What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-01-03 compared with 2023-12-12 · 279 added, 220 removed, 697 unchanged (42% of the section changed)

2 unchanged sentences

The 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, 2022 filed with the Securities and Exchange Commission on November 28, 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 and Results

of Operations” and other information contained in such Form 10-K.

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, 2022 filed with the Securities and Exchange Commission on November 28, 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 and Results of

Operations” and other information contained in such Form 10-K.

The following discussion and analysis also should be read together

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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

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.

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Purchase Agreement

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

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

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

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

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

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

Trail Special Situations LLC (the “Investor”), pursuant to which 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

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Pursuant to the August 2022 Exchange Agreement, we partially paid $35.2 million along with approximately $0.3

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

million 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

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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 a 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 High Trail

Special Situations LLC.

entered into a Securities Exchange Agreement (the “Exchange Agreement” or “Second Amendment”) with the Investor.

Pursuant to the Exchange Agreement, at closing the Company will prepay approximately $10.3 million in principal

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a new senior secured convertible note (the “Convertible Note”) with an original principal amount of $10.0 million.

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”)

closing of the Exchange Agreement, the August 2022 Note remained outstanding with a remaining balance of $11.7 million.

This exchange was deemed to be an extinguishment

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On March 8, 2023, as a result

of the Exchange Agreement, the Company issued a Convertible Note to High Trail Special Situations

of the Exchange Agreement, the Company issued the Convertible Note to High Trail Special Situations

LLC (the “Lender”) with a principal balance of $10 million.

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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

Maturity Date, provided that the holder 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

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Note plus accrued but unpaid interest.

The Lender will also have the option of requiring the Company to redeem the Convertible Note (i)

The holder 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

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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

occurs, the holder 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,

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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;

as of the trading day immediately preceding the date that the holder delivers a notice of acceleration;

(b) the total then outstanding

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(“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

day immediately before the date the holder 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

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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,

Note is fully repaid, the holder 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

If the holder elects to convert

the Convertible Note, the conversion price per share will be $7.64, subject to customary adjustments for certain corporate events.

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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

of Common Stock if such conversion would result in the holder 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 holder, but in any

case, to no greater than 9.99%.

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Interest expense related to

the Convertible Notes described above was $609,001 for the six months ended June 30, 2023.

Accrued interest totaled $136,913 as of June

the Convertible Notes described above was $1,757,931 for the nine months ended September 30, 2023.

Accrued interest totaled $1,041,388

as of September 30, 2023.

Note Conversion

Pursuant to the Exchange Agreement

the Company entered into with High Trail Special Situations LLC on March 8, 2023, the Investor elected on April 26, 2023, to convert $1.6

million of the remaining outstanding principal amount on the Convertible Note for 153,617 shares of Common Stock of the Company.

On May 1, 2023, the Company

entered into a letter agreement with the above referenced accredited Lender (the “Letter Agreement”), pursuant to which the

Company and the Investor agreed to exchange or redeem $2.0 million of the remaining outstanding principal amount under the Exchange Note

for a total of 445,196 shares of Common Stock of the Company, subject to a Beneficial Ownership Limitation of 4.99% of the Company’s

Common Stock.

Due to the Beneficial Ownership Limitation of 4.99%, a total of 69,568 shares of Common Stock of the Company were issued

to the Investor, with the remaining 375,629 shares held in abeyance until the balance (or portion thereof) may be issued in compliance with

such limitations.

As a result, the Company recognized a loss on the redemption of $11,609.

At The Marketing Offering

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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 the Company’s 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.

and fees to the Agent totaling $0.5 million and legal fees totaling $0.1 million.

$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 the Company’s 2022 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

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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 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

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as financial income.

For the three months ended June 30, 2023 and 2022, we did not have any such financial income.

For the three months ended September 30, 2023 and 2022, we did not have any such financial income.

Payment terms with customers

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in the notes to the condensed consolidated financial statements.

During the three and six months ended June 30, 2023, no impairment charges

were recorded.

During the three and nine months ended September 30, 2023, no impairment

charges were recorded.

