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Item 7. Management’s Discussion and Analysis

2024-04-15 compared with 2023-11-28 · 796 added, 1055 removed, 74 unchanged (96% of the section changed)

Management’s Discussion and Analysis

of Financial Condition and Results of Operations.

You should read the following

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

the notes thereto appearing elsewhere in this report.

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

whose actual outcomes involve risks and uncertainties.

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

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

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

We are one of the most innovative

providers of advanced cultivation and extraction solutions for the cannabis industry, bringing data, science, and technology to the forefront

of the market.

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

produce the highest quality products with what we believe to be an unmatched consistency, yield, and Return on Investment at scale.

comprehensive extraction product line, which includes hydrocarbon, ethanol, solventless, post-processing, and lab equipment, empowers

producers to maximize the quantity and quality of extract required for premium concentrates.

Our cultivation and extraction

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

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

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

highly fragmented market.

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

Agrify Corporation was incorporated

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

(or “Agrinamics”).

On September 16, 2019,

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

Our corporate headquarters

are located in Troy, Michigan.

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

Colorado, Georgia and Michigan.

Reverse Stock Splits

On January 12, 2021, we effected

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

On October 18, 2022, we effected

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

On July 5 th , 2023,

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

All share and per information has been retroactively adjusted to give

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

Recent Business Developments

Private Placement

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

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

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

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

Warrants”), in a private placement offering.

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

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

Subject to certain ownership

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

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

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

Each Common Warrant is exercisable into one share of Common

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

anniversary of the initial exercise date.

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

in March 2022.

Raymond Chang, our Chairman

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

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

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

The gross proceeds to us

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

Acquisition of Lab Society

On February 1, 2022, we entered

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

(“Lab Society”), Lab Society

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

as the Owner Representative

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

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

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

The aggregate consideration

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

of Lab Society at closing;

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

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

to the extent earned.

We withheld 638 of the Buyer

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

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

During the third

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

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

subject to the conditions of the Merger Agreement.

Additional information regarding our contingent consideration arrangements may

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

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

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

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

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

Based upon the combined first

and second-quarter actual revenue performance, Lab Society’s revenue trend is significantly below the originally estimated revenue

trends incorporated into our original fair value estimates at the time of the acquisition.

We have concluded Lab Society will not achieve

any contingent earn-out consideration in connection with its first earn-out period.

Accordingly, we reversed the current accrued contingent

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

The reversal of this liability

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

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

The purchase price allocation

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

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

The estimated fair value at acquisition

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

Our initial fair value estimates

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

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

These valuation methods require management to project revenues, operating

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

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

During the three-month ended

June 30, 2022, we identified an impairment-triggering event associated with both a sustained decline in our stock price and associated

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

Due to these factors, we deemed that

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

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

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

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

Securities Purchase Agreement

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

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

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

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

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

August 2022 Securities Exchange Agreement

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

(the “August 2022 Exchange Agreement”).

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

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

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

Stock (the “Note Exchange Warrant”).

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

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

2022 Warrants”).

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

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

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

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

The Exchange Note will mature on the

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

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

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

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

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

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

the Note plus accrued but unpaid interest.

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

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

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

Note plus accrued but unpaid interest.

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

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

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

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

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

If an event of default under the Exchange Note

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

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

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

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

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

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

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

and similar transactions, will be exercisable on and after the six-month anniversary of issuance, has a term of five and one-half years

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

resale of the shares issuable upon exercise of the Modified Warrant (the “Modified Warrant Shares”), in which case the Modified

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

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

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

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

upon exercise of the Warrant (the “Note Exchange Warrant Shares” and, together with the Modified Warrant Shares, the “Exchange

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

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

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

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

The Note Exchange Warrant also prohibited

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

and/or provisions.

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

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

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

Additionally, the August 2022 Warrants could not be exercised

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

on October 14, 2022.

March 2023 Securities Exchange Agreement

On March 8, 2023, we entered

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

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

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

with an original principal amount of $10.0 million.

The Convertible Note will mature on August 19, 2025.

We also amended the Exchange

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

At The Marketing Offering

On October 18, 2022, we entered

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

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

as an agent for sales.

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

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

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

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

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

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

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

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

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

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

Agent totaling $516 thousand.

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

the Exchange Note.

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

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

Confidentially Marketed Public Offering

On December 16, 2022, we

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

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

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

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

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

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

The December 2022 Warrants

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

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

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

The Pre-Funded 2022 Warrants

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

date using a relative fair value allocation method.

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

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

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

In addition, such warrants do not provide any guarantee

of value or return.

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

to our Common Stock.

Raymond Chang, our Chairman

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

of approximately $1.5 million.

We received aggregate gross

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

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

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

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

Impact of coronavirus pandemic (“COVID-19”)

The extensive impact of the

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

as businesses and capital markets around the world.

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

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

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

extended closures of businesses.

To date, although all of

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

delivery of our inventory.

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

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

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

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

The extent to which COVID-19

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

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

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

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

We continue to service our customers amid

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

Nasdaq Deficiency Notices

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

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

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

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

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

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

To regain compliance with the Minimum Bid Requirement, the closing

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

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

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

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

On January 19, 2023,

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

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

The Nasdaq Capital Market under the Minimum Bid Requirement.

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

days to regain compliance with the Minimum Bid Requirement.

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

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

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

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

On April 18, 2023, we received

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

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

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

should read the following discussion and analysis of our financial condition and results of our operations together with our consolidated

financial statements and the notes thereto appearing elsewhere in this report.

This discussion contains forward-looking statements reflecting

our current expectations, whose actual outcomes involve risks and uncertainties.

Actual results and the timing of events may differ materially

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

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

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 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.

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 provider.

The totality of our product offerings and service capabilities forms an unrivaled ecosystem

in what has historically been a highly

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

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

(“Agrinamics”).

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

corporate headquarters are located in Troy, Michigan.

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

conduct business, including Colorado, Georgia and Michigan.

October 18, 2022, we effected a 1-for-10 reverse stock split on our Common Stock.

July 5th, 2023, we effected a 1-for-20 reverse stock split on our Common Stock.

