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Item 2. Management’s Discussion and Analysis

2023-11-28 compared with 2022-11-14 · 876 added, 997 removed, 78 unchanged (96% of the section changed)

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

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

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

10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on March 31, 2022 (the “Form 10-K”)

10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on November 27, 2023 (the “Form 10-K”)

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

3 unchanged sentences

on Form 10-Q.

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

Private Securities Litigation Reform Act of 1995.

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

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

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

Forward-looking

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

The following discussion

contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation

Reform Act of 1995.

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

Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance

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

Forward-looking statements

speak only as of the date of this quarterly report.

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

strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K in the section entitled “Risk

Factors” in the Annual Report on Form 10-K for a description of certain risks that could, among other things, cause actual results

to differ from these forward-looking statements.

We assume no responsibility to update the forward-looking statements contained in this

Quarterly Report on Form 10-Q.

The following should also be read in conjunction with the unaudited financial statements and notes thereto

that appear elsewhere in this report.

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

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

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

and technology to the forefront of the market.

Our proprietary micro-environment-controlled Agrify Vertical Farming Units (or “VFUs”)

enable cultivators to produce the highest quality products with what we believe to be an unmatched consistency, yield, and Return on

Investment at scale.

Our 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.

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

Our cultivation and extraction

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

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

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

highly fragmented market.

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

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

We strongly encourage

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

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

these forward-looking statements.

We assume no responsibility to update the forward-looking statements contained in this Quarterly Report

on Form 10-Q.

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

in this report.

Except as otherwise indicated

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

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

We are a developer of proprietary

precision hardware and software grow solutions for the indoor commercial agriculture industry and provides equipment and solutions for

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

We believe we are the only company with an

automated and fully integrated grow solution in the industry.

Our Agrify “Precision Elevated™” cultivation solution

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

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

totality of our product offerings and service capabilities forms an unrivaled ecosystem in what has historically been a highly fragmented

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

Agrify Corporation was incorporated

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

(or “Agrinamics”).

On September 16, 2019, Agrinamics amended its articles of incorporation to reflect a name change to Agrify Corporation.

corporate headquarters are located in Billerica, Massachusetts.

We also lease properties located within various geographic regions in

which we conduct business, including Colorado, Georgia, Massachusetts, and Michigan.

January 12, 2021, we effected a 1-for-1.581804 reverse stock split on our Common Stock.

All share and per share information has been

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

On October 18, 2022, we effected a 1-for-10 reverse stock split on

our Common Stock.

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

periods presented, unless otherwise indicated.

Business Developments

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

and other accredited investors for the sale by us of (i) 245,035 shares (the “SA Shares”) of the our Common Stock, (ii) pre-funded

warrants (the “Pre-Funded Warrants”) to purchase up to an aggregate of 157,064 shares of Common Stock and (iii) 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 is exercisable into

one share of Common Stock at a price per share of $0.001 (as adjusted from time to time in accordance with the terms thereof).

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.

Chang, our Chairman and Chief Executive Officer, and Stuart Wilcox, who is currently our Chief Operating Officer, and at the time was

a member of our Board of Directors, participated in the private placement on essentially the same terms as other investors, except for

having a combined purchase price of $69.00 per share.

gross proceeds to us from the private placement were approximately $27.3 million, before deducting the placement agent’s fees

and other offering expenses, and excluding the proceeds, if any, from the exercise of the SA Warrants.

of Lab Society

On February 1, 2022,

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

(“Lab Society”),

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

On September 16, 2019,

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

Our corporate headquarters

are located in Billerica, Massachusetts.

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

including Colorado, Georgia, Massachusetts, Michigan, and Oregon.

Reverse Stock Split

On January 12, 2021, we effected

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

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

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

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.

Recent Business Developments

Private Placement

On January 25, 2022, we entered

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

for the sale of 12,253 shares (the “SA Shares”) of our Common Stock, pre-funded warrants (the “Pre-Funded Warrants”)

to purchase up to an aggregate of 7,853 shares of Common Stock and warrants to purchase up to an aggregate of 15,079 shares of Common

Stock (the “Common Warrants” and, collectively with the Pre-Funded Warrants, the “SA Warrants”), in a private

placement offering.

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

of a Common Warrant was $1,360.00 per share.

Subject to certain ownership

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

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

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

Each Common Warrant is exercisable into one share of Common

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

anniversary of the initial exercise date.

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

in March 2022.

Raymond Chang, our Chairman

and Chief Executive Officer (“CEO”), and Stuart Wilcox, who previously served as our Chief Operating Officer, and at the time

was a member of our Board of Directors, participated in the private placement on essentially the same terms as other investors, except

for having a combined purchase price of $1,380.00 per share.

The gross proceeds to us

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

Acquisition of Lab Society

On February 1, 2022, we entered

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

(“Lab Society”), Lab Society

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

as the Owner Representative

3 unchanged sentences

The aggregate consideration

for the Lab Society Acquisition consisted of:

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

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

of Lab Society at closing;

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

and the Earn-out Consideration (as defined

below), to the extent earned.

We withheld 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 us and any

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

During the third quarter of 2022,

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.

Additional information regarding our contingent consideration arrangements may be found in

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

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

may become entitled to additional consideration with a value of up to $3.5 million based on the eligible net revenues achieved by the

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

the remaining 50% will be payable by issuing shares of Common Stock.

Based upon the combined first and second-quarter actual revenue performance,

Lab Society’s revenue trend is significantly below the originally estimated revenue trends incorporated into our original fair value

estimates at the time of the acquisition.

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

with its first earn-out period.

Accordingly, we reversed the current accrued contingent consideration liability associated with Lab Society’s

first earn-out period as of September 30, 2022.

The reversal of this liability of approximately $1.0 million, as required by ASC Topic

805 Business Combination (“ASC805”), was recorded as a reduction in operating expenses during the second quarter of 2022.

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

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

The estimated fair value at acquisition is $7.9 million and may be adjusted upon further review of the values assigned to identifiable

intangible assets and goodwill.

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, we identified an

impairment-triggering event associated with both a sustained decline in our stock price and associated market capitalization, as well

as a second-quarter slowdown in the cannabis industry as a whole.

Due to these factors, we deemed that there was an impairment to the

carrying value of its long-lived assets and accordingly performed interim testing as of June 30, 2022.

Based on its interim testing, we

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

Additional information regarding our interim

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

notes to the consolidated financial statements.

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

to the extent earned.

We withheld 638 of the Buyer

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

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

During the third

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

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

subject to the conditions of the Merger Agreement.

Additional information regarding our contingent consideration arrangements may be found

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

The Merger Agreement includes

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

The Owners may become entitled to additional

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

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

shares of Common Stock.

The purchase price allocation

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

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

The estimated fair value at acquisition

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

Our initial fair value estimates

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

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

These valuation methods require management to project revenues, operating

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

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

We amortize our intangible

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

Purchase Agreement

On March 14, 2022, we entered

into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with an accredited investor (the “Investor”),

we agreed to issue and sell to the Investor, in a private placement transaction, in exchange for the payment by the Investor of $65 million,

less applicable expenses as set forth in the Securities Purchase Agreement, a senior secured promissory note in an aggregate principal

amount of $65 million (the “SPA Note”), and a warrant (the “SPA Warrant”) to purchase up to an aggregate

of 688,111 shares of Common Stock.

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

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

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

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

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

August 2022 Securities Exchange Agreement

On August 18, 2022, we reached

an agreement with the Investor to amend its existing SPA Note and entered into a Securities Exchange Agreement (the “August 2022

Exchange Agreement”).

On August 18, 2022, we

reached an agreement with its Investor to amend its existing SPA Note and entered into a Securities Exchange Agreement (the “Exchange

Pursuant to the Exchange Agreement, we partially paid $35.2 million under the SPA Note and exchanged the remaining

balance of the SPA Note for a new senior secured note (the “Exchange Note”) with an aggregate original principal amount of

$35.0 million and a new warrant to purchase 1,422,764 shares of Common Stock (the “Note Exchange Warrant”).

Additionally,

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

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

Additional information regarding

our 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 us and ranks senior to all indebtedness of us.

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 us in connection with any equity

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

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

the Note plus accrued but unpaid interest.