Capitalization of Internal Software Development

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Results of Operations

Comparison of the Three and Six Months Ended

June 30, 2023 and 2022

Comparison of the Three and Nine Months

Ended September 30, 2023 and 2022

The following table summarizes

our results of operations for the three and six months ended June 30, 2023 and 2022:

our results of operations for the three and nine months ended September 30, 2023 and 2022:

Three months ended

Six Months Ended

September 30,

Nine months ended

September 30,

Revenue (including $0, $0, $46, and $1,763 from related parties, respectively)

Cost of goods sold

Gross profit (loss)

General and administrative

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Change in contingent consideration

Gain on disposal

Impairment of goodwill and intangible assets

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Change in fair value of warrant liabilities

Gain (loss) on extinguishment of notes payable

Loss on extinguishment of notes payable

Other expense, net

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Income tax benefit

Income (loss) attributable to non-controlling interests

(Loss) income attributable to non-controlling interest

Net loss attributable to Agrify Corporation

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

$ (1,003.10 )

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

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

reverse stock split on July 5, 2023.

Additional information regarding reverse stock splits may be found in Note

1 – Overview, Basis of Presentation, and Significant Accounting Policies , included

in the notes to the consolidated financial statements

Our goal is to provide our

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The following table provides

a breakdown of our revenue for the three and six months ended June 30, 2023 and 2022:

a breakdown of our revenue for the three and nine months ended September 30, 2023 and 2022:

Three months ended

September 30,

Nine months ended

September 30,

(In thousands)

solutions, including ancillary products and services

Cultivation solutions, including ancillary products and services

Agrify Insights software

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Total revenue

Revenues decreased by less

than $3.9 million, or 55% for the three months ended September 30, 2023 compared to the same period in 2022.

Revenues decreased by $38.4

million, or 74% for the three months ended June 30, 2023 compared to the same period in 2022.

Revenues decreased by $34.5 million, or

76%, for the six months ended June 30, 2023 compared to the same period in 2022.

The comparative decreases in revenue were generated primarily

from decreases in revenue from facility build-outs and extraction solutions.

Design and build revenues decreased by $8.8 million and $21.3

million for the three and six months ended June 30, 2023, respectively, due to reduced build-out of facilities under our TTK Solutions.

Additionally, extraction division revenues decreased by $5.5 million and $13.0 million for the three and six months ended June 30, 2023,

respectively.

million, or 73% for the nine months ended September 30, 2023 compared to the same period in 2022.

The comparative decrease in revenue

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

Extraction division revenues totaled

$2.9 million and $12.4 million for the three and nine months ended September 30, 2023, respectively.

Additionally, design and build revenues

decreased by $1.3 million and $22.7 million for the three and nine months ended September 30, 2023, respectively, due to the continued

build-out of facilities under our TTK Solutions.

Cost of Goods Sold

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The following table provides

a breakdown of our cost of goods sold for the three and six months ended June 30, 2023 and 2022:

Three months ended

Six months ended

a breakdown of our cost of goods sold for the three and nine months ended September 30, 2023 and 2022:

Three months ended September 30,

Nine months ended September 30,

(In thousands)

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Cost of goods sold decreased

by $13.3 million, or 75%, for the three months ended June 30, 2023 compared to the same period in 2022.

Cost of goods sold decreased by

$30.3 million, or 77%, for the six months ended June 30, 2023 compared to the same period in 2022.

The comparative decreases in cost of

goods sold is associated with the decreased amount of subcontractor construction costs related to facility build-outs, internal and outsourced

labor and materials costs for the extraction solutions sales and cultivation solutions, including ancillary products and services.

by $9.0 million, or 81%, for the three months ended September 30, 2023 compared to the same period in 2022.

Cost of goods sold decreased

by $39.3 million, or 77%, for the nine months ended September 30, 2023 compared to the same period in 2022.

The comparative quarterly

decrease in cost of goods sold is associated with the decreased amount of subcontractor construction costs related to our facility build-outs,

internal and outsourced labor and materials costs for the extraction solutions sales, and cultivation solutions, including ancillary products

and services.

Gross Profit (Loss)

Three months ended

Six months ended

September 30,

Nine months ended

September 30,

(In thousands)

Gross profit (loss)

Gross profit totaled $1.0

thousand, or 11.8% of total revenue during the three months ended June 30, 2023 compared to $1.6 million, or 8.3% of total revenue during

the three months ended June 30, 2022.

Gross profit totaled $1.6 million, or 14.6%, of total revenue during the six months ended June 30,

2023 compared to a gross profit of $5.8 million, or 12.7%, of total revenue during the six months ended June 30, 2022.

million, or 31.0% of total revenue during the three months ended September 30, 2023 compared to a gross loss of $4.1 million, or 58.6%

of total revenue during the three months ended September 30, 2022.

Gross profit totaled $2.6 million, or 18.3% of total revenue during

the nine months ended September 30, 2023 compared to a gross profit of $1.7 million, or 3.2% of total revenue during the nine months ended

September 30, 2022.

The $5.1 million three-month and $0.9 million nine-month comparative decrease in gross profit is primarily attributable

to to a smaller decrease in costs of goods sold relative to the decrease in revenue for the period.

We realized a gross profit margin

of 45% and 28% associated with our extraction solutions revenue for the three and nine months ended September 30, 2023, respectively,

while we realized a gross loss margin of approximately 303% and 149% on our cultivation-related revenues for the three and nine months

ended September 30, 2023, respectively.

General and Administrative

Three months ended

Six months ended

September 30,

Nine months ended

September 30,

(In thousands)

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G&A expense decreased

by $14.6 million, or 75%, for the three months ended June 30, 2023, compared to the same period in 2022.

G&A expense decreased by

$17.4 million, or 60%, for the six months ended June 30, 2023, compared to the same period in 2022.

The decrease is largely attributable

to payroll, benefits and related expenses decreases of $2.1 million, a decrease in acquisition-related expenses of $1.3 million, a decrease

in bad debt expense of $9.0 million, a decrease in consulting and other related expenses of $0.7 million, a decrease in stock based compensation

of $0.9 million, a decrease in insurance expenses of $0.2 million, and a decrease in depreciation and amortization of $0.7 million.

Selling and Marketing

Three months ended

Six months ended

(In thousands)

Selling and marketing

Selling and marketing expenses

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

Selling and marketing expenses

decreased by $1.3 million, or 54%, for the three months ended June 30, 2023, compared to the same period in 2022.

Selling and marketing

expenses decreased by $1.7 million, or 39%, for the six months ended June 30, 2023, compared to the same period in 2022.The decreases

are largely attributable to reduced payroll, advertising and trade show expenses.

by $19.8 million, or 82%, for the three months ended September 30, 2023, compared to the same period in 2022.

G&A expense decreased

by $37.2 million, or 70%, for the nine months ended September 30, 2023, compared to the same period in 2022.

The decrease for the three

months ended September 30, 2023 was primarily attributable to a decrease in bad debt expenses, of approximately $15.6 million, a decrease

in depreciation expense, of approximately $1 million, a decrease in stock based compensation, of approximately $1.1 million, a decrease

in salaries and related costs for personnel, of approximately $0.8 million, a decrease in insurance expenses of approximately $0.3 million.

Research and Development

Three months ended

Six months ended

September 30,

Nine months ended

September 30,

(In thousands)

Research and development

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

VFUs, which include:

Research and development (“R&D”)

expenses consisted primarily of costs incurred for development of our Agrify Insights software, next generation VFUs and new Extraction

products, which includes:

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

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

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

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 $1.7 million, or 72%, for the three months ended June 30, 2023, compared to the same period in 2022.

R&D expense decreased by $3.1

million, or 70%, for the six months ended June 30, 2023, compared to the same period in 2022.

The decreases are largely 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.

Other (Expense) Income, Net

by $1.3 million, or 72%, for the three months ended September 30, 2023, compared to the same period in 2022.

R&D expense decreased

by $4.4 million, or 70%, for the nine months ended September 30, 2023, compared to the same period in 2022.

The decrease for the three

months ended September 30, 2023, compared to the same period in 2022 is primarily attributable to decreased personnel and facility costs

associated with the continued development of our VFUs.

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 15.5% and 13.3% of total revenue for the three and nine months ended September 30, 2023, respectively, compared to 24.9%

and 12.0% for the three and nine months ended September 30, 2022.

Selling and Marketing

Three months ended

Six months ended

September 30,

Nine months ended

September 30,

(In thousands)

Interest expense, net

Selling and marketing

Selling and marketing expenses

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

Selling and marketing expenses

decreased by $1.3 million, or 62%, for the three months ended September 30, 2023, compared to the same period in 2022.

Selling and marketing

expenses decreased by $3.1 million, or 46%, for the nine months ended September 30, 2023, compared to the same period in 2022.

for the three months ended September 30, 2023 was primarily attributable to a reduction in salaries and related costs of personnel, of

approximately $0.8 million, and a reduction in trade show and advertising costs, of approximately $0.5 million.

Other Income (Expense), Net

Three months ended September 30,

Nine months ended September 30,

(In thousands)

Interest income (expense), net

Change in fair value of warrant liabilities

Loss on extinguishment of notes payable

Gain on extinguishment of notes payable

Other expense, net

1 unchanged sentence

Interest income (expense),

net decreased by $2.9 million, or 88%, for the three months ended June 30, 2023, compared to the same period in 2022.

net decreased by $4.3 million, or 92%, for the three months ended September 30, 2023, compared to the same period in 2022.

Interest income

(expense), net decreased by $1.6 million, or 56%, for the six months ended June 30, 2023, compared to the same period in 2022.The decrease

in interest expense is attributable mainly to the decrease in principal balance of the debt payable to High Trail Special Situations LLC

on which interest in accrued.

(expense), net decreased by $5.8 million, or 79%, for the nine months ended September 30, 2023, compared to the same period in 2022.The

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

The change in fair value

of warrant liabilities decreased by $21.2 million, or 105% during the three months ended June 30, 2023, compared to the same period in

The change in fair value of warrant liabilities decreased by $29.3 million, or 95% during the six months ended June 30, 2023, compared

to the same period in 2022.The decrease is related to a significant decline in the fair value of warrant liabilities during the three

and six months ended June 30, 2022 between the initial grant date fair value and the fair value as of June 30, 2022.

This decline in fair

value was driven by a significant decrease in stock price during that time, which is an input to the valuation calculation.

Such a fluctuation

in stock price did not exist in the same period in 2023 and therefore there was not a significant change in the fair value of warrant

liabilities in the current period.

The loss on extinguishment

of notes payable of $4.6 million incurred during the six months ended June 30, 2023 is driven by the modification of the notes payable

to High Trail Special Situations LLC through the Securities Exchange Agreement that was entered into on March 8, 2023 which was deemed

to be an extinguishment of debt under ASC 470.

of warrant liabilities decreased by $14.3 million, or 88% during the three months ended September 30, 2023, compared to the same period

The change in fair value of warrant liabilities decreased by $43.6 million, or 92% during the nine months ended September 30,

2023, compared to the same period in 2022.The decrease is related to the fair value remeasurement of warrants discussed in Note 4.

Income Tax Benefit

The change in the provision for (benefit from)

income taxes for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to a

recording of a valuation allowance on the company’s net deferred tax assets.

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.

Liquidity and Capital Resources

As of June 30, 2023, our

principal sources of liquidity were cash and cash equivalents totaling $308 thousand.

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.

There are many factors that may negatively impact our available sources of funds in the future, including the ability to generate cash

from operations, raise debt capital and raise cash from the issuance of our securities.

The amount of cash generated from operations is

dependent upon factors such as the successful execution of our business strategy and general economic conditions.

As of September 30, 2023,

our principal sources of liquidity were cash and cash equivalents and marketable securities totaling $0.2 million.

Our current working

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

manage inventory to meet demand forecasts and support operational growth.

Our long-term financial needs primarily include working capital

requirements and capital expenditures.

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

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

These arrangements require a significant amount of upfront

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

There are many factors that may negatively

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

cash from the issuance of our securities.

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

execution of our business strategy and general economic conditions.

We may opportunistically

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to raise such capital on terms acceptable to us or at all.

If we are unable to raise additional capital when desired, we may be forced

to cease operations.

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

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We received total

proceeds of approximately $779 thousand from the unsecured PPP Loan which was originally scheduled to mature in May 2022.

proceeds of approximately $0.8 million 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.

forgiveness on the $0.8 million of our PPP Loan however was denied by the SBA.

On June 23, 2022, we received a letter from Bank of America

2 unchanged sentences

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 March 14, 2022, we entered into a Securities Purchase Agreement with

the 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

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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

$0.3 million 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.

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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.

The Convertible Note is a senior secured obligation and ranks 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 holder 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

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The following table presents

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

the major components of net cash flows from and used in operating, investing, and financing activities for the nine months ended September

30, 2023, and 2022:

(In thousands)

Net cash and cash equivalents (used in) provided by:

September 30,

Net cash (used in) provided by:

Operating activities

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Financing activities

Net (decrease) increase in cash and cash equivalents

Cash Flows from Operating Activities

For the six months ended

June 30, 2023, we incurred a net loss of $17.1 million, which included a $12.9 million loss from operations, a $4.6 million loss on extinguishment

of notes payable, and $1.2 million of interest expense, net, partially offset by a $1.6 million credit related to the change in fair value

of warrant liabilities.

Net cash used in operating activities for the six months ended June 30, 2023 was $11.6 million.

For the six months ended

June 30, 2022, we incurred a net loss of $72.8 million, which included a $101.3 million loss from operations and $2.8 million of interest

expense, net, partially offset by a $31.0 million credit related to the change in fair value of warrant liabilities.

Net cash used in

operating activities for the six months ended June 30, 2022 was $50.5 million.

Cash Flows from Investing Activities

For the six months ended

June 30, 2023, net cash provided by investing activities was $11.4 million, which included cash inflows of $10.5 million in proceeds from

the sale of securities and $1.5 million in proceeds from the repayment of a loan receivable, partially offset by cash outflows of $591

thousand in costs related to the issuance of loans.

For the six months ended

June 30, 2022, net cash used in investing activities was $29.6 million, which included cash outflows of $20.4 million related to the issuance

of TTK-related loans receivable, $9.1 million of expenditures for property and equipment, $3.5 million paid in connection with our 2022

acquisition of Lab Society and partially offset by $3.4 million in net sales of marketable securities.

Cash Flows from Financing Activities

For the six months ended

June 30, 2023, net cash used in financing activities was $9.9 million, which was primarily driven by repayment of debt in a private placement

of $10.3 million and payments on insurance financing loans of $999 thousand, partially offset by proceeds from the ATM Program of $1.5

For the six months ended

June 30, 2022, net cash provided by financing activities was $86.7 million, which consisted largely of $62.4

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

and warrants in a private placement, net of fees.

Net decrease in cash, cash equivalents, and restricted cash

Cash Flow from Operating Activities

For the nine months ended

September 30, 2023, we incurred a net loss of $19.2 million, which included $3.6 million related to the change in fair value of warrant

liabilities, $1.5 million of depreciation and amortization, $2.1 million of stock based compensation expense, and $24 thousand of debt

issuance costs.

Net cash was increased by changes in operating assets and liabilities of $6.4 million.

For the nine months ended

September 30, 2022, cash 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.

Cash Flow from Investing Activities

For the nine months ended

September 30, 2023, net cash provided by investing activities was $25.2 million, which included cash inflows of $10.5 million in proceeds

from sale of securities and $15.3 million in proceeds from repayment of loan receivable, and cash outflows of $0.6 million related to

a certain loan issuance of loan and $0.1 million in purchases of property and equipment.

For the nine months ended

September 30, 2022, 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.

Cash Flow from Financing Activities

For the nine months ended

September 30, 2023, net cash used in financing activities was $9.6 million.

Net cash used in financing activities was primarily driven

by the repayment of certain of our debt instruments of $10.3 million, and payments on insurance financing loans of $1.2 million, offset

by proceeds generated from the sale of securities pursuant to our “at the market” program, net, of $1.5 million and proceeds

from issuance of a related party note of $0.5 million.

For the nine months ended

September 30, 2022, 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.

Off-Balance Sheet Arrangements

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Critical Accounting Policies and Estimates

Our consolidated financial

statements 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

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

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

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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 on Form 10-K and in Note

1 - Overview, Basis of Presentation and Significant Accounting Policies to our condensed 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.

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

Information on recently issued

accounting pronouncements is included in Note 1 - Overview, Basis of Presentation and Significant Accounting Policies, included in the

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

New Accounting Pronouncements Not Yet Adopted

More information on new accounting

pronouncements not yet adopted by the Company is included within Note 1 - Overview, Basis of Presentation and Significant Accounting Policies,

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

For more information on 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.

Quantitative and Qualitative Disclosures

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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