All share and per information has been retroactively

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

Business Developments

the beginning of 2023, we announced a strategic plan to foster sustainable long-term growth through cost efficiencies and enhanced sales

and growth initiatives.

We have been focused on growing our cultivation business by helping our existing Agrify Total Turn-Key customers

to bring their facilities online and driving additional sales through our RDP.

As a result, we have successfully installed and commenced

our Las Vegas customer, Nevada Holistic Medicine, our Denver Colorado customer, Denver Greens, and signed several new customers such

as Golden Lake Business Park in California, and Harvest Works in New Jersey.

As a testimony to the Vertical Farming Unit’s (“VFU”)

ability to produce high quality flower, Nevada Holistic Medicine is already consistently harvesting 9 pounds of A-grade flower per VFU,

or roughly 64 grams per canopy square foot, and seeing 90%+ A-grade flower produced with exceptional color, trichome, and terpene levels.

since we have streamlined our expansive extraction portfolio of technologies, we have successfully supported the deployment of several

turnkey solvent-based and solventless extraction packages to customers in California, Michigan, and the East Coast.

In addition, we have

released several new technologies and products into the market based on customer feedback, including our first peer-reviewed Cannabeast

13 Distillation Unit, a Diamond Miner, Stitch-less Double Filtration Rosin Bags, and the revamped PX30 Hydrocarbon Extractor.

also made significant strides to receive UL Compliance for Precision Extractions’ EXP Explosion Proof Rooms in an effort to continue

our commitment to safety and quality within cannabis extraction facilities.

industry developments illustrate the continuous innovation, and commitment to safety within the cannabis sector as our company adapts

to evolving market demands.

More importantly, our growing partnership across the Country is a strong testimony to operators’ continued

trust in Agrify’s team and technologies in the most competitive markets.

Acquisition and Warrant Issuance

October 27, 2023, following the execution of the Modification Agreement (as defined below), CP Acquisitions LLC (the “New Lender”),

an entity affiliated with and controlled by Raymond Chang, our Chairman and Chief Executive Officer, and I-Tseng Jenny Chan, a member

of our Board of Directors, purchased from the Former Lender the Senior Secured Note issued by us to the Former Lender on August 19, 2022

(the “Exchange Note”) and the Senior Secured Convertible Note issued by us to the Former Lender on March 10, 2023 (the “Convertible

As a condition to the Note Purchase, we and the New Lender entered into an acknowledgment and release (the “Release

Agreement”) with the Former Lender, pursuant to which we and the New Lender released the Former Lender from any claims, demands,

actions, suits, obligations and causes of action arising on or before the date thereof.

October 27, 2023, as a condition precedent to the Note Purchase, we entered into a letter agreement (the “Letter Agreement”)

with the Former Lender.

Pursuant to the Letter Agreement, we agreed, immediately prior to the note purchase transaction, to exchange

$3.0 million in principal and approximately $1.1 million in accrued but unpaid interest outstanding under the Exchange Note for a warrant

(the “Exchange Warrant”) to purchase 2,809,669 shares of common stock.

Additionally, we agreed to exchange the 375,629 shares

of common stock held in abeyance for the Former Lender under the terms of the letter agreement between us and the Former Lender dated

as of April 26, 2023 for a warrant to purchase 375,629 shares of common stock (the “Abeyance Warrant”).

of the Exchange Warrant and the Abeyance Warrant has an exercise price of $0.001 per share, became exercisable upon issuance, has a term

of five years from the date of issuance and is exercisable on a cash basis or on a cashless exercise basis at the Former Lender’s

The Former Lender exercised the Exchange Warrant and Abeyance Warrant in full during January and February 2024.

Amendment and Secured Promissory Note

July 12, 2023, we issued an unsecured promissory note in favor of GIC Acquisition, LLC (“GIC”), an entity that is owned and

managed by Raymond Chang, our Chairman and Chief Executive Officer.

On October 27, 2023, we and GIC amended and restated the Note (the

Pursuant to the terms of the GIC Note, as restated, the maturity date was extended until December 31, 2023 and

we granted a junior security interest in our assets.

On January 25, 2024, we and GIC amended and restated the GIC Note to increase the

principal amount thereunder to $1.0 million, all of which is currently outstanding under the GIC Note, and to extend the maturity date

until June 30, 2024.

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

Pursuant to the Junior Secured Note, the New Lender loaned an aggregate of approximately $4.0 million to us.

The Junior Secured Note

bore interest at a rate of 10% per annum, had a maturity date of December 31, 2023, and could be prepaid without any fee or penalty.

The Junior Secured Note was a junior secured obligation.

Amendment, Consolidation and Conversion

January 25, 2024, following stockholder approval at an annual meeting of stockholders on January 8, 2024, we and the New Lender consolidated

the outstanding principal and interest due under the Junior Secured Note and the Exchange Note into the Convertible Note and amended

and restated the Convertible Note (as amended and restated, the “Restated Note”), with an outstanding principal amount of

approximately $18.9 million at the time of issuance of the Restated Note.

The Restated Note amended the terms of the Convertible Note

by, among other things, (i) reducing the conversion price to $1.46 per share of common stock, (ii) increasing the beneficial ownership

limitation to 49.99% with respect to any individual or group, provided that the New Lender may assign its right to receive shares upon

conversion to Mr.

Chang and/or Ms.

Chan or their affiliates, in which case the 49.99% beneficial ownership limitation will apply to each

of them individually, (iii) extending the maturity date to December 31, 2025, (iv) increasing the interest rate from 9% to 10% per annum,

(v) increasing the default interest from 15% to 18% per annum, and (vi) providing for the payment of interest every six months, or in

lieu of cash interest payments, we may issue shares as payments-in-kind at a conversion price equal to the higher of (i) $1.46 or (ii)

a 20% discount to our trailing seven-day volume weighted average price as of the date of interest payment.

Immediately following the

execution of the Restated Note, the New Lender immediately elected to convert approximately $3.9 million of outstanding principal into

an aggregate of 2,671,633 shares of common stock, and assigned its rights to receive such shares to entities affiliated with Mr.

Following the conversion, there was $15.0 million in principal amount outstanding under the Restated Note.

Molding Settlement and Warrant Issuance

prior to the note purchase described above on October 27, 2023, and with an effective date as of October 18, 2023, we entered into a

Modification and Settlement Agreement (the “Modification Agreement”) with Mack Molding Company (“Mack”).

to the Modification Agreement, we and Mack agreed to settle an outstanding dispute of approximately $8.24 million under a Supply Agreement

between the parties dated December 7, 2020 (the “Supply Agreement”) by reducing the aggregate amount due to Mack and extending

the timeline for payment.

The Modification Agreement requires us to make payments of $500,000 and $250,000 to Mack on or before November

1, 2023 and February 15, 2024, respectively.

Following the November 1, 2023 payment, we will be entitled to take possession of certain

Vertical Farming Units (“VFUs”) that were assembled under the Supply Agreement.

The Modification Agreement also requires

us to purchase from Mack a minimum of 25 VFUs per quarter for each quarter during 2024 and a minimum of 50 VFUs per quarter for the six

quarters beginning with the first quarter of 2025.

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

Modification Agreement.

Additionally,

as part of the Modification Agreement, we agreed to issue to Mack a warrant (the “Mack Warrant”) to purchase 750,000 shares

of common stock.

The Mack Warrant has an exercise price of $4.00 per share, was exercisable upon issuance, has a term of three years

from the date of issuance and is exercisable on a cash basis unless at the time of exercise there is no effective registration statement

for the resale of the underlying shares, in which case the Mack Warrant may be exercised on a cashless exercise basis at Mack’s

Notices and Hearing

April 18, 2023, we received a notice (the “April Nasdaq Notice”) from The Nasdaq Stock Market LLC (“Nasdaq”)

that we were noncompliance with Nasdaq Listing Rule 5250(c)(1) as a result of our failure to file our Annual Report on Form 10-K (the

“Form 10-K”) with the SEC by the required due date.

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

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

On August 16, 2023, we received

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

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

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

August 16, 2023, we received a third notice from Nasdaq that we remain noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of

our failure to file our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 (the “Second Quarter Form 10-Q”)

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

Nasdaq Notice, the “Nasdaq Notices”).

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

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“Delinquent Reports”) in a timely manner.

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

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

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

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

extension period granted by the Panel following the hearing.

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

this additional extension period.

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

extension period.

As disclosed in the Current

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

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

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

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

As a result of such restatements,

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

Mack Molding Modification

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

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

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

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

The Modification

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

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

that were assembled under the Supply Agreement.

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

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

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

We filed each of the Delinquent Reports between November 28, 2023 and January 3,

December 1, 2023, we received a notice Nasdaq stating that because we reported stockholders’ equity of $(17.17) million in our

Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, we were no longer in compliance with Nasdaq Listing Rule 5550(b)(1),

which requires that listed companies maintain a minimum of $2.5 million in stockholders’ equity.

timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”), which hearing was held on January 11, 2024.

the hearing, we presented a plan to regain compliance with Nasdaq Listing Rule 5550(b)(1).

On January 30, 2024, we received formal notice

that the Panel had granted our request for an exception through April 15, 2024 to evidence compliance with Rule 5550(b)(1), which represents

the full extent of the Panel’s discretion to grant continued listing.

As a result, there can be no assurance that we can regain

compliance by the end of the extension period.

Additionally,

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

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

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

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

Warrant Issuance

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

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

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

of common stock (the “Exchange Warrant”).

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

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

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

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

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

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

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

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

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

Additionally, in the event that we have not

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

Chang or his affiliates (subject to certain offsets)

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

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

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

Letter Agreement requires us to issue equity securities to Mr.

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

minus any funds advanced by Mr.

Chang to us since July 1, 2023.

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

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

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

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

Amendment and Secured Promissory Note

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

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

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

Pursuant to the terms of the Restated

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

Exchange Note and the Convertible Note.

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

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

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

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

The Junior Secured Note is a secured obligation

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

Use of Estimates

The preparation of consolidated

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

(“GAAP”) requires management

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

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

on March 5, 2024, we received a deficiency letter from the Listing Qualifications Department of Nasdaq notifying us that, for the last

30 consecutive business days, the bid price for our common stock had closed below $1.00 per share, which is the minimum closing price

required to maintain continued listing on the Nasdaq Stock Market under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”).

The Notice had no immediate effect on the listing of our common stock on Nasdaq.

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

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

To regain compliance with the Minimum Bid Requirement,

the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive trading days during this 180-day

compliance period, unless the Staff exercises its discretion to extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(H).

compliance period for us will expire on September 3, 2024.

will take all possible actions to restore our compliance with Nasdaq, but we can provide no assurances that the listing of our common

stock will be restored or that we otherwise will remain listed on Nasdaq.

If we fail to continue to satisfy the continued listing requirements

of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq will take steps to delist

our common stock.

Such a de-listing would likely have a negative effect on the price of our common stock and would impair stockholders’

ability to sell or purchase our common stock when they wish to do so, as well as adversely affect our ability to issue additional securities

and obtain additional financing in the future.

February 27, 2024, we entered into a placement agency agreement with Alexander Capital, LP as placement agent, pursuant to which we agreed

to issue and sell an aggregate of 2,760,000 shares of common stock, and, in lieu of common stock to certain investors that so chose,

pre-funded warrants to purchase 3,963,684 shares of common stock.

The public offering price for each share of common stock was $0.38,

and the offering price for each pre-funded warrant was $0.379, which equals the public offering price per share of the common stock,

less the $0.001 per share exercise price of each pre-funded warrant.

The Offering was made pursuant to a registration statement on Form

S-1 that we filed with the Securities and Exchange Commission on January 26, 2024 and was declared effective on February 14, 2024.

Chang, our Chairman and Chief Executive Officer, participated in the offering on the same terms as other investors.

The net proceeds

from the public offering were approximately $2.2 million, after deducting placement agent fees and commissions and expenses.

offering closed on February 28, 2024.

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

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

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

the reporting 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, the valuation

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

Financial Overview

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion

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

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

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

On an ongoing basis, we evaluate estimates,

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

reported period.

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

to be reasonable under the circumstances.

Actual results may differ materially from those estimates or assumptions.

Revenue Recognition

We generate revenue from

the following sources:

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

In accordance with ASC 606

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

● identify the customer contract;

● identify performance obligations

that are distinct;

● determine the transaction price;

● allocate the transaction price

to the distinct performance obligations;

● recognize revenue as the performance

obligations are satisfied.

Identify the customer contract

A customer contract is generally

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

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

Specifically, we obtain written/electronic signatures

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

Identify performance

obligations that are distinct

A performance obligation

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

A good or service that is promised

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

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

other promises in the contract.

Determine the transaction

The transaction price is

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

sales taxes that are collected on behalf of government agencies.

Allocate the transaction

price to distinct performance obligations

The transaction price is

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

being provided to the customer.

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

performance obligations separately, if they are distinct.

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

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

Recognize revenue as

the performance obligations are satisfied

Revenue is recognized when,

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

Significant Judgments

We enter into contracts that

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

for as separate performance obligations.

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

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

versus together may require significant judgment.

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

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

We then allocate the transaction

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

The corresponding revenue is recognized as the related performance

obligations are satisfied.

Judgment is required to determine

the SSP for each distinct performance obligation.

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

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

If the SSP is not observable through past transactions, we estimate

the SSP, considering available information such as market conditions, expected margins, and internally approved pricing guidelines related

to the performance obligations.

We license our software as a Software-as-a-Service (“SaaS”) type subscription license, whereby

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

The full value of the contract is recognized ratably

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

We typically satisfy our performance

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

for services sales as services are rendered

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

We utilize the cost-plus

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

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

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

We determine the SSP for

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

We estimate variable consideration

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

of each reporting period if additional information becomes available.

Variable consideration is typically not subject to constraint.

to variable consideration were not material for the periods presented.

If a contract has payment

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

significant financing component.

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

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

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

For those contracts in which the period exceeds

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

requires judgment.

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

separately as financial income.

For the years ended December 31, 2022 and 2021, we did not have any such financial income.

Payment terms with customers

typically require payment 30 days from the invoice date.

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

products and therefore no specific reserve for such is maintained.

In the infrequent instances where customers raise a concern over

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

in all periods presented.

We have elected to treat

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

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

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

the time value of money.

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

We receive payment from customers

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

There are no contract

assets related to performance under the contract.

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

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

We 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.

Significant estimates include assumptions about collection of

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

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

Accounting Estimates

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 GAAP.

The preparation of consolidated financial statements in conformity with GAAP requires

us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

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

of revenues and expenses during the reported period, fair value of warrant liabilities, sales tax liabilities, and net realizable value

of inventory and collectibility of trade accounts and loans receivable.

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

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

Actual results may differ materially from those

estimates or assumptions.

See below for detail on how certain accounting estimates are determined.

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 ASC 606-10-32-33.

If the SSP is not observable

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

approved pricing guidelines related to the performance obligations.

We license our software as a Software-as-a-Service (“SaaS”)

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

The full value

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

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

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 years ended December 31, 2023 and 2022, 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 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

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

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.

In accordance with ASC 450-20-25,

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

● 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 Systems, LLC (“TriGrow”), which occurred in 2020, the acquisition

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

the acquisition of PurePressure, LLC (“PurePressure”), which also occurred in 2021, and the acquisition of Lab Society, which

occurred in 2022.

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

trade names were identified as intangible assets, and are amortized over their estimated useful lives.

We recognize the excess of

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

Goodwill is not amortized but is tested for impairment

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

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

We have determined that were a single reporting

unit for the purpose of conducting the goodwill impairment assessment.

A goodwill impairment charge is recorded if the amount by which

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

Factors that could lead to a future impairment

include material uncertainties such as a significant reduction in projected revenues, a deterioration of projected financial performance,

future acquisitions and/or mergers, and a decline in our market value as a result of a significant decline in our stock price.

During the three-month ended

June 30, 2022, we identified an impairment-triggering event associated with both a sustained decline in our stock price and associated

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

Due to these factors, we deemed that

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

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

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

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

Convertible Notes Payable

We evaluate our convertible

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

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

The accounting treatment of

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

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

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

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

expense for each reporting period at each balance sheet date.

We reassess the classification of our derivative instruments at each balance

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

event that caused the reclassification.

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

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

using the effective interest method.

If we determine that an instrument

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

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

We record a BCF as a debt discount which is amortized

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

BCFs that are contingent upon the occurrence

of a future event are recognized when the contingency is resolved.

Warrant Liabilities

We do not use derivative

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

We evaluate all of our financial instruments, including

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

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

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

and applicable authoritative guidance in ASC 480 and ASC 815.

Our assessment considers whether the warrants are freestanding financial

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

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

other conditions for equity classification.

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.

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.

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

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

If the actual forfeiture rate is higher than the

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

to the expense recognized in our consolidated financial statements.

If the actual forfeiture rate is lower than the estimated forfeiture

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

in our consolidated financial statements.

The expense we recognize in future periods will be affected by changes in the estimated forfeiture

rate and may differ significantly from amounts recognized in the current period.

Realizable Value of Inventory

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

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

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

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

Value of Warrant Liabilities

estimated fair value of the warrant liabilities on December 31, 2023 and 2022 is determined using Level 3 inputs.

Inherent in a Black-Scholes

option-pricing model are assumptions used in calculating the estimated fair values that represent the Company’s best estimate.

The volatility rate is determined utilizing the Company’s own share price and the share price of competitors over time.

Collectibility

of Trade Accounts and Loans Receivable

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

Accounts receivable

and loan receivable balances are presented net of an allowance for credit losses, which is an estimate of billed or borrowed amounts

that may not be collectible.

In determining the amount of the allowance at each reporting date, management makes judgments about general

economic conditions, historical write-off experience, and any specific risks identified in customer or counterparty collection matters,

including the aging of unpaid accounts receivable and changes in customer financial conditions.

Accounts and loans receivable balances

are written off after all means of collection are exhausted and the potential for non-recovery is determined to be probable.

to the allowance for credit losses are recorded as general and administrative expenses in the consolidated statements of operations.

Tax Liabilities

to acquisition, Precision Extraction NewCo had an unrecorded liability for uncollected sales taxes for sales made in 18 states where

state sales tax filings were not submitted, leaving the entity with a potential sales tax liability.