The Investor will also have the option of requiring us to redeem the Exchange Note on the

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

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

under the Exchange Note plus accrued but unpaid interest.

Pursuant to the August 2022 Exchange Agreement, we partially paid $35.2 million along with approximately $300

thousand in repayments for other fees under the SPA Note and exchanged the remaining balance of the SPA Note for a the Exchange Note with

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

Additionally, we exchanged the SPA Warrant for a new warrant for the same number of underlying shares but with a reduced

exercise price (the “Modified Warrant” and, collectively with the Note Exchange Warrant, the “August 2022 Warrants”).

Additional information regarding our August 2022 Warrants may be found in Note 1 – Overview,

Basis of Presentation and Significant Accounting Policies and Note 4 – Fair Value Measures,

included in the notes to the condensed consolidated financial statements.

The Exchange Note is a senior

secured obligation of ours and ranks senior to all indebtedness of ours.

The Exchange Note will mature on the three-year anniversary of

its issuance (the “Maturity Date”) and contains a 9.0% annualized interest rate, with interest to be paid monthly, in cash,

beginning September 1, 2022.

The principal amount of the Exchange Note will be payable on the Maturity Date, provided that the holder

will be entitled to a cash sweep of 20% of the proceeds received by us in connection with any equity financing, which will reduce the

outstanding principal amount under the Exchange Note.

At any time, we may prepay

all of the Exchange Note by redemption at a price equal to 102.5% of the then-outstanding principal amount under the Note plus accrued

but unpaid interest.

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

of issuance at a price equal to the then-outstanding principal amount under the Exchange Note plus accrued but unpaid interest, or if

we undergo a fundamental change at a price equal to 102.5% of the then-outstanding principal amount under the Exchange Note plus accrued

but unpaid interest.

The Exchange Note imposes

certain customary affirmative and negative covenants upon us, as well as covenants that restrict us and our subsidiaries from incurring

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

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

to specified exceptions, requires us not to exceed maximum levels of allowable cash spend while the Exchange Note is outstanding,

and requires us to maintain minimum amounts of cash on hand.

If an event of default under the Exchange Note occurs, the 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, we are in compliance with the financial debt covenants

associated with our 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 us or our subsidiaries.

The Modified Warrant has 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, has a term of five and one-half years from the date of issuance and will be exercisable on a cash basis, unless

there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Modified Warrant (the

“Modified Warrant Shares”), in which case the Modified Warrant will also be exercisable on a cashless exercise basis at the

Investor’s election.

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

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

to specified exceptions, requires us not to exceed maximum levels of allowable cash spend while the Exchange Note is outstanding, and

requires us to maintain minimum amounts of cash on hand.

If an event of default under the Exchange Note occurs, the holder can elect to

redeem the Exchange Note for cash equal to 115% of the then-outstanding principal amount of the Note (or such lesser principal amount

accelerated by the holder), plus accrued and unpaid interest, including default interest, which accrues at a rate per year equal to 15%

from the date of a default or event of default.

Until the date the Exchange

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

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

other instrument or security, of us or our subsidiaries.

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, has a term of five and one-half years from the date of issuance

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

upon exercise of the Modified Warrant (the “Modified Warrant Shares”), in which case the Modified Warrant will also be exercisable

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

The Note Exchange Warrant

has an exercise price of $12.30 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions,

was exercisable upon issuance, and has a term of five and one-half years from the date of issuance and is exercisable on a cash basis,

unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Warrant (the “Note

Exchange Warrant Shares” and, together with the Modified Warrant Shares, the “Exchange Warrant Shares”), in which case

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

Until we complete 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 we issue securities for a lower purchase price.

The Note Exchange

Warrant also prohibited us, until following the completion of such qualified equity financing, from issuing warrants with more favorable

or preferential terms and/or provisions.

The Warrant Liabilities 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 beneficial ownership exceeding 4.99%

of our shares of Common Stock outstanding at the time of exercise (which percentage may be decreased or increased by the Investor, but

to no greater than 9.99%, and provided that any increase above 4.99% will not be effective until the sixty-first day after notice of such

request by the Investor to increase its beneficial ownership limit has been delivered to us).

Additionally, the Warrant Liabilities could

not 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.

of coronavirus pandemic (“COVID-19”)

extensive impact of the pandemic caused by COVID-19 has resulted and will likely continue to result in significant disruptions to the

global economy, as well as businesses and capital markets around the world.

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

of countries, states, counties, and other jurisdictions have imposed, and may impose in the future, various measures, including but not

limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, limitations on gatherings of people,

reduced operations, and extended closures of businesses.

date, although all of our operations are functioning, COVID-19 has continued to cause some disruptions to our business, such as some

temporary delays in the delivery of our inventory.

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

of our deliveries, currently the difficulties experienced by our suppliers have not yet materially impacted our ability to deliver products

to our customers.

However, if this continues, it may negatively affect any inventory we may have and more significantly delay the delivery

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

extent to which COVID-19 and the related global economic crisis, affect our business, results of operations and financial condition,

will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic

and any recovery period, future actions taken by governmental authorities, central banks and other third parties (including new financial

regulation and other regulatory reform) in response to the pandemic, and the effects on our produce, clients, vendors and employees.

We continue to service our customers amid uncertainty and disruption linked to COVID-19 and we are actively managing our business to

respond to its impact.

Nasdaq Deficiency Notice

4, 2022, we received a deficiency letter (the “Notice”) from the Listing Qualifications Department (the “Staff”)

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

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

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

In accordance with Nasdaq Listing Rule

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

To regain compliance with the Minimum Bid

Requirement, the closing bid price of our Common Stock must be at least $1.00 per share for a minimum of 10 consecutive trading days during

this 180-day compliance period, unless the Staff exercises its discretion to extend the minimum trading day period pursuant

to Nasdaq Listing Rule 5810(c)(3)(G).

On October 28, 2022, the Staff notified us that the closing bid price of our Common Stock was more

than $1.00 for 10 consecutive trading days, and that we therefore regained compliance with the Minimum Bid Requirement.

The preparation of financial statements in accordance with accounting

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

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

amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

Significant estimates

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

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

Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis

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

accounting principles generally accepted in the United States of America (“GAAP”).

The preparation of financial statements

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

accompanying notes.

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

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

has an exercise price of $246.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar

transactions, was exercisable upon issuance, and has a term of five and one-half years from the date of issuance and is exercisable on

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

Warrant (the “Note Exchange Warrant Shares” and, together with the Modified Warrant Shares, the “Exchange Warrant Shares”),

in which case the Note Exchange Warrant will also be exercisable on a cashless exercise basis at the holder’s election.

completed a qualified equity financing of at least $15.0 million, which requirement was satisfied with sales under the at-the-market continuous

equity offering (“ATM” or “ATM Program”), the Note Exchange Warrant’s exercise price would have been reduced

to the extent we issued securities for a lower purchase price.

The Note Exchange Warrant also prohibited us, until following the completion

of such qualified equity financing, from issuing warrants with more favorable or preferential terms and/or provisions.

The August 2022 Warrants

each provide that in no event will the number of shares of Common Stock issued upon exercise of such warrants result in the holder’s

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

or increased by the holder, but to no greater than 9.99).

Additionally, the August 2022 Warrants could not be exercised for more than

an aggregate of 26,542 shares of Common Stock unless and until shareholder approval is obtained, which approval was obtained on October

March 2023 Securities Exchange Agreement

On March 9, 2023 we entered

into senior note with High Trail Special Situations LLC (“Holder”).

for value received, promises to pay to High Trail Special

Situations LLC (the “Initial Holder”), or its registered assigns, the principal sum of ten million dollars ($10,000,000) (such

principal sum, the “Principal Amount”) on August 19, 2025, and to pay any outstanding interest thereon, as provided in this

Note, in each case as provided in and subject to the other provisions of this Note, including the earlier redemption, repurchase or conversion

of this Note.

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

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.

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%.

Company evaluated the embedded features in accordance with ASC 815-15-25 and determined the 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.

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, we

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

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

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

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

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

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

December 2022 Warrants may not be exercised by the holder to the extent that the holder, together with its affiliates, would beneficially

own, after such exercise more than 4.99% of the shares of our Common Stock then outstanding (subject to the right of the holder to increase

or decrease such beneficial ownership limitation upon notice to us, provided that such

limitation cannot exceed 9.99%) .

The Pre-Funded 2022 Warrants

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

date using a relative fair value allocation method.

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

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

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

In addition, such warrants do not provide any guarantee

of value or return.

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

to our Common Stock.

Raymond Chang, our Chairman

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

of approximately $1.5 million.

We received aggregate gross

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

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

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

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

Impact of coronavirus pandemic (“COVID-19”)

The extensive impact of the

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

as businesses and capital markets around the world.

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

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

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

of businesses.

To date, although all of

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

delivery of our inventory.

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

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

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

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

The extent to which COVID-19

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

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

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

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

We continue to service our customers amid

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

Use of Estimates

The preparation of financial

statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and

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

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

Actual results could differ

from those estimates.

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

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

Financial Overview

Critical Accounting Policies and Significant

Judgments and Estimates

Our management’s discussion

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

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

The preparation of financial statements in conformity

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

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

reported amounts of revenues and expenses during the reported period.

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

2 unchanged sentences

estimates or assumptions.

generate revenue from the following sources:

Revenue Recognition

We generate revenue from

the following sources:

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

accordance with ASC 606 “Revenue Recognition”, we recognize revenue from contracts with customers using a five-step model,

which is described below:

In accordance with ASC 606

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

identify the customer contract;

1 unchanged sentence

determine the transaction price;

allocate the transaction price to the distinct performance

recognize revenue as the performance obligations are

the customer contract

A customer contract is generally identified when there is approval

and commitment from both us and its customer, the rights have been identified, payment terms are identified, the contract has commercial

substance and collectability, and consideration is probable.

Specifically, we obtain written/electronic signatures on contracts and a

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

performance obligations that are distinct

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

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

with other resources that are readily available to the customer, and our promise to transfer the good or service to the customer is separately

identifiable from other promises in the contract.

the transaction price

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

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

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.

Our contracts typically contain multiple performance obligations, for which we

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

The standalone selling price reflects the price we would

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

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.

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

distinct and accounted for as separate performance obligations.

Contracts with customers often include promises to transfer multiple

products and services to a customer.

Determining whether products and services are considered distinct performance obligations that should

be accounted for separately versus together may require significant judgment.

Once we determine the performance obligations, it determines

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

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

The corresponding revenue is

recognized as the related performance obligations are satisfied.

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

We determine SSP based on the price at which the performance

obligation is sold separately and the methods of estimating SSP under the guidance of Accounting Standards Codification (“ASC”)

606-10-32-33.

If the SSP is not observable through past transactions, we estimate the SSP, considering available information such as

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

We license our

software as a SaaS type subscription 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

We typically satisfy our performance obligations for equipment sales when equipment is made available for shipment to the

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

when contract is completed.

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

This method is based on the cost of the

services from third parties, plus a reasonable markup that we believe is reflective of a market-based reseller margin.

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

estimate variable consideration in the form of royalties, revenue share, monthly fees, and service credits are estimated at contract

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

Variable consideration is typically

not subject to constraint.

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

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

contracts includes a significant financing component.

We have elected the practical expedient that permits an entity to not adjust for

the effects of a significant financing component if we expect that at the contract inception, the period between when the entity transfers

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

For those contracts

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

and its relative significance, requires judgment.

Accordingly, we impute interest on such contracts at an agreed-upon interest rate and

will present the financing components separately as financial income.

For the three and nine months ended September 30, 2022 and 2021,

we did not have any such financial income.

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

Our agreements with customers do not provide for any refunds

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

In the infrequent instances where customers raise

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

been insignificant in all periods presented.

have elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not

as a promised good or service.

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

at the time of shipment.

We have payment terms with its customers of one year or less and has elected the practical expedient applicable

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

Sales, value add, and other taxes we collect concurrent with revenue-producing

activities are excluded from revenue.

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

obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer.

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

We recognize deferred revenue

when consideration has been received or an amount of consideration is due from the customer, and we have a future obligation to transfer

certain proprietary products.

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

current reporting period.

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

The majority of our remaining

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

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

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

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

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 use and its customer, the rights have been identified, payment terms are identified,

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

Specifically, we obtain written/electronic signatures

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

Identify performance

obligations that are distinct

A performance obligation

is a promise by us to provide a distinct good or service or a series of distinct goods or services.

A good or service that is promised

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

are readily available to the customer, and our promise to transfer the good or service to the customer is separately identifiable from

other promises in the contract.

Determine the transaction

The transaction price is

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

sales taxes that are collected on behalf of government agencies.

Allocate the transaction

price to distinct performance obligations

The transaction price is

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

being provided to the customer.

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

performance obligations separately, if they are distinct.

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

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

Recognize revenue as

the performance obligations are satisfied

Revenue is recognized when,

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

Significant Judgments

We enter into contracts that

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

for as separate performance obligations.

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

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

versus together may require significant judgment.

Once we determine the performance obligations, it determines the transaction price,

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

We then allocate the transaction

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

The corresponding revenue is recognized as the related performance

obligations are satisfied.

Judgment is required to determine

the SSP for each distinct performance obligation.

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

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

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

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

We license our software as a SaaS

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

The full value of

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

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

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

is completed.

We utilize the cost-plus

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

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

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

We determine the SSP for

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

We estimate variable consideration

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

of each reporting period if additional information becomes available.

Variable consideration is typically not subject to constraint.

to variable consideration were not material for the periods presented.

If a contract has payment

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

financing component.

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

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

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

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

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

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

as financial income.

For the three months ended March 31, 2023 and 2022, we did not have any such financial income.

Payment terms with customers

typically require payment 30 days from invoice date.

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

and therefore no specific reserve for such is maintained.

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

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

We have elected to treat

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

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

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

the time value of money.

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

We receive payment from customers

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

There are no contract

assets related to performance under the contract.

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

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

We fulfill obligations under a contract with

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

Accounts receivables are recorded when

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

We recognize deferred revenue when consideration has been

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

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

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

The reserve for warranty returns is included

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

for Business Combinations

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

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

These fair values are typically

estimated with assistance from independent valuation specialists.

The purchase price allocation process requires us to make significant

estimates and assumptions, especially at the acquisition date with respect to intangible assets, contractual support obligations assumed,

contingent consideration arrangements, and pre-acquisition contingencies.

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

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

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

future expected cash flows from software license sales,

support agreements, consulting contracts, other customer contracts, and acquired developed technologies;

expected costs to develop in-process research and development

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

the acquired company’s brand and competitive

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

product portfolio;

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

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

The majority of our remaining contracts meet certain exemptions

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

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

We generally provide a one-year

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

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

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

when the loss is probable and can be reasonably estimated.

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

current liabilities in our consolidated balance sheets.

Accounting for Business Combinations

We allocated the purchase

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

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

These fair values are typically estimated with assistance

from independent valuation specialists.

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

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

arrangements, and pre-acquisition contingencies.

Although we believe the assumptions

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

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

Examples of critical estimates

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

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

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

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

cost of capital and discount rates;

estimating the useful lives of acquired assets as well

as the pattern or manner in which the assets will amortize.

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.

and Intangible Assets

Amortization of acquired intangible assets is the result of the acquisition

of TriGrow Systems, LLC (“TriGrow”), which occurred in 2020, the acquisition of Precision Extraction NewCo, LLC (“Precision”)

and Cascade Sciences, LLC (“Cascade”) which occurred in 2021, the acquisition of PurePressure, LLC (“PurePressure”),

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

As a result of these transactions, customer relationships,

acquired developed technology, non-compete agreements and trade names were identified as intangible assets, and are amortized over their

estimated useful lives.

recognize the excess of the purchase price over the fair value of identifiable net assets acquired as goodwill.

Goodwill is not amortized

but is tested for impairment annually on December 2 or more frequently if events or changes in circumstances indicate that the carrying

amount of the goodwill may not be recoverable.

We have determined it is a single reporting unit for the purpose of conducting the goodwill

impairment assessment.

A goodwill impairment charge is recorded if the amount by which our carrying value exceeds its fair value, not

to exceed the carrying amount of goodwill.

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

reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline

in our market value as a result of a significant decline in our stock price.

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

we identified an impairment-triggering event associated with both a sustained decline in our stock price and associated market capitalization,

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

Due to these factors, we deemed that there was an impairment

to the carrying value of its long-lived assets and accordingly performed interim testing as of June 30, 2022.

Based on its interim testing,

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

Additional information regarding our

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

in the notes to the consolidated financial statements.

Capitalization

of Internal Software Development Costs

We capitalize on 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.

software is amortized on a straight-line basis over the estimated useful life of the asset, which ranges from two to five years.

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

an asset and liability approach to calculating deferred income taxes.

The asset and liability approach requires the recognition of deferred

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

bases of assets and liabilities.

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

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

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

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

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

In accordance with the guidance of

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

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

the resolution of appeals or litigation processes, if any.

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

The fair value estimates

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

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

These valuation methods require management to project revenues, operating

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

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

Goodwill and Intangible Assets

Amortization of acquired

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

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

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

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

We recognize the excess of

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

Goodwill is not amortized but is tested for impairment

annually on December 2 or more frequently if events or changes in circumstances indicate that the carrying amount of the goodwill may

not be recoverable.

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

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

the carrying amount of goodwill.

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

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

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

There have been no impairment charges recorded for

three months ended March 31, 2023 and 2022, respectively.

Capitalization of Internal Software Development

We capitalize certain software

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

Costs incurred during the application

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

functionality.

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

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

Costs related to the research and development are expensed as incurred

until technical feasibility is established as well as post-implementation activities.

Internal-use software is amortized on a straight-line

basis over the estimated useful life of the asset, which ranges from two to five years.

We account for income taxes

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

to calculating deferred income taxes.

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

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

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

the net deferred asset will not be realized.

We follow the provisions

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

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

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

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

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

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

or litigation processes, if any.

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

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

We believe our tax positions are all highly certain of being upheld upon examination.

As such, we have not recorded a liability

for unrecognized tax benefits.

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

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

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

tax benefits.

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

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

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

with the applicable taxing authority.

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

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

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

We believe our tax positions are all

highly certain of being upheld upon examination.

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

We recognize the benefit

of a tax position when it is effectively settled.

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

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

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

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

for Stock-Based Compensation

We follow the provisions of ASC Topic 718, “Compensation-Stock

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

equity instruments for goods or services.

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

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

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

This model incorporates certain

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

life, and expected volatility in the market value of the underlying Common Stock.

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

and are fully transferable.

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

stock price volatility.

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

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

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

The risk-free interest rate is based

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

The expected dividend

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

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

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

The expected lives for such grants were based on the simplified

method for employees and directors.

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

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

If the actual forfeiture rate is higher than the

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

to the expense recognized in our financial statements.

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

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

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

from amounts recognized in the current period.

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

of Operations

have incurred recurring losses to date.

Our financial statements have been prepared assuming that we will continue as a going concern

and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities

that might be necessary should we be unable to continue in operation.

expect we will require additional capital to meet our long-term operating requirements.

We expect to raise additional capital through,

among other things, the sale of equity or debt securities.

of the Three and Nine Months Ended September 30, 2022 and 2021

following table summarizes our results of operations for the three and nine months ended September 30, 2022 and September 30, 2021:

Accounting for Stock-Based Compensation

We follow the provisions

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

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

ASC Topic 718 focuses primarily on accounting

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

Option Plans.

The fair value of each option

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

This model incorporates certain assumptions for inputs

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

volatility in the market value of the underlying Common Stock.

The Black-Scholes option-pricing

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

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

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

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

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

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

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

The expected dividend yield is based upon our history

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

We calculate the

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

the underlying instrument’s expected term.

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

and directors.

In arriving at stock-based

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

Our forfeiture assumption

is based primarily on its turn-over historical experience.

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

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

our financial statements.

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

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

The expense we

recognize in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized

in the current period.

It is important that the

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

Results of Operations

Comparison of the Three Months Ended March

31, 2023 and 2022

The following table summarizes

our results of operations for the three months ended March 31, 2023 and 2022:

Three months ended

September 30,

Nine Months Ended

September 30,

(In thousands, except share and per share data)

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

goal is to provide our customers with a variety of products to address their entire indoor agriculture needs.

Our core product offering

includes our VFUs and Agrify Integrated Grow Racks with our Agrify Insights™ cultivation software, which are supplemented with

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)

Our goal is to provide our

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

Our core product offering includes our Agrify Vertical

Farming Units (or “VFUs”) and Agrify Integrated Grow Racks with our Agrify Insights software, which are supplemented with

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

We continue to monitor and address the COVID-19

pandemic impacts on our supply chain.

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

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

customers during the pandemic.

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

sales and interim profits.

We generate revenue from sales of cultivation solutions, including

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

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

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

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

We continue to monitor and

address COVID-19 pandemic impacts on our supply chain.

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

locations, and the extent to which they are impacted by the COVID-19 pandemic, we are proactively working with manufacturers to meet the

needs of our customers during the pandemic.

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

to sales and interim profits.

We generate revenue from

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

equipment and solutions.

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

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

the grow business with our Agrify Insights software and finally, our extraction, post-processing and testing services to transform harvest

into a sellable product.

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

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

solutions and services.

following table provides a breakdown of our revenue for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30,

Nine Months Ended September 30,

The following table provides

a breakdown of our revenue for the three months ended March 31, 2023 and 2022:

(In thousands)

Cultivation solutions, including ancillary products and services

Agrify Insights™ cultivation software

Agrify Insights software

Facility build-outs

1 unchanged sentence

Total revenue

Revenues decreased by $8.7 million, or 55.4% for

the three months ended September 30, 2022, as compared to the same period in 2021.

The comparative decrease in revenue was primarily related

to a reduction in facility build-outs of $11.7 million and a reduction in our cultivation solution sales of $2.8 million, partially offset

by the sale of extraction solutions equipment and services from our acquisition of Lab Society in 2022 and the acquisitions of Precision,

Cascade and PurePressure in 2021, which contributed $5.7 million in revenue for the three months ended September 30, 2022.

The $11.7 million

decrease in facility build-out revenue was the result of the completed build-out of two facilities under our TTK Solutions, the deferral

of $5.3 million of revenue for the Bud & Mary’s Cultivation, Inc.

(“Bud & Mary’s”) project due to pending

litigation and a decrease in cultivation products and service sales of $2.8 million primarily due to migrating to a VFU leasing model.

Additional information regarding Bud & Mary’s pending litigation may be found in Note 5 – Loan Receivable and Note 19

– Subsequent Events, included elsewhere in the notes to the consolidated financial statements.

Revenues increased by $17.8 million, or 51.4%

for the nine months ended September 30, 2022, as compared to the same period in 2021.

The comparative increase in revenue was generated

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

Precision, Cascade and PurePressure in 2021, which contributed $28.1 million in revenue for the nine months ended September 30, 2022.

This was partially offset by a reduction of $6.9 million in facility build-out revenue resulting from the completed build-out of two facilities

under our TTK Solutions which includes the deferral of $5.3 million of revenue resulting from Bud & Mary’s pending litigation

and a decrease in cultivation products and service sales of $3.4 million primarily due to migrating to a VFU leasing model.

of Goods Sold

of goods sold represents a combination of the following:

construction-related costs associated with our facility build-outs, internal

and outsourced labor and material costs associated with the assembly of both cultivation equipment (primarily VFUs) and extraction equipment,

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

following table provides a breakdown of our cost of goods sold for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30,

Nine Months Ended September 30,

Revenues decreased by $20.2

million, or 78% for the three months ended March 31, 2023 compared to the same period in 2022.

The comparative decrease in revenue was

generated primarily from decreases in revenue from factory build-outs and extraction solutions.

Extraction division revenues totaled $5.0

million in the first quarter of 2023.

Additionally, design and build revenues decreased by $12.6 million due to the continued build-out

of facilities under our TTK Solutions.

Cost of Goods Sold

Cost of goods sold represents

a combination of the following:

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

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

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

The following table provides

a breakdown of our cost of goods sold for the three months ended March 31, 2023 and 2022:

Three months ended

(In thousands)

Cultivation solutions, including ancillary products and services

Agrify Insights™ cultivation software

Agrify Insights software

Facility build-outs

1 unchanged sentence

Total cost of goods sold

Cost of goods sold decreased by $5.0 million,

or 31%, for the three months ended September 30, 2022 as compared to the same period in 2021.

The comparative quarterly decrease in the

cost of goods sold is related to a decrease of $6.1 million related to costs for facility build-outs and a decrease of $3.0 million of

costs for cultivation product and service sales.

This was partially offset by an increase of $4.1 million in expenses associated with

the sales of our extraction-related equipment, for which there was no associated revenue or expense in the prior year quarterly period.

The cost of goods sold related to facility build-outs decreased disproportionately as compared to revenue in the period as we have included

$5.1 million of facility build-out expenses related to the Bud & Mary’s project for which revenue has been deferred in the period.

Cost of goods sold increased by $15.7 million,

or 45%, for the nine months ended September 30, 2022 compared to the same period in 2021.

The comparative quarterly increase in the cost

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

associated with extraction equipment-related equipment sales accounted for $20.2 million of the comparative year-to-date fiscal 2022 increase

in the cost of goods sold.

This increase was partially offset by a decrease of $1.3 million in facility build-outs and a decrease of $3.1

million in cultivation product and service sales.

The cost of goods sold related to facility build-outs decreased disproportionately as

compared to revenue in the period as we have included $5.1 million of facility build-out expenses related to

the Bud & Mary’s project for which revenue has been deferred in the period.

Gross (Loss) Profit

Cost of goods sold decreased

by $17.0 million, or 78%, for the three months ended March 31, 2023 compared to the same period in 2022.

The comparative quarterly decrease

in cost of goods sold is associated with decreases in cost of goods sold related to factory build-outs and extraction solutions.

Gross Profit (Loss)

Three months ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Gross (loss) profit

Gross loss totaled $(4.1) million, or (58.6) %

of total revenue during the three months ended September 30, 2022 compared to a gross loss of

$(380) thousand, or ( 2.4)% of total revenue

during the three months ended September 30, 2021.

During the three months ended September 30, 2022, we realized a gross profit

margin of 27% associated with our extraction solutions revenue.

The negative gross margin on the cultivation-related revenue is primarily

related to $5.1 million of facility build-out costs recognized for the Bud & Mary’s project for which $5.3 million of revenue

has been deferred due to pending litigation and $568 thousand of overhead expenses for cultivation

solutions expenses.

This was partially offset by $1.5 million of contribution related to extraction solutions equipment and service

sales from our acquisition of Lab Society in 2022 and the acquisitions of Precision, Cascade and PurePressure in 2021.

Gross profit totaled $1.7 million, or 3.2 %

of total revenue during the nine months ended September 30, 2022 compared to a gross loss of $(393) thousand, or (1.1)% of total

revenue during the nine months ended September 30, 2021.

The comparative $2.1 million year-over-year

improvement in gross profit, as well as the comparative improvement in gross profit margin, is primarily attributable

to the introduction of our extraction solutions revenue during the first nine months of 2022.

No extraction solutions-related revenues

were recognized during the first nine months of 2021.

Extraction solutions revenue contributes a higher gross profit and gross

profit margins than those realized on our cultivation-related revenue, which includes our TTK Solutions build-out revenue.

first nine months of 2022, we realized a gross profit margin of 28% associated with our extraction solutions revenue, while we realized

a gross loss of approximately (26)% on our cultivation-related revenues.

The negative gross margin on the cultivation-related revenue

is primarily related to $5.1 million of facility build-out costs recognized for the Bud & Mary’s project for which $5.3 million

of revenue has been deferred due to pending litigation.

Three Months Ended September 30,

Nine Months Ended September 30,

Gross profit totaled $1.0

million, or 17.0% of total revenue during the three months ended March 31, 2023 compared to a gross loss of $4.2 million, or 16.0% of

total revenue during the three months ended March 31, 2022.

The comparative $3.2 million first-quarter year over year decrease in gross

profit, as well as the comparative decrease in gross profit margin, is primarily attributable to a smaller decrease in costs of goods

sold relative to the decrease in revenue for the period.

During the first quarter of 2023, we realized a gross profit margin of 28% associated

with our extraction solutions revenue, while we realized a gross profit margin of approximately (215)% on our cultivation-related revenues.

a forward-looking basis, with the full year benefit of anticipated margin contribution associated with the extraction-related revenue

contributions, the Company anticipates that gross margin performance, aided by our extraction-related equipment sales, will be in a mid-teens

We anticipate that we will be able to improve upon that expected gross profit margin performance once we are able to generate meaningful

software and production fee revenues from our TTK Solutions, which we currently expect to begin in the late third or early fourth quarter

General and Administrative

Three months ended

(In thousands)

General and administrative

Selling and marketing

Research and development

Change in contingent consideration

Impairment of goodwill and intangible assets

Total operating expenses

General and administrative

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

compensation and travel expenses, associated with executive and other administrative functions.

Other G&A expenses include, but are

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

G&A expense increased by $16.4 million, or

213%, for the three months ended September 30, 2022, compared to the same period in 2021.

The primary drivers of the increase in comparative

G&A expense in the third quarter of 2022 is largely the result of a $14.7 million increase in loan receivable allowances recorded

during the quarter, a $1.4 million increase in payroll and employee-related expenses, a $597 thousand increase in subscription, facilities

and other expenses, an increase of $151 thousand of investor related and compliance expenses and an additional $1.9 million of G&A

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

expenses were partially offset by a decrease of $2.4 million in consulting expenses that were related to a one-time financing arrangement

cancellation fee in September 2021.

During the third quarter of 2022, we increased

our loans receivable reserve by approximately $14.7 million.

We deemed it necessary to fully reserve Bud & Mary’s loan receivable

balance due to the current litigation and the uncertainty of the customer’s ability to repay the outstanding balance.

the litigation is without merit and will continue to vigorously defend ourselves.

G&A expense increased by $36.7 million, or

222%, for the nine months ended September 30, 2022, compared to the same period in 2021.

The primary drivers of the year-over-year increase

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

of $23.7 million and $8.8 million of incremental G&A expenses related to our acquisition of Lab Society in 2022 and the acquisitions

of Precision, Cascade and PurePressure in 2021.

Other drivers of the comparative year-over-year increase in G&A expense included $1.3

million related to legal and accounting services associated with our acquisition of Lab Society in 2022 and acquisitions of Precision,

Cascade and PurePressure in 2021, $1.8 million in employee-related expenses, $1.1 million of severance expenses, $800 thousand legal settlement

and $389 thousand of other operating expenses.

second and third quarter of 2022, we increased our loan receivable reserve by approximately $7.1 million and $14.7 million, respectively.

The $7.1 million increase during the second quarter of 2022, is specifically related to Greenstone Holdings (“Greenstone”).

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

would impact collectability and is primarily the result of unfavorable market conditions within the Colorado market.

We 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 we have made the decision to place a reserve against the loan receivable amounts.

Additional information regarding

recent developments with Greenstone may be found in Note 5 – Loan Receivable, included elsewhere

in the notes to the consolidated financial statements.

The $14.7 million increase during the third quarter of 2022, specifically

related to Bud & Mary’s.

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

litigation and the uncertainty of the customer’s ability to repay the outstanding balance.

We believe the litigation is without

merit and will continue to vigorously defend ourselves.

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

travel expenses, associated with executive and other administrative functions.

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

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

G&A expense decreased

by $2.8 million, or 29%, for the three months ended March 31, 2023, compared to the same period in 2022.

The decrease is attributable

to payroll, benefits and related expenses decrease of $1.3 million, a decrease in acquisition-related expenses of $1.3 million, an increase

in consulting and other related expenses of $652 thousand, a decrease in insurance expenses of $207 thousand, a decrease in depreciation

and amortization of $639 thousand.

Selling and Marketing

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

Selling and marketing expenses increased by $1.3

million, or 143%, for the three months ended September 30, 2022, compared to the same period in 2021.

The increase is attributable to

our acquisition of Lab Society in 2022 and the acquisitions of Precision, Cascade and PurePressure in 2021, which contributed $972 thousand,

an increase in payroll and employee-related expenses of $163 thousand and an increase in advertising and trade show expenses of $147 thousand.

Selling and marketing expenses increased by $4.3

million, or 188%, for the nine months ended September 30, 2022, compared to the same period in 2021.

The increase is primarily related

to our acquisition of Lab Society in 2022 and the acquisitions of Precision, Cascade, and PurePressure in 2021, which attributed $3.2

million, an increase in payroll, severance, and related expenses of $540 thousand and an increase in advertising, trade shows and other

expenses of $539 thousand.

Three months ended

(In thousands)

Selling and marketing

Selling and marketing expenses

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

Selling and marketing ex penses

decreased by $0.5 million, or 24%, for the three months ended March 31, 2023, compared to the same period in 2022.

The decrease is attributable

to a decrease in payroll, advertising and trade show expenses, along with an increase in travel and other expenses.

Research and Development

Research and development (“R&D”)

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

generation VFUs, which includes:

employee-related expenses, including salaries, benefits,

incurred by the subcontractor under agreements to provide engineering work related to the

development of our next-generation VFUs;

expenses related to our facilities, depreciation, and

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

R&D expense increased by $920 thousand, or

111%, for the three months ended September 30, 2022, compared to the same period in 2021.

The increase is primarily related to an increase

in materials and other costs of $565 thousand and our acquisition of Lab Society in 2022 and the acquisitions of Precision, Cascade, and

PurePressure in 2021, which contributed $470 thousand.

These increases were partially offset by a decrease of $116 thousand in payroll

and employee-related expenses.

As a percentage of net revenue, R&D expenses were 24.9% of total revenue for the three months ended

September 30, 2022, compared to 5.3% for the three months ended September 30, 2021.

R&D expense increased by $3.8 million, or

152%, for the nine months ended September 30, 2022, compared to the same period in 2021.

The comparative periodic increase in R&D

expense is attributable to third-party consulting services of $1.4 million, $1.2 million of incremental R&D expense related to the

acquisition of Lab Society in 2022 and the acquisitions of Precision, Cascade and PurePressure in 2021, increases in wages and benefits-related

expenses of $684 thousand and an increase in materials, supplies and other expenses of $450 thousand.

As a percentage of net revenue,

R&D expenses were 12.0% of total revenue for the nine months ended September 30, 2022, compared to 7.1% for the nine months ended

September 30, 2021.

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

Although we continue to increase our investment in R&D activities, we expect R&D expenses to decrease as a percentage of revenue

due to our revenue growth.

in contingent consideration

Change in contingent consideration resulted in

a gain of $602 thousand, or 100%, for the three months ended September 30, 2022, compared to the same periods in 2021.

The change in contingent

consideration, which was recognized by us during the third quarter of 2022, primarily relates to the reduction in the projected earn-out

achievement associated with PurePressure’s first twelve-month earn-out period, for which current revenue projections are trending

below our original earn-out achievement fair value estimates.

During the third quarter of 2022, we reduced the current fair value estimate

of contingent consideration to be earned by the former members of PurePressure by approximately $602 thousand.

As per the guidelines of

ASC805, we are required to record subsequent changes to our original fair value estimates related to contingent consideration as an operating

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

Change in contingent consideration resulted in

a gain of $1.5 million, or 100%, for the nine months ended September 30, 2022, compared to the same periods in 2021.

The change in contingent

consideration, which was recognized by us during the second and third quarter of 2022, primarily relates to the reduction in the projected

earn-out achievement associated with Lab Society’s and PurePressure’s first twelve-month earn-out period, for which current

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

During the second quarter of 2022, we reduced

the current fair value estimate of contingent consideration to be earned by the former members of Lab Society by approximately $1.0 million.

During the third quarter of 2022, we reduced the current fair value estimate of contingent consideration to be earned by the former members

of PurePressure by approximately $602 thousand.

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

amount earned by the former members of Precision and Cascade.

As per the guidelines of ASC805, we are required to record subsequent changes

to our original fair value estimates related to contingent consideration as an operating expense in the period of change and not as an

increase to goodwill.

of goodwill and intangible assets

During the three months period ended June 30,

2022, we identified an impairment-triggering event associated with both a sustained decline in our stock price and associated market capitalization,

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

Due to these factors, we deemed that there was an impairment

to the carrying value of its long-lived assets and accordingly performed interim testing as of June 30, 2022.

Based on its interim testing, we noted that the

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

of our goodwill and intangible assets.

Accordingly, we 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 our interim testing

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

Income (Expense), Net

Three months ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Interest (expense) income, net

Other income (expense)

Change in fair value of warrant liability

(Loss) gain on extinguishment of notes payable

Total other (expense) income, net

(expense) income, net

Interest expense increased by $4.0 million, or

8,943%, for the three months ended September 30, 2022 compared to the same period in 2021.

The increase in interest expense primarily

is attributable to an increase in interest expense, including the amortization of debt discount costs associated with the outstanding

principal balance of our existing debt facility, plus incremental pre-payment penalty interest incurred in connection with the modification

of our debt facility, of $4.1 million related to our SPA Note and Exchange Note.

This was partially offset by interest income of approximately

$100 thousand from our TTK Solutions.

Interest expense increased by $5.3 million, or

7,782%, for the nine months ended September 30, 2022 compared to the same period in 2021.

The increase in interest expense primarily is

attributable to an increase in interest expense, including the amortization of debt discount costs associated with the outstanding principal

balance of our existing debt facility, plus incremental pre-payment penalty interest incurred in connection with the modification of our

debt facility, of $6.9 million related to our SPA Note and Exchange Note.

This was partially offset by interest income of approximately

$1.2 million from our TTK Solutions.

Other income (expense)

Other income increased by $1.5 million, or 10,140%,

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

The increase in other income primarily is attributable

to the finalization and favorable true-up of previously estimated acquisition-related net working capital amounts related to the acquisition

of Lab Society in 2022 and the acquisitions of Precision, Cascade and PurePressure in 2021 of $1.5 million.

This partially was offset

by other expense-related items.

Other expenses increased by $1.6 million, or 2,031%,

for the nine months ended September 30, 2022 compared to the same period in 2021.

The increase in other income primarily is attributable

to the finalization and favorable true-up of previously estimated acquisition-related net working capital amounts related to the acquisition

of Lab Society in 2022 and the acquisitions of Precision, Cascade and PurePressure in 2021 of $1.5 million.

This partially was offset

by other expense-related related items.

Change in fair value of warrant liability

Change in fair value of warrant liability increased

by $5.7 million, or 100% for the three and nine months ended September 30, 2022, compared to $0 for the three and nine months ended September

During the three months period ended September 30, 2022, we recorded a non-cash gain of

$5.7 million related to changes in the valuation of our liability-classified warrants issued through a private placement associated with

Warrant Liabilities , which was primarily driven by movements in our stock price.

information regarding the fair value of our liability-classified warrants issued through a private

placement using a Black - Scholes option- pricing

model that makes certain assumptions may be found in Note 4 – Fair Value Measures, included elsewhere in the notes to the

consolidated financial statements.

(Loss) gain on extinguishment of notes payable

Loss on extinguishment of notes payable increased

by $17.9 million, or 100%, for the three months ended September 30, 2022 compared to the same period in 2021.

The loss on extinguishment

of notes payable, which was recognized by us during the third quarter of 2022, relates to the extinguishment of the SPA Note dated March

We recognized a loss on extinguishment of $17.9 million (inclusive of $12.4 million of unamortized warrants, $3.0 million default

penalty on the principal amount, $2.3 million of unamortized issuance costs and $1.2 million of the incremental fair value of warrants

modified in exchange of debt).

Additional information relating to our SPA Note may be found in Note 9 – Debt, included elsewhere

in the notes to the consolidated financial statements.

Loss on extinguishment of notes payable increased

by $20.7 million, or 768%, for the nine months ended September 30, 2022 compared to the same period in 2021.

The loss on extinguishment

of notes payable, which was recognized by us during the third quarter of 2022, relates to the extinguishment of the SPA Note.

We recognized

a loss on extinguishment of $17.9 million (inclusive of $12.4 million of unamortized warrants, $3.0 million default penalty on the principal

amount, $2.3 million of unamortized issuance costs and $1.2 million of the incremental fair value of warrants modified in exchange of

This is compared to 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) in the nine months ended September 30, 2021.

Additional information relating to our gain on extinguishment

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

September 30,

Research and development

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

VFUs, which includes:

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

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

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

R&D expense decreased

by $$1.3 million, or 65%, for the three months ended March 31, 2023, compared to the same period in 2022.

The decrease is attributable

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

unit cooling and humidity environments.

We expect to continue to

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

As a percentage of net revenue, R&D

expenses were 12.7% of total revenue for the three months ended March 31, 2023, compared to 8.0% for the three months ended March 31,

Other Income (Expense), Net

Three months ended

(In thousands)

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

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, we recognized a small benefit of approximately $62 thousand related to the reversal of our opening

deferred tax liability on indefinite-lived assets.

(Loss) Attributable to Non-Controlling Interest

We consolidate the results of operations of two

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

On December 8, 2019, we formed Agrify-Valiant, LLC (“Agrify-Valiant”),

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

Agrify-Valiant started

its operations during the second quarter of 2020.

On October 27, 2022, we provided notice to Valiant-America, LLC of our intention to

begin winding up of Agrify Valiant, LLC.

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

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

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

in the marketplace.

Interest income (expense), net

Loss on extinguishment of notes payable

Change in fair value of warrant liabilities

Other income (expense)

Total other income (expense), net

Interest income (expense),

net decreased by $1.4 million, or 243%, for the three months ended March 31, 2023, compared to the same period in 2022.

The decrease in

interest income is attributable mainly to decreases in interest from marketable securities and interest income from TTK Solutions.

The change in fair value

of warrant liabilities during the three months ended March 31, 2023 is related to the fair value remeasurement of warrants issued during

March, August, and December, 2022.

Income (Loss) Attributable to Non-Controlling

We consolidate the results

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

On December 8, 2019, we formed Agrify

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

Agrify Valiant

LLC started its operations during the second quarter of 2020.

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

TriGrow’s 75% interest in Agrify Brands, LLC (formerly TriGrow Brands, LLC), a licensor of an established portfolio of consumer

brands that utilize our grow technology.

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

customers’ products in the marketplace.

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

Accordingly, we are currently

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

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

calculated as a product of the net income of the entity multiplied by the percentage of ownership held by the non-controlling interest.

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

and regulatory perspective.

Loss attributable to non-controlling

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

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

Liquidity and Capital Resources

Operating Capital Requirements

We have incurred operating losses since our inception

and have negative cash flows from operations.

We have an accumulated deficit of $207.5 million as of September 30, 2022.

Our primary sources

of liquidity are cash and cash equivalents, with additional liquidity accessible, subject to market conditions and other factors, including

limitations that may apply to us under applicable Securities Exchange Commission (“SEC”) regulations, from the capital markets,

including under its (“ATM” or ATM Program”).

As of September 30, 2022, we had $12.5 million

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

Our restricted cash of $10.0 million is associated with the Exchange

Note as of September 30, 2022.

Current liabilities were $41.5 million as of September 30, 2022.

In October 2022, we entered into the ATM Program

with Canaccord Genuity LLC (the “Agent”) pursuant to which we may issue and sell, from time to time, shares of our Common

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

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

SEC and the ATM Program agreement.

Subsequent to the quarter ended September 30, 2022, as of November 7, 2022, we 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 us 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.

We have used, and intend 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.

As of November 7, 2022, we had $34.4 million of remaining availability for future

issuances of Common Stock under the ATM Program.

We believe we have sufficient cash on hand to

continue operations for the next six months.

Our current working capital needs are to support revenue growth, fund construction and equipment

financing commitments associated with our TTK Solutions, manage inventory to meet demand forecasts and support operational growth.

long-term financial needs primarily include working capital requirements and capital expenditures.

We anticipate that we will allocate

a significant portion of our current balance of working capital to satisfy the financing requirements of our current and future TTK arrangements.

These arrangements require a significant amount of upfront capital necessary to fund construction, associated with facility build-outs,

and equipment.

We may opportunistically raise debt capital, subject

to market and other conditions.

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

and general corporate purposes.

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

terms acceptable to us or at all.

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

condition may be adversely affected.

These financial statements have been prepared

on a going concern basis, which implies we believe these conditions raise substantial doubt about our ability to continue as a going

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

Our continuation as a going

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

sufficient cash flows from operations to meet its obligations.

There is no assurance that we will ever be profitable.

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

of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.

We entered into one Loan Agreement and Promissory

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

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

As of March 31, 2023, our

principal sources of liquidity were cash and cash equivalents and marketable securities totaling $1.5 million and $— million in

restricted cash.

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

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

Our long-term financial needs

primarily include working capital requirements and capital expenditures.

We anticipate that we will allocate a significant portion of

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

These arrangements

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

are many factors that may negatively impact our available sources of funds in the future, including the ability to generate cash from

operations, raise debt capital and raise cash from the issuance of our securities.

The amount of cash generated from operations is dependent

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

We may opportunistically

raise debt capital, subject to market and other conditions.

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

for strategic alternatives and general corporate purposes.

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

to raise such capital on terms acceptable to us or at all.

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

results and financial condition may be adversely affected.

We entered into one Loan

Agreement and Promissory Note with Bank of America pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus

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

Small Business Administration.

We received total proceeds of approximately

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

We applied for forgiveness on the $779

thousand of our PPP Loan however was denied by the SBA.

On June 23, 2022, we received a letter from Bank of America agreeing to extend

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

The PPP loan is payable in 34 equal combined monthly

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

On March 14, 2022, we

entered into a Securities Purchase Agreement with an institutional investor.

The Purchase Agreement provides for the issuance of a senior

secured note (the “SPA Note”) in the aggregate amount of $65 million and a warrant (the “SPA Warrant”) to purchase

up to an aggregate of 688,111 shares of Common Stock, with the potential for two potential subsequent closings for notes with an original

principal amount of $35 million each.

On August 18, 2022, we

entered into a Securities Exchange Agreement.

Pursuant to the Exchange Agreement, we have paid $35.2 million under the SPA Note and exchanged

the remaining balance of the SPA Note for a new senior secured note (the “Exchange Note”) with an aggregate original principal

amount of $35 million and a new warrant to purchase 1,422,764 shares of Common Stock (the “Note Exchange Warrant”).

We received total

proceeds of approximately $779 thousand from the unsecured PPP Loan which was originally scheduled to mature in May 2022.

We applied for

forgiveness on the $779 thousand of our PPP Loan however was denied by the SBA.

On June 23, 2022, we received a letter from Bank of America

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

The PPP loan is payable in 34 equal

combined monthly principal and interest payments of approximately $24 thousand that commenced on August 7, 2022.

On March 14, 2022, we entered

into a Securities Purchase Agreement with an institutional investor.

The Purchase Agreement provides for the issuance of the SPA Note

in the aggregate amount of $65.0 million and a SPA Warrant to purchase up to an aggregate of 34,406 shares of Common Stock, with the potential

for two potential subsequent closings for notes with an original principal amount of $35.0 million each.

On August 18, 2022, we entered

into a Securities Exchange Agreement.

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

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

with an aggregate original principal amount of $35.0 million and a Note Exchange Warrant to purchase 71,139 shares of Common Stock.

Additionally,

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

The Exchange Note is

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

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 us in connection with any equity financing, which will

reduce the outstanding principal amount under the Exchange Note.

At any time, we may

prepay all of the Exchange Note by redemption at a price equal to 102.5% of the then-outstanding principal amount under the Note plus

accrued but unpaid interest.

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

anniversaries of issuance at a price equal to the then-outstanding principal amount under the Exchange Note plus accrued but unpaid interest,

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

accrued but unpaid interest.

Statement of Cash Flows

following table presents the major components of net cash flows from and used in operating, investing, and financing activities for the

nine months ended September 30, 2022, and 2021:

we exchanged the SPA Warrant for a Modified Warrant for the same number of underlying shares but with a reduced exercise price.

On March 8, 2023, the Company

entered into a new Securities Exchange Agreement.

Pursuant to the March 2023 Exchange Agreement, we prepaid approximately $10.3 million

in principal amount under the Exchange Note and exchanged $10.0 million in principal amount of the remaining balance of the Exchange Note

for a new senior secured convertible note (the “Convertible Note”).

The Convertible Note is a

senior secured obligation and will rank senior to all of our indebtedness.

The Convertible Note will mature on August 19, 2025 (the “Maturity

Date”) and has a 9.0% annualized interest rate, with interest to be paid monthly, in cash.

The principal amount of the Convertible

Note will be payable on the maturity date, provided that the lender will be entitled to a cash sweep of 30% of the proceeds of any at-the-market

equity offering and 20% of the proceeds received by us in connection with any other equity financing, which will reduce the outstanding

principal amount under the Exchange Note.

On October 27, 2023, CP Acquisitions LLC, and entity affiliated with and controlled by Raymond

Chang, acquired the Exchange Note and the Convertible Note.

As of October 30, 2023, there was approximately $6.7 million outstanding under

the Exchange Note and $8.8 million outstanding under the Convertible Note.

At any time, we may prepay

all of the Exchange Note by redemption at a price equal to 102.5% of the then-outstanding principal amount under the Note plus accrued

but unpaid interest.

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

of issuance at a price equal to the then-outstanding principal amount under the Exchange Note plus accrued but unpaid interest, or if

we undergo a fundamental change at a price equal to 102.5% of the then-outstanding principal amount under the Exchange Note plus accrued

but unpaid interest.

The following table presents

the major components of net cash flows from and used in operating, investing, and financing activities for the three months ended March

31, 2023, and 2022:

(In thousands)

September 30,

Net cash (used in) provided by:

2 unchanged sentences

Financing activities

Net increase in cash and cash equivalents

Flow from Operating Activities

used in operating activities consists of net income adjusted for non-cash benefits and expenses, and changes in operating assets and liabilities.

Our primary source of cash provided by operating activities is cash collections from our customers related to the sale of cultivation

and extraction solutions.

Our primary uses of cash from our operating activities include payments for employee-related expenditures, payments

for inventory due to increased demand forecasts, construction costs related to TTK Solutions, acquisition-related costs and the payment

of other operating expenses incurred in the ordinary course of business.

used in operating activities increased from the nine months ended September 30, 2022 to the nine months ended September 30, 2021 primarily

due to higher inventory purchases to meet demand, increased construction costs related to TTK Solutions, payments for employee-related

expenditures and other working capital needs.

Net increase in cash, cash equivalents, and restricted cash

Cash Flow from Operating Activities

For the three months ended

March 31, 2023, we incurred a net loss of $10.3 million, which included $0.4 million related to depreciation and amortization, $—

related to amortization of debt issuance costs, $0.9 of stock based compensation expense, and $2.7 related to the change in fair value

of warrant liabilities.

Net cash was reduced by changes in operating assets and liabilities of $2.6 million.

For the three months ended

March 31, 2022, we recorded net income of $1.8 million, which included a non-cash gain related to the remeasurement of warrant liabilities

of $10.8 million, non-cash expenses of $1.1 million related to depreciation and amortization, $1.0 million in connection with the issuance

and acceleration of stock options, debt issuance costs of $2.7 million, non-cash interest income of $0.4 million related to TTK Solutions,

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

Net cash was reduced by a $0.8 million increase in accounts

receivable, a $2.4 million decrease in deferred revenue, a $16.4 million increase in inventory due to demand forecast, and a $3.0 million

increase in prepaid expenses, a $2.1 million increase in accrued expenses and other current liabilities and $2.8 million decrease in accounts

Cash Flow from Investing Activities

Cash provided by investing activities consists

primarily of maturities and sales of investments in marketable securities.

Cash used in investing activities consists primarily of purchases

of marketable securities, cash paid associated with our 2022 acquisition of Lab Society, the issuance of loans receivable in connection

with our financing of construction and equipment under its TTK Solutions offering and purchases of property and equipment expenditures.

The capital expenditures support growth and investment in property and equipment, to expand research, development, and testing capabilities

and, to a lesser extent, the replacement of existing equipment.

Net cash used in investing activities decreased

from the nine months ended September 30, 2022 to the nine months ended September 30, 2021

primarily due to a net decrease in cash used for purchases, sales and maturities of marketable securities, partially offset by an increase

in purchases of property and equipment, issuance of TTK-related loans and cash paid

in connection with our 2022 acquisitions of Lab Society.

For the three months ended March 31, 2023, net cash provided by investing

activities was $9.8 million, which included cash outflows of $0.1 million in net purchases of property, plant and equipment and $0.6 in

issuances of notes receivable and cash inflows of $10.4 million related to proceeds from sales of securities.

For the three months ended

March 31, 2022, net cash used in investing activities was $13.4 million, which included cash outflows of $6.4 million in net purchases

of marketable securities, $3.5 million paid in connection with our 2022 acquisitions of Lab Society, $12.5 million related to the issuance

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

Cash Flow from Financing Activities

Cash provided

by financing activities consists primarily of proceeds from the issuance of Common Stock, debt, and warrants in private placements and

proceeds from the initial and secondary public offerings.

Cash used in financing activities consists primarily of repayment of debt.

provided by financing activities decreased from the nine months ended September 30, 2022 to the nine months ended September 30, 2021 primarily

due to an increase in repayment of debt.

Sheet Arrangements

the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships,

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

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

We are therefore not exposed to the

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

Accounting Policies and Estimates

I, Item, 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated

financial statements, which have been prepared in accordance with GAAP.

The preparation of these consolidated financial statements

requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of

contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses

during the reporting period.

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

estimates are based on our knowledge and understanding of current conditions and actions that we may take in the future.

in these estimates will occur as a result of the passage of time and the occurrence of future events.

Subsequent changes in these

estimates may have a significant impact on our financial condition and results of operations and are recorded in the period in which

they become known.

We have identified the following estimates that, in our opinion, are subjective in nature, require the exercise

of judgment and involve complex analysis:

the fair value of derivative assets and liabilities, goodwill impairment assessment, revenue

recognition and cost of goods sold.

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

are detailed in Note 2 - Summary of Significant Accounting Policies included in our 2021 Annual Report and Note 1 - Overview, Basis of

Presentation and Significant Accounting Policies to our consolidated financial statements in Part I, Item 1 of this Quarterly Report

on Form 10-Q.

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

results of operations for the periods covered in this Quarterly Report.

Issued Accounting Pronouncements Adopted

more information on recently issued accounting pronouncements are included within Note 1 - Overview,

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

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

Accounting Pronouncements Not Yet Adopted

more information on new accounting pronouncements not yet adopted are included within Note 1 -

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

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

Quantitative and Qualitative Disclosures About Market Risk

a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information

required by this Item.

For the three months ended

March 31, 2023, net cash used in financing activities was $9.3 million.

Net cash used in financing activities was primarily driven by

repayments of notes payable of $10.7 million, proceeds from at-the-market offerings of $1.5 million, and proceeds from ESPP shares of

$0.03 million.

For the three months ended

March 31, 2022, net cash provided by financing activities was $87.4 million.

Net cash provided by financing activities was primarily driven

by the Company’s two private placements during 2022.

The Company received $65.0 million in net proceeds from our issuance of debt

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

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

Each of the above inflows

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

Off-Balance Sheet Arrangements

During the periods presented,

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

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

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

We are therefore not exposed to the financing, liquidity,

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

Critical Accounting Policies and Estimates

Part I, Item, 2, “Management’s

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

have been prepared in accordance with GAAP.

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

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

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

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

These estimates are based

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

Changes in these estimates will occur

as a result of the passage of time and the occurrence of future events.

Subsequent changes in these estimates may have a significant impact

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

We have identified the

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

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

The significant accounting

policies and estimates that have been adopted and followed in the preparation of our consolidated financial statements are detailed in

Note 1 - Overview, Basis of Presentation and Significant Accounting Policies included in our 2022 Annual Report and Note 1 - Overview,

Basis of Presentation and Significant Accounting Policies to our consolidated financial statements in Part I, Item 1 of this Quarterly

Report on Form 10-Q.

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

and results of operations for the periods covered in this Quarterly Report.

Recently Issued Accounting Pronouncements Adopted

For more information on recently

issued accounting pronouncements are included within Note 1 - Overview, Basis of Presentation and Significant Accounting Policies, included

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

New Accounting Pronouncements Not Yet Adopted

For more information on new

accounting pronouncements not yet adopted are included within Note 1 - Overview, Basis of Presentation and Significant Accounting Policies,

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

Quantitative and Qualitative Disclosures

About Market Risk

As a “smaller reporting

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis