, acquired and/or developed technology, non-compete agreements, and trade

names, are reported net of accumulated amortization, and are being amortized over their estimated useful lives at amortization rates that

are proportional to each asset’s estimated economic benefit.

The Company’s intangible assets are amortized on a straight-line

basis over the estimated useful lives of the assets.

The Company reviews the carrying value of these intangible assets annually, or more

frequently if indicators of impairment are present.

The useful lives are as follows:

Acquired developed technology

2 unchanged sentences

Capitalized website costs

performing the review of the recoverability of intangible assets, the Company considers several factors, including whether there have

been significant changes in legal factors or the overall business climate that could affect the underlying value of an asset.

also considers whether there is an expectation that the asset will be sold or disposed of before the end of its remaining estimated useful

If, as the result of examining any of these factors, the Company concludes that the carrying value of the intangible asset exceeds

its estimated fair value, the Company recognizes an impairment charge and reduces the carrying value of the asset to its estimated fair

During the three-month period ended June 30,

2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price

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

In performing the review

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

in legal factors or the overall business climate that could affect the underlying value of an asset.

The Company also considers whether

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

If, as the result

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

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

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

During the quarter ended

June 30, 2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock

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

Due to these factors,

the Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing

as of June 30, 2022.

Based on its interim testing, the Company noted that the carrying value

of equity exceeded the calculated fair value by an amount greater than the aggregate value of our goodwill and intangible assets.

the Company concluded that the entire carrying value of its goodwill and intangible assets should be impaired, resulting in a second-quarter

impairment charge of $69.9 million.

Additional information regarding the Company’s interim testing on intangible assets may be found

in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

Notes Payable

Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative

financial instruments to be separately accounted for in accordance with ASC Topic 815 Derivatives and Hedging (“ASC815”).

The accounting treatment of derivative financial instruments requires that the Company identify and record certain embedded conversion

options (“ECOs”), certain variable-share settlement features, and any related freestanding instruments at their fair values

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

Any change in fair value is recorded

as non-operating, non-cash income or expense for each reporting period at each balance sheet date.

The Company reassesses the classification

of its derivative instruments at each balance sheet date.

If the classification changes as a result of events during the period, the

contract is reclassified as of the date of the event that caused the reclassification.

Bifurcated embedded conversion options, variable-share

settlement features and any related freestanding instruments are recorded as a discount to the host instrument which is amortized to

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

the Company determines that an instrument is not a derivative liability, it then evaluates whether there is a beneficial conversion feature

(“BCF”), by comparing the commitment date fair value to the effective current conversion price of the instrument.

records a BCF as a debt discount which is amortized to interest expense over the life of the respective note using the effective interest

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

the Company deemed that there was an impairment to the carrying value of its property and equipment and accordingly performed interim

testing as of June 30, 2022.

Based on its interim testing,

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

our intangible assets.

Accordingly, the Company concluded that the entire carrying value of its intangible assets should be impaired,

resulting in a second-quarter impairment charge of $ 15.2 million.

Additional information regarding the Company’s interim testing

on 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

The Company evaluates its

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

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

The accounting treatment

of derivative financial instruments requires that the Company identify and record certain ECOs, certain variable-share settlement features,

and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent

balance sheet date.

Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each

balance sheet date.

The Company reassesses the classification of its derivative instruments at each balance sheet date.

If the classification

changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

Bifurcated embedded conversion options, variable-share settlement features, and any related freestanding instruments are recorded as a

discount to the host instrument which is amortized to interest expense over the life of the respective note using the effective interest

If the Company determines

that an instrument is not a derivative liability, it then evaluates whether there is a BCF, by comparing the commitment date fair value

to the effective current conversion price of the instrument.

The Company records a BCF as a debt discount which is amortized to interest

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

BCFs that are contingent upon the occurrence of a future

event are recognized when the contingency is resolved.

Warrant Liabilities

The Company does not use derivative instruments to hedge exposures

to cash flow, market, or foreign currency risks.

The Company evaluates all of its 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 (“ASC480”) and ASC815.

The Company accounts 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 ASC480 and ASC815.

Management’s assessment considers whether the warrants are freestanding financial instruments pursuant

to ASC480, whether they meet the definition of a liability pursuant to ASC480, and whether the warrants meet all of the requirements for

equity classification under ASC815, including whether the warrants are indexed to the Company’s own Common Stock among other conditions

for equity classification.

For 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.

On August 18, 2022, the

Company reached an agreement with its institutional lender to amend its existing Securities Purchase

Agreement and entered into a Securities Exchange Agreement (the “Exchange Agreement”).

Pursuant to the Exchange Agreement,

the Company issued a new warrant to purchase 1,422,764 shares of Common Stock (the “Note Exchange Warrant”) and modified an

existing warrant (the “SPA Warrant”) to purchase up to an aggregate of 688,111 shares of Common Stock.

The Company does not use

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

The Company evaluates all its 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.

The Company accounts 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.

Management’s 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 the Company’s

own Common Stock among other conditions for equity classification.

For 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

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 consolidated statements of operations.

August 18, 2022, the Company reached an agreement with its institutional lender to amend its existing Securities Purchase Agreement and

entered into a Securities Exchange Agreement (the “August 2022 Exchange Agreement”).

Pursuant to the August 2022 Exchange

Agreement, the Company issued a new warrant to purchase 71,139 shares of Common Stock (the “Note Exchange Warrant”) and modified

an existing warrant (the “SPA Warrant”) to purchase up to an aggregate of 34,406 shares of Common Stock.

The Company exchanged

the SPA Warrant for a new warrant for the same number of underlying shares but with a reduced exercise price (the “Modified Warrants”

and, collectively with the Note Exchange Warrant, the “Warrant Liabilities”).

As of September 30, 2022, the Company had outstanding

liability-classified Warrant Liabilities that allows the accredited investor (the “Investor”) to purchase 2,110,875 shares

of the Company’s Common Stock.

Additional information regarding the Exchange Agreement and Warrant Liabilities may be found in Note

4 – Fair Value Measures and Note 9 – Debt, included elsewhere in the notes to the condensed

consolidated financial statements.

Issue Costs and Debt Discount

The Company may record debt issuance costs and/or debt discounts in

connection with issuing of debt.

The Company may cover these costs by paying cash or issuing warrants.

These costs are amortized to interest

expense over the expected life of the debt.

If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts

is immediately expensed.

and, collectively with the Note Exchange Warrant, the “August 2022 Warrants”).

Additional information regarding the August

2022 Exchange Agreement and August 2022 Warrants may be found in Note 4 – Fair Value Measures and Note 9 – Debt, included

elsewhere in the notes to the consolidated financial statements.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Debt Issuance Costs and Debt Discount

The Company may record debt

issuance costs and/or debt discounts in connection with the issuance of debt.

The Company may cover these costs by paying cash or issuing

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

If a conversion of the underlying debt occurs,

a proportionate share of the unamortized amounts is immediately expensed.

Issue Discount

certain convertible debt issued by the Company, it may provide the debt holder with an original issue discount.

The Company would

record the original issue discount to debt discount, reducing the face amount of the note, and is then amortized to interest expense

over the life of the debt.

Company determines at the inception of a right-of-use asset contract if such arrangement is or contains a lease.

A contract is or contains

a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The Company classifies leases at the lease commencement date as operating or finance leases and records a right-of-use asset and a lease

liability on its consolidated balance sheet for all leases with an initial lease term of greater than 12 months.

A lease with an initial

term of 12 months or less is not recorded on the balance sheet, but related payments are recognized as an expense on a straight-line

basis over the lease term.

Company’s right-of-use asset contracts may contain both lease and non-lease components.

Non-lease components may include maintenance,

utilities, and other operating costs.

The Company combines the lease and non-lease components of fixed costs in its lease arrangements

as a single lease component.

Variable costs, such as utilities or maintenance costs, are not included in the measurement of right-of-use

assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs.

liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected

The Company determines the present value of future lease payments by using its estimated secured incremental borrowing rate

for that lease term as the interest rate implicit in the lease is not readily determinable.

The Company estimates its secured incremental

borrowing rate for each lease based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease

payments on a collateralized basis over a similar term.

of the Company’s right-of-use asset leases include options to extend or terminate the lease.

The amounts determined for the Company’s

right-of-use assets and lease liabilities generally do not assume that renewal options or early-termination provisions, if any, are exercised

unless it is reasonably certain that the Company will exercise such options.

revenue includes amounts collected or billed in excess of revenue that it can recognize.

The Company recognizes deferred revenue

as revenue as the related performance obligation is satisfied.

Certain convertible debt

issued by the Company, may provide the debt holder with an original issue discount.

The Company would record the original issue discount

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

The Company determines at

the inception of an asset contract if such arrangement is or contains a lease.

A contract is or contains a lease if the contract conveys

the right to control the use of an identified asset for a period of time in exchange for consideration.

The Company classifies leases

at the lease commencement date as operating or finance leases and records a right-of-use asset and a lease liability on its consolidated

balance sheet for all leases with an initial lease term of greater than 12 months.

A lease with an initial term of 12 months or less is

not recorded on the balance sheet, but related payments are recognized as an expense on a straight-line basis over the lease term.

The Company’s asset

contracts may contain both lease and non-lease components.

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

The Company combines the lease and non-lease components of fixed costs in its lease arrangements as a single lease component.

costs, such as utilities or maintenance costs, are not included in the measurement of right-of-use assets and lease liabilities, but rather

are expensed when the event determining the amount of variable consideration to be paid occurs.

Lease liabilities and their

corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term.

determines the present value of future lease payments by using its estimated secured incremental borrowing rate for that lease term as

the interest rate implicit in the lease is not readily determinable.

The Company estimates its secured incremental borrowing rate for

each lease based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized

basis over a similar term.

Certain of the Company’s

leases include options to extend or terminate the lease.

The amounts determined for the Company’s right-of-use assets and lease

liabilities generally do not assume that renewal options or early-termination provisions, if any, are exercised unless it is reasonably

certain that the Company will exercise such options.

Deferred Revenue

Deferred revenue includes

amounts collected or billed in excess of revenue that the Company can recognize.

The Company recognizes deferred revenue and non-current

deferred revenue as revenue as the related performance obligation is satisfied.

The Company records deferred revenue that will be recognized

during the succeeding twelve-month period as a current liability on the consolidated balance sheet.

Value of Financial Instruments

Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses.

The estimated fair

value of the accounts receivable and accounts payable approximates their carrying value due to the short-term nature of these instruments.

Company measures all stock options and other stock-based awards granted to employees and directors based on the fair value on the date

of the grant and recognizes compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which

is generally the vesting period of the respective award.

Historically, the Company has issued stock options to employees, directors and

consultants with only service-based vesting conditions and records the expense for these awards using the straight-line method.

Company classifies stock-based compensation expense in its consolidated statements of operations in the same manner in which the award

recipient’s payroll costs are classified.

The Company estimates the fair value of each stock option grant on

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

Before the IPO, the Company was a private company and therefore lacks

company-specific historical and implied volatility information.

Therefore, it estimates its expected stock volatility based on the historical

volatility of similar publicly-traded companies and expects to continue to do so until such time as it has adequate historical data regarding

the volatility of its own traded stock price.

The expected term of the Company’s stock options has been determined utilizing the

“simplified” method for awards that qualify as “plain-vanilla” options.

The risk-free interest rate is determined

by reference to the U.S.

Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the

expected term of the award.

The expected dividend yield is based on the fact that the Company has never paid cash dividends and does not

expect to pay any cash dividends in the foreseeable future.

The Company accounts for business acquisitions using the purchase method

of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition

The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities

assumed based on their respective fair values.

Goodwill represents the excess of the purchase price over the estimated fair values of

the assets acquired and liabilities assumed.

Company’s management exercises significant judgments in determining the fair value of assets acquired and liabilities assumed,

as well as intangibles and their estimated useful lives.

Fair value and useful life determinations are based on, among other factors,

estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values.

judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed,

as well as the Company’s current and future operating results.

Actual results may vary from these estimates which may result in

adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination

of asset and liability fair values, whichever occurs first.

Adjustments to the fair value of assets and liabilities made after the

end of the measurement period are recorded within the Company’s operating results.

For contingent consideration arrangements, the Company recognizes a

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

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

included elsewhere in the notes to the consolidated financial statements.

Company generates revenue from the following sources:

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

accordance with ASC 606 “Revenue Recognition”, the Company recognizes 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

customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have

been identified, payment terms are identified, the contract has commercial substance and collectability, and consideration is probable.

Specifically, the Company obtains written/electronic signatures on contracts and a purchase order, if said purchase orders are issued

in the normal course of business by the customer.

performance obligations that are distinct

performance obligation is a promise by the Company to provide a distinct good or service or a series of distinct goods or services.

good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or

together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service

to the customer is separately identifiable from other promises in the contract.

the transaction price

transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services

to a customer, excluding sales taxes that are collected on behalf of government agencies.

the transaction price to distinct performance obligations

transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of

the goods or services being provided to the customer.

The Company’s contracts typically contain multiple performance obligations,

for which the Company accounts for individual performance obligations separately, if they are distinct.

The standalone selling price

reflects the price the Company would charge for a specific piece of equipment or service if it was sold separately in similar circumstances

and to similar customers.

revenue as the performance obligations are satisfied

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

Company enters into contracts that may include various combinations of equipment, services and construction, which are generally capable

of being distinct and accounted for as separate performance obligations.

Contracts with customers often include promises to transfer

multiple products and services to a customer.

Determining whether products and services are considered distinct performance obligations

that should be accounted for separately versus together may require significant judgment.

Once the Company determines the performance

obligations, it determines the transaction price, which includes estimating the amount of variable consideration to be included in the

transaction price, if any.

The Company then allocates the transaction price to each performance obligation in the contract based on the

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

is required to determine the SSP for each distinct performance obligation.

The Company determines SSP based on the price at which the

performance obligation is sold separately and the methods of estimating SSP under the guidance of ASC 606-10-32-33.

If the SSP is not

observable through past transactions, the Company estimates the SSP, taking into account available information such as market conditions,

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

The Company licenses its software

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

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

The Company typically satisfies its performance obligations for equipment sales when equipment is made available for shipment

to the customer;

for services sales as services are rendered to the customer and for construction contracts both as services are rendered

and when contract is completed.

Company utilizes the cost-plus margin method to determine the SSP for equipment and build-out services.

This method is based on the cost

of the services from third parties, plus a reasonable markup that the Company believes is reflective of a market-based reseller margin.

Company determines the SSP for services in time and materials contracts by observable prices in standalone services arrangements.

Company estimates variable consideration in the form of royalties, revenue share, monthly fees, and service credits at contract inception

and updated at the end of each reporting period if additional information becomes available.

Variable consideration is typically not

subject to constraint.

Changes to variable consideration were not material for the periods presented.

a contract has payment terms that differ from the timing of revenue recognition, the Company will assess whether the transaction price

for those contracts include a significant financing component.

The Company has elected the practical expedient that permits an entity

to not adjust for the effects of a significant financing component if the Company expects that at the contract inception, the period

between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service, will

be one year or less.

For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative

estimate of the financing component and its relative significance, requires judgment.

Accordingly, the Company imputes interest on such

contracts at an agreed-upon interest rate and will present the financing components separately as financial income.

For the three months

and nine months ended September 30, 2022 and 2021, the Company did not have any such financial income.

terms with customers typically require payment 30 days from the invoice date.

The Company’s agreements with its customers do not

provide for any refunds for services or products and therefore no specific reserve for such is maintained.

In the infrequent instances where

customers raise concern over delivered products or services, the Company has endeavored to remedy the concern and all costs related

to such matters have been insignificant in all periods presented.

Company has elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and

not as a promised good or service.

Accordingly, the Company will accrue all fulfillment costs related to the shipping and handling of

consumer goods at the time of shipment.

The Company has payment terms with its customers of one year or less and has elected the practical

expedient applicable to such contracts not to consider the time value of money.

Sales, value add, and other taxes the Company collects

concurrent with revenue-producing activities are excluded from revenue.

Company receives payment from customers based on specified terms that are generally less than 30 days from the satisfaction of performance

There are no contract assets related to performance under the contract.

The difference in the opening and closing balances

of the Company’s deferred revenue primarily results from the timing difference between the Company’s performance and the

customer’s payment.

The Company fulfills obligations under a contract with a customer by transferring products and services in

exchange for consideration from the customer.

Accounts receivables are recorded when the customer has been billed or the right to consideration

is unconditional.

The Company recognizes deferred revenue when consideration has been received or an amount of consideration is due from

the customer, and the Company has a future obligation to transfer certain proprietary products.

accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end

of the current reporting period.

Fair Value of Financial Instruments

The Company’s financial

instruments consist of cash, accounts receivable, accounts payable and accrued expenses.

The estimated fair values of accounts receivable

and accounts payable approximate their carrying values due to the short-term nature of these instruments.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Stock-Based Compensation

The Company measures all

stock options and other stock-based awards granted to employees, directors and consultants based on the fair value on the date of the

grant and recognizes compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally

the vesting period of the respective award.

Historically, the Company has issued stock options to employees, directors and consultants

with only service-based vesting conditions and records the expense for these awards using the straight-line method.

The Company classifies stock-based

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

are classified.

The Company estimates the

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

Before the IPO, the Company

was a private company and therefore lacks company-specific historical and implied volatility information.

Therefore, it estimates its

expected stock volatility based on the historical volatility of similar publicly-traded companies and expects to continue to do so until

such time as it has adequate historical data regarding the volatility of its own traded stock price.

The expected term of the Company’s

stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla”

The risk-free interest rate is determined by reference to the U.S.

Treasury yield curve in effect at the time of grant of the

award for time periods approximately equal to the expected term of the award.

The expected dividend yield is based on the fact that the

Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

Business Combinations

The Company accounts for

business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded

at their respective fair values at the acquisition date.

The fair value of the consideration paid, including contingent consideration,

is assigned to the assets acquired and liabilities assumed based on their respective fair values.

Goodwill represents the excess of the

purchase price over the estimated fair values of the assets acquired and liabilities assumed.

The Company’s management

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

estimated useful lives.

Fair value and useful life determinations are based on, among other factors, estimates of future expected cash

flows, royalty cost savings and appropriate discount rates used in computing present values.

These judgments may materially impact the

estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company’s current

and future operating results.

Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition

date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values,

whichever occurs first.

Adjustments to the fair value of assets and liabilities made after the end of the measurement period are recorded

within the Company’s operating results.

For contingent consideration

arrangements, the Company recognizes a liability at fair value as of the acquisition date with subsequent fair value adjustments recorded

in the consolidated statements of operations.

Additional information regarding the Company’s contingent consideration arrangements

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

Revenue Recognition

The Company generates revenue

from the following sources:

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

In accordance with ASC 606

“Revenue Recognition”, the Company recognizes revenue from contracts with customers using a five-step model, which is described

identify the customer contract;

identify performance obligations that are distinct;

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

determine the transaction price;

allocate the transaction price to the distinct performance obligations;

recognize revenue as the performance obligations are satisfied.

Identify the customer

A customer contract is generally

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

are identified, the contract has commercial substance and collectability is probable.

Specifically, the Company obtains written/electronic

signatures on contracts and purchase orders, 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 the Company to provide a distinct good or service or a series of distinct goods or services.

A good or service that is

promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources

that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately

identifiable from other promises in the contract.

Determine the transaction

The transaction price is

the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer,

excluding sales taxes that are collected on behalf of government agencies.

Allocate the transaction

price to distinct performance obligations

The transaction price is

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

being provided to the customer.

The Company’s contracts typically contain multiple performance obligations, for which the Company

accounts for individual performance obligations separately, if they are distinct.

The standalone selling price reflects the price the

Company would charge for a specific piece of equipment or service if it was sold separately in similar circumstances and to similar customers.

Recognize revenue as

the performance obligations are satisfied

Revenue is recognized when,

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

Significant Judgments

The Company enters into contracts

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

for as separate performance obligations.

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

Determining whether products and services are considered distinct performance obligations that should be accounted for separately

versus together may require significant judgment.

Once the Company determines the performance obligations, it determines the transaction

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

The Company then

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

The corresponding revenue is recognized

as the related performance obligations are satisfied.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Judgment is required to determine

the SSP for each distinct performance obligation.

The Company determines SSP based on the price at which the performance obligation is

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

If the SSP is not observable through past transactions,

the Company estimates the SSP, taking into account available information such as market conditions, expected margins, and internally approved

pricing guidelines related to the performance obligations.

The Company licenses its SaaS type subscription license, whereby the customer

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

The full value of the contract is recognized ratably over the contractual

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

The Company typically satisfies its performance obligations

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

for services sales as services are rendered to the

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

The Company utilizes the

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

This method is based on the cost of the services from

third parties, plus a reasonable markup that the Company believes is reflective of a market-based reseller margin.

The Company determines the

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

The Company estimates variable

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

of each reporting period if additional information becomes available.

Variable consideration is typically not subject to constraint.

to variable consideration were not material for the periods presented.

If a contract has payment

terms that differ from the timing of revenue recognition, the Company will assess whether the transaction price for those contracts include

a significant financing component.

The Company has elected the practical expedient that permits an entity to not adjust for the effects

of a significant financing component if the Company expects that at the contract inception, the period between when the entity transfers

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

For those contracts

in which the period exceeds the one-year threshold, this assessment, as well as the quantitative estimate of the financing component and

its relative significance, requires judgment.

Accordingly, the Company imputes interest on such contracts at an agreed-upon interest rate

and will present the financing components separately as financial income.

For the three months ended March 31, 2023 and 2022, the Company

did not have any such financial income.

Payment terms with customers

typically require payment 30 days from the invoice date.

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

for services or products and therefore no specific reserve for such is maintained.

In the infrequent instances where customers raise concern

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

insignificant in all periods presented.

The Company has elected to

treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not as a promised good

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

The Company has payment terms with its customers of one year or less and has elected the practical expedient applicable to

such contracts not to consider the time value of money.

Sales, value add, and other taxes the Company collects concurrent with revenue-producing

activities are excluded from revenue.

The Company receives payment

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

no contract assets related to performance under the contract.

The difference in the opening and closing balances of the Company’s

deferred revenue primarily results from the timing difference between the Company’s performance and the customer’s payment.

The Company fulfills obligations under a contract with a customer by transferring products and services in exchange for consideration

from the customer.

Accounts receivables are recorded when the customer has been billed or the right to consideration is unconditional.

The Company recognizes deferred revenue when consideration has been received or an amount of consideration is due from the customer, and

the Company has a future obligation to transfer certain proprietary products.

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

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

Due to the nature of the Company’s contracts, these reporting requirements are not applicable.

The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A,

including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the

right to invoice practical expedient.

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

as negotiated, and will pass on the warranties from its vendors, if any, which generally covers this one-year period.

In accordance with

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

The reserve for

warranty returns is included in accrued expenses and other current liabilities in the Company’s consolidated balance sheets.

and Development Costs

Company expenses research and development costs as incurred.

Research and development expenses include payroll, employee benefits and

other expenses associated with product development.

The Company incurs research and development costs associated with the development

and enhancement of both hardware and software products associated with its cultivation and extraction equipment, as well as its SaaS-based

software offering, Agrify Insights™ cultivation software.

Capitalization

of Internal Software Development Costs

Company capitalizes certain software engineering efforts related to the continued development of Agrify Insights™ cultivation software

under ASC 985-20.

Costs incurred during the application 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.

and Handling Charges

Company incurs costs related to shipping and handling of its manufactured products.

These costs are expensed as incurred as a component

of cost of goods sold.

Shipping and handling charges related to the receipt of raw materials are also incurred, which are recorded as

a cost of the related inventory.

Method Investments

in affiliates that are 50 % or less owned by the Company for which the Company exercises significant influence but does not have

control are accounted for on the equity method.

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

which represents investments in entities where the Company does not have the ability to significantly influence the operations of the

assessment of whether or not the Company (as a holder of 50 % of TPI) has the power to direct activities that most significantly impact

TPI’s economic performance and to identify the party that obtains the majority of the benefits of the investment was performed

as of September 30, 2022 and December 31, 2021 and will be performed as of each subsequent reporting date.

After each of these assessments,

the Company concluded that the activities that most significantly impact TPI’s economic performance are the growth, marketing,

sale, and distribution of products using TPI’s technology and IP, each of which is solely directed by TPI.

Based on the consideration

of these assessments, the Company concluded that the Company’s investment in TPI should be accounted for under the equity method.

carrying value of the Company’s investment in TPI was $ 0 as of September 30, 2022 and December 31, 2021.

The Company did not recognize

revenue from TPI for the three and nine months ended September 30, 2022 and September 30, 2021.

Company accounts for income taxes pursuant to the provisions of ASC Topic 740, “Income Taxes,” which requires, among other

things, an asset and liability approach to calculating deferred income taxes.

The asset and liability approach requires the recognition

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

and the tax bases of assets and liabilities.

A valuation allowance is provided to offset any net deferred tax assets for which management

believes it is more likely than not that the net deferred asset will not be realized.

Company follows the provisions of ASC 740-10-25-5, “Basic Recognition Threshold.” When tax returns are filed, it is highly

certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty

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

In accordance with the guidance

of ASC 740-10-25-6, the benefit of a tax position is recognized in the consolidated financial statements in the period during which,

based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination,

including the resolution of appeals or litigation processes, if any.

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

The majority of the Company’s

remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation

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

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

The Company generally provides

a one-year warranty on its products for materials and workmanship but may provide multiple year warranties as negotiated, and generally

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

In accordance

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

maintains a reserve for warranty returns of $ 613 thousand and $ 553 thousand for March 31, 2023 and December 31, 2022, respectively.

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

Additional information regarding the Company’s warranty reserve may be found in Note 3 – Supplemental Consolidated

Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements.

Research and Development Costs

The Company expenses research

and development costs as incurred.

Research and development expenses include payroll, employee benefits and other expenses associated

with product development.

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

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

cultivation software (“Agrify Insights™”).

Capitalization of Internal Software Development

The Company capitalizes certain

software engineering efforts related to the continued development of Agrify Insights™ under ASC Topic 350-40.

The costs incurred

in the preliminary stages of development are expensed as incurred as research costs.

Once the application has reached the development

stage, internal and external costs incurred to develop internal-use software are capitalized and amortized on a straight-line basis over

the estimated useful life of the software.

Maintenance and enhancement costs, including those costs in the post-implementation stages,

are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the software that result in added

functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful life of the software.

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.

The estimated useful life of capitalized internal-use software ranges from

two to five years.

The Company accounts for

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

to calculating deferred income taxes.

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

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

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

the net deferred tax asset will not be realized.

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.

2 unchanged sentences

has not recorded a liability for unrecognized tax benefits.

As of September 30, 2022, tax years 2017 through 2021 remain open for IRS

The Company has received no notice of audit from the IRS for any of the open tax years.

Company recognizes the benefit of a tax position when it is effectively settled.

ASC 740-10-25-10, “Basic Recognition Threshold”

provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously

unrecognized tax benefits.

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

by a taxing authority.

For tax positions considered effectively settled, the Company recognizes the full amount of the tax benefit.

Loss Per Share

Company presents basic and diluted net loss per share attributable to Common Stockholders in conformity with the two-class method required

for participating securities.

The Company computes basic loss per share by dividing net loss available to Common Stockholders by the

weighted-average number of common shares outstanding.

Net loss available to Common Stockholders represents net loss attributable to Common

Stockholders reduced by the allocation of earnings to participating securities.

Losses are not allocated to participating securities

as the holders of the participating securities do not have a contractual obligation to share in any losses.

Diluted loss per share adjusts

basic loss per share for the potentially dilutive impact of stock options and warrants.

As the Company has reported losses for all periods

presented, all potentially dilutive securities including stock options and warrants, are anti-dilutive, and accordingly, basic net loss

per share equals diluted net loss per share.

Net loss per share calculations for all periods have been adjusted

to reflect the reverse stock splits effected on January 12, 2021 and October 18, 2022.

Net loss per share was calculated based on the

weighted-average number of Common Stock outstanding.

Adopted Accounting Pronouncements

In August 2020, the FASB issued ASU No.

2020-06, Debt

- Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own

Equity (Subtopic 815-40):

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

The Company recognizes the

benefit of a tax position when it is effectively settled.

ASC 740-10-25-10 provides guidance on how an entity should determine whether

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

ASC 740-10-25-10 clarifies

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

For tax positions considered

effectively settled, the Company recognizes the full amount of the tax benefit.

Net Loss Per Share

The Company presents basic

and diluted net loss per share attributable to Common Stockholders in conformity with the two-class method required for participating

The Company computes basic loss per share by dividing net loss available to Common Stockholders by the weighted-average number

of common shares outstanding.

Net loss available to Common Stockholders represents net loss attributable to Common Stockholders reduced

by the allocation of earnings to participating securities.

Losses are not allocated to participating securities as the holders of the

participating securities do not have a contractual obligation to share in any losses.

Diluted loss per share adjusts basic loss per share

for the potentially dilutive impact of stock options and warrants.

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

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

net loss per share.

Net loss per share calculations

for all periods have been adjusted to reflect the reverse stock splits effected on January 12, 2021, October 18, 2022 and July 5, 2023.

Net loss per share was calculated based on the weighted-average number of Common Stock outstanding.

Recently Adopted Accounting Pronouncements

In August 2020, the FASB

issued ASU No.

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20), and Derivatives and Hedging—Contracts

in an Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

The amendments

The amendments in ASU No.

2020-06 simplify the complexity associated with applying GAAP for certain financial instruments with characteristics

4 unchanged sentences

interim periods within those fiscal years.

The adoption of this new accounting guidance had no impact

on the Company’s consolidated financial position.

Accounting Pronouncements

June 2016, the FASB issued ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326), which introduces a new methodology

for accounting for credit losses on financial instruments, including available-for-sale debt securities and accounts receivable.

guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial

instruments by using all practical and relevant information.

Any expected credit losses are to be reflected as allowances rather than

reductions in the amortized cost of available-for-sale debt securities.

ASU 2016-13 is effective in the first quarter

of fiscal 2024.

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

related disclosures.

In October 2021, the FASB issued ASU No.

2021-08, Business

Combinations (Topic 606):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that

an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as

if it had originated the contracts.

Generally, this should result in an acquirer recognizing and measuring the acquired contract assets

and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree

prepared financial statements in accordance with GAAP.

The amendment in this update is effective for fiscal years beginning after December

15, 2022, including interim periods within those fiscal years.

Early adoption is permitted, including adoption in an interim period.

The guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendment in this

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

Other recent accounting pronouncements

issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities

and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial

2 — Revenue and Deferred Revenue

the three and nine months ended September 30, 2022 and 2021, the Company generated revenue from the following sources:

(1) equipment

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

Company sells its equipment and services to customers under a combination of a contract and purchase order.

Equipment revenue includes

sales from proprietary products designed and engineered by the Company such as Agrify Vertical Farming Units (“VFUs”), container

farms, integrated grow racks, and LED grow lights, and non-proprietary products designed, engineered, and manufactured by third parties

such as air cleaning systems and pesticide-free surface protection.

contracts normally provide for payment upon completion of specified work or units of work as identified in the contract.

Although there

is considerable variation in the terms of these contracts, they are primarily structured as time-and-material contracts.

enters into time-and-materials contracts under which the Company is paid for labor and equipment at negotiated hourly billing rates and

other expenses, including materials, as incurred at rates agreed to in the contract.

The Company uses three main sub-contractors to execute

the construction contracts.

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

The adoption of this new accounting guidance had no impact on the Company’s consolidated

financial position.

Pending Accounting Pronouncements

In June 2016, the FASB issued

2016-13, Financial Instruments—Credit Losses (Topic 326), which introduces a new methodology for accounting for credit losses

on financial instruments, including available-for-sale debt securities and accounts receivable.

The guidance establishes a new “expected

loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and

relevant information.

Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale

debt securities.

ASU 2016-13 is effective for fiscal years beginning after December 15, 2022.

The Company does not expect that the application

2016-13 will have a material impact on the presentation of its results of operations, financial position, or disclosures.

In October 2021, the FASB

issued ASU No.

2021-08, Business Combinations (Topic 606):

Accounting for Contract Assets and Contract Liabilities from Contracts with

Customers, which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination

in accordance with Topic 606 as if it had originated the contracts.

Generally, this should result in an acquirer recognizing and measuring

the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial

statements, if the acquiree prepared financial statements in accordance with GAAP.

The amendment in this update is effective for fiscal

years beginning after December 15, 2022, including interim periods within those fiscal years.

Early adoption is permitted, including adoption

in an interim period.

The Company does not expect that the application of ASU 2021-08 will have a material impact on the presentation

of its results of operations, financial position, or disclosures.

recent accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or

future consolidated financial statements.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 2 — Revenue and Deferred Revenue

The Company sells its equipment

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

Equipment revenue includes sales from proprietary products

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

and LED grow lights, and non-proprietary products designed, engineered, and manufactured by third parties such as air cleaning systems

and pesticide-free surface protection.

Construction contracts normally

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

Although there is considerable variation

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

The Company enters into time-and-materials

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

as incurred at rates agreed to in the contract.

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

The following table provides the Company’s

revenue disaggregated by the timing of revenue recognition:

Three months ended March 31,

(In thousands)

2 unchanged sentences

Total revenue

accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end

of the current reporting period.

Due to the nature of the Company’s contracts, these reporting requirements are not applicable,

because the majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A,

including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the

right to invoice practical expedient.

The Company generally provides a one-year warranty on its products

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

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

In accordance with ASC 450-20-25, the Company accrues

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

The Company maintains a reserve for warranty returns

of $ 540 thousand and $ 398 thousand for September 30, 2022 and December 31, 2021, respectively.

The Company’s reserve for warranty

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

Additional information regarding

the Company’s warranty reserve may be found in Note 3 – Supplemental Consolidated Balance

Sheet Information, included elsewhere in the notes to the consolidated financial statements.

in the Company’s current deferred revenue balance for the nine months ended September 30, 2022 and the year ended

December 31, 2021 were as follows:

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

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

Due to the nature of the Company’s contracts, these reporting requirements are not applicable, because the majority of the Company’s

remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation

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

Deferred Revenue

Changes in the Company’s current deferred

revenue balance for the three months ended March 31, 2023 and the year ended December 31, 2022 were as follows:

(In thousands)

Nine Months Ended

September 30,

Deferred revenue – beginning of period

1 unchanged sentence

Deferred revenue – end of period

revenue balances primarily consist of customer deposits on its cultivation and extraction solutions equipment.

As of September 30, 2022

and December 31, 2021, all of the Company’s deferred revenue balances were reported as current liabilities in the accompanying

consolidated balance sheets.

3 — Supplemental Consolidated Balance Sheet Information

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

Deferred revenue balances

primarily consist of customer deposits on the Company’s cultivation and extraction solutions equipment.

As of March 31, 2023 and December

31, 2022, all of the Company’s deferred revenue balances were reported as current liabilities in the accompanying consolidated balance

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 3 — Supplemental Consolidated Balance Sheet Information

Accounts Receivable

Accounts receivable consisted of the following

as of March 31, 2023 and December 31, 2022:

(In thousands)

September 30,

Accounts receivable, gross

1 unchanged sentence

Accounts receivable, net

NEIA, a related party, accounted for $ 0 and $ 3.5 million of the Company’s

accounts receivable, net as of September 30, 2022 and December 31, 2021, respectively.

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

The changes in the allowance for doubtful accounts

consisted of the following:

(In thousands)

Nine Months Ended

September 30,

Allowance for doubtful accounts - beginning of period

Provision for doubtful accounts

(Recovery of) Provision for doubtful accounts

Write-offs of uncollectible accounts

Other adjustments

Allowance for doubtful accounts - end of period

Bad debt expense was $ 385 thousand and $ 0 for the three months ended

September 30, 2022 and 2021, respectively, and $ 1.9 million and $ 0 for the nine months ended September 30, 2022 and 2021, respectively.

Expenses and Other Current Receivables

expenses and other current receivables consisted of the following as of September 30, 2022 and December 31, 2021:

Bad debt expense was $ 0.2 million and $ 0 for the

three months ended March 31, 2023 and 2022, respectively.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted

of the following as of March 31, 2023 and December 31, 2022:

(In thousands)

September 30,

Deferred costs

Prepaid insurance

March 31, 2023

December 31, 2022

Other receivables, other

Other note receivables (1)

Prepaid expenses, other

Prepaid materials

Prepaid software

Prepaid insurance

Deferred issuance costs, net

Prepaid software

Prepaid materials

Total prepaid expenses and other current assets

Other note receivables relate to the current portion

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

and Equipment, Net

and equipment, net consisted of the following as of September 30, 2022 and December 31, 2021:

Property and Equipment, Net

Property and equipment, net consisted of the following

as of March 31, 2023 and December 31, 2022:

(In thousands)

September 30,

Leasehold improvements

1 unchanged sentence

Computer and office equipment

Leased equipment at customer

Leased equipment

Furniture and fixtures

Research and development of laboratory equipment

Research and development laboratory equipment

Trade show assets

3 unchanged sentences

Total property and equipment, net

Depreciation expense for the three months ended September 30, 2022

and 2021 was $ 409 thousand and $ 139 thousand, respectively, and $ 1.2 million and $ 337 thousand for the nine months ended September 30,

2022 and 2021, respectively.

Non-Current Assets

non-current assets consisted of the following as of September 30, 2022 and December 31, 2021:

Depreciation expense for the three months ended March 31, 2023 and

2022 was $ 0.4 million and $ 0.4 million, respectively.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Other Non-Current Assets

Other non-current assets consisted of the following

as of March 31, 2023 and December 31, 2022:

(In thousands)

September 30,

Long-term deferred commissions expense

Deferred debt issuance costs, non-current, net

Security deposits

Long-term deferred commissions expense

Total other non-current assets

Expenses and Other Current Liabilities

expenses and other current liabilities consisted of the following as of September 30, 2022 and December 31, 2021:

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities

consisted of the following as of March 31, 2023 and December 31, 2022:

(In thousands)

September 30,

Accrued acquisition liabilities (1)

Sales tax payable (2)

Accrued construction costs

Accrued acquisition liability (2)

Compensation related fees

Accrued warranty costs

Accrued professional fees

Accrued interest expense

Accrued warranty expenses

Accrued consulting fees

Accrued inventory purchases

Accrued interest expense

Financing lease liabilities

Accrued consulting fees

Accrued non-income taxes

Other current liabilities

Total accrued expenses and other current liabilities

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

These amounts are included as part of the initial purchase price allocations and are the subject matter of an indemnification claim under the Precision and Cascade acquisition agreement.

Accrued acquisition liabilities include both the contingent consideration and the value of held-back Common Stock

associated with the 2022 acquisition of Lab Society and the 2021 acquisition of PurePressure.

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

(1) Accrued acquisition liabilities

includes both the contingent consideration and the value of held back Common Stock associated with the 2022 acquisition of Lab Society

and the 2021 acquisitions of Precision, Cascade and PurePressure.

(2) Sales tax payable primarily

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

These amounts are included

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

acquisition agreement.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Accrued Warranty Costs

The following table summarizes the activity related

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

(In thousands)

September 30,

Warranty accrual - beginning of period

accrued for warranties issued during period

Liabilities accrued for warranties issued during the period

Warranty accrual - end of period

— Fair Value Measures

Values of Assets and Liabilities

accordance with ASC Topic 820 “Fair Value Measurement”, the Company measures fair value at the price that would be received

to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on

a tiered fair value hierarchy consisting of three levels, as follows:

Observable inputs such as quoted prices for identical

assets or liabilities in active markets.

Other inputs that are observable directly or indirectly,

such as quoted prices for similar instruments in active markets or for similar markets that are not active.

Unobservable inputs for which there is little or no

market data which require the Company to develop its own assumptions about how market participants would price the asset or liability.

techniques for assets and liabilities include methodologies such as the market approach, the income approach, or the cost approach, and

may use unobservable inputs such as projections, estimates and management’s interpretation of current market data.

These unobservable

inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

September 30, 2022 and December 31, 2021, the Company’s assets and liabilities measured at fair value on a recurring basis

were as follows:

September 30, 2022

Note 4 — Fair Value Measures

Fair Values of Assets and Liabilities

In accordance with ASC Topic

820 “Fair Value Measurement”, the Company measures fair value at the price that would be received to sell an asset or paid

to transfer a liability in an orderly transaction between market participants at the measurement date.

In determining fair value, the

assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy

consisting of three levels, as follows:

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

Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active.

Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions about how market participants would price the asset or liability.

Valuation techniques for

assets and liabilities include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable

inputs such as projections, estimates and management’s interpretation of current market data.

These unobservable inputs are only

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

At March 31, 2023 and December

31, 2022, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:

March 31, 2023

December 31, 2022

Fair Value Measurements Using Input

Fair Value Measurements Using Input Types

(In thousands)

Mutual funds (included in cash and cash equivalents)

Municipal bonds

Money market funds

Cash receivables

Corporate bonds

Contingent consideration

Warrant liabilities

Warrant liabilities - January 2022 warrants

Warrant liabilities - March 2022 warrants

Warrant liabilities - August 2022 warrants

Warrant liabilities - December 2022 warrants

Total liabilities

Value of Financial Instruments

The Company has certain financial instruments which consist of cash

and cash equivalents, marketable securities, warrant liabilities, and contingent consideration.

Fair value information for each of these

instruments is as follows:

Cash and cash equivalents, accounts receivable, accounts

payable, accrued expenses and deferred revenue liabilities approximate their fair values based on the short-term nature of these instruments.

Marketable securities classified as current held-to-maturity

securities are recorded at amortized cost, which at September 30, 2022, approximated fair value.

The Company’s deferred consideration was recorded

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

of the transaction.

As of September 30, 2022 and December 31, 2021, the carrying value of the deferred consideration approximated

fair value, respectively.

The Company’s Warrant Liabilities are

marked-to-market each reporting period with the changes in fair value of warrant liability are recorded to other income (expense), net

in the accompanying consolidated statements of operations until the warrants are exercised.

The fair value of the warrant liability is

estimated using a Black-Scholes option-pricing model.

As of September 30, 2022, the Company held investments in mutual funds,

municipal bonds and corporate bonds.

The Company records mutual funds at fair value in the accompanying consolidated balance sheet as

part of cash and cash equivalents.

The municipal and corporate bonds are considered held-to-maturity securities and are recorded at amortized

cost in the accompanying consolidated balance sheet.

The fair values of these investments were estimated using recently executed transactions

and market price quotations.

The Company considers current assets as those investments which will mature within the next 12 months including,

interest receivable on long-term bonds.

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

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Fair Value of Financial Instruments

The Company has certain financial

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

value information for each of these instruments as well as other balances of the Company are as follows:

● Cash and cash equivalents,

accounts receivable, accounts payable, accrued expenses and deferred revenue liabilities approximate their fair values, based on the

short-term nature of these instruments.

● Marketable securities classified

as current held-to-maturity securities are recorded at amortized cost, which at March 31, 2023, approximated fair value.

● The Company’s deferred consideration was recorded in

connection with acquisitions during the three months ended March 31, 2023 and fiscal 2022 using an estimated fair value discount at the

time of the transactions.

As of March 31, 2023 and December 31, 2022, the carrying value of the deferred consideration approximated fair

value, respectively.

● The Company’s warrant

liabilities are marked-to-market each reporting period with the changes in fair value of warrant liabilities recorded in other income

(expense), net in the accompanying consolidated statements of operations until the warrants are exercised.

The fair value of the warrant

liabilities are estimated using a Black-Scholes option-pricing model.

Marketable Securities

As of March 31, 2023, the

Company held investments in, municipal bonds and corporate bonds.

The municipal and corporate bonds are considered held-to-maturity securities

and are recorded at amortized cost in the accompanying consolidated balance sheet.

The fair values of these investments were estimated

using recently executed transactions and market price quotations.

The Company considers current assets as those investments which will

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

The composition of the Company’s marketable

securities are as follows:

(In thousands)

September 30,

Current marketable securities:

Municipal bonds

Corporate bonds

At September 30, 2022, marketable securities consisted

of the following:

(In thousands)

Current marketable securities (due within 1 year)

Corporate bonds

At December 31, 2021, marketable securities consisted

of the following:

(In thousands)

Current marketable securities (due within 1 year)

Municipal bonds

Money market funds

Cash receivables

Corporate bonds

Consideration

Company has classified its net liability for contingent earn-out considerations to the sellers relating to one acquisition completed

during the first quarter of 2022 and two acquisitions completed during fiscal 2021.

The fair value for the contingent consideration associated

with these acquisitions is within Level 3 of the fair value hierarchy because the associated fair value is determined using significant

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

A description of the Company’s acquisitions completed during the first quarter of 2022 and fiscal 2021 are included within Note

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

Contingent Consideration

The Company has classified

its net liability for contingent earn-out considerations to the sellers relating to one acquisition completed during the first quarter

of 2022 and two acquisitions completed during fiscal 2021.

The fair value for the contingent consideration associated with these acquisitions

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

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

The company recorded no change

in contingent consideration for the three months ended March 31, 2023 The contingent earn-out payments

to the sellers for each acquisition are based on the achievement of certain revenue thresholds.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(In thousands)

September 30,

ended December 31, 2022

Contingent consideration – beginning of period

4 unchanged sentences

Contingent consideration – end of period

Company included contingent consideration within accrued expenses and other current liabilities in its consolidated balance sheets as

of September 30, 2022 and December 31, 2021, respectively.

below for additional information related to each acquisition’s contingent consideration.

The Company included contingent consideration

within accrued expenses and other current liabilities on its consolidated balance sheets as of March 31, 2023 and December 31, 2022.

See below for additional information related to

each acquisition’s contingent consideration.

Contingent Consideration – PurePressure

The Company, in its review of

actual revenue performance as compared to its originally projected revenue estimates, noted that PurePressure’s revenue trend is

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

of the acquisition.

As a result, the Company has reduced its fair value estimate of achievement for PurePressure’s first earn-out

During the third quarter ended September 30, 2022, the Company reduced the estimated fair value of the contingent consideration

liability associated with PurePressure’s first earn-out period by approximately $ 602 thousand.

As required by ASC Topic 805 Business

Combination (“ASC805”), the change in contingent consideration was recorded as a reduction in operating expenses during the

third quarter of 2022.

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

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

at the time of the acquisition.

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

earn-out period.

During the third quarter ended September 30, 2022, the Company reduc ed the estimated fair value of the contingent

consideration liability associated with PurePressure’s first earn-out period by approximately $ 602 thousand and their second earn-out

by approximately $ 170 thousand.

As required by ASC Topic 805 Business Combination (“ASC 805”), the change in contingent consideration

was recorded as a reduction in operating expenses during the third and fourth quarters of 2022, respectively.

Contingent Consideration – Lab Society

The Company, in its review of

actual revenue performance as compared to its originally projected revenue estimates, noted that Lab Society’s revenue trend is

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

of the acquisition.

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

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

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

As required by ASC805, the change in contingent

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

Contingent Consideration

– Precision and Cascade

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

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

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

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

This amount, as required by ASC805,

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

During the three-month period ended September

30, 2022 , the Company made the final payment on the contingent consideration of approximately $ 5.6

million to the members of Precision and Cascade.

Additional information regarding the Company’s final payment to Precision and Cascade

may be found in Note 8 – Business Combination, included elsewhere in the notes to the consolidated financial statements.

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

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

at the time of the acquisition.

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

earn-out period .

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

consideration liability associated with Lab Society’s first earn-out period by approximately $ 1.0 million and their second earn-out

by approximately $ 484 thousand.

As required by ASC 805, the change in contingent consideration was recorded as a reduction in operating

expenses during the second and fourth quarters of 2022, respectively.

Consideration – Precision and Cascade

The earn-out period for the

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

concluded on December 31, 2021.

The Company, during the second quarter of 2022, increased the amount

of the contingent consideration earned by the former members of Precision and Cascade by approximately $ 121 thousand, to reflect the final

contingent consideration amount due.

This amount was recorded as an increase in operating expenses during the second quarter of 2022.

During the period ended December 31, 2022, the Company made the final payment on the contingent consideration of approximately

$ 5.6 million to the m embers of Precision and Cascade.

Warrant Liabilities

The estimated fair value of the Warrant Liabilities

on September 30, 2022 is determined using Level 3 inputs.

Inherent in a Black-Scholes option-pricing model are assumptions used in

calculating the estimated fair values represent the Company’s best estimate.

However, inherent uncertainties are involved.

or assumptions change, the estimated fair values could be materially different.

The following table summarizes the Company’s

assumptions used in the valuation of Warrant Liabilities for the nine months ended September 30, 2022:

Stock price at issuance

Option exercise price

Expected term (Years)

The estimated fair value

of the warrant liabilities on March 31, 2023 is determined using Level 3 inputs.

Inherent in a Black-Scholes option-pricing model are

assumptions used in calculating the estimated fair values represent the Company’s best estimate.

The volatility rate is determined

utilizing the Company’s own share price and the share price of competitors over time.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

January 2022 Warrants

The following table summarizes

the Company’s assumptions used in the valuation as of March 31, 2023 and for the year ended December 31, 2022:

Exercise price

Expected term (in years)

Discount rate - treasury yield

The following table sets forth a summary of the

changes in the fair value of the Level 3 Warrant Liabilities for the nine months ended September 30, 2022:

The following table sets forth

a summary of the changes in the fair value of the Level 3 warrant liabilities for the three months ended March 31, 2023:

(In thousands)

September 30,

Warrant liabilities – beginning of period

Initial fair value of warrant liabilities

Change in estimated fair value

Warrant liabilities – end of period

Loan Receivable

portion of the capital raised from the Company’s IPO has been allocated to launch the Company’s TTK Solution program.

TTK Solution is the industry’s first-of-its-kind program in which the Company engages with qualified cannabis operators

in the early phases of their business plans and provides critical support, typically over a 10 -year period, which includes:

capital for construction costs, the design and build-out of their cultivation and extraction facilities, state-of-the-art cultivation

and extraction equipment, subscription to the Company’s Agrify Insights™ cultivation software, process design, training,

implementation, proven grow recipes, product formulations, data analytics, and consumer branding, which will enable the Company’s

customers to go to market faster and better.

The loan agreements entered into with customers

receiving the TTK Solution generally provide for loans with maturity dates of approximately two to three years after the completion of

the construction projects.

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

During the quarter ended September 30, 2022, the Company

provided a notice of default under the term loan agreement between the Company and Bud & Mary’s (the “Bud & Mary’s

TTK Agreement”).

March 2022 Warrants

The following table summarizes

the Company’s assumptions used in the valuation as of March 31, 2023 and for the year ended December 31, 2022:

Exercise price

Expected term (in years)

Discount rate - treasury yield

The following table sets forth

a summary of the changes in the fair value of the Level 3 warrant liabilities for the three months ended March 31, 2023:

(In thousands)

Warrant liabilities – beginning of period

Change in estimated fair value

Warrant liabilities – end of period

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

August 2022 Warrants

The following table summarizes

the Company’s assumptions used in the valuation as of March 31, 2023 and for the year ended December 31, 2022:

Exercise price

Expected term (in years)

Discount rate - treasury yield

The following table sets forth

a summary of the changes in the fair value of the Level 3 warrant liabilities for the three months ended March 31, 2023:

(In thousands)

Warrant liabilities – beginning of period

Change in estimated fair value

Warrant liabilities – end of period

December 2022 Warrants

The following table summarizes

the Company’s assumptions used in the valuation as of March 31, 2023 and for the year ended December 31, 2022:

Exercise price

Expected term (in years)

Discount rate - treasury yield

The following table sets forth

a summary of the changes in the fair value of the Level 3 warrant liabilities for the three months ended March 31, 2023:

(In thousands)

Warrant liabilities – beginning of period

Change in estimated fair value

Warrant liabilities – end of period

Note 5 — Loans Receivable

A portion of the capital

raised from the Company’s IPO was allocated to launch the Company’s TTK Solution program.

The TTK Solution is the industry’s

first-of-its-kind program in which the Company engages with qualified cannabis operators in the early phases of their business plans and

provides critical support, typically over a 10 -year period, which includes:

access to capital for construction costs, the design and build-out

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

Agrify Insights™, process design, training, implementation, proven grow recipes, product formulations, data analytics, and consumer

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

On September 15, 2022, the

Company provided a notice of default under the term loan agreement between the Company and Bud & Mary’s (the “Bud &

Mary’s TTK Agreement”).

On October 5, 2022, Bud & Mary’s Cultivation, Inc.

(the “Bud & Mary’s”) filed a

complaint in the Superior Court of Massachusetts in Suffolk County naming the Company as defendant.

Bud & Mary’s is seeking,

among other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion

(the “Bud & Mary’s”)

filed a complaint in the Superior Court of Massachusetts in Suffolk County naming the Company as defendant.

Bud & Mary’s is

seeking, among other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion

arising from the Bud & Mary’s TTK Agreement .

1 unchanged sentence

to Bud & Mary’s.

The Company deemed it necessary to fully reserve the $ 14.7 outstanding balance due to the current litigation

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

In addition, $ 5.3 million of the notes receivable

balance for work performed during the third quarter of 2022 has been recorded as an unbilled note receivable and deferred the revenue

to a future period.

The Company has recognized the expenses associated with the work completed in the current period due to the uncertainty

of the Company’s ability to recover the funds owed by the customer and its obligations to the vendors that have performed this work.

The Company determined that it will only recognize unbilled notes receivable revenue if cash is collected from the customer in a future

The Company believes that Bud & Mary’s claims have no merit and intends to defend itself vigorously.

The Company is

taking all necessary steps to pursue repayment from Bud & Mary’s and is taking all actions necessary to protect its shareholders’ interests.

the quarter ended June 30, 2022, the Company established a reserve of approximately $ 7.1 million specifically related to Greenstone.

The Company established the reserve based upon its review of Greenstone’s financial stability, which would impact collectability,

which is primarily the result of unfavorable market conditions within the Colorado market.

The Company will continue to monitor the operations

of Greenstone in an effort to collect all outstanding receivables but due to the uncertain nature of Greenstone’s business at this

time the Company has made the decision to place a reserve against the receivables.

Greenstone is a related party as of September 30,

2022 and December 31, 2021.

breakdown of loans receivable by customer as of September 30, 2022 and December 31, 2021 is as follows:

The Company deemed it necessary to fully reserve the $ 14.7 million outstanding balance in the third quarter

of 2022 due to the current litigation and the uncertainty of the customer’s ability to repay the outstanding balance.

believes that Bud & Mary’s claims have no merit and intends to defend itself vigorously.

The Company is taking all necessary

steps to pursue repayment from Bud & Mary’s and is taking all actions necessary to protect its shareholders’ interests.

During the year ended December

31, 2022, the Company established a reserve of approximately $ 12.5 million specifically related to Greenstone.

Greenstone is a related

party because one of the Company’s former Agrify Brands employees and its VP of Engineering had a minority ownership.

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

the result of unfavorable market conditions within the Colorado market.

The Company will continue to monitor the operations of Greenstone

in an effort to collect all outstanding receivables but due to the uncertain nature of Greenstone’s business at this time the Company

has made the decision to place a reserve against the receivables.

During the quarter ended March 31, 2023 the Greenstone loan was fully

written off against the reserve as a result of the sale of Greenstone to Denver Greens.

It was agreed that Denver Greens would not have

to pay back Greenstone’s Loan.

The breakdown of loans receivable by customer

as of March 31, 2023 and December 31, 2022 were as follows:

(In thousands)

September 30,

Bud & Mary’s – TTK Solution

3 unchanged sentences

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

Company Customer Number 140 – TTK Solution

Other – Non-TTK Solutions

TTK Solution – Allowance for doubtful accounts (2)

Allowance for doubtful accounts (2)

Total loan receivable

The current portion of loan receivable are included

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

(2) The Company established an allowance for doubtful accounts of approximately

$ 14.7 million related to Bud & Mary’s ongoing litigation.

The remaining balance of approximately $ 7.1 million relates to

Greenstone consisting of capital advances, accrued interest and VFUs sales.

At this time, the Company is not aware of, nor

has it identified any risk or potential performance failure associated with any of its other TTK Solution arrangements with the noted

exception of Bud & Mary’s TTK Solution and Greenstone TTK Solution, as described above.

The Company analyzed whether any of the above

customers are a VIE in accordance with ASC810 and if so, whether the Company is the primary beneficiary requiring consolidation.

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

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

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

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

are stated at the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a First-In,

First-Out basis.

(1) The current portion of loan

receivable is included within Note 3 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to

the consolidated financial statements.

(2) The balance was written off

at December 31, 2022 due to the cancellation of this TTK Solution project.

(3) The Company established an

allowance for doubtful accounts of approximately $ 14.7 million related to Bud & Mary’s ongoing litigation.

Approximately $ 12.5

million relates to Greenstone, which is a related party because one of the Company’s former Agrify Brands employees and its VP

of Engineering had a minority ownership, consisting of capital advances, accrued interest, and VFUs sales.

Approximately $ 4.5 million

relates to Hannah, and $ 1.4 million relates to WhiteCloud.

At this time, the Company

is not aware of, nor has it identified any risk or potential performance failure associated with any of its TTK Solution arrangements,

other than the noted exceptions of Bud & Mary’s TTK Solution and Greenstone TTK Solution, which is a related party, as described

The Company analyzed whether

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

Based on the Company’s analysis, the Company has determined that Greenstone, which is a related party because one of the Company’s

former Agrify Brands employees and its VP of Engineering had a minority ownership, is a VIE.

As of March 31, 2023, two of the Company’s

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

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

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 6 — Inventory

Inventories are stated at

the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a first-in, first-out

Such costs include the acquisition cost for raw materials and operating supplies.

The Company’s standard payment

terms with suppliers may require making payments in advance of delivery of the Company’s products.

The Company’s prepaid

inventory is a short-term, non-interest-bearing asset that is applied to the purchase of products once they are delivered.

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

The Company’s standard payment terms with

suppliers may require making payments in advance of delivery of the Company’s products.

The Company’s prepaid inventory is

a short-term, non-interest-bearing asset that is applied to the purchase of products once they are delivered.

Inventory consisted of the following as of March

31, 2023 and December 31, 2022:

(In thousands)

September 30,

Raw materials

1 unchanged sentence

Finished goods

Inventory for resale

Inventory, gross

1 unchanged sentence

Total inventory, net

Company establishes an inventory reserve for obsolete, slow-moving, and defective inventory.

The Company calculates inventory reserves

for obsolete, slow-moving, or defective items as the difference between the cost of inventory and its estimated net realizable value.

The reserves are based upon management’s expected method of disposition.

in the Company’s inventory reserve are as follows:

Inventory Reserves

The Company establishes an

inventory reserve for obsolete, slow moving, and defective inventory.

The Company calculates inventory reserves for obsolete, slow moving,

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

The reserves are based upon

management’s expected method of disposition.

Changes in the Company’s inventory reserve

are as follows:

(In thousands)

September 30,

Inventory reserves – beginning of period

Increase in inventory reserves

(Decrease) increase in inventory reserves

Inventory reserves – end of period

Note 7 — Goodwill and Intangible Assets, Net

assets are initially recorded at fair value and tested periodically for impairment.

Goodwill represents the excess of the purchase price

over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination and is

tested at least annually for impairment.

The Company performs its goodwill impairment testing annually during the fourth quarter, or

sooner if indicators or if circumstances were to occur that would more likely than not reduce the fair value of the Company’s reporting

unit below its carrying amount.

The Company would recognize an impairment charge for the amount by which the carrying amount exceeds

the reporting unit’s fair value, not to exceed the total amount of goodwill.

The Company has concluded that there was an impairment-triggering event

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

its goodwill and intangible assets.

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

During the three-month period ended June 30, 2022, the Company’s

market capitalization fell below total net assets.

In addition, financial performance continued to weaken during the quarter, which is

contrary to prior experience.

Management reassessed business performance expectations, following persistent adverse developments in equity

markets, deterioration in the environment in which the Company operates, lower-than-expected sales, and an increase in operating expenses.

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

on the results of this testing, the Company determined that the carrying values of the aggregate value of its goodwill and intangible

assets were not recoverable.

The Company recorded impairment charges during the second quarter of 2022, representing a full impairment

of the carrying value of its goodwill and intangible assets.

The Company recorded an impairment charge of approximately $ 69.9 million,

representing the carrying values of intangible assets and goodwill, which totaled $ 15.2 million and $ 54.7 million, respectively.

consisted of the following:

Intangible assets are initially

recorded at fair value and tested periodically for impairment.

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

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

for impairment.

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

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

The Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s

fair value, not to exceed the total amount of goodwill.

The Company has concluded

that there was an impairment-triggering event during the three months ended June 30, 2022 that required the Company to perform a detailed

analysis of the current carrying value of its goodwill and intangible assets.

For goodwill and intangible asset impairment testing purposes,

the Company has one reporting unit.

During the three-month ended

June 30, 2022, the Company’s market capitalization fell below total net assets.

In addition, financial performance continued to

weaken during the quarter, which was contrary to prior experience.

Management reassessed business performance expectations, following

persistent adverse developments in equity markets, deterioration in the environment in which the Company operates, lower-than-expected

sales, and an increase in operating expenses.

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

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Based on the results of this

testing, the Company determined that the carrying values of the aggregate value of its goodwill and intangible assets were not recoverable.

The Company recorded impairment charges during the second quarter of 2022, representing a full impairment of the carrying value of its

goodwill and intangible assets.

The Company recorded an impairment charge of approximately $ 69.9 million, representing the carrying values

of goodwill and intangible assets, which totaled $ 54.7 million and $ 15.2 million, respectively.

Changes in goodwill consisted of the following:

(In thousands)

September 30,

Goodwill - beginning of period

Goodwill acquired during

Goodwill acquired during period

Goodwill purchase accounting adjustment

Goodwill impairment loss

purchase accounting adjustment

Goodwill - end of period

assets, net as of September 30, 2022 was as follows:

Intangible assets, net as of December 31, 2022

were as follows:

Assets, Gross

Amortization and Impairment

(In thousands)

September 30,

Impairments, net

September 30,

relationships

developed technology

website costs

intangible assets, net

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

Intangible Assets, Gross

Accumulated Amortization

Intangible Assets, Net

(In thousands)

and Impairment

Additions and Retirements, net

and Retirements, net

Customer Relationships

Acquired developed Technology

Non-compete agreements

Capitalized website costs

Total intangible assets, net

Amortization expense recorded in general and administrative in the

consolidated statements of operations were $ 0 and $ 57 thousand for the three months ended September 30, 2022 and 2021, respectively, and

$ 1.4 million and $ 172 thousand for the nine months ended September 30, 2022 and 2021, respectively.

— Business Combination

of Lab Society

February 1, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lab Society, a newly-formed

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

Maibach Jr., as the Owner Representative thereunder, and

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

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

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

The aggregate consideration for the Lab Society Acquisition consisted

$4.0 million in cash, subject to certain adjustments for working capital, cash, and indebtedness of Lab Society at closing;

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

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

The Company withheld 12,768 of the Buyer Shares issuable to the Owners

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

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

During the third quarter of

2022, 2,785 of the Holdback Lab Buyer Shares were forfeited after the finalization of the net working capital settlement.

The remaining

9,983 Holdback Lab Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance with and subject

to the conditions of the Merger Agreement.

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.

Additional information regarding the Company’s contingent

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

Transaction and related costs, consisting primarily of professional

fees, related to the acquisition, totaled approximately $ 0 and $ 66 thousand for the three months and nine months ended September 30, 2022,

respectively.

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

Company has prepared purchase price allocations for the business combination with Lab Society on a preliminary basis.

Changes to those

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

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

Purchase price consideration

closing proceeds

Closing buyer shares

Holdback buyer shares

consideration

working capital adjustment

value of total consideration transferred

purchase price, net of cash acquired

Fair value allocation of

purchase price

cash equivalents

expenses and other current receivables

of-use assets, net

and equipment, net

and refundable taxes

payable, accrued expenses, and other current liabilities

tax liability

lease liabilities, current

lease liabilities, non-current

lease liabilities, current

lease liabilities, non-current

intangible assets

purchase price

Identified intangible assets consist of trade

names, technology, and customer relationships.

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

were made in accordance with ASC805 and are outlined in the table below:

Identified intangible assets

developed technology

relationships

identified intangible assets

Company’s initial fair value estimates related to the various identified intangible assets of Lab Society were determined under

various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method.

These valuation

methods require management to project revenues, operating expenses, working capital investment, capital spending, and cash flows for

the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate.

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

the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and

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

Due to these factors, the

Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as

of June 30, 2022.

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

should be impaired.

Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found

in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

The amount of revenue of Lab Society included in the consolidated statements

of operations from the acquisition date of February 1, 2022 to September 30, 2022 was $ 4.0 million.

of Precision and Cascade

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

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

liability company (“Sinclair”), Mass2Media, LLC, Precision, a Michigan limited liability company;

and each of the equity

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

On October 1, 2021, the Company consummated the

transactions contemplated by the Purchase Agreement.

to the terms and conditions set forth in the Purchase Agreement, (1) Sinclair transferred, to the Company, and the Company purchased

(the “Interest Purchase”) from Sinclair, 100 % of the equity interests of Cascade, a Delaware limited liability company,

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

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

aggregate consideration for the Interest Purchase and the Merger consisted of:

(a) the sum of $30 million in cash, plus consideration

payable to holders of outstanding Sinclair equity awards, subject to certain adjustments for working capital, cash and indebtedness,

payable in connection with the Interest Purchase;

(b) the number of shares of Common Stock, subject to adjustment, equal to the quotient

of (i) $20.0 million divided by (ii) the volume weighted-average price per share of Common Stock on The Nasdaq Capital Market for

the 30 consecutive trading days ending on the Execution Date (the “VWAP Price”), issuable in connection with the Merger;

and (c) the True-Up Buyer Shares, if any (as defined below), issuable in connection with the Merger.

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

Members may become entitled to additional shares of Common Stock (the “True-Up Buyer Shares”) and cash (together with the

True-Up Buyer Shares, the “Aggregate True-Up Payment) based on the eligible net revenues (as defined in the Purchase Agreement)

achieved by the Cascade and Precision businesses during the fiscal year ending December 31, 2021.

However, in no event shall the aggregate

purchase price paid by the Company pursuant to the terms of the Purchase Agreement, taking into account any Aggregate True-Up Payment

in favor of the Sinclair Members, exceed $65.0 million.

On August 10, 2022, the Company entered into a

post-closing adjustment settlement agreement (“Agreement”) with Sinclair.

The Agreement was entered into in connection with

the Purchase Agreement.

According to the Purchase Agreement, $2.5 million was held by the escrow agent as the Adjustment Escrow Amount,

$4.5 million was held by the escrow agent as the Indemnity Escrow Amount and 11,760 Buyer Shares were held by the Company as the Holdback

Buyer Shares.

During the three-month period ended September 30, 2022 , the Company made the final

Aggregate True-up Payment of approximately $5.6 million, of which, $3.3 million was paid in cash and 8,704 Holdback Buyer Shares

were released to the Sinclair Members and the Company received $1.4 million from the Adjustment Escrow Amount, and the remaining $1.1

million balance of the Adjustment Escrow Amount became part of the Indemnity Escrow Amount.

Transaction and related costs, consisting primarily of professional

fees, related to the acquisition, totaled approximately $0 and $63 thousand for the three and nine months ended September 30, 2022, respectively.

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

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

Purchase price consideration

paid to Sinclair Members at the close

Cash contributed

to escrow accounts at the close

for excess net working capital

value of contingent consideration to be achieved

value of total consideration transferred

purchase price, net of cash acquired

Fair value allocation of

purchase price

cash equivalents

expenses and other current receivables

and equipment, net

web costs, net

payable and accrued expenses

lease liabilities, current

lease liabilities, non-current

intangible assets

purchase price

Identified intangible assets consist of trade

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

The fair value of intangible assets and the determination of their

respective useful lives were made in accordance with ASC805 and are outlined in the table below:

Identified intangible assets

developed technology

relationships

identified intangible assets

Company’s initial fair value estimates related to the various identified intangible assets were determined under various valuation

approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method.

These valuation methods require

management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit

over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate.

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

the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and

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

Due to these factors, the

Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as

of June 30, 2022.

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

should be impaired.

Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found

in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

of PurePressure

December 31, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Pure Purchase Agreement”) with

PurePressure, LLC, a Colorado Limited liability company (“PurePressure”), and the members of PurePressure (collectively,

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

Concurrently with the

execution of the Pure Purchase Agreement, the Company consummated the acquisition of all the outstanding equity interests of PurePressure,

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

aggregate consideration for the Acquisition consisted of:

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

cash and indebtedness of PurePressure at closing;

(b) 32,918 shares of Common Stock (the “Buyer Shares”);

and (c) the Earn-out

Consideration (as defined below), to the extent earned.

The Company withheld 8,888 of the Buyer Shares issuable to certain

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

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

During the third

quarter of 2022, 1,456 of the Holdback Buyer Shares were forfeited after the finalization of the net working capital settlement.

The remaining

7,432 of the Holdback Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance with and

subject to the conditions of the Pure Purchase Agreement.

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

Members may become entitled to additional consideration with a value of up to $3.0 million based on the eligible net revenues achieved

by the PurePressure business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 40% will be payable in

cash and the remaining 60% will be payable by issuing shares of Common Stock (collectively, the “Earn-out Consideration”).

Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value

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

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

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

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

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

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

or obligations under the Pure Purchase Agreement.

Transaction and related costs, consisting primarily of professional

fees, related to the acquisition, totaled approximately $ 0 and $ 563 thousand for the three and nine months ended September 30, 2022, respectively.

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

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).

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

Purchase price consideration

closing proceeds

Closing buyer shares

Holdback buyer shares

consideration

working capital adjustments

value of total consideration transferred

purchase price, net of cash acquired

Fair value allocation of

purchase price

cash equivalents

receivable, net

and equipment, net

expenses and other current receivables

Other non-current

payable and accrued expenses

lease liabilities, current

lease liabilities, non-current

lease liabilities, current

lease liabilities, non-current

Notes payable,

intangible assets

purchase price

Identified intangible assets consist of trade

names, technology, and customer relationships.

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

were made in accordance with ASC805 and are outlined in the table below:

Identified intangible assets

developed technology

relationships

identified intangible assets

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

the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and

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

Due to these factors, the

Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as

of June 30, 2022.

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

should be impaired.

Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found

in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

Company’s debt consisted of:

September 30,

Note payable –

Exchange Note

notes payable (1)

unamortized debt discount

net of debt discount

website costs

Note 8 — Debt

The Company’s debt

consisted of:

(In thousands)

Note payable – Exchange Note

Other notes payable (1)

unamortized debt premium (discount)

Total debt, net of debt discount

current portion, net of current unamortized debt discount

Long-term debt

(1) Other notes payable relates

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

Purchase Agreement

On March 14, 2022, the

Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with the Investor, pursuant to

which the Company agreed to issue and sell to the Investor, in a private placement transaction, in exchange for the payment by the Investor

of $65 million, less applicable expenses, as set forth in the Securities Purchase Agreement, a

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

Warrant to purchase up to an aggregate of 688,111 shares of Common Stock.

Exchange Agreement

On August 18, 2022, the

Company reached an agreement with its Investor to amend its existing senior SPA Note and entered into the Exchange Agreement.

to the Exchange Agreement, the Company partially paid $ 35.2 million 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 new Note Exchange Warrant to purchase 1,422,764

shares of Common Stock and modified an existing SPA Warrants to purchase up to an aggregate of 688,111 shares of Common Stock.

exchanged the SPA Warrant for a new warrant for the same number of underlying shares but with a reduced exercise price (the “Modified

Warrants” and, collectively with the Note Exchange Warrant, the “Warrant Liabilities”).

As of September 30, 2022, the

Company had outstanding liability-classified Warrant Liabilities that allows the Investor to purchase 2,110,875 shares of the Company’s

Common Stock.

Additional information regarding the Company’s Warrant Liabilities may be found in Note

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

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

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

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 Investor will be entitled to a cash sweep of 20 % of the proceeds received by the Company

in connection with any equity financing, which will reduce the outstanding principal amount under the Exchange Note.

any time, the Company 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 Investor will also have the option of requiring the Company 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 the Company undergoes 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.

The Exchange Note imposes certain customary affirmative and negative

covenants upon the Company, as well as covenants that restrict the Company and its subsidiaries from incurring any additional indebtedness

or suffering any liens, subject to specified exceptions, restrict the ability of the Company and its subsidiaries from making certain

investments, subject to specified exceptions, restrict the declaration of any dividends or other distributions, subject to specified exceptions, require

the Company not to exceed maximum levels of allowable cash spend while the Exchange Note is outstanding, and require the Company

to maintain minimum amounts of cash on hand.

If an event of default under the Exchange Note occurs, the Investor 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 Investor), plus accrued and unpaid interest, including default interest, which accrues at a rate per year equal to 15 % from the

date of a default or event of default.

As of September 30, 2022, the Company is in compliance with the financial debt covenants associated

with its Exchange Note.

the date the Exchange Note is fully repaid, the Investor 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 the Company or its subsidiaries.

The Modified Warrant

have an exercise price of $ 21.50 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, have 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”) or if shareholder approval for

the full exercise of the Modified Warrant is not received, in which case the Modified Warrant will also be exercisable on a cashless exercise

basis at the Investor’s election.

The Note Exchange Warrant have an exercise price of $ 12.30 per share,

subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, were exercisable upon issuance,

and have a term of five and one-half years from the date of issuance and will be exercisable on a cash basis, unless there is not an effective

registration statement covering the resale of the shares issuable upon exercise of the Warrant (the “Note Exchange Warrant Shares”

and, together with the Modified Warrant Shares, the “Exchange Warrant Shares”) or if shareholder approval for the full exercise

of the Note Exchange Warrant is not received, in which case the Note Exchange Warrant will also be exercisable on a cashless exercise

basis at the Investor’s election.

Until the Company completes a qualified equity financing of at least $ 15.0 million, which requirement

was satisfied with sales under the ATM Program, the Note Exchange Warrant’s exercise price would have been reduced to the extent

the Company issues securities, subject to certain exceptions, for a lower purchase price.

The Note Exchange Warrant also prohibited the

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

terms and/or provisions.

The Warrant Liabilities

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Securities Purchase Agreement

On March 14, 2022, the Company

entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with the Investor, pursuant to which the

Company agreed to issue and sell to the Investor, in a private placement transaction, in exchange for the payment by the Investor of $ 65.0

million, less applicable expenses, as set forth in the Securities Purchase Agreement, a senior secured promissory note in an aggregate

principal amount of $ 65.0 million (the “SPA Note”), and a SPA Warrant to purchase up to an aggregate of 34,406 shares of Common

August 2022 Securities Exchange Agreement

On August 18, 2022, the Company

reached an agreement with the Investor to amend its existing senior SPA Note and entered into the August 2022 Exchange Agreement.

to the August 2022 Exchange Agreement, the Company 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 new Note Exchange Warrant to purchase 71,139 shares of Common Stock and modified an existing SPA Warrants

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

The Company exchanged the SPA Warrant for new August 2022 Warrants.

The Exchange Note is a senior

secured obligation of the Company and ranks senior to all indebtedness of the Company.

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

Investor will be entitled to a cash sweep of 20 % of the proceeds received by the Company in connection with any equity financing, which

will reduce the outstanding principal amount under the Exchange Note.

At any time, the Company

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 Investor will also have the option of requiring the Company 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 the Company undergoes 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.

The Exchange Note imposes

certain customary affirmative and negative covenants upon the Company, as well as covenants that restrict the Company and its subsidiaries

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

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

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

Note is outstanding, and require the Company to maintain minimum amounts of cash on hand.

If an event of default under the Exchange Note

occurs, the Investor 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 Investor), plus accrued and unpaid interest, including default interest, which accrues

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

Until the date the Exchange

Note is fully repaid, the Investor 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 the Company or its subsidiaries.

The 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, have 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”) or if shareholder approval for the full exercise of

the Modified Warrant is not received, in which case the Modified Warrant will also be exercisable on a cashless exercise basis at the

Investor’s election.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

The 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, were exercisable upon issuance, and have a term of five and one-half years from the date of issuance and will be exercisable

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

Warrant (the “Note Exchange Warrant Shares” and, together with the Modified Warrant Shares, the “Exchange Warrant Shares”)

or if shareholder approval for the full exercise of the Note Exchange Warrant is not received, in which case the Note Exchange Warrant

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

Until the Company completed a qualified equity

financing of at least $ 15.0 million, which requirement was satisfied with sales under the ATM Program, the Note Exchange Warrant’s

exercise price would have been reduced to the extent the Company issued securities, subject to certain exceptions, for a lower purchase

The Note Exchange Warrant also prohibited the Company, until following the completion of such qualified equity financing, from

issuing warrants with more favorable or preferential terms and/or provisions.

The August 2022 Warrants

will each provide that in no event will the number of shares of Common Stock issued upon exercise of such warrant result in the Investor’s

3 unchanged sentences

the Company).

Additionally, the Warrant Liabilities could be exercised for more than an aggregate of 530,858 shares of Common Stock unless

and until shareholder approval is obtained, which approval was obtained on October 14, 2022.

following table summarizes the short-term and long-term portions of the Exchange Note as of September 30, 2022:

issuance costs

carrying amount

of September 30, 2022, future minimum principal payments were as follows:

ending December 31 (In thousands),

Modification of Notes Payable

On March 8, 2023, the Company

entered into a Securities Exchange Agreement (the “Exchange Agreement” or “Second Amendment”) with the High Trail

Special Situations LLC.

Pursuant to the Exchange Agreement, at closing the Company will prepay approximately $ 10.3 million in principal

amount under the August 2022 Note and exchange $ 10.0 in principal amount of the remaining balance of the August 2022 Note for a new senior

secured convertible note (the “Convertible Note”) with an original principal amount of $ 10.0 million.

After the closing of

the Exchange Agreement, the August 2022 Note will remain outstanding with a remaining balance of $ 11.7 million (the “Modified August

2022 Note” and, collectively with the Convertible Note, the “Notes”).

This exchange was deemed

to be an extinguishment under ASC 470, as the modified debt added a substantive conversion option that was not inherent in the August

As a result, the Company recognized a loss on the extinguishment of debt of $ 4,619,846 .

Convertible Notes

On March 8, 2023, as a result

of the Exchange Agreement, the Company issued a Convertible Note to High Trail Special Situations

LLC (the “Lender”) with a principal balance of $ 10 million.

The Convertible Note bears a 9.0 % annualized interest rate,

with interest to be paid monthly, in cash, beginning April 1, 2023.

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 the Company in connection with any other equity financing, which will reduce the outstanding principal

amount under the August 2022 Note or the Convertible Note.

At any time, the Company

may prepay all of the Convertible Note by redemption at a price equal to 102.5 % of the then-outstanding principal amount under the Convertible

Note plus accrued but unpaid interest.

The Lender will also have the option of requiring the Company to redeem the Convertible Note (i)

on August 19, 2023 or August 19, 2024 at a price equal to the then-outstanding principal amount under the Convertible Note plus accrued

but unpaid interest, provided that the redemption right on August 19, 2023 will not be exercisable if the Company raises at least $ 8.0

million in gross proceeds from equity offerings prior to such date, or (ii) if the Company undergoes a fundamental change (as defined

below) at a price equal to 102.5 % of the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest.

The Convertible Note will

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

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

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

declaration of any dividends or other distributions, subject to specified exceptions.

If an event of default under the Convertible Note

occurs, the Lender can elect to redeem the Convertible Note for cash equal to (A) 115 % of the then-outstanding principal amount of the

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

which accrues at a rate per annum equal to 15 % from the date of a default or event of default, or, only in connection with certain events

of default, (B) the greater of the amount under clause (A) or the sum of (i) 115 % of the product of (a) the conversion rate in effect

as of the trading day immediately preceding the date that the Lender delivers a notice of acceleration;

(b) the total then outstanding

principal amount under the Convertible Note (in thousands);

and (c) the greater of (1) the highest daily volume weighted average price

(“VWAP”) per share of Common Stock occurring during the fifteen consecutive trading days ending on, and including, the trading

day immediately before the date the Lender delivers such notice and (2) the highest daily VWAP per share of Common Stock occurring during

the fifteen consecutive trading days ending on, and including, the trading immediately before the date the applicable event of default

occurred and (ii) the accrued and unpaid interest on the Convertible Note.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Until the date the Convertible

Note is fully repaid, the Lender will have, 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 the Company or its subsidiaries.

If the Lender elects to convert

the Convertible Note, the conversion price per share will be $ 0.3820 , subject to customary adjustments for certain corporate events.

conversion of the Convertible Note will be subject to certain customary conditions.

The Convertible Note may not be converted into shares

of Common Stock if such conversion would result in the Lender and its affiliates owning an aggregate of in excess of 4.99 % of the then-outstanding

shares of Common Stock, provided that upon 61 days’ notice, such ownership limitation may be adjusted by the Lender, but in any

case, to no greater than 9.99 %.

evaluated the embedded features in accordance with ASC 815-15-25 and the determined embedded features are not required to be bifurcated

and separately measured at fair value.

Interest expense related

to the Convertible Notes described above was $ 170,974 for the three months ended March 31, 2023.

Accrued interest totaled $ 170,974 as

of March 31, 2023.

The following table summarizes

the short-term and long-term portions of the Exchange Note as of March 31, 2023:

(In thousands)

Notes payable, net

Unamortized premium

Net carrying amount

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

As of March 31, 2023, future

minimum payments were as follows:

Years ending December 31 (In thousands),

Remaining 2023

and thereafter

future payments

Protection Program Loan

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

May 2020, the Company entered into a PPP Loan with Bank of America pursuant to the PPP under the CARES Act administered by the SBA.

Company received total proceeds of approximately $ 779 thousand from the unsecured PPP Loan, which was originally scheduled to mature

on May 7, 2022 .

The SBA denied the Company’s submission to have the remaining $ 779 thousand PPP Loan forgiven.

On June 23, 2022,

the Company received a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and bears interest at a rate of

1.00 % per year.

The PPP loan is payable in 34 equal combined monthly principal and interest payments of approximately $ 24 thousand that

commenced on August 7, 2022.

breakdown of PPP Loan balances by current and non-current as of September 30, 2022 and December 31, 2021 were as follows:

Total future payments

Paycheck Protection Program Loan

Paycheck Protection Program Loans under

the Coronavirus Aid, Relief, and Economic Security Act

In May 2020, the Company

entered into a PPP Loan with Bank of America pursuant to the PPP under the CARES Act administered by the SBA.

The Company received total

proceeds of approximately $ 779 thousand from the unsecured PPP Loan, which was originally scheduled to mature on May 7, 2022 .

applied for forgiveness on the $ 779 thousand of PPP loan, but forgiveness was denied by the SBA.

On June 23, 2022, the Company received

a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and the loan 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

The breakdown of PPP Loan

balances by current and non-current as of March 31, 2023 and December 31, 2022 were as follows:

(In thousands)

Balance Sheet

September 30,

PPP Loan, current

Long-term debt,

Loan, non-current

Long-term debt, current

PPP Loan, non-current

Long-term debt,

PPP Loan outstanding

part of the acquisition of PurePressure, $ 159 thousand of debt remained outstanding from a standard SBA loan as of December 31, 2021.

This debt has subsequently been paid as a part of the PurePressure acquisition.

determination if any arrangement contained a lease at its inception was done based on whether or not the Company has the right to control

the asset during the contract period.

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

Leases with a lease term of 12 months or less at inception were not reflected in the Company’s balance sheet and those lease

costs are expensed on a straight-line basis over the respective term.

Leases with a term greater than 12 months were reflected as non-current

right-of-use assets and current and non-current lease liabilities in the Company’s consolidated balance sheets.

As the implicit interest rate in its leases was generally not known,

the Company’s used its incremental borrowing rate as the discount rate for purposes of determining the present value of its lease

At September 30, 2022 and December 31, 2021, the Company’s weighted-average discount rate utilized for its leases was

7.27 % and 7.16 %, respectively.

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

Company had several non-cancelable finance leases for machinery and equipment.

The Company’s finance leases have remaining lease

terms of one year to five years.

The Company had several non-cancelable operating leases for corporate

offices, warehouses, showrooms, research and development facilities and vehicles.

The Company’s leases have remaining lease terms

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

Total PPP Loan outstanding

Note 9 — Leases

The determination if any

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

the contract period.

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

a lease term of 12 months or less at inception were not reflected in the Company’s balance sheet and those lease costs are expensed

on a straight-line basis over the respective term.

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

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

As the implicit interest

rate in its leases was generally not known, the Company’s used its incremental borrowing rate as the discount rate for purposes

of determining the present value of its lease liabilities.

At March 31, 2023, the Company’s weighted-average discount rate utilized

for its leases was 7.33 %.

When a contract contained

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

The Company had several non-cancelable

finance leases for machinery and equipment.

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

The Company had several non-cancelable

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

The Company’s leases

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

Some leases include payment for common

area maintenance associated with the property.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

The Company had several non-cancellable

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

The Company’s leases

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

Some leases include payment for communal

area maintenance associated with the property.

information on the Company’s operating and financing lease activity is as follows:

September 30,

Operating lease

of right-of-use assets

on lease liabilities

Balance Sheet

September 30,

Additional information on the Company’s

operating and financing lease activity was as follows:

Three months ended

(In thousands)

Operating lease cost

Finance lease cost:

Amortization of right-of-use assets

Interest on lease liabilities

Short-term lease cost

Total lease cost

Weighted-average remaining lease term – operating leases

Weighted-average remaining lease term – finance leases

Weighted-average discount rate – operating leases

Weighted-average discount rate – finance leases

(In thousands)

Balance Sheet Location

Right-of-use assets, net

Right-of-use, net

Finance lease assets

Property and equipment, net

Operating lease liabilities, current

Accrued expenses and other current liabilities

Operating lease liabilities, current

Operating lease liabilities, non-current

Total operating lease liabilities

Finance lease liabilities, current

Accrued expenses and other current liabilities

Finance lease liabilities, non-current

Other non-current liabilities

lease liabilities

Weighted-average

remaining lease term – operating leases

Weighted-average

remaining lease term – finance leases

Weighted-average

discount rate – operating leases

Weighted-average

discount rate – finance leases

of operating and finance lease liabilities as of September 30, 2022 are as follows:

ending December 31 (In thousands),

Total finance lease liabilities

Maturities of operating and finance lease liabilities

as of March 31, 2023 are as follows:

Years ending December 31 (In thousands),

Operating lease

Finance lease

Remaining 2023

minimum lease payments

imputed interest

lease liabilities

11 — Convertible Promissory Notes

On January 11, 2021, the Company’s Board of Directors and shareholders

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

Company on dates between August 2020 and November 2020.

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

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

of fully paid and non-assessable shares of Common Stock, at a conversion price of $ 77.20 per share.

the original conversion feature was bifurcated from the host instrument, the Company determined that the amended conversion feature would

not require bifurcation.

Since the accounting for the conversion feature changed because of the amendment, the Company applied extinguishment

accounting pursuant to its accounting policy.

the Company recognized a gain on extinguishment of $ 2.7 million in connection with the derecognition of the net carrying amount of the

extinguished debt of $ 19.6 million (inclusive of $ 13.1 million of principal, $ 7.1 million of derivative liabilities, less $ 587 thousand

of debt discount) and the recognition of the $ 16.9 million fair value of the new convertible notes (including the same principal amount

of $ 13.1 million plus the $ 3.8 million fair value of the beneficial conversion feature).

February 1, 2021, in conjunction with the closing of the Company’s IPO, the Convertible Notes in the aggregate principal amount

of $ 13.1 million were converted into 169,707 shares of Common Stock at the election of the Company at a conversion price of $ 77.20 per

12 — Stockholders’ Equity

July 11, 2022, the Company increased its authorized number of shares of Common Stock to 103,000,000 , consisting of:

100,000,000 shares

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

Total minimum lease payments

Less imputed interest

Total lease liabilities

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 10 — Stockholders’ Equity

On July 11, 2022, the Company

increased its authorized number of shares to 8,000,000 , consisting of:

5,000,000 shares of Common Stock, par value $ 0.001 per share and

3,000,000 shares of preferred stock, par value $ 0.001 per share.

On January 9, 2020, the Company designated 105,000 shares of the 3,000,000

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

A Convertible Preferred Stock

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

price of $ 6.0 million.

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

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

of Conversion Formulas

January 11, 2021, the Company’s Board of Directors approved the amendment to the conversion formula of the Series A Preferred Stock

and Convertible Notes.

After the amendment:

● the Series A Preferred Stock is convertible, at any time after the issuance or immediately prior to the closing of a public transaction, into Common Stock in an amount of shares equal to (i) the product of the Series A Preferred Stock original price plus accrued but unpaid dividends on the shares being converted, multiplied by the number of shares of Series A Preferred Stock being converted, divided by (ii) a conversion price of $77.20 per share (after the reverse split taking effect);

immediately prior to the consummation of a public transaction, the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest shall convert into a number of fully paid and non-assessable shares of Common Stock equal to the quotient of (i) the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest thereunder immediately prior to such public transaction divided by (ii) a conversion price of $77.20 per share (after the reverse split taking effect).

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

Public Offering

February 1, 2021, the Company completed an IPO for the sale of 540,000 shares of Common Stock at a price of $ 100.00 per share.

also granted the underwriters:

(a) a 45-day option to purchase up to 81,000 additional shares of Common Stock on the same terms and conditions

for the purpose of covering any over-allotments in connection with the IPO, and (b) warrants to purchase 16,200 shares of Common Stock

(equal to 3 % of the aggregate number of shares of Common Stock issued in the IPO) at an exercise price of $ 125.00 per share (which is

equal to 125 % of the IPO price).

Subsequently, the underwriters exercised the over-allotment option, and on February 4, 2021, the Company

closed on the sale of an additional 81,000 shares of Common Stock for a price of $ 100.00 per share and granted to the underwriters warrants

to purchase 2,430 additional shares of Common Stock (equal to 3 % of the amount of shares issued as part of the exercised of the over-allotment

option) at an exercise price of $ 125.00 per share.

The exercise of the over-allotment option brought the total number of shares of Common

Stock sold by the Company in connection with the IPO to 621,000 shares and the total net proceeds received in connection with the IPO

to approximately $ 57.0 million, after deducting underwriting discounts and estimated offering expenses.

prior to the closing of the Company’s IPO, all outstanding shares of Series A Preferred Stock and Convertible Notes were converted

into 137,304 shares of Common Stock and 169,707 shares of Common Stock, respectively, at a conversion price of $ 77.72 per share.

Public Offering

February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) for the sale of 555,556

shares of Common Stock for a price of $ 135.00 per share.

The Company also granted the underwriters:

(a) a 45-day option to purchase up

to 83,333 additional shares of Common Stock on the same terms and conditions for the purpose of covering any over-allotments in connection

with the February Offering, and (b) warrants to purchase 16,667 shares of Common Stock (equal to 3 % of the aggregate number of shares

of Common Stock issued in the February Offering) at an exercise price of $ 168.75 per share (which is equal to 125 % of the February Offering).

Subsequently, the underwriters exercised the over-allotment option, and on March 22, 2021, the Company closed on the sale of an additional

83,333 shares of Common Stock for a price of $ 135.00 per share and granted to the underwriters warrants to purchase 2,500 additional

shares of Common Stock (equal to 3 % of the amount of shares issued as part of the exercised of the over-allotment option) at an exercise

price of $ 168.75 per share.

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

Company in connection with the February Offering to 638,889 shares and the total net proceeds received in connection with the February

Offering to approximately $ 80.0 million, after deducting underwriting discounts and estimated offering expenses.

September 14, 2021, the Company entered into a letter agreement and waiver (the “Letter Agreement”), to amend the terms of

its underwriting agreement with the representative of the underwriters in the IPO.

Pursuant to the Letter Agreement, the representative

agreed to waive the right of first refusal included in the underwriting agreement in consideration of a cash payment to the representative

of $ 2.4 million and the right to participate as a co-manager with 10 % of the economics with respect to the Company’s next public

offering of securities, payable in cash upon the closing of such offering.

On January 25, 2022, the Company entered into a Securities Purchase

Agreement (the “Securities Agreement”) with an institutional investor and other accredited investors for the sale by the Company

of 245,035 shares (the “SA Shares”) of Common Stock, pre-funded warrants (the “Pre-Funded Warrants”) to purchase

up to an aggregate of 157,064 shares of Common Stock and warrants to purchase up to an aggregate of 301,575 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 $68.00 per share.

to certain ownership limitations, the SA Warrants are exercisable six months from issuance.

Each Pre-Funded Warrant was exercisable into one share

of Common Stock at a price per share of $0.001 (as adjusted from time to time in accordance with the terms thereof).

Warrant is exercisable into one share of Common Stock at a price per share of $74.80 (as adjusted from time to time in accordance

with the terms thereof) and will expire on the fifth anniversary of the initial exercise date.

The institutional investor that received

the Pre-Funded Warrants fully exercised such warrants in March 2022.

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

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

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

$ 69.00 per share.

gross proceeds to the Company from the private placement were approximately $ 27.3 million, before deducting the placement agent’s

fees and other offering expenses, and excluding the proceeds, if any, from the exercise of the SA Warrants.

of Common Stock in Connection with Acquisitions

October 1, 2021, the Company issued an aggregate of 66,640 shares of its Common Stock to the Precision and Cascade shareholders

in connection with the Company’s acquisition of Precision and Cascade.

On August 17, 2022, the Company issued an additional 8,704 shares

of its Common Stock to the Precision and Cascade shareholders in connection with the finalization of the net working capital settlement.

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

On March 1, 2023, the Company further increased its authorized number

of shares to 13,000,000 , consisting of:

10,000,000 shares of Common Stock, par value $ 0.001 per share and 3,000,000 shares of preferred

stock, par value $ 0.001 per share.

Private Placement

On January 25, 2022, the

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

accredited investors for the sale by the Company of 12,253 shares (the “SA Shares”) of 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 are exercisable six months from issuance.

Each Pre-Funded Warrant was 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, Chairman and

Chief Executive Officer (“CEO”) of the Company, and Stuart Wilcox, who formerly served as our Chief Operating Officer, and

at the time he was a member of the Company’s Board of Directors, participated in the private placement on essentially the same terms

as other investors, except for having a combined purchase price of $ 1,380.00 per share.

The gross proceeds to the

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

expenses, and excluding the proceeds, if any, from the exercise of the SA Warrants.

Issuance of Common Stock in

Connection with Acquisitions

On October 1, 2021, the Company

issued an aggregate of 3,332 shares of its Common Stock to the Precision and Cascade shareholders in connection with the Company’s

acquisition of Precision and Cascade.

On August 17, 2022, the Company issued an additional 435 shares of its Common Stock to the Precision

and Cascade shareholders for contingent liabilities.

On December 31, 2021, the

Company issued an aggregate of 1,202 shares of its Common Stock to the PurePressure shareholders in connection with the Company’s

acquisition of PurePressure.

On January 31, 2023, the remaining 372 Holdback Buyer Shares were released, including 6 Holdback Buyer Shares

that were withheld to cover a tax indemnification claim in accordance with the Purchase Agreement.

Additional information regarding the

PurePressure Holdback Buyer Shares may be found in Note 8 – Business Combinations, included elsewhere in the notes to the consolidated

financial statements.

December 31, 2021, the Company issued an aggregate of 24,030 shares of its Common Stock to the PurePressure shareholders in connection

with the Company’s acquisition of PurePressure.

Refer to Note 8 – Business Combinations,

included elsewhere in the notes to the consolidated financial statements.

February 1, 2022, the Company issued an aggregate of 29,793 shares of its Common Stock to the Lab Society shareholders in connection

with the Company’s acquisition of Lab Society.

Refer to Note 8 – Business Combinations,

included elsewhere in the notes to the consolidated financial statements.

13 — Stock-Based Compensation and Employee Benefit Plans

On February 1, 2022, the

Company issued an aggregate of 1,491 shares of its Common Stock to the Lab Society shareholders in connection with the Company’s

acquisition of Lab Society.

On April 28, 2023, the Company issued the remaining 499 Holdback Buyer Shares to the Lab Society Owners in

accordance with the Lab Society Merger Agreement.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

At The Marketing Offering

On October 18, 2022, the

Company entered into the ATM Program with the Agent pursuant to which it may issue and sell, from time to time, shares of its 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 the Company to sell shares of Common Stock pursuant to specific parameters defined by the Company as well as those

defined by the SEC and the ATM Program agreement.

As of December 31, 2022, the Company sold 306,628 shares of Common Stock, under the

ATM at an average price of $ 50.85 per share, resulting in gross proceeds of $ 15.6 million, and net proceeds of $ 15.0 million after commissions

and fees to the Agent totaling $ 468 thousand and legal fees totaling $ 75 thousand.

$ 3.0 million of the proceeds under the ATM Program

were used to repay amounts due to the Investor under the Exchange Note.

The Company used 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, the Company is no longer

eligible to utilize the registration statement on Form S-3 relating to the ATM Program, and does not anticipate any further sales under

the ATM Program in the foreseeable future.

Confidentially Marketed Public Offering

On December 16, 2022, the

Company issued 594,232 shares of its Common Stock, Pre-Funded 2022 Warrants to purchase 75,000 shares of its Common Stock and accompanying

December 2022 Warrants to purchase 1,338,471 shares of the Company’s Common Stock.

The Company received net proceeds from the Offering

of approximately $ 8.2 million, after deducting underwriting discounts and commissions and estimated expenses.

The Company intends 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.

The Pre-Funded 2022 Warrants

were exercisable immediately upon issuance at an exercise price of $ 0.001 per share and do not have an expiration date.

The December 2022

Warrants were exercisable immediately and have a term of exercise equal to five years from the initial exercise date at an exercise price

of $13.00 per share.

The offering price for the securities was $ 13.00 per share (or $ 12.98 for each Pre-Funded 2022 Warrant).

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 the Company’s Common Stock then outstanding (subject to the right of the holder to increase or

decrease such beneficial ownership limitation upon notice to the Company, provided that such limitation cannot exceed 9.99 %) and provided

that any increase in the beneficial ownership limitation shall not be effective until the sixty-first day after such notice is delivered.

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 the Company’s own stock.

As of December 31, 2022,

the Company valued the December 2022 Warrants using the Black-Scholes option-pricing model and determined the fair value at $ 5.9 million.

The key inputs to the valuation model included the annualized volatility of 98.0 % and the expected term of about 5 years.

Raymond Chang, Chairman and

CEO, participated in the Offering and purchased 115,385 shares of Common Stock and 230,769 December 2022 Warrants for an aggregate purchase

price of approximately $ 1.5 million.

Additional information regarding

the Company’s December 2022 Warrants may be found in Note 1 – Overview, Basis

of Presentation, and Significant Accounting Policies and Note 4 – Fair Value Measures, included

elsewhere in the notes to the consolidated financial statements.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 11 — Stock-Based

Compensation and Employee Benefit Plans

2022 Omnibus Equity Incentive Plan

April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the

2022 Omnibus Equity Incentive Plan (the “2022 Plan”), which replaced the 2020 Stock Option Plan (the “2020 Plan”).

The 2022 Plan provides for the grant of stock options, stock appreciation right awards, performance share awards, restricted stock awards,

restricted stock unit awards, other stock-based awards and cash-based awards.

The aggregate number of shares of Common Stock that may

be reserved and available for grant and issuance under the 2022 Plan is 529,665 shares, which includes the 200,000 shares authorized

under the 2022 Plan, plus the rollover of 329,665 issued and outstanding awards under the 2020 Plan.

Shares will be deemed to have been

issued under the 2022 Plan solely to the extent actually issued and delivered pursuant to an award.

If any award granted under the 2020

Plan or the 2022 Plan expires, is canceled, or terminates unexercised or is forfeited, the number of shares subject thereto is again

available for grant under the 2022 Plan.

The 2022 Plan shall continue in effect, unless sooner terminated, until the tenth anniversary

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

The Company’s stock option

compensation expense was $ 1.6 million and $ 941 thousand for the three months ended September 30, 2022 and 2021, respectively, and

$ 3.5 million and $ 4.0 million for the nine months ended September 30, 2022 and 2021, respectively.

There was $ 4.3 million

of total unrecognized compensation cost related to unvested options granted under the Company’s options plans as of September 30,

This stock option expense will be recognized through 2025.

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.

No stock options were granted during the nine months

ended September 30, 2022.

following table summarizes the Company’s assumptions used in the valuation of options granted during the year ended December 31,

Risk-free interest rate

1.10 % – 1.63 %

Dividend yield

0% Expected life (Years)

Forfeiture rate

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

and are fully transferable.

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

stock price volatility.

Because the Company’s stock options and warrants have characteristics different from those of its traded

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

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

The risk-free interest

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

expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s current expectation

of future action surrounding dividends.

On April 29, 2022, the Company’s

Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Omnibus Equity Incentive Plan

(the “2022 Plan”), which replaced the 2020 Stock Option Plan (the “2020 Plan”).

The 2022 Plan provides for the

grant of stock options, stock appreciation right awards, performance share awards, restricted stock awards, restricted stock unit awards,

other stock-based awards and cash-based awards.

The aggregate number of shares of Common Stock that may be reserved and available for

grant and issuance under the 2022 Plan is 26,483 shares, which includes the 10,000 shares authorized under the 2022 Plan, plus the rollover

of 16,483 issued and outstanding awards under the 2020 Plan.

Shares will be deemed to have been issued under the 2022 Plan solely to the

extent actually issued and delivered pursuant to an award.

If any award granted under the 2020 Plan or the 2022 Plan expires, is canceled,

terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2022 Plan.

Plan shall continue in effect, unless sooner terminated, until the tenth anniversary of the date on which it is adopted by the Board of

As of March 31, 2023, there were 13,123 shares of Common Stock available to be granted under the Company’s 2022 Plan.

Company’s stock compensation expense was $ 0.9 million and $ 4.3 million for the three months ended March 31, 2023 and

2022, respectively.

Stock Options

Stock options granted under

the Company’s 2022 Plan are generally non-qualified and are granted with an exercise price equal to the market price of the Company’s

Common Stock on the date of grant.

The fair value of each option grant was estimated on the date of the 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.

No stock options were granted during the three months ended March 31, 2023.

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.

The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the expected

The expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s current

expectation of future action surrounding dividends.

The Company calculates the expected volatility of the stock price based on the corresponding

1 unchanged sentence

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

arriving at stock-based compensation expense, the Company estimates the number of stock-based awards that will be forfeited due to employee

The Company’s forfeiture assumption is based primarily on its employee turnover historical experience.

If the actual

forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate,

which will result in a decrease to the expense recognized in the Company’s financial statements.

If the actual forfeiture rate

is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result

in an increase to expense recognized in the Company’s financial statements.

The expense the Company recognizes in future periods

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

of September 30, 2022, there were 64,688 shares of Common Stock available to be granted under the Company’s 2022 Plan.

Option Activity

following table presents option activity under the Company’s stock option plans for the nine months ended September 30, 2022 and

the year ended December 31, 2021:

thousands, except share and per share data)

Options outstanding at December

Options outstanding at December 31, 2021

Options outstanding at

September 30, 2022

In arriving at stock-based

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

The Company’s

forfeiture assumption is based primarily on its employee turnover historical experience.

If the actual forfeiture rate is higher than

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

to the expense recognized in the Company’s 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 the Company’s consolidated financial statements.

The expense the Company recognizes in future periods will be affected by changes

in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

The following table presents

option activity under the Company’s stock option plans for the three months ended March 31, 2023 and 2022:

(In thousands, except share and per share data)

Weighted-Average

Exercise Price

Aggregate Intrinsic Value

Options outstanding at January 1, 2023

Options outstanding at March 31, 2023

Options vested and exercisable as of March 31, 2023

Options vested and expected to vest as of March 31, 2023

As of March 31, 2023, total

unrecognized compensation expense related to unvested options under the Company’s 2022 Plan was $ 2.4 million, which is expected

to be recognized over a weighted average period of 0.95 years.

The following table summarizes information about

options vested and exercisable at March 31, 2023:

Options Vested and Exercisable

as of September 30, 2022

vested and expected to vest as of September 30, 2022

The following table presents restricted stock unit activity under the

2022 Plan for the nine months ended September 30, 2022:

Number of Options

Weighted-Average Remaining Contractual Life (Years)

Weighted-Average

Exercise Price

The following table summarizes information about

options expected to vest after March 31, 2023:

Options Vested and Expected to Vest

Number of Options

Weighted-Average Remaining Contractual Life (Years)

Weighted-Average

Exercise Price

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Restricted Stock Units

Under the 2022 Plan, the Company may grant restricted

stock units to employees, directors and officers.

The restricted stock units granted generally vest equally over periods ranging from

one to three years.

The fair value of restricted stock units is determined based on the closing market price of the Company’s Common

Stock on the date of grant.

Compensation expense related to the restricted stock units is recognized using a straight-line attribution

method over the vesting period.

Number of Shares

Weighted-Average

Grant Date Fair Value

Unvested at December 31, 2022

Unvested at September 30, 2022

Unvested at March 31, 2023

As of March 31, 2023, total

unrecognized compensation expense related to unvested restricted stock units was $ 1.2 million, which is expected to be recognized over

a weighted average period of 2.20 years.

2022 Employee Stock Purchase Plan

April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the

2022 Employee Stock Purchase Plan ("ESPP").

The Company has initially reserved 50,000 shares of Common Stock for

issuance under the ESPP.

On September 30, 2022, 50,000 shares were available for future issuance.

the ESPP, eligible employees are granted options to purchase shares of Common Stock at the lower of 85 % of the fair market value

of the stock at the time of grant or 85 % of the fair market value at the time of exercise.

Options to purchase shares are granted

twice yearly on or about August 1 and February 1 and are exercisable on or about the succeeding January 31 and July 31, respectively,

of each year.

No participant may purchase more than $ 25 thousand worth of Common Stock annually.

No Common Stock was granted under the

2022 ESPP during the nine months ended September 30, 2022.

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

All full-time U.S.

On April 29, 2022, the Company’s

Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Employee Stock Purchase Plan

The Company has initially reserved 2,500 shares of Common Stock for issuance under the ESPP.

On March 31, 2023,

2,500 shares were available for future issuance.

Under the ESPP, eligible

employees are granted options to purchase shares of Common Stock at the lower of 85 % of the fair market value of the stock at the time

of grant or 85 % of the fair market value at the time of exercise.

Options to purchase shares are granted twice yearly on or about August

1 and February 1 and are exercisable on or about the succeeding January 31 and July 31, respectively, of each year.

No participant may

purchase more than $ 25 thousand worth of Common Stock annually.

No Common Stock was granted under the 2022 ESPP during the three months

ended March 31, 2023.

Employee Benefit Plan

The Company maintains an

employee’s savings and retirement plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”).

All full-time

employees become eligible to participate in the 401(k) Plan.

The Company’s contribution to the 401k

Plan is discretionary.

During the three and nine months ended September 30, 2022 and 2021, the Company did not contribute to the 401k

14 — Stock Warrants

following table presents all warrant activity of the Company for the nine months ended September 30, 2022 and the year ended December

Warrants outstanding at December 31, 2020

The Company’s contribution to the 401(k) Plan is discretionary.

During the three months ended March 31, 2023, the Company did not contribute to the 401(k) Plan.

Note 12 — Stock Warrants

The following tables present all warrant activity

of the Company for the three months ended March 31, 2023 and 2022:

Weighted-Average

Exercise Price

Warrants outstanding at December 31, 2022

Warrants outstanding at September 30, 2022

The Company received proceeds from the exercise of warrants of less

than $ 1 thousand and $ 4 thousand for the three months ended September 30, 2022 and September 30, 2021, respectively ,

and $ 2 thousand and $ 9 thousand for the nine months ended September 30, 2022 and 2021, respectively.

15 — Income Taxes

Company’s effective income tax rate was 0.0 % for both the three months ended September 30, 2022 and 2021.

The income tax benefit

was $ 0 for both the three months ended September 30, 2022 and 2021.

The Company’s effective income tax rate was 0.2 % and 0.0 %

for the nine months ended September 30, 2022 and 2021, respectively.

The income tax benefit was $ 262 thousand and $0 for the nine

months ended September 30, 2022 and 2021, respectively.

The difference between the Company’s effective tax rates for the 2022 and

2021 periods and the U.S.

statutory tax rate of 21 % was primarily due to a valuation allowance recorded against the Company’s deferred

The change in the income tax benefit for the nine months ended September 30, 2022 compared to the nine months ended September

30, 2021 was primarily due to a discrete income tax benefit of $ 200 thousand recorded during the first quarter of 2022, which is attributable

to a non-recurring partial release of the Company's U.S.

valuation allowance as a result of the Lab Society acquisition.

Additionally,

as a result of the goodwill impairment charge recorded during the second quarter of 2022, the Company recognized a small benefit of $ 62

thousand related to the reversal of its opening deferred tax liability on indefinite-lived assets.

16 — Net Loss Per Share

loss per share calculations for all periods have been adjusted to reflect the Company’s reverse stock splits.

Net loss per share

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

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

Net loss per share,

assuming dilution, is calculated using the weighted-average number of common shares outstanding and the dilutive effect of all potentially

dilutive securities, including Common Stock equivalents and convertible securities.

Net loss per share, assuming dilution, is equal to

basic net loss per share because the effect of dilutive securities outstanding during the periods, including options and warrants computed

using the treasury stock method, is anti-dilutive.

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

September 30,

thousands, except share and per share data)

loss attributable to Agrify Corporation

$ ( 148,551 )

dividend attributable to Preferred A Stockholders

loss available for Common Stockholders

$ ( 148,551 )

Warrants outstanding at March 31, 2023

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Weighted-Average

common shares outstanding – basic and diluted (1)

loss per share attributable to Common Stockholders – basic and diluted (1)

Periods presented have been

adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021 and the 1-for-10 reverse stock split on October 18,

Additional information regarding the reverse stock splits may be found in Note 1 –

Overview, Basis of Presentation and Significant Accounting Policies , included elsewhere

in the notes to the condensed consolidated financial statements.

Company’s potential dilutive securities, which include stock options and warrants, have been excluded from the computation of diluted

Exercise Price

Warrants outstanding at December 31, 2021

Warrants outstanding at March 31, 2022

The Company received proceeds from the exercise

of warrants of $ 0 and $ 1 thousand for the three months ended March 31, 2023 and 2022, respectively.

Note 13 — Income Taxes

The Company’s quarterly

provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items within the period presented.

determine the annual effective tax rate, the Company estimates both the total income (loss) before income taxes for the full year and

the jurisdictions in which that income (loss) is subject to tax.

The actual effective tax rate for the full year may differ from these

estimates if income (loss) before income taxes is greater than or less than what was estimated or if the allocation of income (loss) to

jurisdictions in which it is taxed is different from the estimated allocations.

The provision for income

taxes represents Federal and state and local income taxes.

The effective rate differs from statutory rates due to the effect of certain

nondeductible expenses.

Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including,

but not limited to, the geographical mix of earnings, enacted tax legislation, and state and local income taxes.

In addition, changes

in judgment from the evaluation of new information resulting in the recognition de-recognition or re-measurement of a tax position taken

in a prior annual period is recognized separately in the quarter of the change.

Tax contingencies are recorded,

if needed, to address potential exposure involving tax positions the Company has taken that could be challenged by tax authorities.

potential exposures could result from applications of various statutes, rules, regulations and interpretations.

Any estimates of tax contingencies

contain assumptions and judgments about potential actions by taxing jurisdictions.

Any interest and penalties related to uncertain tax

positions would be included as part of the income tax provision.

The Company’s conclusions regarding uncertain tax positions may

be subject to review and adjustment at a later date based upon ongoing analysis of or changes in tax laws, regulations and interpretations

thereof as well as other factors.

Note 14 — Net Loss Per Share

Net loss per share calculations

for all periods have been adjusted to reflect the Company’s reverse stock splits.

Net loss per share was calculated based on the

weighted-average number of the Company’s Common Stock outstanding.

Basic net loss per share

is calculated using the weighted-average number of Common Stock outstanding during the periods.

Diluted net loss per share is computed

by giving effect to all potential shares of Common Stock, including outstanding stock options, stock related to unvested restricted stock

units, and outstanding warrants to the extent dilutive.

Net loss per share, assuming dilution, is equal to basic net loss per share because

the effect of dilutive securities outstanding during the periods, including options and warrants computed using the treasury stock method,

is anti-dilutive.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

The components of basic and diluted net loss per

share were as follows:

Three months ended

(In thousands, except share and per share data)

Net income (loss) attributable to Agrify Corporation

Net income (loss) available for common shareholders

Weighted-average common shares outstanding – basic

Weighted-average common shares outstanding – diluted

Net income (loss) per share attributable to Common Stockholders – basic

Net income (loss) per share attributable to Common Stockholders – diluted

The Company’s potential

dilutive securities, which include stock options, restricted stock units, and warrants, have been excluded from the computation of diluted

net loss per share as the effect would be to reduce the net loss per share.

2 unchanged sentences

The Company excluded

the following potential common shares equivalents presented based on amounts outstanding at each period end, from the computation of

diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive

September 30,

Shares subject to outstanding Common Stock options

the following potential Common Stock equivalents presented based on amounts outstanding at each period end, from the computation of diluted

net loss per share attributable to Common Stockholders for the periods indicated because including them would have had an anti-dilutive

Three months ended

Shares subject to outstanding stock options

Shares subject to unvested restricted stock units

Shares subject to outstanding warrants

17 — Commitments and Contingencies

and Weinstein Matter

January 5, 2021, the Company received a demand letter from Nicholas Cooper and Richard Weinstein, (two of the Company’s former

employees), and one of Mr.

Cooper’s affiliated entities, asserting that Messrs.

Cooper and Weinstein were entitled to compensation

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

The demand letter asserts that Messrs.

Cooper and Weinstein are due certain sales commissions under their applicable bonus plan, equity

earn-outs based on certain sales targets, and various equity purchases through the Company’s employee stock ownership plan.

demand letter also asserts various employment claims, including but not limited to, statutory wage withholding violations, wrongful termination,

breach of contract, breach of the duty of good faith and fair dealing, fraud in the inducement, promissory estoppel, minority shareholder

oppression, breach of fiduciary duty, unjust enrichment, and violations of state and federal securities laws.

January 19, 2021, Messrs.

Cooper and Weinstein filed a lawsuit against the Company in the United States District Court for the Western

District of Washington, alleging the same claims made in their demand letter based on the facts disclosed above.

The plaintiffs are seeking

relief in the form of monetary damages in an amount to be determined.

Cooper and Weinstein are also seeking relief in the form

of reinstatement and Mr.

Weinstein is seeking rescission of his previously executed Release of Claims Agreement.

On March 10, 2021, the

Company moved to dismiss all Messrs.

Cooper and Weinstein’s claims, asserting that the claims failed to allege legal grounds for

On May 12, 2021, a Magistrate issued a preliminary Report and Recommendation, which recommended dismissal of certain of Messrs.

Cooper and Weinstein’s claims, and recommended others for additional factual discovery.

On July 27, 2021, a District Judge entered

an order partially adopting the Report and Recommendation, dismissing one claim with prejudice, dismissing a second claim with leave

to amend, and permitting the remaining claims to proceed.

Additionally,

on July 29, 2021, the Company filed a separate arbitration in Boston, Massachusetts against Messrs.

Cooper and Weinstein, in which the

Company alleges that Messrs.

Cooper and Weinstein were liable for certain conduct during the time they were TriGrow employees, including

breach of fiduciary duty, unjust enrichment, usurpation of corporate opportunity, conversion, fraudulent concealment, and false representation.

on July 29, 2021, the Company submitted a claim for indemnification to certain legacy TriGrow Systems, LLC.

shareholders.

for indemnification relates to conduct by Messrs.

Cooper and Weinstein during the time they were TriGrow employees.

During the third

quarter of 2022, the Company and Messrs.

Cooper and Weinstein settled all claims and potential claims between themselves and any affiliated

entities by the Company to Messrs.

Cooper and Weinstein, and a related entity for approximately $ 800 thousand.

States Customs Seizure Matter

June 28, 2022, the Company was notified by the United States Customs and Border Protection (“CBP”) that they seized 123 cartons

of horticulture grow lights appraised at approximately $ 623 thousand at the Port of Savannah, Georgia based on CBP’s interpretation

of certain importation laws which prohibit the importation of certain goods that are subject to health and safety legal restrictions,

including a prohibition on the importation of drug paraphernalia, in accordance with 21 U.S.C.

The Company is currently

disputing the seizure.

The Company does not believe these claims have any merit and intends to vigorously defend its position.

Agreement with Mack Molding Co.

December 2020, the Company entered into a five-year supply agreement with Mack Molding Co.

(“Mack”) pursuant to which Mack

will become a key supplier of VFUs.

In February 2021, the Company placed a purchase order with Mack amounting to approximately $ 5.2 million

towards the initial production of VFUs during 2021.

In September 2021, the Company increased the purchase order with Mack to approximately

$ 11.5 million towards production of VFUs during 2021 and 2022.

The Company believes the supply agreement with Mack will provide the Company

with increased scaling capabilities and the ability to meet the potential future demand of its customers more efficiently.

agreement contemplates that, following an introductory period, the Company will negotiate a minimum percentage of the VFU requirements

that the Company will purchase from Mack each year based on the agreed-upon pricing formula.

The introductory period is not time-based

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

a certain minimum requirements percentage.

The Company believes this approach will result in both parties making a more informed decision

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

Agreements with Related Party

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

(“Bluezone”) for distribution

rights to the Bluezone products with certain exclusivity rights.

The agreement requires minimum purchases amounting to $ 480 thousand

and $ 600 thousand for the first and second contract anniversary years.

The agreement auto-renews for successive one-year periods unless

earlier terminated.

In March 2021, the Company notified Bluezone of the non-renewal of the agreement which means it ended on May 31,

The Company exceeded the minimum purchase amount for the first year and purchased approximately $ 309 thousand of the committed

$ 660 thousand second-year purchases through December 31, 2021.

Note 15 — Commitments and Contingencies

Legal Matters

Bud & Mary’s Litigation

On September 15, 2022, the

Company provided a notice of default to Bud & Mary’s and certain related parties notifying such parties that Bud & Mary’s

was in default of its obligations under the Bud & Mary TTK Agreement.

On October 5, 2022, Bud & Mary’s filed a complaint

in the Superior Court of Massachusetts in Suffolk County, naming the Company as the defendant.

Bud & Mary’s is seeking, among

other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion arising

from the Agreement.

While the Company believes the claim is without merit and will continue to vigorously defend itself against Bud &

Mary’s allegations, litigation is inherently unpredictable and there can be no assurance that the Company will prevail in this matter.

During the third quarter

of 2022, the Company deemed it necessary to fully reserve for the outstanding $ 14.7 million note receivable balance due to the current

litigation and the uncertainty of the customer’s ability to repay the balance.

The $ 14.7 million represents the amount of the contingent

loss that the Company has determined to be reasonably possible and estimable.

The actual cost of resolving this matter may be higher or

lower than the amount the Company has reserved.

If the Company is unable

to realize revenue from its TTK Solution offerings on a timely basis or at all, or if it incurs an additional loss as a result of the

Bud & Mary’s claim, the Company’s business and financial performance will be adversely affected.

On November 14, 2022,

the Company filed its answers and affirmative defenses to the Bud & Mary’s complaint and counterclaims.

The Company is seeking,

among other relief, monetary damages in connection with the breach of contract, breach of the implied covenant of good faith and fair

dealing, unjust enrichment, and enforcement of the guarantees.

Bud & Mary’s is permitted to file an amended complaint during

October 2023, and Agrify will be permitted to make responsive filings, which may include an answer and counterclaim.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Bowdoin Construction Corp.

February 22, 2023, Bowdoin Construction Corp.

(“Bowdoin”) filed a complaint (the “Bowdoin Complaint”) in the Superior

Court of Massachusetts in Norfolk County naming the Company, Bud & Mary’s and certain related parties as defendants, captioned

Bowdoin Construction Corp.

Agrify Corporation, Bud & Mary’s Cultivation, Inc.

and BMLC2, LLC ,

The Bowdoin Complaint relates to a construction contract between Bowdoin and the Company relating to the property

that is the subject of the Bud & Mary’s Complaint, and alleges breach of contract by Bud & Mary’s and by the Company

due to nonpayment of approximately $ 6.3 million due under the contract and related indemnification claims and mechanics’ liens.

The Company is entitled to indemnification by Bud & Mary’s and intends to vigorously defend this claim.

Mack Molding Co.

In December 2020, the Company

entered into a five-year supply agreement with Mack Molding Co.

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

In February 2021, the Company placed a purchase order with Mack amounting to approximately $ 5.2 million towards the initial production

of VFUs during 2021.

Since February 2021, the Company increased the purchase order with Mack to approximately $26.5 million towards production

of VFUs during 2021 and 2022.

The Company believed the supply agreement with Mack would provide the Company with increased scaling capabilities

and the ability to meet the potential future demand of its customers more efficiently.

The supply agreement contemplates that, following

an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack

each year based on the agreed-upon pricing formula.

The introductory period is not time-based but rather refers to the production of an

initial number of units after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage.

The Company believed this approach would result in both parties making a more informed decision with respect to the pricing and other

terms of the supply agreement with Mack.

On October 11, 2022, the

Company received a $ 9.4 million invoice from Mack for inventory purchased on the Company’s behalf to build VFUs.

As part of the

terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had aged greater

than nine months.

Due to the slowdown in the demand for the VFUs and the lack of a demand forecast that the Company could provide to the

vendor, Mack exercised the right to invoice the Company for the slow-moving inventory.

As of December 31, 2022, the Company owed Mack

$ 8.4 million for purchased inventory on behalf of the Company to produce VFUs, which is included in accounts payable in the consolidated

balance sheet.

On March 2, 2023, Mack filed

an arbitration action seeking the amounts owed to Mack for purchased inventory.

On October 27, 2023, and effective as of October 18, 2023,

Mack and the Company entered into a Modification and Settlement Agreement with respect to the dispute.

See Note 17 –

Subsequent Events.

TRC Electronics Litigation

The Company was named as

a defendant in a complaint filed by TRC Electronics, Inc.

(“TRC”) on April 13, 2023 in the United States District Court for

the Eastern District of Pennsylvania.

In the Complaint, TRC asserts two causes of action against the Company:

(1) breach of contract,

and (2) promissory estoppel.

TRC’s claims are based on allegations that the Company failed to make payments due under three purchase

orders for commercial electronics parts.

TRC seeks damages in the amount of $ 565,210 , plus attorneys’ fees, costs, and post-judgment

The Company has filed an answer denying liability on TRC’s claims and is proceeding with discovery.

Sinclair Scientific

On June 15, 2023, the Company

and its wholly-owned subsidiary Precision Extraction Newco, LLC (“Precision”), filed an Amended Verified Complaint in the

Court of Chancery of the State of Delaware against Sinclair Scientific, LLC (“Sinclair”) and certain individual defendants

(the “Delaware Action”).

The claims filed in the Delaware Action concern various breaches of the Plan of Merger and Equity

Purchase Agreement dated September 29, 2021, by and between the Company, Sinclair, Mass2Media, LLC, and certain of their members (the

“Merger Agreement”).

In response to the Delaware Action, certain of the defendants filed counterclaims for breach of contract

and declaratory judgment against the Company and Precision alleging breach of the Merger Agreement.

The Company and Precision filed an

answer to the counterclaims denying all liability on the claims and discovery in the Delaware Action has recently commenced.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Supply Agreement with Mack Molding Co.

In December 2020, the Company

entered into a five-year supply agreement with Mack Molding Co.

(“Mack”) pursuant to which Mack would become a key supplier

In February 2021, the Company placed a purchase order with Mack amounting to approximately $ 5.2 million towards the initial production

of VFUs during 2021.

Since February 2021, the Company increased the purchase order with Mack to approximately $ 26.5 million towards production

of VFUs during 2021 and 2022.

The Company believed the supply agreement with Mack would provide the Company with increased scaling capabilities

and the ability to meet the potential future demand of its customers more efficiently.

The supply agreement contemplates that, following

an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack

each year based on the agreed-upon pricing formula.

The introductory period is not time-based but rather refers to the production of an

initial number of units, after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage.

The Company believed this approach would result in both parties making a more informed decision with respect to the pricing and other

terms of the supply agreement with Mack.

On October 11, 2022, the

Company received a $ 9.4 million invoice from Mack for inventory purchased on the Company’s behalf to build VFUs.

As part of the

terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had aged greater

than nine months.

Due to the slowdown in the demand for the VFUs and the lack of a demand forecast that the Company could provide to the

vendor, Mack exercised the right to invoice the Company for the slow-moving inventory.

As of March 31, 2023, the Company owed Mack $ 8.4

million for purchased inventory on behalf of the Company to produce VFUs, which is included in accounts payable in the consolidated balance

On October 27, 2023, and effective as of October 18, 2023, Mack and the Company entered into a Modification and Settlement Agreement

with respect to the dispute.

See Note 17 – Subsequent Events.

Distribution Agreements with Related Party

– Bluezone Products, Inc.

On September 7, 2019, the

Company entered into a distribution agreement with Bluezone Products, Inc.

(“Bluezone”) for distribution rights to the Bluezone

products with certain exclusivity rights.

The agreement requires minimum purchases amounting to $ 480 thousand and $ 600 thousand for the

first and second contract anniversary years.

The agreement auto-renews for successive one-year periods unless earlier terminated.

2021, the Company notified Bluezone of the non-renewal of the agreement which means it ended on May 31, 2021.

The Company exceeded the

minimum purchase amount for the first year and purchased approximately $ 309 thousand of the committed $ 660 thousand second-year purchases

through December 31, 2021.

Bluezone is a related party to the Company.

Purchase Agreement with Related Party – Greenstone

December 29, 2021, Greenstone purchased 239 VFUs from the Company of which 60 VFUs were already in Greenstone’s possession under

a lease agreement.

Under the lease agreement, Greenstone owed the Company a production service fee of $ 300 per pound of flower produced

and contained an option to purchase the equipment within the lease agreement.

The term of this agreement was for ten years , but it was

terminated upon signing the purchase agreement for the 239 VFUs.

There is no remaining obligation under the lease agreement.

The remaining

179 VFUs were shipped to the Greenstone storage facility on December 30, 2021 and December 31, 2021.

Greenstone is a related party to

Additional information regarding recent developments with Greenstone may be found in Note

5 – Loan Receivable, included elsewhere in the notes to the consolidated financial statements.

Purchase Agreement with Related Party – Ora Pharm

June 2022, the Company entered into an agreement with Ora Pharm (“Ora”) pursuant to which Ora will purchase approximately

$ 1.6 million in equipment from the Company, and Ora may purchase software services from the Company in the future.

Wilcox is the

Chairman of Ora.

Wilcox has not had an interest in any transaction since the beginning of the Company’s last fiscal year, or

any currently proposed transaction.

There are no family relationships among any of the Company’s directors or executive officers

Commitments and Contingencies

Company is potentially subject to claims related to various non-income taxes (such as sales, value-added, consumption, and similar taxes)

from various tax authorities, including in jurisdictions in which the Company already collects and remits such taxes.

If the relevant

taxing authorities successfully pursue these claims, the Company could be subject to additional tax liabilities.

to Note 9 – Debt, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future

minimum debt payments.

Refer to Note 10 – Leases, included elsewhere in the notes to the consolidated financial statements for

details of the Company’s future minimum lease payments under operating and financing lease liabilities.

Committed Purchase Agreement with Related

Party – 4D Bios, Inc.

On September 18, 2021, the

Company entered into an amended purchase agreement with 4D Bios, Inc.

(“4D”) to secure purchases of horticultural equipment.

The original agreement required minimum purchases of between $577 dollars and $607 dollars per unit of 4D products until December 31,

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

4D is a related party to the Company.

The Company settled all outstanding commitments, leaving no open committed purchases as of

December 31, 2021 .

Committed Purchase Agreement with Related

Party – Ora Pharm

In June 2022, the Company

entered into an agreement with Ora Pharm (“Ora”) pursuant to which Ora will purchase approximately $ 1.6 million in equipment

from the Company, and Ora may purchase software services from the Company in the future.

Stuart Wilcox, the Company’s former Chief

Operating Officer, is the Chairman of Ora.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Other Commitments and Contingencies

The Company is potentially

subject to claims related to various non-income taxes (such as sales, value-added, consumption, and similar taxes) from various tax authorities,

including in jurisdictions in which the Company already collects and remits such taxes.

If the relevant taxing authorities successfully

pursue these claims, the Company could be subject to additional tax liabilities.

Refer to Note 8 – Debt, included elsewhere

in the notes to the consolidated financial statements for details of the Company’s future minimum debt payments.

Refer to Note 9

Income Taxes, included elsewhere in the notes to the consolidated financial statements for information regarding income tax contingencies.

18 — Related Parties

of the officers and directors of the Company are involved in other business activities and may, in the future, become involved in other

business opportunities that become available.

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

September 30,

– Leases, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum

lease payments under operating and financing lease liabilities.

Refer to Note 13 – Income Taxes, included elsewhere in the notes

to the consolidated financial statements for information regarding income tax contingencies

Note 16 — Related Parties

Some of the officers and

directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities

that become available.

The following table describes the net purchasing

(sales) activity with entities identified as related parties to the Company:

Three months ended

(In thousands)

Cannae Policy Group

Topline Performance Group

Greenstone Holdings

Valiant Americas, LLC

Living Greens Farm

(1) Purchases from 4D for the nine months ended September 30, 2021 include $ 384 thousand for a down payment on inventory orders.

following table summarizes net related party receivable (payable) as of September 30, 2022 and December 31, 2021:

September 30,

Greenstone (net of allowance for doubtful accounts of $ 7,079 and $ 0 at September 30, 2022 and December 31, 2021, respectively) (1)

Greens Farm (2)

Americas, LLC

Performance Group

Greenstone allowance for doubtful accounts balance consisted of capital advances, accrued

interest and VFUs sales.

Additional information regarding recent developments with Greenstone

may be found in Note 5 – Loan Receivable, included

elsewhere in the notes to the consolidated financial statements.

balance was fully reserved at September 30, 2022 due to an ongoing dispute with the customer.

Subsequent Events

& Mary’s Litigation

On September 15, 2022, the Company provided a

notice of default to Bud & Mary’s and certain related parties notifying such parties that Bud & Mary’s was in default

of its obligations under the Bud & Mary TTK Agreement.

On October 5, 2022, Bud & Mary’s filed a complaint in the Superior

Court of Massachusetts in Suffolk County naming the Company as defendant.

Bud & Mary’s is seeking, among other relief, monetary

damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion arising from the Agreement.

While the Company believes the claim is without merit and will continue to vigorously defend itself against Bud & Mary’s allegations,

litigation is inherently unpredictable and there can be no assurance that the Company will prevail in this matter.

During the third

quarter of 2022, the Company deemed it necessary to fully reserve for the outstanding $ 14.7 million note receivable balance outstanding

due to the current litigation and the uncertainty of the customer’s ability to repay the outstanding balance.

The $14.7 million

represents the amount of the contingent loss that the Company has determined to be reasonably possible and estimable.

The actual cost

of resolving this matter may be higher or lower than the amount the Company has reserved.

In addition, $ 5.3 million of the notes receivable

balance for work performed during the third quarter of 2022 has been recorded as an unbilled note receivable and deferred the revenue

to a future period.

The Company has recognized the expenses associated with the work completed in the current period due to the uncertainty

of the Company’s ability to recover the funds owed by the customer and its obligations to the vendors that have performed this

The Company determined that it will only recognize unbilled notes receivable revenue if cash is collected from the customer in

a future period.

of Issuance of Shares Upon Exercise of Warrants

On October 14, 2022, the Company received approval for the issuance

of up to 2,110,875 shares of Common Stock upon the exercise of the SPA Warrant and Note Exchange Warrant in

connection with the issuance of a senior secured note and the exchange of previously issued warrants in August 2022, and the reduction

of the exercise price of certain of those warrants under certain circumstances, was approved.

Additional information regarding

the Warrant Liabilities may be found in Note 9 – Debt, included elsewhere in the notes to

the consolidated financial statements.

October 18, 2022, the Company effected a 1-for-10 reverse stock split of its Common Stock.

All owners of record as of October 18, 2022

received one issued and outstanding share of the Company’s Common Stock in exchange for ten outstanding shares of the Company’s

Common Stock.

Additional information regarding the reverse stock splits may be found in Note 1

– Overview, Basis of Presentation and Significant Accounting Policies , included elsewhere

in the notes to the consolidated financial statements.

The Marketing Offering

In October 2022, the Company entered into the ATM Program with the

The ATM Program allows the Company to sell shares of Common Stock pursuant to specific parameters defined by the Company as well

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

Subsequent to the quarter ended September 30, 2022, as of November 7, 2022,

the Company sold 6,132,565 shares of Common Stock, under the ATM at an average price of $ 2.54 per share, resulting in gross proceeds to

the Company of $ 15.6 million, and net proceeds of $ 15.1 million after commissions and fees to the Agent totaling $ 468 thousand.

$ 3.1 million

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

The ATM allows for quick

and agile sales of Common Stock to interested investors and provides an opportunity to raise additional capital for working capital requirements

or to fund strategic opportunities that may present themselves from time to time.

The Company has used, and intends to continue to use,

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.

Deficiency Notice

October 4, 2022, the Company received a deficiency letter (the “Notice”) from the Listing Qualifications Department (the

“Staff”) of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business

days, the bid price for the Company’s 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 Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”).

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company 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 the Company’s 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

the Company that the closing bid price for its Common Stock was more than $1.00 for 10 consecutive trading days, and that the Company

therefore regained compliance with the Minimum Bid Requirement.

Agrify-Valiant

On October 27, 2022, the Company provided notice to Valiant-America,

LLC that the Company intended to begin the winding up of Agrify-Valiant.

The following table summarizes net related party

(payable) receivable as of March 31, 2023 and December 31, 2022:

(In thousands)

Valiant Americas, LLC

Topline Performance Group

Note 17 — Subsequent Events

The Company evaluated subsequent

events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued.

Nasdaq Deficiency Notices

On April 18, 2023, the Company

received a notice from Nasdaq (the “April Nasdaq Notice”) that it was noncompliant with Nasdaq Listing Rule 5250(c)(1) as

a result of its failure to file its Annual Report on Form 10-K with the SEC by the required due date.

May 17, 2023, the Company received a second notice from Nasdaq (the “May Nasdaq Notice”)

that it remained noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of its failure to file its 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, the Company

received a third notice from Nasdaq that it remain noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of its failure to file

its 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 Notices”).

Nasdaq granted the Company an exception until October 16, 2023, to file its 2022 Form 10-K and First and Second Quarter 2023 Forms 10-Q

(the “Delayed Reports”).

The Nasdaq Notice had no immediate effect on the listing of the Company’s common stock on

The Nasdaq Stock Market LLC.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On October 17, 2023, the

Company received the Staff Determination from the Listing Qualifications Department of Nasdaq notifying the Company that it was not in

compliance with Nasdaq’s continued listing requirements under the Listing Rule as a result of its failure to file the Delinquent

Reports in a timely manner.

The Company timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”), and the

Panel scheduled a hearing for January 11, 2024.

Securities Exchange Agreement

On April 26, 2023, the Company

entered into a letter agreement with the above referenced accredited lender (the “Letter Agreement”), pursuant to which the

Company and the lender agreed to exchange $ 2.0 million of the remaining outstanding principal amount under the Exchange Note for 445,197

shares of common stock of the Company, subject to a Beneficial Ownership Limitation of 4.99 % of the Company’s Common Stock.

Discontinuance of the ATM Program

The ATM Program was discontinued

after April 1, 2023.

Repricing of Common Stock Warrants

The Company issued 1,338,462

common stock warrants in conjunction with the Company’s public offering from December, 2022.

On April 18, 2023, the Company undertook

a warrant exercise inducement program, which it later cancelled.

As a result, the warrant exercise price was reduced from $ 13.00 per share

to $ 3.45 per share.

of May 23, 2023, the Company extended its lease by three years until July 31, 2026, for the premises located at 2625 S.

Santa Fe Dr.,

1, Units 1H and 1IJ.

Mack Molding Modification Agreement

On October 27, 2023, and

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

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

Pursuant to the Modification Agreement, the Company and Mack agreed

to settle an outstanding dispute under the Supply Agreement between the parties dated December 7, 2020 (the “Supply Agreement”).

The Modification Agreement requires the Company 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, the Company will be entitled to take possession of certain Vertical Farming

Units (“VFUs”) that were assembled under the Supply Agreement.

The Modification Agreement also requires the Company 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 2025.

The Company is required to pay a storage fee of $ 25,000 per month for VFUs subject to the Modification

Additionally, as part of

the Modification Agreement, the Company 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.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Warrant Issuance

On October 27, 2023, the

Company entered into a letter agreement with the holder of the Exchange Note and the Convertible Note.

Pursuant to the agreement, the

Company 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, the Company agreed to exchange

the 375,629 shares of common stock held in abeyance for the lender under the terms of the Letter Agreement 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 the Company, 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

the Company has 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 the Company receives 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 that the Company 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 the Company since July 1, 2023.

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

Chief Executive Officer, purchased the Exchange Note and the Convertible Note from their holder .

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 the Company to extend the maturity date thereon to December 31, 2025.

Amendment and Secured Promissory Note

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

an entity that is managed by Raymond Chang, the Company’s Chairman and Chief Executive Officer, with an original principal amount

of up to $ 500,000 .

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

to the terms of the Restated Note, the Maturity Date was extended until December 31, 2023 and the Company granted a security interest

in the Company’s assets that ranks junior to the Exchange Note and the Convertible Note.

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

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

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

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

What changed 10-Q

Item 1. Financial Statements