To assess Precision Extraction NewCo’s

potential liability, the company analyzed invoice data encompassing customer details, their location, product/service taxability, and

sales prices.

Through this analysis, Precision NewCo determined its nexus across various states and estimated the corresponding sales

tax liabilities.

Of the 18 states identified with tax obligations, sales to tax-exempt customers were excluded from liability calculations.

In Q1 2022, Precision NewCo’s taxable revenue stood at approximately $4 million, with an associated sales tax liability of around

$190,000, equivalent to 4.7% of the taxable revenue for that period.

This ratio served as the basis for projecting the sales tax liability

for the remainder of 2022.

For the assessment of penalties and interest, the company adhered to the guidelines outlined by the State

As per Michigan’s Sales Tax Return Form 5080, penalties are capped at 25%, while interest is calculated based on the

prevailing rates provided on the official.gov website.

These penalties and interest charges were factored into the overall sales tax

liability in accordance with Michigan’s guidelines.

Starting from November 1, 2022, all Precision Extraction NewCo customers have

been transitioned to Agrify.

All sales from November 1, 2022, until today are accounted for under Agrify.

Sales tax is accrued and paid

under Agrify.

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:

the customer contract;

performance obligations that are distinct;

the transaction price;

the transaction price to the distinct performance obligations;

revenue as the performance obligations are satisfied.

the customer contract

customer contract is generally identified when there is approval and commitment from both 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.

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

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

other customer contracts, and acquired developed technologies;

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

estimated cash flows from the projects when completed;

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;

of capital and discount rates;

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

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

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

We have determined that we are 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.

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.

the three-month ended June 30, 2022, we identified an impairment-triggering event associated with both a sustained decline in our stock

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

Due to these factors,

we deemed that there was an impairment to the carrying value of our property and equipment and accordingly performed interim testing

as of June 30, 2022.

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

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.

Notes Payable

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

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

The accounting treatment of derivative financial instruments requires that we identify and record certain embedded conversion options

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

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

Any change in fair value is recorded

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

We reassess the classification of

our derivative instruments at each balance sheet date.

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

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

Bifurcated embedded conversion options, variable-share

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

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

we determine that an instrument is not a derivative liability, we then evaluate whether there is a beneficial conversion feature (“BCF”),

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

We record a BCF as a debt discount

which is amortized to interest expense over the life of the respective note using the effective interest method.

BCFs that are contingent

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

do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

We evaluate all of our financial

instruments, including issued private placement stock purchase warrants, to determine if such instruments are derivatives or contain

features that qualify as embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”)

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

specific terms and applicable authoritative guidance in ASC 480 and ASC 815.

Our assessment considers whether the warrants are freestanding

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

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

among other conditions for equity classification.

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

capital at the time of issuance.

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

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

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

Capitalization of Internal Software Development

We capitalize on certain

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

under ASC 985-20.

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

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

The types of costs capitalized during

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

on these projects.

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

as well as post-implementation activities.

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

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

We account for income taxes

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

to calculating deferred income taxes.

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

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

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

the net deferred asset will not be realized.

We follow the provisions

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

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

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

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

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

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

or litigation processes, if any.

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

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

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

Capitalization

of Internal Software Development Costs

capitalize on certain software engineering efforts related to the continued development of Agrify Insights™ cultivation software

(“Agrify Insights™”) under ASC 985-20.

Costs incurred during the application development phase are only capitalized

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

The types of costs

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

developers working on these projects.

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

is established as well as post-implementation activities.

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

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

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.

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

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

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

with the applicable taxing authority.

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

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

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

We believe our tax positions are all

highly certain of being upheld upon examination.

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.

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

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

Accounting for Stock-Based Compensation

We follow the provisions

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

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

ASC 718 focuses primarily on accounting for transactions in

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

The fair value of each option

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

This model incorporates certain assumptions for inputs

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

volatility in the market value of the underlying Common Stock.

The Black-Scholes option-pricing

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

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

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

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

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

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

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

The expected dividend yield is based upon our history

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

We calculate the

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

the underlying instrument’s expected term.

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

and directors.

In arriving at stock-based

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

Our forfeiture assumption

is based primarily on its turn-over historical experience.

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

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

our consolidated financial statements.

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

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

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

amounts recognized in the current period.

It is important that the

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

Results of Operations

We have incurred recurring

losses to date.

Our consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly,

do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary

should we be unable to continue in operation.

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

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

meet our obligations.

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

Comparison of Years Ended December 31, 2022

The following table summarizes our results of

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

for Stock-Based Compensation

follow the provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”) which establishes standards surrounding

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

ASC 718 focuses primarily

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

under our Stock Option Plans.

Refer to the Critical Accounting Estimates section above for further detail on accounting for stock compensation.

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 consolidated financial statements have been prepared assuming that we will continue as a

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

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

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

until we begin generating sufficient cash flows from operations to meet our obligations.

If we are unable raise additional funds, we

may be forced to cease operations.

of Years Ended December 31, 2023 and 2022

following table summarizes our results of operations for the years ended December 31, 2023 and 2022:

Ended December 31,

(In thousands)

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

Revenue (including $0, and $2,417

from related parties, respectively)

Cost of goods sold

Gross (loss) profit

profit (loss)

General and administrative

2 unchanged sentences

Change in contingent consideration

Gain on disposal on property and equipment

Impairment of property and equipment

Impairment of goodwill and intangible assets

Total operating expenses

Loss from operations

Interest (expense) income, net

Other expense, net

Change in fair value of warrant liability

Gain on forgiveness of PPP Loan

(Loss) gain on extinguishment of notes payable

Impairment of goodwill

and intangible assets

operating expenses

from operations

Interest expense, net

Change in fair value of warrant liabilities

Loss on extinguishment of long-term debt, net

Other income, net

Net loss before income taxes

other income, net

Net loss before income

Income tax expense

(Income) loss attributable to non-controlling interests

Net loss attributable to Agrify Corporation

Our goal is to provide our

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

Our core product offering includes our VFUs and

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

facility build-out services, and extraction equipment.

We generate revenue from

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

equipment and solutions.

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

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

Income attributable to non-controlling

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™, which are supplemented with environmental control

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

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

and extraction equipment and solutions.

We believe that our product mix forms an integrated ecosystem that allows us to be engaged with

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

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

2 unchanged sentences

of additional solutions and services.

The following table provides a breakdown of our

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

following table provides a breakdown of our revenue for the years ended December 31, 2023 and 2022:

Ended December 31,

(In thousands)

Cultivation solutions, including ancillary products and services

Agrify Insights™

Cultivation solutions, including

ancillary products and services

Agrify Insights software

Facility build-outs

Extraction solutions

Total revenue

Revenues decreased by $1.6

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

The comparative decrease in revenue was

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

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

Additionally, there was a $10.6 million decrease in cultivation

solutions due to the migration to a VFU leasing model.

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

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

$22.0 million.

Cost of Goods Sold

Cost of goods sold represents

a combination of the following:

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

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

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

The following table provides a breakdown of our

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

decreased by $41.4 million, or 71%, for the year ended December 31, 2023, as compared to the same period in 2022.

The comparative decrease

in revenue was primarily driven by a $22.2 million reduction in facility build-outs due to winding down TTK solutions Facility build-outs

at the end of 2022.

Additionally, there was a $19.6 million reduction in Extraction solutions due to an overall down-turn in the cannabis

industry and the difficulty of integrating four acquired extraction companies, which was offset by $0.5 million increase in cultivation

solutions and Agrify Insights software combined.

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 years ended December 31, 2023 and 2022:

Ended December 31,

(In thousands)

Cultivation solutions, including ancillary products, and services

Agrify Insights™

Cultivation solutions, including

ancillary products and services

Facility build-outs

Extraction solutions

Total cost of goods sold

Cost of goods sold increased

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

The year-over-year increase in cost

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

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

and Mary’s project due to pending litigation.

Gross (Loss) Profit

cost of goods sold

of goods sold decreased by $78 million, or 87%, for the year ended December 31, 2023, as compared to the same period in 2022.

The year-over-year

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

the decline in sales of Extraction solutions, internal and outsourced labor and materials costs for the extraction solutions sales, and

cultivation solutions, including ancillary products and services.

(Loss) Profit

Ended December 31,

(In thousands)

Gross (loss) profit

Gross loss totaled $31.8

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

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

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

attributable to reserves for inventory and facility build-outs.

The Bud & Mary’s project

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

The gross profit decline was

partially offset by increased Extraction solutions revenue in 2022 .

Operating Expenses

Gross profit (loss)

profit totaled $5.3 million, or 31%, of total revenue during the year ended December 31, 2023 compared to a gross loss of $32 million,

or 55% of total revenue during the year ended December 31, 2022.

The comparative $37.1 million year-over-year increase in gross profit,

as well as the comparative increase in gross profit margin, is primarily attributable to reduction in facility build-outs.

Although sales

of Extraction Solutions decreased, they have higher margins.

Additionally, there was a $114 thousand increase in revenue from Agrify

insight software which has 90% plus gross profit.

Ended December 31,

(In thousands)

5 unchanged sentences

Impairment of goodwill and intangible assets

Total operating expenses

General and administrative

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

for personnel associated with executive and other administrative functions.

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

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

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

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

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

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

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

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

and $11.3 million, respectively.

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

(“Greenstone”).

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

had a minority ownership.

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

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

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

Additional information regarding recent developments with

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

financial statements.

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

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

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

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

defend ourselves.

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

Selling and marketing

Selling and marketing expenses

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

Selling and marketing expenses

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

The comparative period

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

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

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

Research and development

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

VFUs, which includes:

● employee-related expenses,

including salaries, benefits, and travel;

● subcontractor expenses incurred

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

● expenses related to our facilities,

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

other supplies.

R&D expenses increased

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

The comparative period increase is

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

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

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

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

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

We expect to continue to

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

Although we continue to invest in R&D

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

Change in contingent consideration

Contingent consideration

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

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

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

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

consideration.

Impairment of property and equipment

Results from a 50% reserve on equipment to be

leased to Hannah Industries due to uncertainty of the project.

Impairment of goodwill and intangible assets

During the three months ended

June 30, 2022, we identified an impairment-triggering event associated with both a sustained decline in our stock price and associated

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

Due to these factors, we deemed that

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

Based on our interim testing,

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

the aggregate value of our goodwill and intangible assets.

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

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

Additional information regarding our

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

financial statements.

Other Income, Net

Gain on disposal

operating expenses

and administrative

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

and travel expenses, for personnel associated with executive and other administrative functions.

Other G&A expenses include, but

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

expenses decreased by $54.3 million, or 74%, for the year ended December 31, 2023, compared to the same period in 2022.

The primary drivers

of the year-over-year decrease of G&A expenses were largely attributable to a decrease in bad debt expenses, of approximately $36.8

million, a decrease in depreciation expense, of approximately $1 million, a decrease in stock based compensation, of approximately $1.6

million, a decrease in salaries and related costs for personnel, of approximately $3.4 million, a decrease in insurance expenses of approximately

$0.6 million.

and marketing

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

and marketing expenses decreased by $5.2 million, or 56%, for the year ended December 31, 2023, compared to the same period in 2022.

The decrease was primarily attributable to a reduction in salaries and related costs of personnel, of approximately $3.4 million, and

a reduction in trade show and advertising costs, of approximately $1.8 million.

and development

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

and next-generation VFUs, which includes:

● employee-related

expenses, including salaries, benefits, and travel;

● subcontractor

expenses incurred under agreements to provide engineering work related to the development

of our next-generation VFUs;

related to our facilities, depreciation, and other expenses, which include direct and allocated

expenses for rent and maintenance of facilities, insurance, and other supplies

expenses decreased by $5.9 million, or 72%, for the year ended December 31, 2023, compared to the same period in 2022.

As a percentage

of net revenue, R&D expenses were 14% of total revenue for the year ended December 31, 2023, compared to 14% for same period in 2022.

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

Although we continue

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

in contingent consideration

consideration increased $0.8 million for the year ended December 31, 2023, compared to $2.2 million for the same period in 2022.

of property and equipment

from a 50% reserve on equipment to be leased to Hannah Industries due to uncertainty of the project.

of goodwill and intangible assets

the three months ended June 30, 2022, we identified an impairment-triggering event associated with both a sustained decline in our stock

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

Due to these factors,

we deemed that there was an impairment to the carrying value of our property and equipment and accordingly performed interim testing

as of June 30, 2022.

on our interim testing, we noted that the current carrying value of equity significantly exceeded the calculated fair value of equity,

by an amount greater than the aggregate value of our goodwill and intangible assets.

Accordingly, we concluded that the entire carrying

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

information regarding our interim impairment testing may be found in Note 7 - Goodwill and Intangible Assets, Net, included in the notes

to the consolidated financial statements.

in Gain on Disposal

on disposal Increased $0.1 million for the year ended December 31, 2023, compared to $0 for the same period in 2022.

Ended December 31,

(In thousands)

Interest (expense) income, net

Other expense, net

Change in fair value of warrant liability

Gain on forgiveness of PPP loan

(Loss) gain on extinguishment of notes payable

Interest (expense) income, net

Interest expense was approximately

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

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

Other expense, net

Other expense, net increased

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

Change in fair value of warrant liability

Change in fair value of warrant

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

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

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

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

Additional information regarding the fair value of our liability-classified

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

Gain on forgiveness of PPP loan

In September 2021, the PPP

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

Small Business Administration.

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

of the loan and the associated accrued interest.

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

(Loss) gain on extinguishment of notes payable

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

Interest expense, net

Other income, net

Change in fair value of warrant liabilities

Loss on extinguishment

of notes payable

other income, net

expense was approximately $1.9 million for the year ended December 31, 2023 compared to interest expense of approximately $8.8 million

for the same period in 2022.

The significant decrease in our interest expense was resulted from our continuous efforts to restructure,

modify and reduce our SPA Note and Exchange Note.

expense, net increased by $483 thousand, or 37%, for the year ended December 31, 2023, compared to the same period in 2022.

in fair value of warrant liability

in fair value of warrant liability decreased by $46.8 million, or (91)%, for the year ended December 31, 2023, compared to the same period

The decrease is related to the fair value of warrants discussed in Note 4.

on extinguishment of notes payable

in loss on extinguishment of notes payable decreased by $34.7 million, or (89)%, for the year ended December 31, 2023, compared to the

same period in 2022.

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

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

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

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

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

Additional information relating to our SPA

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

The gain on extinguishment

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

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

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

fair value of the beneficial conversion feature).

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

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

Income Tax Expense

The decrease is related to related to the extinguishment of the SPA Note recorded in prior period discussed in Note

Loss on extinguishment of notes payable was $4.3 million for the year ended December 31, 2023, compared to a loss of $39.0 million

for the same period in 2022.

Ended December 31,

(In thousands)

1 unchanged sentence

Effective tax rate

Income (Loss) Attributable to Non-Controlling

We consolidate the results

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

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

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

LLC owns 40%.

(Loss) Attributable to Non-Controlling Interest

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

8, 2019, we formed Agrify-Valiant, LLC (“Agrify-Valiant”), a joint-venture limited liability company in which we are the

60% majority owner and Valiant-America, LLC owns 40%.

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

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

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

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

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

our grow technology.

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

products in the marketplace.

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

Accordingly, we

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

Income (loss) attributable

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

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

Liquidity and Capital Resources

Operating Capital Requirements

We have incurred operating

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

We have an accumulated deficit of approximately $247.1 million

as of December 31, 2022.

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

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

As of December 31, 2022,

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

Our restricted cash and restricted marketable securities of $10.0

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

27, 2022, we provided notice to Valiant-America of our intention to begin the winding up of Agrify-Valiant.

On January 22, 2020, as part

of the acquisition of TriGrow, we received TriGrow’s 75% interest in Agrify Brands, LLC (formerly TriGrow Brands, LLC), a licensor

of an established portfolio of consumer brands that utilize our grow technology.

The license for these brands is ancillary to the sale

of our VFUs and provides a means to differentiate customers’ products in the marketplace.

It is not a material aspect of our business

and we have not realized any royalty income.

Accordingly, we are currently evaluating whether to continue this legacy business from an

operational standpoint, as well as from a legal and regulatory perspective.

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

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

and Capital Resources

Capital Requirements

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

We have an accumulated deficit of approximately

$265.8 million as of December 31, 2023.

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

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

capital markets.

As of December 31, 2023, we had $0.4 million of cash, cash equivalents,

and restricted cash.

We had no restricted cash and restricted marketable securities associated with the Exchange Note as of December 31,

Current liabilities were $41.2 million as of December 31, 2023.

On October 18, 2022, we

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

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

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

and the ATM Program agreement.

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

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

fees to the Agent totaling $468 thousand.

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

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

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

For the entire period

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

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

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

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

funding its transformation initiatives and product category expansion efforts and capital expenditures.

Due to the late filing of this

Annual Report on Form 10-K, we are no longer eligible to utilize the registration statement on Form S-3 relating to the ATM Program,

and do not anticipate any further sales under the ATM Program in the foreseeable future.

Our current working capital

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

inventory to meet demand forecasts and support operational growth.

Our long-term financial needs primarily include working capital requirements

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 possible future TTK arrangements.

These arrangements require a significant amount of upfront

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

We do not intend to enter into any new TTK

Solutions for the foreseeable future, however, we have deployed this program with certain key customers.

We may opportunistically

raise debt capital, subject to market and other conditions.

Additionally, as part of our growth strategies, we may also raise debt capital

for strategic alternatives and general corporate purposes.

If additional financing is required from outside sources, we may not be able

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

If we are unable to raise additional capital when desired, our business, operating

results, and financial condition may be adversely affected.

These consolidated

financial statements have been prepared based on the assumption that we will continue as a going concern for the next twelve-months

October 18, 2022, we entered into the ATM Program with the Agent pursuant to which we could issue and sell, from time to time, shares

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

agent for sales.

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

defined by the SEC and the ATM Program agreement.

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

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

commissions and fees to the Agent totaling $468 thousand.

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

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

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

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

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

Agent totaling $516 thousand.

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

the Exchange Note.

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

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

to the late filing of this Annual Report on Form 10-K, we are no longer eligible to utilize the registration statement on Form S-3 relating

to the ATM Program, and do not anticipate any further sales under the ATM Program in the foreseeable future.

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

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

Our long-term financial needs primarily include

working capital requirements and capital expenditures.

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

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

These arrangements require

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

intend to enter into any new TTK Solutions for the foreseeable future, however, we have deployed this program with certain key customers.

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.

consolidated financial statements have been prepared based on the assumption that we will continue as a going concern for the next twelve-months

from the date these consolidated financial statements are available to be issued.

However, we have incurred operating losses since

our inception and have negative cash flows from operations, and our significant operating losses raise substantial doubt about our

ability to continue as a going concern.

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

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

our obligations.

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

There is no assurance that

we will ever be profitable.

The consolidated financial statements do not include any adjustments to reflect the potential future effects

on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable

However, we have incurred operating losses since our

inception and have negative cash flows from operations, and our significant operating losses raise substantial doubt about our ability

to continue as a going concern.

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.

Our continuation as a going concern is dependent upon our ability to obtain the necessary debt or equity

financing to continue operations until we begin generating sufficient cash flows from operations to meet our obligations.

If we are unable

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

is no assurance that we will ever be profitable.

The consolidated financial statements do not include any adjustments to reflect the

potential future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may

result should we be unable to continue as a going concern.

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.

We received total proceeds of approximately $779 thousand from the unsecured PPP Loan which was originally scheduled to mature in May

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.

loan is payable in 34 equal combined monthly principal and interest payments of approximately $24 thousand that commenced on August 7,

March 14, 2022, we entered into a Securities Purchase Agreement with an institutional investor.

14 unchanged sentences

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 will mature on

August 19, 2025 (the “Maturity Date”) and has a 9.0% annualized interest rate, with interest to be paid monthly, in cash.

The principal amount of the Convertible Note will be payable on the maturity date, provided that the lender will be entitled to a cash

sweep of 30% of the proceeds of any at-the-market equity offering and 20% of the proceeds received by us in connection with any other

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

On October 27, 2023, CP Acquisitions LLC,

and entity affiliated with and controlled by Raymond Chang, acquired the Exchange Note and the Convertible Note.

As of October 30, 2023,

there was approximately $6.7 million outstanding under the Exchange Note and $8.8 million outstanding under the Convertible Note.

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

1 unchanged sentence

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

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

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

Note plus accrued but unpaid interest.

Summary Statement of Cash Flows

The following table presents

the major components of net cash flows from and used in operating, investing, and financing activities for the years ended December 31,

2022 and 2021:

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

years ended December 31, 2023 and 2022:

(In thousands)

Net cash (used in) provided by:

Operating activities

Investing activities

Financing activities

Net increase in cash and cash equivalents

Cash Flows from Operating Activities

used in operating activities consists of net loss adjusted for non-cash benefits and expenses, and changes in operating assets and liabilities.

Net cash used in operating activities increased for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily

due to higher inventory purchases to meet demand, increased construction costs related to TTK Solutions, payments for employee-related

expenditures, and other working capital needs.

Cash Flows from Investing Activities

Cash used in investing activities

consists primarily of maturities and sales of investments in marketable securities.

decrease in cash, cash equivalents, and restricted cash

Flows from Operating Activities

the year ended December 31, 2023, we incurred a net loss of $18.6 million primarily due to the $4.7 million related to the change in

fair value of warrant liabilities, $1.9 million of depreciation and amortization, $2.7 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 $13.7 million.

the year ended December 31, 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.

Flows from Investing Activities

the year ended December 31, 2023, net cash provided by investing activities was approximately $25.2 million, which included cash inflows

of $10.5 million in proceeds from sale of securities and $15.1 million in proceeds from repayment of loan receivable, and cash outflows

of $0.6 million related to a certain loan issuance of loan and $0.3 million in purchases of property and equipment.

the year ended December 31, 2022, cash provided by investing activities of $2.3 million.

Cash used in investing activities consists primarily

of purchases of marketable securities, cash paid associated with our 2022 and 2021 acquisitions, the issuance of loans receivable in connection

with our financing of construction and equipment under our TTK Solutions offering, and purchases of property and equipment.

Capital expenditures

are used to expand research, development, and testing capabilities and, to a lesser extent, to replace existing equipment.

Investing activities

used $1.2 million for the year ended December 31, 2022, compared to the use of $104.7 million for

the year ended December 31, 2021, primarily due to net cash of $34.3 million provided by purchases, sales, and maturities of marketable

securities in 2022, compared to net cash of $44.5 million used for purchases, sales, and maturities of marketable securities in 2021,

along with decreased cash paid for business combinations, partially offset by an increase in purchases of property and equipment .

Cash Flows from Financing Activities

provided by financing activities consists primarily of proceeds from the issuance of Common Stock, debt, and warrants in private placements

and proceeds from public offerings.

Cash used in financing activities consists primarily of repayment of our debt.

Net cash provided by

financing activities decreased for the year ended December 31, 2022, compared to the year ended December 31, 2021, largely due to the

repayment of debt.

Quantitative and Qualitative Disclosures

About Market Risk.

As a “smaller reporting

company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.

of purchases of marketable securities of $294.7 million, proceeds of marketable securities of $329.0 million, payment of contingent contingent

liabilities of $3.3 million, cash paid associated with our 2022 acquisition of Lab Society and Sinclair of $2.2 million million, the

issuance of loans receivable if $23.0 million 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 of $8.1 million, to expand research, development, and testing capabilities and, to a lesser extent, the replacement of existing

Flows from Financing Activities

the year ended December 31, 2023, net cash used in financing activities was $4.2 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 $1.3 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 $4.4 million.

the year ended December 31, 2022, cash provided by financing activities was $72.8 million.

This consists primarily of proceeds from the

issuance of Common Stock of $25.8, and warrants in private placements of $61.8 million, and proceeds from the initial and secondary public

offerings of $23.2 million.

Cash used in financing activities consists primarily of repayment of debt of $38.0 million.

Quantitative and Qualitative Disclosures About Market Risk.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis