RYTHM, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Management, with the participation of our Chief Executive Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2023. Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this evaluation, management has concluded that our internal control over financial reporting was not effective at the reasonable assurance level as of December 31, 2023. During the year ended December 31, 2023, management identified material weaknesses in internal control over financial reporting. These material weaknesses related to the accounting for complex financial instruments, inadequate design of the controls over the preparation of the consolidated financial statements due to the lack of a timeline and process in place to timely close our annual books and records, and insufficient technical accounting resources and lack of segregation of duties. These deficiencies could result in misstatements to our consolidated financial statements that could be material and may not be prevented or detected on a timely basis. 61 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm because we are an “emerging growth company,” and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. Remediation of Material Weakness in Internal Control over Financial Reporting As of December 31, 2023 and through the date of this filing, we were in varying stages of remediating the current and previously reported material weaknesses in our internal control over financial reporting. During the fiscal year ended December 31, 2023, we have improved our technical accounting resources by hiring outside consultants that have strong technical knowledge in financial reporting and accounting. However, the finance team has remained weakened, with the departure of our CFO and VP of Finance. We are in the process of rebuilding the finance function and have engaged outside consultants to assist. We will need to continue to devote specific attention to these aspects of our internal control environment to ensure that these material weaknesses are fully remediated. The material weaknesses identified will not be considered fully remediated until these additional controls and procedures have operated effectively for a sufficient period of time and management has concluded, through testing, that these controls are effective. Our management will monitor the effectiveness of our remediation plans and will make changes management determines to be appropriate. If not remediated, these material weaknesses could result in material misstatements to our annual or interim consolidated financial statements that may not be prevented or detected on a timely basis or result in a delayed filing of required periodic reports. If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of the internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our Common Stock could be adversely affected, and we could become subject to litigation or investigations by the Nasdaq Capital Market, the SEC, or other regulatory authorities, which could require additional financial and management resources. Changes in Internal Control Over Financial Reporting Other than the changes to remediate the material weaknesses noted above, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal year ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. None . Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 62 PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference. Item 11. Executive Compensation. The information required by this Item 11 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters. The information required by this Item 12 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this Item 13 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services. The information required by this Item 14 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference. 63 PART IV Item 15. Exhibits, Financial Statements and Schedules. (a) Financial Statements: (1) The consolidated financial statements required to be included in this report appear after the signature page to this report as a separate section beginning on page F-1. (2) All supplemental schedules have been omitted since the information is either included in the consolidated financial statements or the notes thereto or they are not required or are not applicable. (3) The Exhibit Index of this report appears below. (b) Exhibits: Exhibit No. Description 2.1± Plan of Merger and Equity Purchase Agreement, dated as of September 29, 2021, among the Registrant, Sinclair Scientific, LLC, Mass2Media, LLC dba PX2 Holdings, LLC, and each of the equity holders of Sinclair Scientific, LLC named therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2021 2.2 Amendment to Plan of Merger and Equity Purchase Agreement, dated as of October 1, 2021, between the Registrant and Sinclair Scientific, LLC (incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2021 2.3± Membership Interest Purchase Agreement, dated as of December 31, 2021, among the Registrant, PurePressure, LLC, Benjamin Britton as Member Representative, and each of the equity holders of PurePressure, LLC named therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2022) 2.4± Merger Agreement, dated as of February 1, 2022, among the Registrant, LS Holdings Corp., Lab Society NewCo, LLC, Michael S. Maibach Jr. as Owner Representative, and each of the Owners named therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 2, 2022) 3.1 Articles of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 13, 2021) 3.2 Certificate of Amendment to the Articles of Incorporation of the Registrant, filed July 11, 2022 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2022). 3.3 Certificate of Amendment to the Articles of Incorporation of the Registrant, filed October 17, 2022 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 2022). 3.4 Certificate of Amendment to the Articles of Incorporation of the Registrant, filed March 1, 2023 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report filed with the Securities and Exchange Commission on March 3, 2023). 3.5 Certificate of Change to Articles of Incorporation of Agrify Corporation, filed June 30, 2023 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2023). 3.6 Certificate of Amendment to the Articles of Incorporation of the Registrant, filed January 22, 2024 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2024). 3.7 Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrant’s Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 26, 2021) 3.8 Third Amended and Restated Certificate of Designations of the Series A Convertible Preferred Stock of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 13, 2021) 64 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 26, 2021) 4.2 Form of Representative’s Warrant dated February 19, 2021 (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 11, 2021) 4.3 Form of Representative’s Warrant dated January 27, 2021 (incorporated by reference to Exhibit 4.2 to the Registrant’s Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 26, 2021) 4.4 Form of Warrant issued to Noteholders (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 4.5 Description of Registrant’s Securities (incorporated by reference to Exhibit 4.5 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2021) 4.6 Form of Common Stock Purchase Warrant dated January 28, 2022 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2022) 4.7 Form of Senior Secured Note (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2022). 4.8 Form of Warrant Exchange Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2022). 4.9 Form of Note Exchange Warrant (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2022). 4.1 Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 16, 2022) 4.11 Form of Common Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 16, 2022) 4.12 Form of Senior Secured Convertible Note (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 9, 2023) 4.13 Amendment to Senior Secured Note (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 9, 2023) 4.14 Exchange Warrant, dated October 27, 2023 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2023) 4.15 Abeyance Warrant, dated October 27, 2023 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2023) 65 4.16 Common Stock Purchase Warrant, dated October 27, 2023 (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2023) 4.17 Amended and Restated Junior Secured Promissory Note (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2023) 4.18 Junior Secured Promissory Note (incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2023) 4.19 Amendment to Junior Secured Promissory Note, dated December 4, 2023, between Agrify Corporation and CP Acquisitions, LLC (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6, 2023). 4.20 Senior Secured Amended, Restated and Consolidated Convertible Promissory Note dated January 25, 2024 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2024). 4.21 Second Amended and Restated Junior Secured Promissory Note dated January 25, 2024 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2024). 4.22 Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 28, 2024). 4.23 Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 28, 2024). 10.1 Operating Agreement of Agrify-Valiant, LLC dated December 8, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.2 Distribution Agreement dated June 7, 2019 between the Registrant and Bluezone Products, Inc.± (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.3 Distribution Agreement dated March 9, 2020 between the Registrant and Enozo Technologies Inc.± (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.4 Purchase Agreement dated as of July 28, 2020 between the Registrant and 4D Bios Inc.± (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.5† Employment Agreement dated as of January 4, 2021 between the Registrant and Raymond Chang (incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2021) 10.6† 2020 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.7 Intellectual Property Assignment and Transfer Agreement by and among the Registrant, Agrify Brands, LLC and The Holden Company effective as of January 1, 2020 (incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.8 Supply Agreement by and among the Registrant and Mack Molding Co. dated December 7, 2020 ± (incorporated by reference to Exhibit 10.15 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 13, 2021) 66 10.9 Amended and Restated Operating Agreement of Agrify Brands, LLC effective as of August 12, 2020 (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 10.1 Form of Indemnification Agreement with directors and executive officers (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 11, 2021) 10.11† Employment Agreement, dated as of November 10, 2021, between the Registrant and Timothy Oakes † (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 15, 2021) 10.12± Form of Securities Purchase Agreement, dated as of January 25, 2022, between the Registrant and the Purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2022 10.13± Form of Securities Purchase Agreement, dated as of March 14, 2022, between the Registrant and High Trail Special Situations LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 18, 2022) 10.14† Agrify Corporation 2022 Omnibus Equity Incentive Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 29, 2022) 10.15† Agrify Corporation 2022 Employee Stock Purchase Plan (incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 29, 2022) 10.16† Separation Agreement of Thomas Massie, dated as of July 8, 2022 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2022) . 10.17† Employment Agreement, dated as of July 14, 2022, between the Registrant and Stuart Wilcox (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2022). 10.18± Exchange Agreement, dated as of August 18, 2022, between the Registrant and High Trail Special Situations LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2022). 10.19± Equity Distribution Agreement, dated as of October 18, 2022, between the Registrant and Canaccord Genuity LLC (incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 18, 2022). 10.20† Employment Agreement, dated as of July 25, 2022, between the Registrant and Timothy Hayden (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2023) 10.21± Exchange Agreement, dated as of March 8, 2023, between the Registrant and High Trail Special Situations LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 9, 2023) 10.22 Company and Investor Acknowledgment, dated as of October 27, 2023, between the Registrant and CP acquisitions LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2023) 67 10.23 Letter Agreement, dated as of October 27, 2023, between the Registrant and High Trail Special Situations LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2023) 10.24± Modification Agreement, effective as of October 18, 2023, between the Registrant and Mack Molding Company (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2023) 14.1 Code of Ethics of Agrify Corporation Applicable To Directors, Officers And Employees (incorporated by reference to Exhibit 14.1 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) 21.1* Subsidiaries of the Registrant 23.1* Consent of Independent Registered Public Accounting Firm 31.1* Certification of Principal Executive Officer and Principal Financial and Accounting Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1** Certification of Principal Executive Officer and Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 97.1* Agrify Corporation Clawback policy 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). ± Certain information has been omitted from this exhibit in reliance upon Item 601(a)(5) of Regulation S-K. † Indicates a management contract, compensatory plan, or arrangement. * Filed herewith. ** Furnished herewith. Item 16. Form 10-K Summary. None. 68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. AGRIFY CORPORATION Date: April 15, 2024 By: /s/ Raymond Chang Raymond Chang Chief Executive Officer (Principal Executive Officer and Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Raymond Chang Chief Executive Officer and Director April 15, 2024 Raymond Chang (Principal Executive Officer and Principal Financial and Accounting Officer) /s/ Krishnan Varier Director April 15, 2024 Krishnan Varier /s/ Timothy Mahoney Director April 15, 2024 Timothy Mahoney /s/ Max Holtzman Director April 15, 2024 Max Holtzman /s/ Leonard Sokolow Director April 15, 2024 Leonard Sokolow /s/ I-Tseng Jenny Chan Director April 15, 2024 I-Tseng Jenny Chan Date: April 15, 2024 69 AGRIFY CORPORATION Index to Consolidated Financial Statements Fiscal Years Ended December 31, 2023 and 2022: Independent Auditors’ Report (PCAOB ID # 688 ) F-2 Consolidated Financial Statements Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders’ Deficit F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 - F-58 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Agrify Corporation and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Agrify Corporation and Subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Explanatory Paragraph – Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2019. Melville, NY April 15, 2024 F- 2 Item 1. Financial Statements AGRIFY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) As of December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 430 $ 10,457 Restricted cash — 10,000 Marketable securities 4 460 Accounts receivable, net of allowance for credit losses of $ 1,887 and $ 4,605 at December 31, 2023 and 2022, respectively 1,149 1,070 Inventory, net of reserves of $ 17,599 and $ 32,422 at December 31, 2023 and 2022, respectively 19,094 21,396 Prepaid expenses and other current assets 3,332 1,510 Total current assets 24,009 44,893 Loan receivable, net of allowance for credit losses of $ 19,215 and $ 33,050 at December 31, 2023 and 2022, respectively 11,583 12,214 Property and equipment, net 7,734 10,044 Operating lease right-of-use assets 1,803 2,210 Other non-current assets 141 326 Total assets $ 45,270 $ 69,687 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 20,766 $ 20,543 Accrued expenses and other current liabilities 10,655 16,380 Operating lease liabilities, current 599 734 Long-term debt, current 766 28,833 Related party debt, current 4,444 — Deferred revenue 4,019 4,112 Total current liabilities 41,249 70,602 Warrant liabilities 1,290 5,985 Other non-current liabilities — 147 Operating lease liabilities, net of current 1,394 1,587 Long-term debt, net of current 16,047 407 Total liabilities 59,980 78,728 Commitments and contingencies (Note 16) Stockholders’ deficit: Common Stock, $ 0.001 par value per share, 10,000,000 and 5,000,000 shares authorized at December 31, 2023 and 2022, respectively, 1,701,243 and 1,038,298 shares issued and outstanding at December 31, 2023 and 2022, respectively (1) 2 1 Preferred Stock, $ 0.001 par value per share, 2,895,000 shares authorized, no shares issued or outstanding — — Preferred A Stock, $ 0.001 par value per share, 105,000 shares authorized, no shares issued or outstanding — — Additional paid-in capital 250,855 237,875 Accumulated deficit ( 265,797 ) ( 247,148 ) Total stockholders’ deficit attributable to Agrify ( 14,940 ) ( 9,272 ) Non-controlling interests 230 231 Total liabilities and stockholders’ deficit $ 45,270 $ 69,687 (1) Periods presented have been adjusted to reflect the 1-for-20 reverse stock split on July 5, 2023. Additional information regarding the reverse stock splits may be found in Note 1 – Overview, Basis of Presentation, and Significant Accounting Policies, included in the notes to the consolidated financial statements The accompanying notes are an integral part of these consolidated financial statements. F- 3 AGRIFY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) Year Ended December 31, 2023 2022 Revenue (including $ 0 , and $ 2,417 from related parties, respectively) $ 16,868 $ 58,259 Cost of goods sold 11,590 90,054 Gross profit (loss) 5,278 ( 31,795 ) General and administrative 19,005 73,354 Selling and marketing 4,134 9,338 Research and development 2,295 8,179 Change in contingent consideration ( 1,322 ) ( 2,156 ) Gain on disposal on property and equipment 144 — Impairment of property and equipment — 2,912 Impairment of goodwill and intangible assets — 69,904 Total operating expenses 24,256 161,531 Loss from operations ( 18,978 ) ( 193,326 ) Interest expense, net ( 1,853 ) ( 8,750 ) Change in fair value of warrant liabilities 4,695 51,461 Loss on extinguishment of long-term debt, net ( 4,311 ) ( 38,985 ) Other income, net 1,799 1,316 Total other income, net 330 5,042 Net loss before income taxes ( 18,648 ) ( 188,284 ) Income tax expense ( 2 ) ( 23 ) Net loss ( 18,650 ) ( 188,307 ) Income attributable to non-controlling interest 1 134 Net loss attributable to Agrify Corporation $ ( 18,649 ) $ ( 188,173 ) Net loss per share attributable to Common Stockholders – basic and diluted (1) $ ( 12.51 ) $ ( 902.19 ) Weighted average common shares outstanding - basic and diluted (1) 1,490,871 208,573 (1) Periods presented have been adjusted to reflect the 1-for-20 reverse stock split on July 5, 2023. Additional information regarding reverse stock splits may be found in Note 1 – Overview, Basis of Presentation, and Significant Accounting Policies, included elsewhere in the notes to the consolidated financial statements The accompanying notes are an integral part of these consolidated financial statements. F- 4 AGRIFY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (In thousands) Common Stock Preferred Stock Preferred A Stock Additional Paid-In- Accumulated Total Stockholders’ Equity (Deficit) attributable to Non- Controlling Total Stockholders’ Equity Shares Amount Shares Amount Shares Amount Capital Deficit Agrify Interests (Deficit) Balance at January 1, 2022 111,035 $ — — $ — — $ — $ 196,034 $ ( 58,975 ) $ 137,059 $ 365 $ 137,424 Stock-based compensation — — — — — — 4,319 — 4,319 — 4,319 Issuance of Common Stock, warrants, and prefunded warrants in private placement 20,105 — — — — — 14,824 — 14,824 — 14,824 Confidentially marketed public offering 594,232 1 — — — — 3,269 — 3,270 — 3,270 Issuance of Common Stock through an “at the market” offering, net of fees 306,628 — — — — — 15,042 — 15,042 — 15,042 Common Stock issued for contingent liabilities 435 — — — — — 2,220 — 2,220 — 2,220 Acquisition of Lab Society 2,128 — — — — — 1,904 — 1,904 — 1,904 Exercise of options 43 — — — — — 20 — 20 — 20 Exercise of warrants 2,443 — — — — — 243 — 243 — 243 Vesting of restricted stock units 1,249 — — — — — — — — — — Net Loss — — — — — — — ( 188,173 ) ( 188,173 ) ( 134 ) ( 188,307 ) Balance at December 31, 2022 1,038,298 $ 1 — $ — — $ — $ 237,875 $ ( 247,148 ) $ ( 9,272 ) $ 231 $ ( 9,041 ) Common Stock Preferred Stock Preferred A Stock Additional Paid-in- Accumulated Total Stockholders’ Deficit attributable to Non- Controlling Total Stockholders’ Shares Amount Shares Amount Shares Amount Capital Deficit Agrify Interests Deficit Balance at January 1, 2023 1,038,298 $ 1 — $ — — $ — $ 237,875 $ ( 247,148 ) $ ( 9,272 ) $ 231 $ ( 9,041 ) Stock-based compensation — — — — — — 2,662 — 2,662 — 2,662 Issuance of Common Stock through an “at the market” offering, net of fees 323,082 — — — — — 1,545 — 1,545 — 1,545 Issuance of held-back shares to Lab Society 499 — — — — — — — — — — Issuance of Common Stock to Pure Pressure 366 — — — — — — — — — — Vesting of restricted stock units 17 — — — — — — — — — — Exercise of prefunded warrants in private placement 84,962 — — — — — — — — — — Issuance of equity classified warrants — — — — — — 1,554 — 1,554 — 1,554 Exchange of private placement debt into equity classified warrants — — — — — — 3,877 — 3,877 — 3,877 Conversion of Exchange Note 69,567 — — — — — 2,146 — 2,146 — 2,146 Conversion of Convertible Note 153,617 1 — — — — 1,171 — 1,172 — 1,172 Proceeds from Employee Stock Purchase Plan Shares 2,500 — — — — — 25 — 25 — 25 Reverse stock split fractional share settlement 28,335 — — — — — — — — — — Net loss — — — — — — — ( 18,649 ) ( 18,649 ) ( 1 ) ( 18,650 ) Balance December 31, 2023 1,701,243 $ 2 — $ — — $ — $ 250,855 $ ( 265,797 ) $ ( 14,940 ) $ 230 $ ( 14,710 ) The accompanying notes are an integral part of these consolidated financial statements. F- 5 AGRIFY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2023 2022 Cash flows from operating activities: Net loss attributable to Agrify Corporation $ ( 18,649 ) $ ( 188,173 ) Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities: Depreciation and amortization 1,896 3,047 Amortization of debt (premium) discount ( 109 ) 4,459 Interest on investment securities — ( 232 ) Amortization of issuance costs 24 420 Deferred income taxes — 23 Stock based compensation expense 2,663 4,319 Change in fair value of warrant liabilities ( 4,695 ) ( 51,461 ) Loss on extinguishment of long-term debt, net 4,311 38,985 Impairment of goodwill and intangible assets — 69,904 (Recovery of) provision for credit losses ( 15,261 ) 36,694 (Recovery of) provision for slow-moving inventory ( 14,823 ) 31,480 (Gain) loss on disposal of property and equipment ( 63 ) 33 Impairment of property and equipment — 2,912 Change in fair value of contingent consideration — ( 2,156 ) Income attributable to non-controlling interests ( 1 ) ( 134 ) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 1,347 1,540 Inventory 17,158 ( 30,248 ) Prepaid expenses and other current assets ( 566 ) 3,222 Right of use assets, net 299 ( 731 ) Other non-current assets 170 1,138 Accounts payable ( 108 ) 11,236 Accrued expenses and other current liabilities ( 4,473 ) ( 8,555 ) Operating lease liabilities ( 217 ) 803 Other non-current liabilities — 79 Deferred revenue ( 93 ) ( 625 ) Net cash and cash equivalents used in operating activities ( 30,974 ) ( 72,021 ) Cash flows from investing activities: Purchases of property and equipment ( 59 ) ( 8,134 ) Proceeds from disposal of property and equipment 311 — Purchase of marketable securities — ( 294,687 ) Proceeds from sale of marketable securities 10,456 329,009 Issuance of loans receivable ( 591 ) ( 23,009 ) Proceeds from repayment of loan receivable 15,057 — Payments on contingent liabilities — ( 3,330 ) Cash received from escrow account related to Sinclair acquisition — 1,351 Cash paid for business combination, net of cash acquired — ( 3,517 ) Net cash and cash equivalents provided by (used in) investing activities 25,174 ( 2,317 ) Cash flows from financing activities: Proceeds from issuance of debt and warrants in private placement, net of fees — 61,817 Proceeds from issuance of Common Stock and warrants in private placement, net of fees — 25,796 Proceeds from issuance of Common Stock through an “at the market” offering, net of fees 1,545 15,042 Proceeds from Employee Stock Purchase Plan Shares 25 — Proceeds from exercise of options — 20 Proceeds from confidentially marketed public offering — 8,193 Proceeds from issuance of warrants in settlement agreement 1,554 — Proceeds from issuance of related party notes 4,444 — Repayments of notes payable, other ( 71 ) ( 187 ) Repayment of debt in private placement ( 10,307 ) ( 35,497 ) Payments on other financing loans ( 5 ) ( 254 ) Payments on insurance financing loans ( 1,332 ) ( 1,928 ) Payments of financing leases ( 80 ) ( 221 ) Net cash and cash equivalents (used in) provided by financing activities ( 4,227 ) 72,781 Net decrease in cash and cash equivalents ( 10,027 ) ( 1,557 ) Cash and cash equivalents at the beginning of period 10,457 12,014 Cash and cash equivalents at the end of period $ 430 $ 10,457 Cash, cash equivalents, and restricted cash at end of period Cash and cash equivalents $ 430 $ 10,457 Restricted cash — 10,000 Total cash, cash equivalents, and restricted cash at the end of period $ 430 $ 20,457 Supplemental disclosures Cash paid for interest 76 4,969 Supplemental disclosures of non-cash flow information Initial fair value of warrants $ 5,432 $ 55,627 Financing of prepaid insurance $ 1,694 $ 1,928 Transfer of property and equipment to inventory $ 33 $ — Conversion of convertible notes $ 3,306 $ — The accompanying notes are an integral part of these consolidated financial statements. F- 6 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 — Overview, Basis of Presentation and Significant Accounting Policies Description of Business Agrify Corporation (“Agrify” or the “Company”) is a leading provider of innovative cultivation and extraction solutions for the cannabis industry, bringing data, science, and technology to the forefront of the market. The Company’s proprietary micro-environment-controlled Agrify Vertical Farming Units (or “VFUs”) enable cultivators to produce the highest quality products with what we believe to be unmatched consistency, yield, and return investment at scale. The Company’s comprehensive extraction product line, which includes hydrocarbon, alcohol, solventless, post-processing, and lab equipment, empowers producers to maximize the quantity and quality of extract required for premium concentrates. The Company believes it is the only company with an automated and fully integrated grow solution in the industry. The Company’s cultivation and extraction solutions seamlessly combine its integrated hardware and software offerings with a broad range of associated services including consulting, engineering, and construction and is designed to deliver the most complete commercial indoor farming solution available from a single provider. The totality of its product offerings and service capabilities forms an unrivaled ecosystem in what has historically been a highly fragmented market. As a result, the Company believes it is well-positioned to capture market share and create a dominant market position in the indoor cannabis sector. The Company was formed in the State of Nevada on June 6, 2016 as Agrinamics, Inc., and subsequently changed its name to Agrify Corporation. The Company is sometimes referred to herein by the words “we,” “us,” “our,” and similar terminology. The Company has nine wholly-owned subsidiaries, which are collectively referred to as the “Subsidiaries” and the Company also has ownership interests in certain companies. Reverse Stock Splits On October 18, 2022, the Company effected a 1-for-10 reverse stock split of its Common Stock. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented unless otherwise indicated. On July 5, 2023, the Company effected a 1-for-20 reverse stock split of its Common Stock. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented unless otherwise indicated. No fractional shares of Common Stock were issued as a result of these reverse stock splits. Any fractional shares in connection with these reverse stock splits were rounded up to the nearest whole share and no stockholders received cash in lieu of fractional shares. The reverse stock splits had no impact on the number of shares of Common Stock that the Company is authorized to issue pursuant to its articles of incorporation or on the par value per share of the Common Stock. Proportional adjustments were made to the number of shares of Common Stock issuable upon exercise or conversion of the Company’s outstanding stock options and warrants, the exercise price or conversion price (as applicable) of the Company’s outstanding stock options and warrants, and the number of shares reserved for issuance under the Company’s equity incentive plan. All share and per share information included in this Annual Report on Form 10-K has been retroactively adjusted to reflect the impact of these reverse stock splits. Confidentially Marketed Public Offering On December 16, 2022, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Canaccord Genuity LLC as the underwriter, pursuant to which the Company agreed to issue and sell an aggregate of 594,232 shares of its Common Stock, and, in lieu of Common Stock to certain investors that so chose, pre-funded warrants (the “Pre-Funded 2022 Warrants”) to purchase 75,000 shares of our Common Stock, and accompanying warrants (the “December 2022 Warrants”) to purchase 1,338,462 shares of the Company’s Common Stock (the “Offering”). The shares of Common Stock (or Pre-Funded 2022 Warrants) and the accompanying December 2022 Warrants will be issued separately but can only be purchased together in this Offering. Additional information regarding the Company’s December 2022 Warrants may be found in Note 4 – Fair Value Measures and Note 11 – Stockholders’ Equity, included elsewhere in the notes to the consolidated financial statements. The aggregate gross proceeds to the Company from the Offering were approximately $ 8.7 million including offering costs of approximately $ 0.5 million for broker fees and legal expenses, for net proceeds of $ 8.2 million. The Company has used the net proceeds from the Offering, together with its existing cash resources, for working capital and general corporate purposes, which may include capital expenditures and repayment of debt. F- 7 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nasdaq Deficiency Notice On October 4, 2022, the Company received a deficiency letter from the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business days, the bid price for the Company’s Common Stock had closed below $ 1.00 per share, which is the minimum closing price required to maintain a continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company had 180 calendar days to regain compliance with the Minimum Bid Requirement. To regain compliance with the Minimum Bid Requirement, the closing bid price of the Company’s Common Stock must be at least $ 1.00 per share for a minimum of 10 consecutive trading days during this 180-day compliance period, unless the Staff exercised its discretion to extend the minimum trading day period pursuant to Nasdaq Listing Rule 5810(c)(3)(G). On October 28, 2022, the Staff notified the Company that the closing bid price for its Common Stock was more than $ 1.00 for 10 consecutive trading days, and that the Company therefore regained compliance with the Minimum Bid Requirement. On January 19, 2023, the Company received a new deficiency letter from the Staff of Nasdaq notifying the Company that, for the previous 30 consecutive business days, the bid price for its Common Stock had closed below $ 1.00 per share, which is the minimum closing price required to maintain a continued listing on The Nasdaq Capital Market under the Minimum Bid Requirement. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company had 180 calendar days to regain compliance with the Minimum Bid Requirement. To regain compliance with the Minimum Bid Requirement, the closing bid price of the Company’s Common Stock must be at least $ 1.00 per share for a minimum of 10 consecutive trading days during this 180-day compliance period, unless the Staff exercises its discretion to extend the minimum trading day period pursuant to Nasdaq Listing Rule 5810(c)(3)(G). On July 19, 2023, the Company received a notice from Nasdaq confirming its compliance with the minimum bid price rule. As disclosed in the Current Report on Form 8-K filed on April 17, 2023, the Company’s audit committee concluded that, as a result of inadvertent errors in the accounting for warrants previously issued by the Company, it was appropriate to restate the Company’s previously issued unaudited 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, the Company was unable to timely file the 2022 Form 10-K, the First Quarter 2023 Form 10-Q and the Second Quarter 2023 Form 10-Q without unreasonable effort or expense. On April 18, 2023, the Company received a notice from Nasdaq (the “April Nasdaq Notice”) that it was noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of its failure to file its Annual Report on Form 10-K (the “Form 10-K”) with the SEC by the required due date. On May 17, 2023, the Company received a second notice from Nasdaq (the “May Nasdaq Notice”) that it remained noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of its failure to file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the “First Quarter Form 10-Q”) with the SEC by the required due date. On August 16, 2023, the Company received a third notice from Nasdaq that it remain noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of its failure to file its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 (the “Second Quarter Form 10-Q”) with the SEC by the required filing date (the “August Nasdaq Notice” and, together with the April Nasdaq Notice and the May Nasdaq Notice, the “Nasdaq Notices”). The Nasdaq granted the Company an exception until October 16, 2023, to file its 2022 Form 10-K and First and Second Quarter 2023 Forms 10-Q. The Nasdaq Notice had no immediate effect on the listing of the Company’s Common Stock on The Nasdaq Stock Market LLC. On October 17, 2023, the Company received a Staff Delisting Determination (the “Staff Determination”) from the Listing Qualifications Department of Nasdaq notifying the Company that it was not in compliance with Nasdaq’s continued listing requirements under the Listing Rule as a result of its failure to file the First Quarter Form 10-Q, the Second Quarter Form 10-Q and the Form 10-K (collectively, the “Delinquent Reports”) in a timely manner. F- 8 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On November 16, 2023, the Company received a notice from Nasdaq that the Company remains noncompliant with the Listing Rule as a result of its failure to file its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2023 with the SEC by the required filing date (the “November Nasdaq Notice” and, together with the April Nasdaq Notice, the May Nasdaq Notice, and the August Nasdaq Notice, the “Nasdaq Notices”). On December 1, 2023, the Company received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) stating that because the Company reported stockholders’ equity of $( 17.17 ) million in its Form 10-Q for the quarter ended March 30, 2023, the Company was no longer in compliance with Nasdaq Listing Rule 5550(b)(1) (the “Primary Equity Listing Rule”), which requires that listed companies maintain a minimum of $ 2.5 million in stockholders’ equity. In response, the Company timely requested a hearing before a Nasdaq Hearings Panel (the “Panel”), which stayed any further action by the Listing Qualifications Staff. The hearing was held on January 11, 2024. The Company arrived at the hearing having previously cured any additional grounds for delisting as a result of delinquent periodic filings during 2023 that were filed prior to the hearing. On January 30, 2024, the Company received formal notice that the Panel had granted the Company’s request for an exception through April 15, 2024 to evidence compliance with the Listing Rule. The compliance date of April 15, 2024 represents the full extent of the Panel’s discretion to grant continued listing while the Company is non-compliant with Nasdaq Listing Rules. Accordingly, there can be no assurance that the Company will be able to regain compliance with the Nasdaq listing rules or maintain its listing on the Nasdaq Capital Market. If the Company’s common stock is delisted, it could be more difficult to buy or sell the Company’s common stock or to obtain accurate quotations, and the price of the Company’s common stock could suffer a material decline. Delisting could also impair the Company’s ability to raise capital. The Paycheck Protection Program In May 2020, the Company received an unsecured Paycheck Protection Program Loan (“PPP Loan”) from 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 (the “SBA”). The Company received total loan proceeds of approximately $ 0.8 million from the PPP Loan. On February 18, 2022, the Company applied for forgiveness of the outstanding balance of the PPP Loan and the application was denied by the SBA on March 18, 2022. However, on June 23, 2022, the Company received a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and the loan will bear interest at a rate of 1.00 % per year. The PPP loan is payable in 34 equal combined monthly principal and interest payments of approximately $ 24 thousand that commenced on August 7, 2022. Basis of Presentation and Principles of Consolidation Accounting for Wholly-Owned Subsidiaries The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of Agrify Corporation and its wholly-owned subsidiaries, as described above, in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The Company includes results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated. Accounting for Less Than Wholly-Owned Subsidiaries For the Company’s less than wholly-owned subsidiaries, which include, Agrify-Valiant LLC (“Agrify-Valiant”), and Agrify Brands, LLC (“Agrify Brands”), the Company first analyzes whether these entities are a variable interest entity (a “VIE”) in accordance with ASC Topic 810, Consolidation (“ASC 810”), and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. The financial results of a VIE are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets. The Company continuously re-assesses (i) whether the joint-venture is a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If it is determined that the joint-venture qualifies as a VIE and the Company is the primary beneficiary, the Company’s financial interest in the VIE is consolidated. F- 9 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Based on the Company’s analysis of these entities, the Company has determined that Agrify-Valiant and Agrify Brands are each a VIE, and that the Company is the primary beneficiary. While the Company owns 60 % of Agrify-Valiant’s equity interests and 75 % of Agrify Brand’s equity interests, the remaining equity interests in Agrify-Valiant and Agrify Brands are owned by unrelated third parties, and the agreement with these third parties provides the Company with greater voting rights. Accordingly, the Company consolidates its interest in the financial statements of Agrify-Valiant and Agrify Brands under the VIE rules and reflects the third parties’ interests in the consolidated financial statements as a non-controlling interest. The Company records this non-controlling interest at its initial fair value, adjusting the basis prospectively for the third parties’ share of the respective consolidated investments’ net income or loss or equity contributions and distributions. These non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holders based on its economic ownership percentage. Going Concern In accordance with the FASB Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern”, the Company’s management evaluated whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the financial statements’ issuance date. The following matters raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The Company has incurred operating losses since its inception and has negative cash flows from operations and a working capital deficit. The Company also has an accumulated deficit of $ 265.8 million as of December 31, 2023. The Company’s primary sources of liquidity are its cash and cash equivalents and marketable securities, with additional liquidity accessible, subject to market conditions and other factors, including limitations that may apply to the Company under applicable SEC regulations, from the capital market. As of December 31, 2023, the Company had $ 0.4 million of cash, cash equivalents, and marketable securities. The Company had no restricted cash as of December 31, 2023. Current liabilities were $ 41.2 million as of December 31, 2023. These consolidated financial statements have been prepared on a going concern basis, which implies the Company believes these conditions raise substantial doubt about its ability to continue as a going concern within the next twelve-months from the date these consolidated financial statements are available to be issued. The Company’s continuation as a going concern is dependent upon its ability to obtain the necessary debt or equity financing to continue operations until the Company begins generating sufficient cash flows from operations to meet its obligations. If the Company is unable raise additional funds, it may be forced to cease operations. On October 27, 2023, the company executed a financial transaction, issuing a junior secured promissory note to CP Acquisitions, LLC (“CP”) with a maximum principal amount of $ 3.0 million, which was later amended on December 4, 2023 to increase the maximum principal amount to $ 4.0 million. Additionally, an unsecured promissory note of $ 0.5 million was issued to GIC Acquisition LLC (“GIC”). Additional information regarding these transactions is included in Note 9 – Debt, included elsewhere in the notes to the consolidated financial statements. As of February 28, 2024, the company raised net proceeds of $ 2.2 million via an S-1 offering through Alexander Capital. The company intends to raise additional capital later this year to support its 2024 and 2025 funding needs. The company also continues to make additional adjustments in headcount, salary, travel, sales and marketing spending, but there is no guarantee that these ongoing cost-cutting efforts or capital raises will be sufficient to maintain operations. There is no assurance that the Company 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 the Company be unable to continue as a going concern. F- 10 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates include assumptions about collection of accounts and notes receivable, the valuation and recognition of stock-based compensation expense, valuation allowance for deferred tax assets, the valuation of inventory, and useful life of fixed assets and intangible assets. The Company bases its estimates on historical experience, known trends and other market-specific information, other relevant factors that it believes to be reasonable under the circumstances, and management’s judgement. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual financial results could differ from those estimates. Reclassifications The Company effected a 1-for-10 reverse stock split of its Common Stock on October 18, 2022 and a 1-for-20 reverse stock split of its Common Stock on July 5, 2023. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented unless otherwise indicated. The shares of Common Stock retained a par value of $ 0.001 per share. Accordingly, the Stockholders’ deficit section of the consolidated balance sheets reflects the reverse stock split by reclassifying from “Common Stock” to “Additional paid-in capital” an amount equal to the par value of the decreased shares resulting from the reverse stock split. Cash and Cash Equivalents Cash and cash equivalents consist principally of cash and deposits with maturities of three months or less as of December 31, 2023 and December 31, 2022. All cash equivalents are carried at cost, which approximates fair value. Restricted cash represents cash required to be held as collateral for the Company’s Notes. Accordingly, these balances contain restrictions as to their availability and usage and are classified as restricted cash in the consolidated balance sheets. Additional information relating to the Company’s Notes may be found in Note 9 - Debt, included elsewhere in the notes to the consolidated financial statements. Marketable Securities The Company’s marketable security investments primarily include investments held in mutual funds, municipal bonds, and corporate bonds. The mutual funds are recorded at fair value in the accompanying consolidated balance sheets as part of cash and cash equivalents. The municipal and corporate bonds are considered to be held-to-maturity securities and are recorded at amortized cost in the accompanying consolidated balance sheets. The fair value of these investments was estimated using recently executed transactions and market price quotations. The Company considers current assets to be those investments that will mature within the next 12 months, including interest receivable on long-term bonds. Accounts Receivable, Net and Loan Receivable, Net Accounts receivable, net, primarily consists of amounts for goods and services that are billed and currently due from customers. The composition of loan receivable, net is detailed in Note 5. 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 borrower collection matters, including the aging of unpaid accounts receivable and changes in customer or borrower 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. Adjustments to the allowance for credit losses are recorded as general and administrative expenses in the consolidated statements of operations. Concentration of Credit Risk and Significant Customer Financial instruments that potentially subject the Company to a concentration of credit risk primarily consist of cash, cash equivalents, restricted cash, marketable securities, and accounts receivable. Cash equivalents primarily consist of money market funds with original maturities of three months or less, which are invested primarily with U.S. financial institutions. Cash deposits with financial institutions, including restricted cash, generally exceed federally insured limits. Management believes minimal credit risk exists with respect to these financial institutions and the Company has not experienced any losses on such amounts. The tables below show customers who account for 10 % or more of the Company’s total revenues and 10 % or more of the Company’s accounts receivable for the periods presented: F- 11 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenue For the year ended December 31, 2023 and 2022, the Company’s customers that accounted for 10 % or more of the total revenue were as follows: 2023 2022 (In thousands) Amount % of Total Revenue Amount % of Total Revenue Company Customer Number - 136 * * $ 8,005 13.8 % Company Customer Number - 139 * * $ 8,761 15.0 % * Customer revenue, as a percentage of total revenue, was less than 10 % Accounts Receivable, Net As of December 31, 2023 and 2022, the Company’s customers that accounted for 10 % or more of the total accounts receivable, net, were as follows: 2023 2022 (In thousands) Amount % of Total Accounts Receivable Amount % of Total Accounts Receivable Company Customer Number – 15095 $ 712 62.0 % $ 352 32.9 % Company Customer Number – 10888 $ 251 21.8 % $ 251 23.5 % Company Customer Number - 16491 * * $ 123 11.5 % * Customer accounts receivable, as a percentage of total accounts receivable, was less than 10 % Inventories The Company values all its inventories, which consist primarily of significant raw material hardware components, at the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a first-in, first-out basis. Write-offs of potentially slow-moving or damaged inventory are recorded through specific identification of obsolete or damaged material. The Company takes physical inventory at least once annually at all inventory locations. F- 12 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are recognized using the straight-line method over the estimated useful life of each asset, as follows: Estimated Useful Life (Years) Computer and office equipment 2 to 3 Furniture and fixtures 2 Software 3 Vehicles 5 Research and development of laboratory equipment 5 Machinery and equipment 3 to 5 Leased equipment 5 to 13 Trade show assets 3 to 5 Leasehold improvements Lower of estimated useful life or remaining lease term The estimated useful lives of the Company’s property and equipment are periodically assessed to determine if changes are appropriate. The Company charges maintenance and repairs to expense as incurred. When the Company retires or disposes of assets, the carrying cost of these assets and related accumulated depreciation or amortization are eliminated from the consolidated balance sheets and any resulting gain or loss is included in the consolidated statements of operations in the period of retirement or disposal. Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service. During construction, costs are accumulated in a construction-in-progress account, with no depreciation. Upon completion, costs are transferred to the appropriate asset account, and depreciation begins when the asset is placed into service. Goodwill Goodwill is defined as the excess of cost over the fair value of assets acquired and liabilities assumed in a business combination. Goodwill is tested for impairment annually, and more frequently if events and circumstances indicate that the asset might be impaired. The Company has determined that it is a single reporting unit for the purpose of conducting the goodwill impairment assessment. A goodwill impairment charge is recorded for the amount by which the Company’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Factors that could lead to a future impairment include material uncertainties such as a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and/or a decline in the Company’s market value as a result of a significant decline in the Company’s stock price. During the quarter ended June 30, 2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there was an impairment to the carrying value of its property and equipment and accordingly performed interim testing as of June 30, 2022. Based on its interim testing, the Company noted that the carrying value of equity exceeded the calculated fair value by an amount greater than the aggregate value of our goodwill. Accordingly, the Company concluded that the entire carrying value of its goodwill was impaired, resulting in a second-quarter impairment charge of $ 54.7 million. Additional information regarding the Company’s interim testing on goodwill may be found in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements. Intangible Assets The Company initially records intangible assets at their estimated fair values and reviews these assets periodically for impairment. Identifiable intangible assets, which consist principally of customer-related acquired assets, acquired and/or developed technology, non-compete agreements, and trade names, are reported net of accumulated amortization, and are being amortized over their estimated useful lives at amortization rates that are proportional to each asset’s estimated economic benefit. The Company’s intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. The Company reviews the carrying value of these intangible assets annually, or more frequently if indicators of impairment are present. F- 13 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The useful lives are as follows: Trade names 5 to 7 years Acquired developed technology 5 to 8 years Non-compete agreements 5 years Customer relationships 5 to 8 years Capitalized website costs 3 to 5 years In performing the review of the recoverability of intangible assets, the Company considers several factors, including whether there have been significant changes in legal factors or the overall business climate that could affect the underlying value of an asset. The Company also considers whether there is an expectation that the asset will be sold or disposed of before the end of its remaining estimated useful life. If, as the result of examining any of these factors, the Company concludes that the carrying value of the intangible asset exceeds its estimated fair value, the Company recognizes an impairment charge and reduces the carrying value of the asset to its estimated fair value. During the quarter ended June 30, 2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there was an impairment to the carrying value of its property and equipment and accordingly performed interim testing as of June 30, 2022. Based on its interim testing, the Company noted that the carrying value of equity exceeded the calculated fair value by an amount greater than the aggregate value of our intangible assets. Accordingly, the Company concluded that the entire carrying value of its intangible assets should be impaired, resulting in a second-quarter impairment charge of $ 15.2 million. Additional information regarding the Company’s interim testing on intangible assets may be found in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements. Convertible Notes Payable The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). The accounting treatment of derivative financial instruments requires that the Company identify and record certain embedded conversion options (“ECOs”), certain variable-share settlement features, and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Bifurcated embedded conversion options, variable-share settlement features, and any related freestanding instruments are recorded as a discount to the host instrument which is amortized to interest expense over the life of the respective note using the effective interest method. Warrant Liabilities The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all its financial instruments, including issued private placement stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815. The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480 and ASC 815. Management’s assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, whether they meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own Common Stock among other conditions for equity classification. F- 14 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For issued or modified warrants that meet all of the criteria for equity classification, they are recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that are precluded from equity classification, they are recorded as a liability at their initial fair value on the date of issuance and subject to remeasurement on each balance sheet date with changes in the estimated fair value of the warrants to be recognized as an unrealized gain or loss in the consolidated statements of operations. On August 18, 2022, the Company reached an agreement with its institutional lender to amend its existing Securities Purchase Agreement and entered into a Securities Exchange Agreement (the “August 2022 Exchange Agreement”). Pursuant to the August 2022 Exchange Agreement, the Company issued a new warrant to purchase 71,139 shares of Common Stock (the “Note Exchange Warrant”) and modified an existing warrant (the “SPA Warrant”) to purchase up to an aggregate of 34,406 shares of Common Stock. The Company exchanged the SPA Warrant for a new warrant for the same number of underlying shares but with a reduced exercise price (the “Modified Warrants” and, collectively with the Note Exchange Warrant, the “August 2022 Warrants”). Additional information regarding the August 2022 Exchange Agreement and August 2022 Warrants may be found in Note 4 – Fair Value Measures and Note 9 – Debt, included elsewhere in the notes to the consolidated financial statements. Additionally, o n April 18, 2023, the Company modified the exercise price of certain warrants, to reduce this from $ 13.00 per share to $ 3.45 per share. Debt Issuance Costs and Debt Discount The Company may record debt issuance costs and/or debt discounts in connection with the issuance of debt. The Company may cover these costs by paying cash or issuing warrants. These costs are amortized to interest expense over the expected life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed. Original Issue Discount Certain convertible debt issued by the Company, may provide the debt holder with an original issue discount. The Company would record the original issue discount to debt discount, reducing the face amount of the note, and is then amortized to interest expense over the life of the debt. Leases The Company determines at the inception of an asset contract if such arrangement is or contains a lease. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company classifies leases at the lease commencement date as operating or finance leases and records a right-of-use asset and a lease liability on its consolidated balance sheet for all leases with an initial lease term of greater than 12 months. A lease with an initial term of 12 months or less is not recorded on the balance sheet, but related payments are recognized as an expense on a straight-line basis over the lease term. The Company’s asset contracts may contain both lease and non-lease components. Non-lease components may include maintenance, utilities, and other operating costs. The Company combines the lease and non-lease components of fixed costs in its lease arrangements as a single lease component. Variable costs, such as utilities or maintenance costs, are not included in the measurement of right-of-use assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term. The Company determines the present value of future lease payments by using its estimated secured incremental borrowing rate for that lease term as the interest rate implicit in the lease is not readily determinable. The Company estimates its secured incremental borrowing rate for each lease based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. Certain of the Company’s leases include options to extend or terminate the lease. The amounts determined for the Company’s right-of-use assets and lease liabilities generally do not assume that renewal options or early-termination provisions, if any, are exercised unless it is reasonably certain that the Company will exercise such options. F- 15 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred Revenue Deferred revenue includes amounts collected or billed in excess of revenue that the Company can recognize. The Company recognizes deferred revenue and non-current deferred revenue as revenue as the related performance obligation is satisfied. The Company records deferred revenue that will be recognized during the succeeding twelve-month period as a current liability on the consolidated balance sheets. Fair Value of Financial Instruments The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses. The estimated fair values of accounts receivable and accounts payable approximate their carrying values due to the short-term nature of these instruments. Stock-Based Compensation The Company measures all stock options and other stock-based awards granted to employees, directors and consultants based on the fair value on the date of the grant and recognizes compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Historically, the Company has issued stock options to employees, directors and consultants with only service-based vesting conditions and records the expense for these awards using the straight-line method. The Company classifies stock-based compensation expense in its consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified. The Company estimates the fair value of each stock option grant on the date of the grant using the Black-Scholes option-pricing model. Before the IPO, the Company was a private company and therefore lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of similar publicly-traded companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. Business Combinations The Company accounts for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed. The Company’s management exercises significant judgments in determining the fair value of assets acquired and liabilities assumed, as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company’s current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to the fair value of assets and liabilities made after the end of the measurement period are recorded within the Company’s operating results. For contingent consideration arrangements, the Company recognizes a liability at fair value as of the acquisition date with subsequent fair value adjustments recorded in the consolidated statements of operations. Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements. F- 16 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenue Recognition Overview The Company generates revenue from the following sources: (1) equipment sales, (2) providing services and (3) construction contracts. In accordance with ASC 606 “Revenue Recognition”, the Company recognizes revenue from contracts with customers using a five-step model, which is described below: ● identify the customer contract; ● identify performance obligations that are distinct; ● determine the transaction price; ● allocate the transaction price to the distinct performance obligations; and ● 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 the Company and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability is probable. Specifically, the Company obtains written/electronic signatures on contracts and purchase orders, if said purchase orders are issued in the normal course of business by the customer. Identify performance obligations that are distinct A performance obligation is a promise by the Company to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Determine the transaction price The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies. Allocate the transaction price to distinct performance obligations The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer. The Company’s contracts typically contain multiple performance obligations, for which the Company accounts for individual performance obligations separately, if they are distinct. The standalone selling price reflects the price the Company would charge for a specific piece of equipment or service if it was sold separately in similar circumstances and to similar customers. Recognize revenue as the performance obligations are satisfied Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer. Significant Judgments The Company enters into contracts that may include various combinations of equipment, services and construction, which are generally capable of being distinct and accounted for as separate performance obligations. Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once the Company determines the performance obligations, it determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on the SSP. The corresponding revenue is recognized as the related performance obligations are satisfied. F- 17 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Judgment is required to determine the SSP for each distinct performance obligation. The Company determines SSP based on the price at which the performance obligation is sold separately and the methods of estimating SSP under the guidance of ASC 606-10-32-33. If the SSP is not observable through past transactions, the Company estimates the SSP, taking into account available information such as market conditions, expected margins, and internally approved pricing guidelines related to the performance obligations. The Company licenses its SaaS type subscription license, whereby the customer only has a right to access the software over a specified time period. The full value of the contract is recognized ratably over the contractual term of the SaaS subscription, adjusted monthly if tiered pricing is relevant. The Company typically satisfies its performance obligations for equipment sales when equipment is made available for shipment to the customer; for services sales as services are rendered to the customer and for construction contracts both as services are rendered and when the contract is completed. The Company utilizes the cost-plus margin method to determine the SSP for equipment and build-out services. This method is based on the cost of the services from third parties, plus a reasonable markup that the Company believes is reflective of a market-based reseller margin. The Company determines the SSP for services in time and materials contracts by observable prices in standalone services arrangements. The Company estimates variable consideration in the form of royalties, revenue share, monthly fees, and service credits at contract inception and updated at the end of each reporting period if additional information becomes available. Variable consideration is typically not subject to constraint. Changes to variable consideration were not material for the periods presented. If a contract has payment terms that differ from the timing of revenue recognition, the Company will assess whether the transaction price for those contracts include a significant financing component. The Company has elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if the Company expects that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service, will be one year or less. For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative estimate of the financing component and its relative significance, requires judgment. Accordingly, the Company imputes interest on such contracts at an agreed-upon interest rate and will present the financing components separately as financial income. As of December 31, 2023 and 2022, the Company did not have any such financial income. Payment terms with customers typically require payment 30 days from the invoice date. The Company’s agreements with its customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise concern over delivered products or services, the Company has endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented. The Company has elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service. Accordingly, the Company will accrue all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. The Company has payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company receives 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 the Company’s deferred revenue primarily results from the timing difference between the Company’s performance and the customer’s payment. The Company fulfills obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional. The Company recognizes deferred revenue when consideration has been received or an amount of consideration is due from the customer, and the Company has a future obligation to transfer certain proprietary products. F- 18 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable. The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the right to invoice practical expedient. The Company generally provides a one-year warranty on its products for materials and workmanship but may provide multiple year warranties as negotiated, and generally transfers to its customers the warranties it receives from its vendors, if any, which generally cover this one-year period. In accordance with ASC 450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably estimated. The Company maintains a reserve for warranty returns of $ 0.4 million and $ 0.6 million as of December 31, 2023 and December 31, 2022, respectively. The Company’s reserve for warranty returns is included in accrued expenses and other current liabilities in its consolidated balance sheets. Additional information regarding the Company’s warranty reserve may be found in Note 3 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements. Research and Development Costs The Company expenses research and development costs as incurred. Research and development expenses include payroll, employee benefits and other expenses associated with product development. The Company incurs research and development costs associated with the development and enhancement of both hardware and software products associated with its cultivation and extraction equipment, as well as its SaaS-based software offering, Agrify Insights™ cultivation software (“Agrify Insights™”). Capitalization of Internal Software Development Costs The Company capitalizes certain software engineering efforts related to the continued development of Agrify Insights™ under ASC Topic 350-40 The costs incurred in the preliminary stages of development are expensed as incurred as research costs. Once the application has reached the development stage, internal and external costs incurred to develop internal-use software are capitalized and amortized on a straight-line basis over the estimated useful life of the software. Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful life of the software. The types of costs capitalized during the application development phase include employee compensation, as well as consulting fees for third-party software developers working on these projects. The estimated useful life of capitalized internal-use software ranges from two to five years. Income Taxes The Company accounts for income taxes pursuant to the provisions of ASC Topic 740, Income Taxes, which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred tax asset will not be realized. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10-25-6, the benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. F- 19 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company recognizes the benefit of a tax position when it is effectively settled. ASC 740-10-25-10, provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. ASC 740-10-25-10 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority. For tax positions considered effectively settled, the Company recognizes the full amount of the tax benefit. The Company’s quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items within the period presented. To determine the annual effective tax rate, the Company estimates both the total income (loss) before income taxes for the full year and the jurisdictions in which that income (loss) is subject to tax. The actual effective tax rate for the full year may differ from these estimates if income (loss) before income taxes is greater than or less than what was estimated or if the allocation of income (loss) to jurisdictions in which it is taxed is different from the estimated allocations. The provision for income taxes represents Federal and state and local income taxes. The effective rate differs from statutory rates due to the effect of certain nondeductible expenses. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, and state and local income taxes. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or re-measurement of a tax position taken in a prior annual period is recognized separately in the quarter of the change. Tax contingencies are recorded, if needed, to address potential exposure involving tax positions the Company has taken that could be challenged by tax authorities. These potential exposures could result from applications of various statutes, rules, regulations and interpretations. Any estimates of tax contingencies contain assumptions and judgments about potential actions by taxing jurisdictions. Any interest and penalties related to uncertain tax positions would be included as part of the income tax provision. The Company’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analysis of or changes in tax laws, regulations and interpretations thereof as well as other factors. Net Loss Per Share The Company presents basic and diluted net loss per share attributable to Common Stockholders in conformity with the two-class method required for participating securities. The Company computes basic loss per share by dividing net loss available to Common Stockholders by the weighted-average number of common shares outstanding. Net loss available to Common Stockholders represents net loss attributable to Common Stockholders reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities as the holders of the participating securities do not have a contractual obligation to share in any losses. Diluted loss per share adjusts basic loss per share for the potentially dilutive impact of stock options and warrants. As the Company has reported losses for all periods presented, all potentially dilutive securities including stock options and warrants, are anti-dilutive, and accordingly, basic net loss per share equals diluted net loss per share. Net loss per share calculations for all periods have been adjusted to reflect the reverse stock splits effected on October 18, 2022 and July 5, 2023. Net loss per share was calculated based on the weighted-average number of Common Stock outstanding. Recently Adopted Accounting Pronouncements In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20), and Derivatives and Hedging—Contracts in an Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in ASU No. 2020-06 simplify the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exceptions for contracts in an entity’s own equity. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted this standard as of January 1, 2022. The adoption of this new accounting guidance had no impact on the Company’s consolidated financial position. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities and accounts receivable. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022. The Company adopted ASU 2016-13 on January 1, 2023. The adoption of this standard did not have a material impact on these consolidated financial statements. F- 20 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 606): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with GAAP. The amendment in this update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company adopted ASU 2021-08 on January 1, 2023. The adoption of this standard did not have a material impact on these consolidated financial statements. Recently Announced Accounting Pronouncements AS U 2023-09, Improvements to Income Tax Disclosures ∙ On December 14, 2023, the FASB issued, ASU 2023-09, Improvements to Income Tax Disclosures, a final standard on improvements to income tax disclosures. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard applies to all entities subject to income taxes and is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. For public business entities (PBEs), the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. The Company is currently in the process of evaluating the effect of this guidance on its financial statements. Other recent accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements. Note 2 — Revenue and Deferred Revenue Revenue The Company sells its equipment and services to customers under a combination of a contract and purchase order. Equipment revenue includes sales from proprietary products designed and engineered by the Company such a VFUs, container farms, integrated grow racks, and LED grow lights, and non-proprietary products designed, engineered, and manufactured by third parties such as air cleaning systems and pesticide-free surface protection. Construction contracts normally provide for payment upon completion of specified work or units of work as identified in the contract. Although there is considerable variation in the terms of these contracts, they are primarily structured as time-and-material contracts. The Company enters into time-and-materials contracts under which the Company is paid for labor and equipment at negotiated hourly billing rates and other expenses, including materials, as incurred at rates agreed to in the contract. The Company uses three main sub-contractors to execute the construction contracts. The following table provides the Company’s revenue disaggregated by the timing of revenue recognition: Year Ended December 31, (In thousands) 2023 2022 Transferred at a point in time $ 14,519 $ 34,813 Transferred over time 2,349 23,446 Total revenue $ 16,868 $ 58,259 F- 21 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides the Company’s revenue disaggregated by revenue type: Year Ended December 31, (In thousands) 2023 2022 Cultivation solutions, including ancillary products and services $ 1,100 $ 711 Agrify Insights™ 188 74 Facility build-outs 882 23,129 Extraction solutions 14,698 34,345 Total revenue $ 16,868 $ 58,259 In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable because the majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the right to invoice practical expedient. Deferred Revenue Changes in the Company’s current deferred revenue balance for the years ended December 31, 2023 and 2022 were as follows: Year Ended December 31, (In thousands) 2023 2022 Deferred revenue – beginning of period $ 4,112 $ 3,772 Additions 4,905 13,392 Recognized ( 4,998 ) ( 13,052 ) Deferred revenue – end of period $ 4,019 $ 4,112 Deferred revenue balances primarily consist of customer deposits on the Company’s cultivation and extraction solutions equipment. As of December 31, 2023 and December 31, 2022, all of the Company’s deferred revenue balances were reported as current liabilities in the accompanying consolidated balance sheets. In the year ended December 31, 2023, the Company recognized $ 2.5 million of revenue that was deferred during 2022. And, during the year ended December 31, 2022, the Company recognized $ 2.7 million of revenue that was deferred during 2021. Note 3 — Supplemental Consolidated Balance Sheet Information Accounts Receivable Accounts receivable consisted of the following as of December 31, 2023 and December 31, 2022: Year Ended December 31, (In thousands) 2023 2022 Accounts receivable, gross $ 3,036 $ 5,675 Less allowance for credit losses ( 1,887 ) ( 4,605 ) Accounts receivable, net $ 1,149 $ 1,070 F- 22 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The changes in the allowance for credit losses accounts consisted of the following: Year Ended December 31, (In thousands) 2023 2022 Allowance for credit losses - beginning of period $ 4,605 $ 1,415 (Recovery of) allowance for credit losses ( 1,426 ) 4,928 Write-offs of uncollectible accounts ( 1,292 ) ( 1,510 ) Other adjustments — ( 228 ) Allowance for credit losses - end of period $ 1,887 $ 4,605 The Company recognized a net recovery of credit losses of $ 1.4 million and a provision credit losses of $ 4.9 million for the years ended December 31, 2023 and 2022, respectively. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following as of December 31, 2023 and December 31, 2022: Year Ended December 31, (In thousands) 2023 2022 Prepaid settlement asset $ 2,054 $ — Other receivables, other 659 424 Prepaid insurance 454 219 Prepaid expenses, other 82 230 Prepaid software 70 129 Prepaid materials 13 45 Deferred issuance costs, net — 463 Total prepaid expenses and other current assets $ 3,332 $ 1,510 Property and Equipment, Net Property and equipment, net consisted of the following as of December 31, 2023 and December 31, 2022: (In thousands) December 31, 2023 December 31, 2022 Leased equipment $ 4,465 $ 602 Leasehold improvements 702 1,111 Machinery and equipment 904 1,049 Software 606 606 Computer and office equipment 588 627 Research and development laboratory equipment 183 260 Furniture and fixtures 116 504 Trade show assets 78 78 Vehicles 43 136 Total property and equipment, gross 7,685 4,973 Accumulated depreciation ( 2,894 ) ( 2,372 ) Construction in progress 2,943 7,443 Total property and equipment, net $ 7,734 $ 10,044 Depreciation expense for the years ended December 31, 2023 and 2022 was $ 1.9 million and $ 1.7 million, respectively. F- 23 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Non-Current Assets Other non-current assets consisted of the following as of December 31, 2023 and December 31, 2022: Year Ended December 31, (In thousands) 2023 2022 Security deposits $ 141 $ 153 Long-term deferred commissions expense — 173 Total other non-current assets $ 141 $ 326 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following as of December 31, 2023 and December 31, 2022: Year Ended December 31, (In thousands) 2023 2022 Sales tax payable (1) $ 5,338 $ 5,950 Accrued acquisition liabilities (2) 2,180 3,502 Accrued construction costs 1,412 2,669 Accrued interest expense 321 240 Compensation related fees 474 2,285 Accrued warranty expenses 420 553 Accrued professional fees 457 313 Accrued inventory purchases 10 569 Accrued consulting fees 43 20 Financing lease liabilities — 152 Other current liabilities — 127 Total accrued expenses and other current liabilities $ 10,655 $ 16,380 (1) Sales tax payable primarily represents identified sales and use tax liabilities arising from our acquisition of Precision and Cascade. These amounts are included as part of our initial purchase price allocations and are the subject matter of an indemnification claim under the Precision and Cascade acquisition agreement. (2) Accrued acquisition liabilities includes both the contingent consideration and the value of held back Common Stock associated with the 2022 acquisition of Lab Society and the 2021 acquisitions of Precision, Cascade and PurePressure. Accrued Warranty Costs The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs: Year Ended December 31, (In thousands) 2023 2022 Warranty accrual – beginning of period $ 553 $ 398 Liabilities accrued for warranties issued during the period 230 264 Warranty accruals paid during the period ( 363 ) ( 109 ) Warranty accrual – end of period $ 420 $ 553 Note 4 — Fair Value Measures Fair Values of Assets and Liabilities In accordance with ASC Topic 820 “Fair Value Measurement”, the Company measures fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows: Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets. Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active. Level 3: Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions about how market participants would price the asset or liability. F- 24 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Valuation techniques for assets and liabilities include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain. At December 31, 2023 and December 31, 2022, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows: December 31, 2023 December 31, 2022 Fair Value Measurements Using Input Types Fair Value Measurements Using Input Types (In thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Mutual funds (included in cash and cash equivalents) $ — $ — $ — $ — $ 33 $ — $ — $ 33 Money market funds 4 — — 4 — — — — Corporate bonds — — — — 427 — — 427 Total assets $ 4 $ — $ — $ 4 $ 460 $ — $ — $ 460 Liabilities: Warrant liabilities - January 2022 warrants $ — $ — $ 1 $ 1 $ — $ — $ 4 $ 4 Warrant liabilities - March 2022 warrants — — 7 7 — — 34 34 Warrant liabilities - August 2022 warrants — — 18 18 — — 93 93 Warrant liabilities - December 2022 warrants — — 1,264 1,264 — — 5,854 5,854 Total liabilities $ — $ — $ 1,290 $ 1,290 $ — $ — $ 5,985 $ 5,985 F- 25 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value of Financial Instruments The Company has certain financial instruments which consist of cash and cash equivalents, marketable securities, warrant liabilities, and contingent consideration. Fair value information for each of these instruments as well as other balances of the Company are as follows: ● Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and deferred revenue liabilities approximate their fair value based on the short-term nature of these instruments. ● Marketable securities classified as current held-to-maturity securities are recorded at amortized cost, which at December 31, 2023 and 2022, approximated fair value. ● The Company’s deferred consideration was recorded in connection with acquisitions during the year ended December 31, 2023 and fiscal 2022 using an estimated fair value discount at the time of the transactions. As of December 31, 2023 and 2022, the carrying value of the deferred consideration approximated fair value. ● The Company’s warrant liabilities are marked-to-market each reporting period with the changes in fair value of warrant liabilities recorded in other income (expense), net in the accompanying consolidated statements of operations until the warrants are exercised. The fair value of the warrant liabilities are estimated using a Black-Scholes option-pricing model. Marketable Securities As of December 31, 2023 and 2022, the Company held investments in municipal bonds and corporate bonds. The municipal and corporate bonds are considered held-to-maturity securities and are recorded at amortized cost in the accompanying consolidated balance sheet. The fair values of these investments were estimated using recently executed transactions and market price quotations. The Company considers current assets as those investments which will mature within the next 12 months including, interest receivable on long-term bonds. The composition of the Company’s marketable securities are as follows: Year Ended December 31, (In thousands) 2023 2022 Current marketable securities: Money market funds $ 4 $ — Corporate bonds — 427 Mutual funds — 33 $ 4 $ 460 Contingent Consideration The Company has classified its net liability for contingent earn-out considerations to the sellers relating to one acquisition completed during the first quarter of 2022 and two acquisitions completed during fiscal 2021. The fair value for the contingent consideration associated with these acquisitions is within Level 3 of the fair value hierarchy because the associated fair value is determined using significant unobservable inputs, which included the key assumptions to model future revenue, costs of goods sold and operating expense projections. The company recorded no change in contingent consideration for the year ended December 31, 2023. The contingent earn-out payments to the sellers for each acquisition are based on the achievement of certain revenue thresholds. F- 26 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands) 2022 Contingent consideration – beginning of period $ 6,137 Accrued contingent consideration 1,420 Accretion of contingent consideration 149 Payments made on contingent liabilities ( 5,550 ) Change in estimated fair value ( 2,156 ) Contingent consideration – end of period $ — The Company included contingent consideration within accrued expenses and other current liabilities on its consolidated balance sheet as of December 31, 2022. See below for additional information related to each acquisition’s contingent consideration. Contingent Consideration – PurePressure The Company, in its review of actual revenue performance as compared to its originally projected revenue estimates, noted that PurePressure’s revenue trend is materially below the originally estimated revenue trends incorporated into the Company’s original fair value estimates at the time of the acquisition. As a result, the Company has reduced its fair value estimate of achievement for PurePressure’s first earn-out period. During the third quarter ended September 30, 2022, the Company reduced the estimated fair value of the contingent consideration liability associated with PurePressure’s first earn-out period by approximately $ 0.6 million and their second earn-out by approximately $ 0.2 million. As required by ASC Topic 805 Business Combination (“ASC 805”), the change in contingent consideration was recorded as a reduction in operating expenses during the third and fourth quarters of 2022, respectively. Contingent Consideration – Lab Society The Company, in its review of actual revenue performance as compared to its originally projected revenue estimates, noted that Lab Society’s revenue trend is materially below the originally estimated revenue trends incorporated into the Company’s original fair value estimates at the time of the acquisition. As a result, the Company has reduced its fair value estimate of achievement for Lab Society’s first earn-out period. During the second quarter ended June 30, 2022, the Company reduced the estimated fair value of the contingent consideration liability associated with Lab Society’s first earn-out period by approximately $ 1.0 million and their second earn-out by approximately $ 0.5 million. As required by ASC 805, the change in contingent consideration was recorded as a reduction in operating expenses during the second and fourth quarters of 2022, respectively. Contingent Consideration – Precision and Cascade The earn-out period for the potential contingent consideration to be earned by the former members of Precision and Cascade concluded on December 31, 2021. The Company, during the second quarter of 2022, increased the amount of the contingent consideration earned by the former members of Precision and Cascade by approximately $ 0.1 million, to reflect the final contingent consideration amount due. This amount was recorded as an increase in operating expenses during the second quarter of 2022. During the period ended December 31, 2022, the Company made the final payment on the contingent consideration of approximately $ 5.6 million to the members of Precision and Cascade. Warrant Liabilities The 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. However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair values could be materially different. F- 27 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 2022 Warrants The following table summarizes the Company’s assumptions used in the valuation of December 31, 2023 and December 31, 2022: Year Ended December 31, 2023 2022 Stock price $ 1.26 $ 6.66 Exercise price $ 1,496.00 $ 1,496.00 Expected term (in Years) 3.57 4.58 Volatility 138.00 % 98.30 % Discount rate - treasury yield 3.96 % 4.05 % The following table sets forth a summary of the changes in the fair value of the Level 3 warrant liabilities of December 31, 2023 and December 31, 2022: Year Ended December 31, (In thousands) 2023 2022 Warrant liabilities – beginning of period $ 4 $ — Initial fair value of warrant liabilities — 10,969 Change in estimated fair value ( 3 ) ( 10,965 ) Warrant liabilities –end of period $ 1 $ 4 March 2022 Warrants The following table summarizes the Company’s assumptions used in the valuation of December 31, 2023 and December 31, 2022: Year Ended December 31, 2023 2022 Stock price $ 1.26 $ 6.66 Exercise price $ 430.00 $ 430.00 Expected term (in Years) 4.13 5.13 Volatility 136.00 % 97.96 % Discount rate - treasury yield 3.91 % 3.99 % The following table sets forth a summary of the changes in the fair value of the Level 3 warrant liabilities of December 31, 2023 and December 31, 2022: Year Ended December 31, (In thousands) 2023 2022 Warrant liabilities – beginning of period $ 34 $ — Initial fair value of warrant liabilities — 29,522 Change in estimated fair value ( 27 ) ( 31,133 ) Component of loss on debt extinguishment — 1,645 Warrant liabilities – end of period $ 7 $ 34 F- 28 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 2022 Warrants The following table summarizes the Company’s assumptions used in the valuation of December 31, 2023 and December 31, 2022: Year Ended December 31, 2023 2022 Stock price $ 1.26 $ 6.66 Exercise price $ 246.00 $ 246.00 Expected term (in Years) 4.13 5.13 Volatility 136.00 % 97.96 % Discount rate - treasury yield 3.91 % 3.99 % The following table sets forth a summary for the changes in the fair value of the Level 3 warrant liabilities of December 31, 2023 and December 31, 2022: Year Ended December 31, (In thousands) 2023 2022 Warrant liabilities – beginning of period $ 93 $ — Initial fair value of warrant liabilities — 10,212 Change in estimated fair value ( 75 ) ( 9,876 ) Warrants settled in period — ( 243 ) Warrant liabilities – end of period $ 18 $ 93 December 2022 Warrants The following table summarizes the Company’s assumptions used in the valuation of December 31, 2023 and December 31, 2022: Year Ended December 31, 2023 2022 Stock price $ 1.26 $ 6.66 Exercise price $ 3.45 $ 13.00 Expected term (in Years) 4.13 4.98 Volatility 136.00 % 98.00 % Discount rate - treasury yield 3.91 % 3.99 % The following table sets forth a summary for the changes in the fair value of the Level 3 warrant liabilities of December 31, 2023 and December 31, 2022: Year Ended December 31, (In thousands) 2023 2022 Warrant liabilities – beginning of period $ 5,854 $ — Initial fair value of warrant liabilities — 4,924 Change in estimated fair value ( 4,590 ) 930 Warrant liabilities – end of period $ 1,264 $ 5,854 F- 29 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 — Loans Receivable A portion of the capital raised from the Company’s IPO was allocated to launch the Company’s TTK Solution program. The TTK Solution is the industry’s first-of-its-kind program in which the Company engages with qualified cannabis operators in the early phases of their business plans and provides critical support, typically over a 10 -year period, which includes: access to capital for construction costs, the design and build-out of their cultivation and extraction facilities, state-of-the-art cultivation and extraction equipment, subscription to the Company’s Agrify Insights™, process design, training, implementation, proven grow recipes, product formulations, data analytics, and consumer branding. On September 15, 2022, the Company provided a notice of default under the term loan agreement between the Company and Bud & Mary’s (the “Bud & Mary’s TTK Agreement”). On October 5, 2022, Bud & Mary’s Cultivation, Inc. (the “Bud & Mary’s”) filed a complaint in the Superior Court of Massachusetts in Suffolk County naming the Company as defendant. Bud & Mary’s is seeking, among other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion arising from the Bud & Mary’s TTK Agreement . In response, the Company established a reserve of $ 14.7 million specifically related to Bud & Mary’s. The Company deemed it necessary to fully reserve the $ 14.7 million outstanding balance in the third quarter of 2022 due to the current litigation and the uncertainty of the customer’s ability to repay the outstanding balance. The Company believes that Bud & Mary’s claims have no merit and intends to defend itself vigorously. The Company is taking all necessary steps to pursue repayment from Bud & Mary’s and is taking all actions necessary to protect its shareholders’ interests. During the year ended December 31, 2022, the Company established a reserve of approximately $ 12.5 million specifically related to Greenstone. Greenstone is a related party because one of the Company’s former Agrify Brands employees and its VP of Engineering had a minority ownership. The Company established the reserve based upon its review of Greenstone’s financial stability, which would impact collectability, which is primarily the result of unfavorable market conditions within the Colorado market. The Company will continue to monitor the operations of Greenstone in an effort to collect all outstanding receivables but due to the uncertain nature of Greenstone’s business at this time the Company has made the decision to place a reserve against the receivables. During the quarter ended June 30, 2023, the Greenstone loan was fully written off against the reserve as a result of the sale of Greenstone to Denver Greens. It was agreed that Denver Greens would not have to pay back Greenstone’s Loan. The breakdown of loans receivable by customer as of December 31, 2023 and December 31, 2022 were as follows: Year Ended December 31, (In thousands) 2023 2022 Customer 139 $ 14,691 $ 14,691 Customer 136 — 12,457 Customer 125 9,297 9,048 Customer 24096 6,810 5,890 Other – Non-TTK Solution (1) — 3,178 Allowance for credit losses (2)(3) ( 19,215 ) ( 33,050 ) Total loan receivable $ 11,583 $ 12,214 (1) The current portion of loan receivable is included in prepaid expenses and other current assets on the balance sheet. (2) As of December 31, 2023 The TTK Solution project balance was written off due to the cancellation of the project. (3) The Company established an allowance for credit losses of approximately $ 14.7 million related to Bud & Mary’s ongoing litigation. Approximately $ 4.5 million relates to Hannah. F- 30 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At this time, the Company is not aware of, nor has it identified any risk or potential performance failure associated with any of its TTK Solution arrangements, other than the noted exceptions of Bud & Mary’s TTK Solution, Hannah, and Greenstone TTK Solution, which is a related party, as described above. The Company analyzed whether any of the above customers are a VIE in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. Based on the Company’s analysis, the Company has determined that Greenstone, which is a related party because one of the Company’s former Agrify Brands employees and its VP of Engineering had a minority ownership, is a VIE. The Company’s loan receivable from Greenstone was written off in full during the quarter ending June 30, 2023. Note 6 — Inventory Inventories are stated at the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a first-in, first-out basis. Such costs include the acquisition cost for raw materials and operating supplies. The Company’s standard payment terms with suppliers may require making payments in advance of delivery of the Company’s products. The Company’s prepaid inventory is a short-term, non-interest-bearing asset that is applied to the purchase of products once they are delivered. Inventory consisted of the following as of December 31, 2023 and December 31, 2022: Year Ended December 31, (In thousands) 2023 2022 Raw materials $ 23,449 $ 24,960 Prepaid inventory 924 15,506 Finished goods 7,438 13,352 Inventory for resale 4,882 — Inventory, gross 36,693 53,818 Inventory reserves ( 17,599 ) ( 32,422 ) Total inventory, net $ 19,094 $ 21,396 Inventory Reserves The Company establishes an inventory reserve for obsolete, slow moving, and defective inventory. The Company calculates inventory reserves for obsolete, slow moving, or defective items as the difference between the cost of inventory and its estimated net realizable value. The reserves are based upon management’s expected method of disposition. Changes in the Company’s inventory reserve are as follows: Year Ended December 31, (In thousands) 2023 2022 Inventory reserves – beginning of period $ 32,422 $ 942 (Decrease) increase in inventory reserves ( 14,823 ) 31,480 Inventory reserves – end of period $ 17,599 $ 32,422 Note 7 — Goodwill and Intangible Assets, Net Intangible assets are initially recorded at fair value and tested periodically for impairment. Goodwill represents the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination and is tested at least annually for impairment. The Company performs its goodwill impairment testing annually during the fourth quarter, or sooner if indicators or circumstances were to occur that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying amount. The Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill. F- 31 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has concluded that there was an impairment-triggering event during the quarter ended June 30, 2022 that required the Company to perform a detailed analysis of the current carrying value of its goodwill and intangible assets. For goodwill and intangible asset impairment testing purposes, the Company has one reporting unit. During the quarter ended June 30, 2022, the Company’s market capitalization fell below total net assets. In addition, financial performance continued to weaken during the quarter, which was contrary to prior experience. Management reassessed business performance expectations following persistent adverse developments in equity markets, deterioration in the environment in which the Company operates, lower-than-expected sales, and an increase in operating expenses. These indicators, in the aggregate, required impairment testing for goodwill and intangible assets. Based on the results of this testing, the Company determined that the carrying values of the aggregate value of its goodwill and intangible assets were not recoverable. The Company recorded impairment charges during the second quarter of 2022, representing a full impairment of the carrying value of its goodwill and intangible assets. The Company recorded an impairment charge of approximately $ 69.9 million, representing the carrying values of goodwill and intangible assets, which totaled $ 54.7 million and $ 15.2 million, respectively. Changes in goodwill consisted of the following: (In thousands) 2022 Goodwill - beginning of period $ 50,090 Goodwill acquired during period 4,368 Goodwill purchase accounting adjustment 289 Goodwill impairment loss ( 54,747 ) Goodwill - end of period $ — Intangible assets, net as of December 31, 2022 were as follows: Intangible Assets, Gross Accumulated Amortization and Impairment Intangible Assets, Net (In thousands) January 1, 2022 Additions and Retirements, net December 31, 2022 January 1, 2022 Expense and Retirements, net December 31, 2022 January 1, 2022 December 31, 2022 Trade names $ 2,418 $ 317 $ 2,735 $ ( 227 ) $ ( 2,508 ) $ ( 2,735 ) $ 2,191 $ — Customer relationships 6,176 713 6,889 ( 302 ) ( 6,587 ) ( 6,889 ) 5,874 — Acquired developed technology 4,911 1,432 6,343 ( 191 ) ( 6,152 ) ( 6,343 ) 4,720 — Non-compete 1,202 — 1,202 ( 60 ) ( 1,142 ) ( 1,202 ) 1,142 — Capitalized website costs 245 — 245 ( 100 ) ( 145 ) ( 245 ) 145 — Total $ 14,952 $ 2,462 $ 17,414 $ ( 880 ) $ ( 16,534 ) $ ( 17,414 ) $ 14,072 $ — Amortization expense recorded in general and administrative expense in the consolidated statements of operations was zero and $ 1.4 million for the years ended December 31, 2023, and 2022, respectively. F- 32 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Business Combinations Acquisition of Lab Society On February 1, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lab Society, a newly-formed wholly-owned subsidiary of the Company (“Merger Sub”), Michael S. Maibach Jr., as the Owner Representative thereunder, and each of the shareholders of Lab Society (collectively, the “Owners”), pursuant to which the Company agreed to acquire Lab Society. Concurrently with the execution of the Merger Agreement, the Company consummated the merger of Lab Society with and into Merger Sub, with Merger Sub surviving such merger as a wholly-owned subsidiary of the Company (the “Lab Society Acquisition”). The aggregate consideration for the Lab Society Acquisition consisted 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. The Company 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 the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Merger Agreement. During the third quarter of 2022, 139 of the Holdback Lab Buyer Shares were forfeited after the finalization of the net working capital settlement. The 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. The Merger Agreement includes customary post-closing adjustments, representations and warranties, and covenants of the parties. The Owners may become entitled to additional consideration with a value of up to $ 3.5 million based on the eligible net revenues achieved by the Lab Society business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 50 % will be payable in cash and the remaining 50 % will be payable by issuing shares of Common Stock. Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 - Fair Value Measures, included elsewhere in the notes to the consolidated financial statements. Transaction and related costs, consisting primarily of professional fees, related to the acquisition, totaled approximately $ 0 and $ 66 thousand for the years ended December 31, 2023, and 2022, respectively. All transaction and related costs were expensed as incurred and are included in general and administrative expense. F- 33 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has prepared purchase price allocations for the business combination. The following table sets forth the components and the allocation of the purchase price for the business combination: (In thousands) Purchase price consideration Closing proceeds $ 4,002 Transaction expenses 80 Closing buyer shares 1,904 Holdback buyer shares 816 Earn-out consideration 1,420 Working capital adjustment ( 255 ) Fair value of total consideration transferred 7,967 Total purchase price, net of cash acquired $ 7,402 Fair value allocation of purchase price Cash and cash equivalents $ 565 Accounts receivable 511 Inventory 2,130 Prepaid expenses and other current receivables 55 Right - of-use assets, net 304 Property and equipment, net 177 Prepaid and refundable taxes 194 Accounts payable, accrued expenses, and other current liabilities ( 1,224 ) Deferred revenue ( 963 ) Deferred tax liability ( 237 ) Finance lease liabilities, current ( 36 ) Finance lease liabilities, non-current ( 35 ) Operating lease liabilities, current ( 112 ) Operating lease liabilities, non-current ( 192 ) Acquired intangible assets 2,462 Goodwill 4,368 Total purchase price $ 7,967 Identified intangible assets consist of trade names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below: (In thousands) Asset Value Useful Life Identified intangible assets Trade names $ 317 5 years Acquired developed technology 1,432 8 years Customer relationships 713 6 years Total identified intangible assets $ 2,462 The Company’s initial fair value estimates related to the various identified intangible assets of Lab Society were determined under various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending, and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate. F- 34 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the quarter ended June 30, 2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there was an impairment to the carrying value of its property and equipment and accordingly performed interim testing as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets were impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 7 - Intangible Assets, Net and Goodwill included elsewhere in the notes to the consolidated financial statements. The amount of revenue of Lab Society included in the consolidated statements of operations from the acquisition date of February 1, 2022 to December 31, 2022 was $ 4.5 million. Acquisition of Precision and Cascade On September 29, 2021 (the “Execution Date”), the Company entered into a Plan of Merger and Equity Purchase Agreement, as amended by an amendment dated October 1, 2021 (as amended, the “Purchase Agreement”), with Sinclair Scientific, LLC, a Delaware limited liability company (“Sinclair”), Mass2Media, LLC, Precision, a Michigan limited liability company; and each of the equity holders of Sinclair named therein (collectively, the “Sinclair Members”). On October 1, 2021, the Company consummated the transactions contemplated by the Purchase Agreement. Subject to the terms and conditions set forth in the Purchase Agreement, Sinclair transferred to the Company, and the Company purchased (the “Interest Purchase”) from Sinclair, 100 % of the equity interests of Cascade, a Delaware limited liability company, such that immediately after the consummation of such Interest Purchase, Cascade became a wholly-owned subsidiary of the Company, and Precision merged (the “Merger”) with and into a newly-formed wholly-owned subsidiary of the Company, Precision Extraction NewCo, LLC. The aggregate consideration for the Interest Purchase and the Merger consisted of the sum of $ 30 million in cash, plus consideration payable to holders of outstanding Sinclair equity awards, subject to certain adjustments for working capital, cash, and indebtedness, payable in connection with the Interest Purchase; the number of shares of Common Stock, subject to adjustment, equal to the quotient of $ 20.0 million divided by the volume weighted average price per share of Common Stock on The Nasdaq Capital Market for the 30 consecutive trading days ending on the Execution Date (the “VWAP Price”), issuable in connection with the Merger; Holdback Buyer Shares; and the True-Up Buyer Shares, issuable in connection with the Merger. The Company withheld 588 shares issuable to certain members (the “Holdback Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Purchase Agreement. These shares were not released as of December 31, 2023. The Purchase Agreement included customary post-closing adjustments, representations and warranties, and covenants of the parties. The Sinclair Members became entitled to additional shares of Common Stock (the “True-Up Buyer Shares”) and cash (together with the True-Up Buyer Shares, the “Aggregate True-Up Payment”) based on the eligible net revenues (as defined in the Purchase Agreement) achieved by the Cascade and Precision businesses during the fiscal year ending December 31, 2021. On August 10, 2022, the Company entered into a post-closing adjustment settlement agreement (“Agreement”) with Sinclair. The Agreement was entered into in connection with the Purchase Agreement. According to the Purchase Agreement, $ 2.5 million was held by the escrow agent as the Adjustment Escrow Amount, $ 4.5 million was held by the escrow agent as the Indemnity Escrow Amount. On August 17, 2022, the Company made the final Aggregate True-up Payment of approximately $ 5.6 million, of which $ 3.3 million was paid in cash and 435 True-Up Buyer Shares were released to the Sinclair Members, and the Company received $ 1.4 million from the Adjustment Escrow Amount, and the remaining $ 1.1 million balance of the Adjustment Escrow Amount became part of the Indemnity Escrow Amount. F- 35 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Transaction and related costs, consisting primarily of professional fees, related to the acquisition, totaled approximately $ 0 and $ 63 thousand for the years ended December 31, 2023, and 2022, respectively. All transaction and related costs were expensed as incurred and are included in general and administrative expense. The following table sets forth the components and the allocation of the purchase price for the business combination: (In thousands) Purchase price consideration Cash paid to Sinclair Members at the close $ 23,000 Cash contributed to escrow accounts at the close 7,000 Cash paid for excess net working capital 1,430 Stock issued at the close 14,535 Fair value of contingent consideration to be achieved 3,953 Fair value of total consideration transferred 49,918 Total purchase price, net of cash acquired $ 48,630 Fair value allocation of purchase price Cash and cash equivalents $ 1,288 Accounts receivable 897 Inventory 6,761 Prepaid expenses and other current receivables 1,736 Property and equipment, net 970 Right-of-use assets, net 730 Capitalized web costs, net 2 Accounts payable and accrued expenses ( 9,223 ) Deferred revenue ( 5,419 ) Long-term debt ( 1,961 ) Operating lease liabilities, current ( 392 ) Operating lease liabilities, non-current ( 362 ) Acquired intangible assets 9,889 Goodwill 45,002 Total purchase price $ 49,918 Identified intangible assets consist of trade names, technology, non-compete agreements, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below: (In thousands) Useful Life Identified intangible assets Trade names $ 1,260 6 to 7 years Acquired developed technology 3,818 5 years Non-compete agreements 1,202 5 years Customer relationships 3,609 7 to 8 years Total identified intangible assets $ 9,889 The Company’s initial fair value estimates related to the various identified intangible assets were determined under various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending, and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate. F- 36 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the quarter ended June 30, 2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there was an impairment to the carrying value of its property and equipment and accordingly performed interim testing as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets were impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 7 - Intangible Assets, Net and Goodwill, included elsewhere in the notes to the consolidated financial statements. Acquisition of PurePressure On December 31, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Pure Purchase Agreement”) with PurePressure, LLC, a Colorado Limited liability company (“PurePressure”), and the members of PurePressure (collectively, the “Members”), Benjamin Britton as the Member Representative thereunder, and each of the Members. Concurrently with the execution of the Pure Purchase Agreement, the Company consummated the acquisition of all the outstanding equity interests of PurePressure, such that immediately after the consummation of such purchase, PurePressure became a wholly-owned subsidiary of the Company (the “Acquisition”). The aggregate consideration for the Acquisition consisted of $ 4.0 million in cash, subject to certain adjustments for working capital, cash, and indebtedness of PurePressure at closing; 1,646 shares of Common Stock (the “Buyer Shares”); and the Earn-out Consideration (as defined below), to the extent earned. The Company withheld 444 of the Buyer Shares issuable to certain Members (the “Holdback Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Pure Purchase Agreement. During the third quarter of 2022, 72 of the Holdback Buyer Shares were forfeited after the finalization of the net working capital settlement. On January 31, 2023, the remaining 372 Holdback Buyer Shares were released, including 6 Holdback Buyer Shares that were withheld to cover a tax indemnification claim in accordance with the Purchase Agreement. The Pure Purchase Agreement includes customary post-closing adjustments, representations and warranties, and covenants of the parties. The Members may become entitled to additional consideration with a value of up to $ 3.0 million based on the eligible net revenues achieved by the PurePressure business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 40 % will be payable in cash and the remaining 60 % will be payable by issuing shares of Common Stock (collectively, the “Earn-out Consideration”). Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 - Fair Value Measures, included elsewhere in the notes to the consolidated financial statements. Subject to certain customary limitations, the Members will indemnify the Company and its affiliates, officers, directors, and other agents against certain losses related to, among other things, breaches of the Members’ and PurePressure’s representations and warranties, indebtedness, transaction expenses, pre-closing taxes, and the failure to perform covenants or obligations under the Pure Purchase Agreement, and the Company will indemnify the Members and their respective affiliates, officers, directors, and other agents against certain losses related to, among other things, breaches of the Company’s representations and warranties and the failure to perform covenants or obligations under the Pure Purchase Agreement. Transaction and related costs, consisting primarily of professional fees, related to the acquisition, totaled approximately $ 0 and $ 563 thousand for the years ended December 31, 2023, and 2022, respectively. All transaction and related costs were expensed as incurred and are included in general and administrative expense. F- 37 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has prepared purchase price allocations for the business combination. The following table sets forth the components and the allocation of the purchase price for the business combination: (In thousands) Purchase price consideration Closing proceeds $ 3,613 Indebtedness paid 320 Transaction expenses 115 Closing buyer shares 2,211 Holdback buyer shares 654 Earn-out consideration 707 Working capital adjustment 330 Fair value of total consideration transferred 7,950 Total purchase price, net of cash acquired $ 7,647 Fair value allocation of purchase price Cash and cash equivalents 303 Accounts receivable, net 48 Inventory 1,537 Property and equipment, net 219 Right-of-use assets, net 191 Prepaid expenses and other current receivables 61 Other non-current assets 16 Accounts payable and accrued expenses ( 765 ) Deferred revenue ( 762 ) Operating lease liabilities, current ( 117 ) Operating lease liabilities, non-current ( 74 ) Finance lease liabilities, current ( 4 ) Finance lease liabilities, non-current ( 10 ) Notes payable, current ( 260 ) Notes payable, non-current ( 12 ) Acquired intangible assets 3,037 Goodwill 4,542 Total purchase price $ 7,950 Identified intangible assets consist of trade names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below: (In thousands) Asset Value Identified intangible assets Trade name $ 227 5 years Acquired developed technology 1,093 8 years Customer relationships 1,717 5 years Total identified intangible assets $ 3,037 During the quarter ended June 30, 2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there was an impairment to the carrying value of its property and equipment and accordingly performed interim testing as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets were impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 7 - Intangible Assets, Net and Goodwill, included elsewhere in the notes to the consolidated financial statements. F- 38 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 – Debt The Company’s debt consisted of: Year Ended December 31, (In thousands) 2023 2022 Note payable – Exchange Note and Convertible Note $ 15,928 $ 31,975 PPP Loan 518 656 Navitas loan 7 23 Related party debt 4,444 — Other notes payable (1) 360 — Total debt 21,257 32,654 Unamortized debt premium (discount) — ( 3,415 ) Total debt, net of debt discount 21,257 29,239 Less: current portion, net of current unamortized debt discount ( 5,210 ) ( 28,832 ) Long-term debt, net of current $ 16,047 $ 407 (1) Other notes payable relates to a one-year insurance premium that was financed over nine-months and incurred interest expense of approximately $ 85 thousand. Note Payable Securities Purchase Agreement On March 14, 2022, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with the Investor, pursuant to which the Company agreed to issue and sell to the Investor, in a private placement transaction, in exchange for the payment by the Investor of $ 65.0 million, less applicable expenses, as set forth in the Securities Purchase Agreement, a senior secured promissory note in an aggregate principal amount of $ 65.0 million (the “SPA Note”), and a SPA Warrant to purchase up to an aggregate of 34,406 shares of Common Stock. August 2022 Securities Exchange Agreement On August 18, 2022, the Company reached an agreement with the Investor to amend its existing senior SPA Note and entered into the August 2022 Exchange Agreement. Pursuant to the August 2022 Exchange Agreement, the Company partially paid $ 35.2 million along with approximately $ 0.3 million in repayments for other fees under the SPA Note and exchanged the remaining balance of the SPA Note for an Exchange Note with an aggregate original principal amount of $ 35.0 million and a new Note Exchange Warrant to purchase 71,139 shares of Common Stock and modified an existing SPA Warrants to purchase up to an aggregate of 34,406 shares of Common Stock. The Company exchanged the SPA Warrant for new August 2022 Warrants. The Exchange Note is a senior secured obligation of the Company and ranks senior to all indebtedness of the Company. The Exchange Note will mature on the three-year anniversary of its issuance (the “Maturity Date”) and contains a 9.0 % annualized interest rate, with interest to be paid monthly, in cash, beginning September 1, 2022. The principal amount of the Exchange Note will be payable on the Maturity Date, provided that the Investor will be entitled to a cash sweep of 20 % of the proceeds received by the Company in connection with any equity financing, which will reduce the outstanding principal amount under the Exchange Note. At any time, the Company may prepay all of the Exchange Note by redemption at a price equal to 102.5 % of the then-outstanding principal amount under the Note plus accrued but unpaid interest. The Investor will also have the option of requiring the Company to redeem the Exchange Note on the one-year or two-year anniversaries of issuance at a price equal to the then-outstanding principal amount under the Exchange Note plus accrued but unpaid interest, or if the Company undergoes a fundamental change at a price equal to 102.5 % of the then-outstanding principal amount under the Exchange Note plus accrued but unpaid interest. The Exchange Note imposes certain customary affirmative and negative covenants upon the Company, as well as covenants that restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, restrict the ability of the Company and its subsidiaries from making certain investments, subject to specified exceptions, restrict the declaration of any dividends or other distributions, subject to specified exceptions, require the Company not to exceed maximum levels of allowable cash spend while the Exchange Note is outstanding, and require the Company to maintain minimum amounts of cash on hand. If an event of default under the Exchange Note occurs, the Investor can elect to redeem the Exchange Note for cash equal to 115 % of the then-outstanding principal amount of the Note (or such lesser principal amount accelerated by the Investor), plus accrued and unpaid interest, including default interest, which accrues at a rate per year equal to 15 % from the date of a default or event of default. F- 39 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Until the date the Exchange Note is fully repaid, the Investor has, subject to certain exceptions, the right to participate for up to 30 % of any offering of debt, equity (other than an offering of solely Common Stock), or equity-linked securities, including without limitation any debt, preferred stock or other instrument or security, of the Company or its subsidiaries. The Modified Warrant has an exercise price of $ 430.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be exercisable on and after the six-month anniversary of issuance, have a term of five and one-half years from the date of issuance and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Modified Warrant (the “Modified Warrant Shares”) or if shareholder approval for the full exercise of the Modified Warrant is not received, in which case the Modified Warrant will also be exercisable on a cashless exercise basis at the Investor’s election. The Note Exchange Warrant has an exercise price of $ 246.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends, and similar transactions, were exercisable upon issuance, and have a term of five and one-half years from the date of issuance and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Warrant (the “Note Exchange Warrant Shares” and, together with the Modified Warrant Shares, the “Exchange Warrant Shares”) or if shareholder approval for the full exercise of the Note Exchange Warrant is not received, in which case the Note Exchange Warrant will also be exercisable on a cashless exercise basis at the Investor’s election. Until the Company completed a qualified equity financing of at least $ 15.0 million, which requirement was satisfied with sales under the ATM Program, the Note Exchange Warrant’s exercise price would have been reduced to the extent the Company issued securities, subject to certain exceptions, for a lower purchase price. The Note Exchange Warrant also prohibited the Company, until following the completion of such qualified equity financing, from issuing warrants with more favorable or preferential terms and/or provisions. The August 2022 Warrants will each provide that in no event will the number of shares of Common Stock issued upon exercise of such warrant result in the Investor’s beneficial ownership exceeding 4.99 % of the Company’s shares of Common Stock outstanding at the time of exercise (which percentage may be decreased or increased by the Investor, but to no greater than 9.99 %, and provided that any increase above 4.99 % will not be effective until the sixty-first day after notice of such request by the Investor to increase its beneficial ownership limit has been delivered to the Company). Modification of Notes Payable On March 8, 2023, the Company entered into a Securities Exchange Agreement (the “Exchange Agreement” or “Second Amendment”) with the High Trail Special Situations LLC. Pursuant to the Exchange Agreement, at closing the Company will prepay approximately $ 10.3 million in principal amount under the August 2022 Note and exchange $ 10.0 in principal amount of the remaining balance of the August 2022 Note for a new senior secured convertible note (the “Convertible Note”) with an original principal amount of $ 10.0 million. After the closing of the Exchange Agreement, the August 2022 Note will remain outstanding with a remaining balance of $ 11.7 million (the “Modified August 2022 Note” and, collectively with the Convertible Note, the “Notes”). This exchange was deemed to be an extinguishment under ASC 470, as the modified debt added a substantive conversion option that was not inherent in the August 2022 Note. As a result, the Company recognized a loss on the extinguishment of debt of approximately $ 4.6 million. Convertible Notes On March 8, 2023, as a result of the Exchange Agreement, the Company issued a Convertible Note to High Trail Special Situations LLC (the “Lender”) with a principal balance of $ 10 million. The Convertible Note bears a 9.0 % annualized interest rate, with interest to be paid monthly, in cash, beginning April 1, 2023. The principal amount of the Convertible Note will be payable on the Maturity Date, provided that the Lender will be entitled to a cash sweep of 30 % of the proceeds of any at-the-market equity offering and 20 % of the proceeds received by the Company in connection with any other equity financing, which will reduce the outstanding principal amount under the August 2022 Note or the Convertible Note. F- 40 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At any time, the Company may prepay all of the Convertible Note by redemption at a price equal to 102.5 % of the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest. The Lender will also have the option of requiring the Company to redeem the Convertible Note (i) on August 19, 2023 or August 19, 2024 at a price equal to the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest, provided that the redemption right on August 19, 2023 will not be exercisable if the Company raises at least $ 8.0 million in gross proceeds from equity offerings prior to such date, or (ii) if the Company undergoes a fundamental change (as defined below) at a price equal to 102.5 % of the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest. The Convertible Note will impose certain customary affirmative and negative covenants upon the Company, as well as covenants that will (i) restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, (ii) restrict the ability of the Company and its subsidiaries from making certain investments, subject to specified exceptions, and (iii) restrict the declaration of any dividends or other distributions, subject to specified exceptions. If an event of default under the Convertible Note occurs, the Lender can elect to redeem the Convertible Note for cash equal to (A) 115 % of the then-outstanding principal amount of the Convertible Note (or such lesser principal amount accelerated by the Investor), plus accrued and unpaid interest, including default interest, which accrues at a rate per annum equal to 15 % from the date of a default or event of default, or, only in connection with certain events of default, (B) the greater of the amount under clause (A) or the sum of (i) 115 % of the product of (a) the conversion rate in effect as of the trading day immediately preceding the date that the Lender delivers a notice of acceleration; (b) the total then outstanding principal amount under the Convertible Note (in thousands); and (c) the greater of (1) the highest daily volume weighted average price (“VWAP”) per share of Common Stock occurring during the fifteen consecutive trading days ending on, and including, the trading day immediately before the date the Lender delivers such notice and (2) the highest daily VWAP per share of Common Stock occurring during the fifteen consecutive trading days ending on, and including, the trading immediately before the date the applicable event of default occurred and (ii) the accrued and unpaid interest on the Convertible Note. Until the date the Convertible Note is fully repaid, the Lender will have, subject to certain exceptions, the right to participate for up to 30 % of any offering of debt, equity (other than an offering of solely Common Stock), or equity-linked securities, including without limitation any debt, preferred stock or other instrument or security, of the Company or its subsidiaries. If the Lender elects to convert the Convertible Note, the conversion price per share will be $ 0.3820 , subject to customary adjustments for certain corporate events. The conversion of the Convertible Note will be subject to certain customary conditions. The Convertible Note may not be converted into shares of Common Stock if such conversion would result in the Lender and its affiliates owning an aggregate of in excess of 4.99 % of the then-outstanding shares of Common Stock, provided that upon 61 days’ notice, such ownership limitation may be adjusted by the Lender, but in any case, to no greater than 9.99 %. The Company evaluated the embedded features in accordance with ASC 815-15-25 and the determined embedded features are not required to be bifurcated and separately measured at fair value. Aggregate interest expense related to the Convertible Note and Exchange Note described above was $ 1,840,300 as of December 31, 2023. Note Conversion Pursuant to the Exchange Agreement the Company entered into with High Trail Special Situations LLC on March 8, 2023, the Lender elected, on April 26, 2023, to convert $ 1.6 million of the remaining outstanding principal amount on the Convertible Note for 153,617 shares of Common Stock of the Company. On May 1, 2023, the Company entered into a letter agreement with the above referenced accredited Lender (the “Letter Agreement”), pursuant to which the Company and the Lender agreed to exchange or redeem $ 2.0 million of the remaining outstanding principal amount under the Exchange Note for a total of 445,196 shares of Common Stock of the Company, subject to a Beneficial Ownership Limitation of 4.99 % of the Company’s Common Stock. Due to the Beneficial Ownership Limitation of 4.99 %, a total of 69,568 shares of Common Stock of the Company were issued to the Lender, with the remaining 375,629 shares held in abeyance until the balance (or portion thereof) may be issued in compliance with such limitations. As a result, the Company recognized a loss on the redemption of approximately $ 12 thousand. F- 41 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The total aggregated Exchange Note and Convertible Note is classified as long-term as of December 31, 2023: Convertible Note Forgiveness On November 30, 2023, the New Lender (defined below) agreed to forgive $ 1.0 million of the principal amount outstanding on the Convertible Note (the “Principal Forgiveness”). The Principal Forgiveness was accounted for as a troubled debt restructuring under ASC 470, as 1) the Company was determined to be experiencing financial difficulties as defined by the ASC, and 2) the Principal Forgiveness was deemed a concession by the New Lender. Per ASC 470-60-35-5, a debtor in a troubled debt restructuring involving only modification of terms of a payable (i.e., not involving a transfer of assets or grant of an equity interest) shall account for the effects of the restructuring prospectively from the time of restructuring and shall not change the carrying amount of the payable at the time of the restructuring unless the carrying amount exceeds the total future cash payments specified by the new terms. As the future undiscounted cash flows were greater than or equal to the net carrying value of the original debt, the carrying amount of the debt at the time of the restructuring was not changed. Related party debt On July 12, 2023, the Board of Directors of the Company approved the issuance of an unsecured promissory note (the “Related Party Note”) in favor of GIC Acquisition, LLC (“GIC”), an entity that is owned and managed by the Company’s Chairman and Chief Executive Officer. Pursuant to the Related Party Note, GIC is obligated to lend up to $ 0.5 million to the Company, $ 0.3 million of which was delivered at issuance and the remaining $ 0.2 million delivered on July 31, 2023. The Related Party Note bears interest at a rate of 10 % per annum, will mature in full on August 6, 2023, and may be prepaid without any fee or penalty. The Related Party Note ranks junior to all existing secured indebtedness of the Company. On October 27, 2023, the maturity date of the Related Party Note was subsequently amended to December 31, 2024 at which point principal and accrued interest will be repaid in full. Interest expense incurred on the Related Party Note amounted to approximately $ 25 thousand for the year ended December 31, 2023. As of December 31, 2023, the Company has borrowed approximately $ 645 thousand under the Related Party Note agreement. On October 27, 2023, CP Acquisitions LLC (the “New Lender” or “CP”), an entity affiliated with and controlled by the Company’s Chief Executive Officer, purchased the Exchange Note and the Convertible Note from their holder (the “Note Purchase”). 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. As part of the same transaction, the Company issued a junior secured promissory note (the “Junior Secured Note”) to the New Lender. Pursuant to the Junior Secured Note, the New Lender will lend up to $ 3.0 million to the Company. The Junior Secured Note bears interest at a rate of 10 % per annum, will mature in full on December 31, 2023, and may be prepaid without any fee or penalty. On December 4, 2023, the New Lender and the Company amended and restated the Junior Secured Note agreement. Pursuant to the terms of the amendment, the maximum principal amount that may be loaned by CP to the Company was increased to $ 4.0 million and extended the maturity date thereon to December 31, 2024. As of December 31, 2023, the Company has borrowed $ 3.8 million and incurred interest expense of approximately $ 253 thousand. F- 42 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Paycheck Protection Program Loan Paycheck Protection Program Loans under the Coronavirus Aid, Relief, and Economic Security Act In May 2020, the Company entered into a PPP Loan with Bank of America pursuant to the PPP under the CARES Act administered by the SBA. The Company received total proceeds of approximately $ 0.8 million from the unsecured PPP Loan, which was originally scheduled to mature on May 7, 2022 . The Company applied for forgiveness on the $ 0.8 million of PPP loan, but forgiveness was denied by the SBA due to failure to comply with the application deadline. On June 23, 2022, the Company received a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and the loan bears interest at a rate of 1.00 % per year. The PPP loan is payable in 34 equal combined monthly principal and interest payments of approximately $ 24 thousand that commenced on August 7, 2022. The breakdown of PPP Loan balances by current and non-current as of December 31, 2023 and December 31, 2022 were as follows: (In thousands) Balance Sheet Location December 31, 2023 December 31, 2022 PPP Loan, current Long-term debt, current $ 399 $ 255 PPP Loan, non-current Long-term debt 119 401 Total PPP Loan outstanding $ 518 $ 656 As of December 31, 2023, future minimum payments on all debt positions were as follows: (In thousands) Years Ended December 31, 2024 $ 5,211 2025 16,046 Total future payments $ 21,257 Accrued interest totaled approximately $ 321 and $ 240 thousand as of December 31, 2023 and December 31, 2022, respectively. Note 10 - Leases The determination if any arrangement contained a lease at its inception was done based on whether or not the Company has the right to control the asset during the contract period. The lease term was determined assuming the exercise of options that were reasonably certain to occur. Leases with a lease term of 12 months or less at inception were not reflected in the Company’s balance sheet and those lease costs are expensed on a straight-line basis over the respective term. Leases with a term greater than 12 months were reflected as non-current right-of-use assets and current and non-current lease liabilities in the Company’s consolidated balance sheets. As the implicit interest rate in its leases was generally not known, the Company’s used its incremental borrowing rate as the discount rate for purposes of determining the present value of its lease liabilities. At December 31, 2023 and 2022, the Company’s weighted-average discount rate utilized for its leases was 7.51 % and 7.29 %, respectively. When a contract contained lease and non-lease elements, both were accounted for as a single lease component. The Company had several non-cancelable finance leases for machinery and equipment. As of December 31, 2023 the Company had no active finance leases. The Company had several non-cancellable operating leases for corporate offices, warehouses, showrooms, research and development facilities and vehicles. The Company’s leases have remaining lease terms of one year to five years, some of which include options to extend. Some leases include payment for communal area maintenance associated with the property. F- 43 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additional information on the Company’s operating and financing lease activity was as follows: Year Ended December 31, (In thousands) 2023 2022 Operating lease cost $ 838 $ 1,119 Finance lease cost: Amortization of right-of-use assets 113 194 Interest on lease liabilities 12 32 Total lease cost $ 964 $ 1,345 Year Ended December 31, (In thousands) 2023 2022 Weighted-average remaining lease term – operating leases 3.09 years 3.59 years Weighted-average remaining lease term – finance leases 0 years 2.30 years Weighted-average discount rate – operating leases 7.51 % 6.76 % Weighted-average discount rate – finance leases — % 7.83 % (In thousands) Balance Sheet Location December 31, 2023 December 31, 2022 Assets Right-of-use assets, net Right-of-use, net $ 1,803 $ 2,210 Finance lease assets Property and equipment, net — 261 Total lease assets $ 1,803 $ 2,471 Liabilities Operating lease liabilities, current Operating lease liabilities, current $ 599 $ 734 Operating lease liabilities, non-current Operating lease liabilities, non-current 1,394 1,587 Total operating lease liabilities $ 1,993 $ 2,321 Finance lease liabilities, current Accrued expenses and other current liabilities $ — $ 152 Finance lease liabilities, non-current Other non-current liabilities — 146 Total finance lease liabilities $ — $ 298 Maturities of operating and finance lease liabilities as of December 31, 2023 are as follows: Years ending December 31 (In thousands), Operating lease 2024 $ 727 2025 748 2026 560 2027 202 Total minimum lease payments 2,237 Less imputed interest ( 244 ) Total lease liabilities $ 1,993 F- 44 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 — Stockholders’ Equity On July 11, 2022, the Company increased its authorized number of shares to 8,000,000 , consisting of: 5,000,000 shares of Common Stock, par value $ 0.001 per share and 3,000,000 shares of preferred stock, par value $ 0.001 per share. On January 9, 2020, the Company designated 105,000 shares of the 3,000,000 authorized shares of Preferred Stock, as Series A Convertible Preferred Stock (“Series A Preferred Stock”). On March 1, 2023, the Company further increased its authorized number of shares to 13,000,000 , consisting of: 10,000,000 shares of Common Stock, par value $ 0.001 per share and 3,000,000 shares of preferred stock, par value $ 0.001 per share. Private Placement On January 25, 2022, the Company entered into a Securities Purchase Agreement (the “Securities Agreement”) with an institutional investor and other accredited investors for the sale by the Company of 12,253 shares (the “SA Shares”) of Common Stock, pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to an aggregate of 7,853 shares of Common Stock and warrants to purchase up to an aggregate of 15,079 shares of Common Stock (the “Common Warrants” and, collectively with the Pre-Funded Warrants, the “SA Warrants”), in a private placement offering. The combined purchase price for one share of Common Stock (or one Pre-Funded Warrant) and the accompanying fraction of a Common Warrant was $ 1,360.00 per share. Subject to certain ownership limitations, the SA Warrants are exercisable six months from issuance. Each Pre-Funded Warrant was exercisable into one share of Common Stock (as adjusted from time to time in accordance with the terms thereof). Each Common Warrant is exercisable into one share of Common Stock at a price per share of $ 1,496.00 (as adjusted from time to time in accordance with the terms thereof) and will expire on the fifth anniversary of the initial exercise date. The institutional investor that received the Pre-Funded Warrants fully exercised such warrants in March 2022. Raymond Chang, Chairman and Chief Executive Officer (“CEO”) of the Company, and Stuart Wilcox, who formerly served as our Chief Operating Officer, and at the time he was a member of the Company’s Board of Directors, participated in the private placement on essentially the same terms as other investors, except for having a combined purchase price of $ 1,380.00 per share. The gross proceeds to the Company from the private placement were approximately $ 27.3 million, before deducting the placement agent’s fees and other offering expenses, and excluding the proceeds, if any, from the exercise of the SA Warrants. Issuance of Common Stock in Connection with Acquisitions On October 1, 2021, the Company issued an aggregate of 3,332 shares of its Common Stock to the Precision and Cascade shareholders in connection with the Company’s acquisition of Precision and Cascade. On August 17, 2022, the Company issued an additional 435 shares of its Common Stock to the Precision and Cascade shareholders for contingent liabilities. On December 31, 2021, the Company issued an aggregate of 1,202 shares of its Common Stock to the PurePressure shareholders in connection with the Company’s acquisition of PurePressure. On January 31, 2023, the remaining 372 Holdback Buyer Shares were released, including 6 Holdback Buyer Shares that were withheld to cover a tax indemnification claim in accordance with the Purchase Agreement. On February 1, 2022, the Company issued an aggregate of 1,491 shares of its Common Stock to the Lab Society shareholders in connection with the Company’s acquisition of Lab Society. On April 28, 2023, the Company issued the remaining 499 Holdback Buyer Shares to the Lab Society Owners in accordance with the Lab Society Merger Agreement. At The Marketing Offering On October 18, 2022, the Company entered into the ATM Program with the Agent pursuant to which it may issue and sell, from time to time, shares of its Common Stock having an aggregate offering price of up to $ 50 million, depending on market demand, with the Agent acting as an agent for sales. The ATM Program allowed the Company to sell shares of Common Stock pursuant to specific parameters defined by the Company as well as those defined by the SEC and the ATM Program agreement. As of December 31, 2022, the Company sold 306,628 shares of Common Stock, under the ATM at an average price of $ 50.85 per share, resulting in gross proceeds of $ 15.6 million, and net proceeds of $ 15.0 million after commissions and fees to the Agent totaling $ 0.5 million and legal fees totaling $ 0.1 million. $ 3.0 million of the proceeds under the ATM Program were used to repay amounts due to the Investor under the Exchange Note. The Company used net proceeds generated from the ATM Program for working capital and general corporate purposes, including repayment of indebtedness, funding its transformation initiatives and product category expansion efforts and capital expenditures. Due to the late filing of this Annual Report on Form 10-K, the Company is no longer eligible to utilize the registration statement on Form S-3 relating to the ATM Program, and does not anticipate any further sales under the ATM Program in the foreseeable future. F- 45 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Confidentially Marketed Public Offering On December 16, 2022, the Company issued 594,232 shares of its Common Stock, Pre-Funded 2022 Warrants to purchase 75,000 shares of its Common Stock and accompanying December 2022 Warrants to purchase 1,338,471 shares of the Company’s Common Stock. The Company received net proceeds from the Offering of approximately $ 8.2 million, after deducting underwriting discounts and commissions and estimated expenses. The Company intends to use the net proceeds from the Offering, together with its existing cash resources, for working capital and general corporate purposes, which may include capital expenditures and repayment of debt. The Pre-Funded 2022 Warrants were exercisable immediately upon issuance at an exercise price of $ 0.001 per share and do not have an expiration date. The December 2022 Warrants were exercisable immediately and have a term of exercise equal to five years from the initial exercise date at an exercise price of $ 13.00 per share. The offering price for the securities was $ 13.00 per share (or $ 12.98 for each Pre-Funded 2022 Warrant). The December 2022 Warrants may not be exercised by the holder to the extent that the holder, together with its affiliates, would beneficially own, after such exercise more than 4.99 % of the shares of the Company’s Common Stock then outstanding (subject to the right of the holder to increase or decrease such beneficial ownership limitation upon notice to the Company, provided that such limitation cannot exceed 9.99 %) and provided that any increase in the beneficial ownership limitation shall not be effective until the sixty-first day after such notice is delivered. The Pre-Funded 2022 Warrants were classified as a component of permanent equity and the December 2022 Warrants were liability-classified and were recorded at the issuance date using a relative fair value allocation method. The Pre-Funded 2022 Warrants are equity-classified because they are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, are immediately exercisable, and permit the holders to receive a fixed number of shares of Common Stock upon exercise. In addition, such warrants do not provide any guarantee of value or return. The December 2022 Warrants are liability-classified as there is a volatility floor and these warrants are not indexed to the Company’s own stock. As of December 31, 2023 and 2022, the Company valued the December Warrants using the Black-Scholes option-pricing model and determined the fair value at $ 1.3 million and $ 5.9 million, respectively. The key inputs to the valuation model included the annualized volatility of 98.0 % and the expected term of about 5 years. Raymond Chang, Chairman and CEO, participated in the Offering and purchased 115,385 shares of Common Stock and 230,769 December 2022 Warrants for an aggregate purchase price of approximately $ 1.5 million. Additional information regarding the Company’s December 2022 Warrants may be found in Note 1 – Overview, Basis of Presentation, and Significant Accounting Policies and Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements. Mack Warrants In October 2023, the Company issued 750,000 warrants to Mack Molding Co. in conjunction with the Modification and Settlement Agreement (the “Mack Warrants”). The warrants have a three-year term and an exercise price of $ 4.00 per share, and are subject to adjustment for stock splits, reverse stock splits, stock dividends, and similar transactions. The warrants 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 warrants or if shareholder approval for the full exercise of the warrants are not received, in which case the Modified Warrant will also be exercisable on a cashless exercise basis at the Investor’s election. The measurement of fair value of the Mack Warrants were determined utilizing a Black-Scholes model considering all relevant assumptions current at the date of issuance (i.e., share price of $ 2.79 , exercise price of $ 4.00 , term of three years , volatility of 138 %, risk-free rate of 5.03 %, and expected dividend rate of 0 %). The grant date fair value of these Investor Warrants was estimated to be $ 1.6 million on October 18, 2023 and is reflected within additional paid-in capital as of December 31, 2023. F- 46 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Warrant Issuance On October 27, 2023, as a condition precedent to the Note Purchase, the Company entered into a letter agreement (the “October Letter Agreement”) with the holder of the Exchange Note and the Convertible Note. Pursuant to the agreement, the Company agreed to exchange $ 3.0 million in principal, approximately $ 95,000 in unamortized debt premium, and approximately $ 1.1 million in accrued but unpaid interest outstanding under the Exchange Note for a warrant to purchase 2,809,669 shares of common stock (the “Exchange Warrant”). Additionally, the Company agreed to exchange the 375,629 shares of common stock held in abeyance for the Investor under the terms of the Letter Agreement for a warrant to purchase 375,629 shares of common stock (the “Abeyance Warrant”). The Company concluded that the Exchange Warrant and the Abeyance Warrant are both equity classified at issuance and recorded within additional paid-in capital in the accompanying consolidated balance sheet. The Company recognized the Exchange Warrant and Abeyance Warrant at fair value at issuance in the amounts of $ 3.9 million and $ 0.4 million, respectively. Resulting from the exchange within the October Letter Agreement, the Company recognized a gain on debt extinguishment of $ 320,125 included within the accompanying consolidated statement of operations for the year ended December 31, 2023. Each 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. The Exchange Warrant provides that in the event that Raymond Chang or his affiliates acquire securities from the Company, exercise convertible securities or amend the terms of convertible securities at a purchase or conversion price lower than $ 1.46 , then the number of shares of common stock underlying Exchange Warrant will be increased to an amount equal to $ 3.0 million divided by such purchase or conversion price, subject to proportional adjustment in the event the Exchange Warrant has been partially exercised. Additionally, in the event that the Company has not issued equity securities in exchange for gross proceeds of at least $ 3.0 million to Mr. Chang or his affiliates (subject to certain offsets) by the third calendar day after the date when the Company receives stockholder approval, then on December 26, 2023, the number of shares of common stock underlying Exchange Warrant will be increased to an amount equal to $ 3.0 million divided by the Minimum Price as defined under Nasdaq listing rules, subject to proportional adjustment in the event the Exchange Warrant has been partially exercised. The Letter Agreement requires that the Company issue equity securities to Mr. Chang or his affiliates for aggregate gross proceeds of at least $ 3.0 million, minus any funds advanced by Mr. Chang to the Company since July 1, 2023. Note 12 — Stock-Based Compensation and Employee Benefit Plans 2022 Omnibus Equity Incentive Plan On April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Omnibus Equity Incentive Plan (the “2022 Plan”), which replaced the 2020 Stock Option Plan (the “2020 Plan”). The 2022 Plan provides for the grant of stock options, stock appreciation right awards, performance share awards, restricted stock awards, restricted stock unit awards, other stock-based awards and cash-based awards. The aggregate number of shares of Common Stock that may be reserved and available for grant and issuance under the 2022 Plan is 26,483 shares, which includes the 10,000 shares authorized under the 2022 Plan, plus the rollover of 16,483 issued and outstanding awards under the 2020 Plan. Shares will be deemed to have been issued under the 2022 Plan solely to the extent actually issued and delivered pursuant to an award. If any award granted under the 2020 Plan or the 2022 Plan expires, is canceled, terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2022 Plan. The 2022 Plan shall continue in effect, unless sooner terminated, until the tenth anniversary of the date on which it is adopted by the Board of Directors. As of December 31, 2023, there were 10,310 shares of Common Stock available to be granted under the Company’s 2022 Plan. The Company’s stock compensation expense was $ 2.7 million an d $ 4.3 million for the year ended December 31, 2023 and 2022 , respectively. F- 47 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Options Stock options granted under the Company’s 2022 Plan are generally non-qualified and are granted with an exercise price equal to the market price of the Company’s Common Stock on the date of grant. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying Common Stock, expected option life, and expected volatility in the market value of the underlying Common Stock. No stock options were granted during the years ended December 31, 2023 and 2022. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the expected term. The expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s current expectation of future action surrounding dividends. The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s 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, the Company estimates the number of stock-based awards that will be forfeited due to employee turnover. The Company’s forfeiture assumption is based primarily on its employee turnover historical experience. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the Company’s consolidated financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized in the Company’s consolidated financial statements. The expense the Company recognizes in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period. The following table presents option activity under the Company’s stock option plans for the years ended December 31, 2023 and 2022: (In thousands, except share and per share data) Number of Options Weighted-Average Exercise Price Aggregate Intrinsic Value Options outstanding at January 1, 2021 17,822 $ 1,436.00 $ 62.64 Exercised ( 43 ) 458.42 Forfeited ( 2,363 ) 1,018.82 Expired ( 1,977 ) 1,394.70 Options outstanding at December 31, 2022 13,439 $ 1,518.05 $ — Forfeited ( 217 ) 7.61 Expired ( 2912 ) 52.85 Options outstanding at December 31, 2023 10,310 $ 1,595.92 $ — Options vested and exercisable as of December 31, 2023 9,962 $ 1,567.14 Options vested and expected to vest as of December 31, 2023 10,310 $ 1,595.92 As of December 31, 2023, total unrecognized compensation expense related to unvested options under the Company’s 2022 Plan was $ 0.4 million, which is expected to be recognized over a weighted average period of 0.2 years. F- 48 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about options vested and exercisable at December 31, 2023: Options Vested and Exercisable Price ($) Number of Options Weighted-Average Remaining Contractual Life (Years) Weighted-Average Exercise Price $ 456.00 2,884 4.50 $ 456.00 $ 972.00 2,839 4.71 $ 972.00 $ 1,536.00 45 6.42 $ 1,536.00 $ 1,840.00 160 8.01 $ 1,840.00 $ 2,768.00 4,034 6.88 $ 2,768.00 The following table summarizes information about options expected to vest after December 31, 2023: Options Vested and Expected to Vest Price ($) Number of Options Weighted-Average Remaining Contractual Life (Years) Weighted-Average Exercise Price $ 456.00 2,884 4.50 $ 456.00 $ 972.00 2,856 4.71 $ 972.00 $ 1,536.00 50 6.42 $ 1,536.00 $ 1,840.00 250 8.01 $ 1,840.00 $ 2,768.00 4,270 6.88 $ 2,768.00 Restricted Stock Units Under the 2022 Plan, the Company may grant restricted stock units to employees, directors and officers. The restricted stock units granted generally vest equally over periods ranging from one to three years. The fair value of restricted stock units is determined based on the closing market price of the Company’s Common Stock on the date of grant. Compensation expense related to the restricted stock units is recognized using a straight-line attribution method over the vesting period. On November 28, 2023, the Company granted an aggregate of 1,774,409 restricted stock units pursuant to its 2022 Plan to its officers, directors and employees. The vesting of the RSUs is subject to future shareholder approval of an amendment to the Plan to increase the shares available for issuance thereunder by an amount that is sufficient for issuance of the underlying shares. The following table presents restricted stock unit activity under the 2022 Plan for the year ended December 31, 2023: Number of Shares Weighted- Average Grant Date Fair Value Unvested at December 31, 2021 — $ — Granted 9,440 252.40 Vested ( 1,249 ) 365.66 Forfeited ( 500 ) 302.41 Unvested at December 31, 2022 7,691 $ 230.75 Vested ( 2,413 ) 230.80 Forfeited ( 3,142 ) 230.80 Unvested at December 31, 2023 2,136 $ 230.80 As of December 31, 2023, total unrecognized compensation expense related to unvested restricted stock units was $ 0.4 million, which is expected to be recognized over a weighted average period of 1.67 years. F- 49 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2022 Employee Stock Purchase Plan On April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 2,500 shares of Common Stock for issuance under the ESPP. On December 31, 2023, 2,500 shares were available for future issuance. Under the ESPP, eligible employees are granted options to purchase shares of Common Stock at the lower of 85 % of the fair market value of the stock at the time of grant or 85 % of the fair market value at the time of exercise. Options to purchase shares are granted twice yearly on or about August 1 and February 1 and are exercisable on or about the succeeding January 31 and July 31, respectively, of each year. No participant may purchase more than $ 25,000 worth of Common Stock annually. No Common Stock was granted under the 2022 ESPP during the year ended December 31, 2023. Employee Benefit Plan The Company maintains an employee’s savings and retirement plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). All full-time U.S. employees become eligible to participate in the 401(k) Plan. The Company’s contribution to the 401(k) Plan is discretionary. During the year ended December 31, 2023 and 2022, the Company did not contribute to the 401(k) Plan. Note 13 — Stock Warrants The following tables present all warrant activity of the Company for the year ended December 31, 2023 and 2022: Number of Warrants Weighted-Average Exercise Price Warrants outstanding at December 31, 2021 1,360 $ 4.00 Issued 1,541,937 38.57 Exercised ( 10,296 ) 47.97 Canceled ( 3,000 ) 246.00 Warrants outstanding at December 31, 2022 1,530,001 $ 38.07 Issued 3,935,298 0.01 Exercised ( 84,962 ) 0.00 Forfeited ( 38 ) 0.00 Warrants outstanding at December 31, 2023 5,380,299 $ 10.83 The Company received proceeds from the exercise of cashless warrants of $ 0 and $ 2 thousand for the for the years ended December 31, 2023, and 2022, respectively. Note 14 — Income Taxes For financial reporting purposes, the net pre-tax book income and/or loss for the U.S. and foreign entities, in the aggregate, was: (In thousands) December 31, 2023 December 31, 2022 United States ( 18,690 ) ( 188,613 ) Foreign — Total ( 18,690 ) ( 188,613 ) F- 50 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income tax expense consisted of the following for the years ended December 31, 2023 and December 31, 2022: (In thousands) December 31, 2023 December 31, 2022 Current: Federal $ — $ — State 2 — Foreign — — Subtotal 2 — Deferred: Federal — ( 10 ) State — ( 13 ) Foreign — — Subtotal — ( 23 ) Total $ 2 $ ( 23 ) The reconciliation between the Company’s effective tax rate on income from continuing operations and the statutory tax rate for the years ended December 31, 2023 and December 31, 2022 is as follows: (In thousands) December 31, 2023 December 31, 2022 Current tax at U.S. statutory rate $ ( 3,925 ) $ ( 39,609 ) Nondeductible/nontaxable items ( 336 ) 7,423 State taxes ( 458 ) ( 5,951 ) Rate change 1,613 47 Foreign operations — — True-up and other 2,621 ( 814 ) Valuation allowance 487 38,881 Income tax expense $ 2 $ ( 23 ) Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of net deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. F- 51 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following items comprise the Company’s net deferred tax assets and liabilities as of December 31, 2023 and December 31, 2022: (In thousands) December 31, 2023 December 31, 2022 Deferred tax assets : Net operating loss carryforward $ 35,491 $ 24,295 Accruals, reserves, and other 11,559 20,082 Stock-based compensation 706 1,578 Research and development tax credit carryforward — 1,260 Lease liability 464 577 Fixed assets 246 68 Intangible assets 3,104 3,534 Capitalized sec. 174 R&E 2,068 1,937 Credits — — Total Deferred Tax Asset 53,638 53,331 Valuation allowance ( 53,219 ) ( 52,730 ) Deferred income tax assets, net of VA 419 601 Deferred tax liabilities: Prepaid Expenses — ( 52 ) Depreciation — Right-of-Use Asset ( 419 ) ( 549 ) Amortization Total Deferred Tax Liability ( 419 ) ( 601 ) Net Deferred Tax Asset/(Liability) $ — $ — The Company continually evaluates the likelihood of the realization of deferred tax assets and adjusts the carrying amount of the deferred tax assets by the valuation allowance to the extent the future realization of the deferred tax assets is more likely than not. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectation of future taxable income or loss, the carryforward periods available to the Company for tax reporting purposes, and other relevant factors. As of December 31, 2023, based on the Company’s history of earnings and its assessment of future earnings, management believes that it is more likely than not that future taxable income will not be sufficient to realize the deferred tax assets. Therefore full valuation allowance has been applied to deferred tax assets. Effective for tax years beginning after December 31, 2021, taxpayers are required to capitalize any expenses incurred that are considered incidental to research and experimentation (R&E) activities under IRC Section 174. While taxpayers historically had the option of deducting these expenses under IRC Section 174, the December 2017 Tax Cuts and Jobs Act mandates capitalization and amortization of R&E expenses for tax years beginning after December 31, 2021. Expenses incurred in connection with R&E activities in the US must be amortized over a 5-year period if incurred, and R&E expenses incurred outside the US must be amortized over a 15-year period. R&E activities are broader in scope than qualified research activities that are considered under IRC Section 41 (relating to the research tax credit). For the year ended December 31, 2023, the Company performed an analysis based on available guidance and determined that it will not impact (increase) taxable income. The Company will continue to monitor this issue for future developments and its impact on taxable income. As of the year ended December 31, 2023, the Company has federal and state net operating loss carryforwards of approximately $ 144.2 million and $ 87.7 million respectively. Federal net operating loss carryforwards in the amount of $ 0.7 million begin expiring in 2036 and approximately $ 143.5 million have an indefinite life. Federal NOL carryforwards generated after tax year 2021 are subject to an 80 % limitation on taxable income, do not expire and will carryforward indefinitely. State net operating loss carryforwards in the amount of $ 82.3 million begin expiring in 2039 and approximately $ 5.4 million have an indefinite life. F- 52 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The utilization of the Company’s net operating losses may be subject to a U.S. federal limitation due to the “change in ownership provisions” under Section 382 of the Internal Revenue Code and other similar limitations in various state jurisdictions. Such limitations may result in a reduction of the amount of net operating loss carryforwards in future years and possibly the expiration of certain net operating loss carryforwards before their utilization. (In thousands) December 31, 2023 Jurisdiction NOL Available Federal 675 Federal - Indefinite 143,552 Subtotal - Federal 144,227 State 85,245 State - Indefinite 8,038 Subtotal - Federal 93,283 Foreign — Foreign - Indefinite — Subtotal - Foreign — The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examinations by federal, foreign, and state and local jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from 2018 to the present in the U.S. and from 2016 to present in the Company’s foreign operations. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state and local tax authorities to the extent utilized in a future period. The Company is also subject to certain non-income taxes such as value added taxes, sales taxes, and property taxes. The Company has taken certain positions that management feels, although not free from doubt, should not result in a successful challenge by certain tax authorities. As required by the uncertain tax position guidance in ASC No. 740, Income Tax the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 % likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applied the uncertain tax position guidance in ASC No. 740, Accounting for Income to all tax positions for which the statute of limitations remained open. Any estimates of tax contingencies contain assumptions and judgments about potential actions by taxing jurisdictions. Any interest and penalties related to uncertain tax positions would be included as part of the income tax provision. The Company’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analysis of or changes in tax laws, regulations and interpretations thereof as well as other factors. On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted and signed into law. Regarded as the reduced version of the proposed Build Back Better Act, the IRS contains two main corporate income tax provisions, including a 15 % minimum tax on the average annual adjusted financial statement income of corporations with profits over $ 1 billion over a three-year period, as well as a 1 % excise tax on the corporate stock buybacks by domestic publicly traded corporations. The Company is currently evaluating the impact of the IRA on its financial statements for tax year 2023 but does not expect a material impact to the Company’s tax position. F- 53 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15 — Net Loss Per Share Net loss per share calculations for all periods have been adjusted to reflect the Company’s reverse stock splits. Net loss per share was calculated based on the weighted-average number of the Company’s Common Stock outstanding. Basic net loss per share is calculated using the weighted-average number of Common Stock outstanding during the periods. Diluted net loss per share is computed by giving effect to all potential shares of Common Stock, including outstanding stock options, stock related to unvested restricted stock units, and outstanding warrants to the extent dilutive. Net loss per share, assuming dilution, is equal to basic net loss per share because the effect of dilutive securities outstanding during the periods, including options and warrants computed using the treasury stock method, is anti-dilutive. The components of basic and diluted net loss per share were as follows: Year Ended December 31, (In thousands, except share and per share data) 2023 2022 Numerator: Net loss available for common shareholders $ ( 18,649 ) $ ( 188,173 ) Denominator: Weighted-average common shares outstanding – basic and diluted 1,490,871 208,573 Net loss per share attributable to Common Stockholders – basic and diluted $ ( 12.51 ) $ ( 902.19 ) The Company’s potential dilutive securities, which include stock options, restricted stock units, and warrants, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of Common Shares outstanding used to calculate both basic and diluted net loss per share attributable to Common Stockholders is the same. The Company excluded the following potential Common Stock equivalents presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to Common Stockholders for the periods indicated because including them would have had an anti-dilutive effect: Year Ended December 31,     2023 2022 Shares subject to outstanding stock options 9,962 13,439 Shares subject to unvested restricted stock units 2,136 7,691 Shares subject to outstanding warrants 5,380,299 1,530,001   5,392,397 1,551,131 Note 16 — Commitments and Contingencies Legal Matters From time to time, we may become involved in material legal proceedings or be subject to claims arising in the ordinary course of our business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. F- 54 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Bud & Mary’s Litigation On September 15, 2022, the Company provided a notice of default to Bud & Mary’s and certain related parties notifying such parties that Bud & Mary’s was in default of its obligations under the Bud & Mary TTK Agreement. On October 5, 2022, Bud & Mary’s filed a complaint in the Superior Court of Massachusetts in Suffolk County, naming the Company as the defendant. Bud & Mary’s is seeking, among other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion arising from the Agreement. While the Company believes the claim is without merit and will continue to vigorously defend itself against Bud & Mary’s allegations, litigation is inherently unpredictable and there can be no assurance that the Company will prevail in this matter. During the third quarter of 2022, the Company deemed it necessary to fully reserve for the outstanding $ 14.7 million note receivable balance due to the current litigation and the uncertainty of the customer’s ability to repay the balance. The $ 14.7 million represents the amount of the contingent loss that the Company has determined to be reasonably possible and estimable. The actual cost of resolving this matter may be higher or lower than the amount the Company has reserved. If the Company is unable to realize revenue from its TTK Solution offerings on a timely basis or at all, or if it incurs an additional loss as a result of the Bud & Mary’s claim, the Company’s business and financial performance will be adversely affected. On November 14, 2022, the Company filed its answers and affirmative defenses to the Bud & Mary’s complaint and counterclaims. The Company is seeking, among other relief, monetary damages in connection with the breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and enforcement of the guarantees. Bud & Mary’s is permitted to file an amended complaint, and Agrify will be permitted to make responsive filings, which may include an answer and counterclaim. Bowdoin Construction Corp. Litigation On February 22, 2023, Bowdoin Construction Corp. (“Bowdoin”) filed a complaint (the “Bowdoin Complaint”) in the Superior Court of Massachusetts in Norfolk County naming the Company, Bud & Mary’s and certain related parties as defendants, captioned Bowdoin Construction Corp. v. Agrify Corporation, Bud & Mary’s Cultivation, Inc. and BMLC2, LLC, case no. 2382CV00173. The Bowdoin Complaint relates to a construction contract between Bowdoin and the Company relating to the property that is the subject of the Bud & Mary’s Complaint, and alleges breach of contract by Bud & Mary’s and by the Company due to nonpayment of approximately $ 6.3 million due under the contract and related indemnification claims and mechanics’ liens. The Company is entitled to indemnification by Bud & Mary’s and intends to vigorously defend this claim . Mack Molding Co. In December 2020, the Company entered into a five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack will become a key supplier of VFUs. In February 2021, the Company placed a purchase order with Mack amounting to approximately $ 5.2 million towards the initial production of VFUs during 2021. Since February 2021, the Company increased the purchase order with Mack to approximately $ 26.5 million towards production of VFUs during 2021 and 2022. The Company believed the supply agreement with Mack would provide the Company with increased scaling capabilities and the ability to meet the potential future demand of its customers more efficiently. The supply agreement contemplates that, following an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack each year based on the agreed-upon pricing formula. The introductory period is not time-based but rather refers to the production of an initial number of units after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage. The Company believed this approach would result in both parties making a more informed decision with respect to the pricing and other terms of the supply agreement with Mack. On October 11, 2022, the Company received a $ 9.4 million invoice from Mack for inventory purchased on the Company’s behalf to build VFUs. As part of the terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had aged greater than nine months. Due to the slowdown in the demand for the VFUs and the lack of a demand forecast that the Company could provide to the vendor, Mack exercised the right to invoice the Company for the slow-moving inventory. As of December 31, 2022, the Company owed Mack $ 8.4 million for purchased inventory on behalf of the Company to produce VFUs, which is included in accounts payable in the consolidated balance sheet. On March 2, 2023, Mack filed an arbitration action seeking the amounts owed to Mack for purchased inventory. On October 27, 2023, and effective as of October 18, 2023, Mack and the Company entered into a Modification and Settlement Agreement (the “Modification Agreement”)with respect to the dispute. The Modification Agreement requires the Company to make payments of $ 500,000 and $ 250,000 to Mack on or before November 1, 2023 and February 15, 2024, respectively. The Company has made the first of these two payments in the amount of $ 500,000 . Following the November 1, 2023 payment, the Company is entitled to take possession of certain VFUs that were assembled under the Supply Agreement. The Modification Agreement also requires the Company to purchase from Mack a minimum of 25 VFUs per quarter for each quarter during 2024 and a minimum of 50 VFUs per quarter for the six quarters beginning with the first quarter of 2025. The Company is required to pay a storage fee of $ 25,000 per month for VFUs subject to the Modification Agreement. F- 55 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TRC Electronics Litigation The Company was named as a defendant in a complaint filed by TRC Electronics, Inc. (“TRC”) on April 13, 2023 in the United States District Court for the Eastern District of Pennsylvania. In the Complaint, TRC asserts two causes of action against the Company: (1) breach of contract, and (2) promissory estoppel. TRC’s claims are based on allegations that the Company failed to make payments due under three purchase orders for commercial electronics parts. TRC seeks damages in the amount of $ 565,210 , plus attorneys’ fees, costs, and post-judgment interest. The Company has filed an answer denying liability on TRC’s claims and is proceeding with discovery. Sinclair Scientific Litigation On June 15, 2023, the Company and its wholly-owned subsidiary Precision Extraction Newco, LLC (“Precision”), filed an Amended Verified Complaint in the Court of Chancery of the State of Delaware against Sinclair Scientific, LLC (“Sinclair”) and certain individual defendants (the “Delaware Action”). The claims filed in the Delaware Action concern various breaches of the Plan of Merger and Equity Purchase Agreement dated September 29, 2021, by and between the Company, Sinclair, Mass2Media, LLC, and certain of their members (the “Merger Agreement”). In response to the Delaware Action, certain of the defendants filed counterclaims for breach of contract and declaratory judgment against the Company and Precision alleging breach of the Merger Agreement. Pursuant to a Settlement and Release Agreement, dated December 14, 2023, the Company and Sinclair dismissed all legal claims and entered into a settlement for an undisclosed amount. Other Litigation In September 2023, the Company settled a legal dispute with a specific customer which resulted in the recognition of a gain of approximately $ 0.9 million, of which $ 0.3 million was paid in October 2023, with the remaining approximate $ 0.6 million to be paid in equal monthly installments, beginning in January, 2024. This gain was recognized as part of other income, net per the consolidated statement of operations for the year ended December 31, 2023, with the approximate $ 0.9 million receivable balance recognized as part of prepaid expenses and other current assets, per the consolidated balance sheet, as of December 31, 2023. The settlement also resulted in the return of equipment to the Company in October 2023. In addition to the above, the Company entered into several additional vendor settlement agreements during the year ended December 31, 2023, which resulted in an aggregate gain being recognized for the year ended December 31, 2023, and a corresponding reduction in accounts payable owing by the Company, as of December 31, 2023, of approximately $ 1 million. Commitments Committed Purchase Agreement with Related Party – Ora Pharm In June 2022, the Company entered into an agreement with Ora Pharm (“Ora”) pursuant to which Ora will purchase approximately $ 1.6 million in equipment from the Company, and Ora may purchase software services from the Company in the future. Stuart Wilcox, the Company’s former Chief Operating Officer, is the Chairman of Ora. Other Commitments and Contingencies The Company is potentially subject to claims related to various non-income taxes (such as sales, value-added, consumption, and similar taxes) from various tax authorities, including in jurisdictions in which the Company already collects and remits such taxes. If the relevant taxing authorities successfully pursue these claims, the Company could be subject to additional tax liabilities. Refer to Note 9 – Debt, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum debt payments. Refer to Note 10 – Leases, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum lease payments under operating and financing lease liabilities. Refer to Note 14 – Income Taxes, included elsewhere in the notes to the consolidated financial statements for information regarding income tax contingencies. F- 56 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 — Related Parties Some of the officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available. The following table describes the net purchasing (sales) activity with entities identified as related parties to the Company: Year Ended December 31, (In thousands) 2023 2022 Bluezone $ 4 $ 5 4D Bios — 3 Cannae Policy Group — 25 Topline Performance Group ( 1 ) 71 NEIA ( 43 ) ( 1,769 ) Greenstone Holdings ( 2 ) 394 Valiant Americas, LLC (1) — 10,520 (1) On October 27, 2022, the Company provided notice to Valiant-America, LLC of its intention to begin winding up of Agrify-Valiant. The following table summarizes net related party (payable) receivable as of December 31, 2023 and December 31, 2022: Year Ended December 31, (In thousands) 2023 2022 Bluezone $ ( 4 ) $ — Valiant Americas, LLC (1) 1 ( 1 ) Topline Performance Group — 1 (1) On October 27, 2022, the Company provided notice to Valiant-America, LLC of its intention to begin winding up of Agrify-Valiant. On July 12, 2023, the Company issued an unsecured promissory note in favor of GIC Acquisition, LLC, an entity that is owned and managed by the Company’s Chairman and Chief Executive Officer. Refer to Note 9 - Debt for further disclosure related to this Related Party Note. On October 27, 2023, CP Acquisitions LLC, an entity affiliated with and controlled by Company’s Chairman and Chief Executive Officer , purchased the Exchange Note and the Convertible Note . In addition, the Company issued to CP a Junior Secured Note. Refer to Note 9 - Debt for further disclosure related to this Related Party Note. Note 18 — Subsequent Events The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Omnibus Equity Incentive Plan Amendment On January 8, 2024, the shareholders of the Company approved an amendment to the Company’s 2022 Omnibus Equity Incentive Plan to increase the number of shares of Common Stock available for issuance thereunder by 250,000 shares and to revise the minimum vesting provision (the “Plan Amendment”). F- 57 AGRIFY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amendment and Restatement of Convertible and Junior Secured Promissory Note On January 25, 2024, the Company 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 consistent with the Note Restatement Proposal (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 reduced the conversion price to $ 1.46 per share of common stock, increased 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, extended the maturity date to December 31, 2025 , increased the interest rate from 9 % to 10 % per annum, increased the default interest from 15 % to 18 % per annum, and provided for the payment of interest every six months, or in lieu of cash interest payments, the Company may issue shares as payments-in-kind at a conversion price equal to the higher of $ 1.46 or a 20 % discount to its trailing seven-day volume weighted average price as of the date of interest payment. 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. Chang and Ms. Chan. Following the conversion, there was $ 15.0 million in principal amount outstanding under the Restated Note. On January 25, 2024, GIC Acquisition, LLC (“GIC”) and the Company amended and restated the Junior Note to increase the principal amount thereunder to $ 1.0 million and to extend the maturity date until June 30, 2024 (as amended and restated, the “Restated Junior Note”). Nasdaq Deficiency Notices On January 30, 2024, the Company received formal notice that the Nasdaq Hearing Panel had granted the Company’s request for an exception through April 15, 2024 to evidence compliance with the Listing Rule. The compliance date of April 15, 2024 represents the full extent of the Panel’s discretion to grant continued listing while the Company is non-compliant with Nasdaq Listing Rules. Accordingly, on March 5, 2024, the Company received a deficiency letter from the Listing Qualifications Department of Nasdaq notifying the Company that, for the last 30 consecutive business days, the bid price for the Company’s common stock had closed below $ 1.00 per share, which is the minimum closing price required to maintain continued listing on the Nasdaq Stock Market under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”). The Notice has no immediate effect on the listing of the Company’s common stock on Nasdaq. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days to regain compliance with the Minimum Bid Requirement. To regain compliance with the Minimum Bid Requirement, the closing bid price of the Company’s common stock must be at least $ 1.00 per share for a minimum of 10 consecutive trading days during this 180-day compliance period, unless the Staff exercises its discretion to extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(H). The compliance period for the Company will expire on September 3, 2024. There can be no assurance that the Company will be able to regain compliance with the Nasdaq listing rules or maintain its listing on the Nasdaq Capital Market. If the Company’s common stock is delisted, it could be more difficult to buy or sell the Company’s common stock or to obtain accurate quotations, and the price of the Company’s common stock could suffer a material decline. Delisting could also impair the Company’s ability to raise capital. Restricted Stock Units On November 28, 2023, the Company granted an aggregate of 1,774,409 restricted stock units pursuant to its 2022 Plan to its officers, directors and employees. Of the total shares granted, 860,486 restricted stock units were approved by the shareholder committee on January 8, 2024. The vesting of the remaining RSUs is subject to future shareholder approval of an amendment to the Plan to increase the shares available for issuance thereunder by an amount that is sufficient for issuance of the underlying shares. Public Offering On February 27, 2024, the Company entered into a placement agency agreement (the “Agency Agreement”) with Alexander Capital, LP as placement agent (the “Placement Agent”), pursuant to which the Company agreed to issue and sell an aggregate of 2,760,000 shares of its common stock, and, in lieu of common stock to certain investors that so chose, pre-funded warrants (the “Pre-Funded Warrants”) to purchase 3,963,684 shares of its common stock (the “Offering”). The public offering price for each share of common stock was $ 0.38 , and the offering price for each Pre-Funded Warrant is $ 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 Pre-Funded Warrants are exercisable at any time. A holder of Pre-Funded Warrants may not exercise the warrant if the holder, together with its affiliates, would beneficially own more than 4.99 % (or such other percentage, up to 9.99 %, as may be required by the investor) of the number of shares of common stock outstanding immediately after giving effect to such exercise. A holder of Pre-Funded Warrants may increase or decrease this percentage, but not in excess of 9.99 %, by providing at least 61 days’ prior notice to the Company. F-58