What changed in this filing

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Item 1. Financial Statements

2024-05-21 compared with 2024-01-03 · 1046 added, 1986 removed, 440 unchanged (87% of the section changed)

2 unchanged sentences

thousands, except share and per share data)

September 30,

Current assets:

Cash and cash equivalents

Restricted cash

Marketable securities

Accounts receivable, net of allowance for credit losses of $ 2,535 and $ 4,605 at September 30, 2023 and December 31, 2022, respectively

Inventory, net of reserves of $ 29,845 and $ 32,759 at September 30, 2023 and December 31, 2022, respectively

Accounts receivable, net of allowance for credit losses of $ 2,512 and $ 1,887 at March 31, 2024 and December 31, 2023, respectively

Inventory, net of reserves of $ 17,184 and $ 17,599 at March 31, 2024 and December 31, 2023, respectively

Loan receivable, current

Prepaid expenses and other current assets

Total current assets

Loan receivable, net of allowance for credit losses of $ 19,215 and $ 33,050 at September 30, 2023 and December 31, 2022, respectively

Loan receivable, net of allowance for credit losses of $ 18,885 and $ 19,215 at March 31, 2024 and December 31, 2023, respectively, net of current

Property and equipment, net

1 unchanged sentence

Other non-current assets

Liabilities and Stockholders’ Equity

Liabilities and Stockholders’ Deficit

Current liabilities:

2 unchanged sentences

Operating lease liabilities, current

Notes payable, current

Long-term debt, current

3 unchanged sentences

Warrant liabilities

Other non-current liabilities

Operating lease liabilities, net of current

Notes payable, net of current

Related party debt, net of current

Long-term debt, net of current

1 unchanged sentence

Commitments and contingencies (Note 14)

Stockholders’ (deficit) equity:

Common Stock, $ 0.001 par value per share, 10,000,000 and 5,000,000 shares authorized at September 30, 2023 and December 31, 2022, respectively, 1,651,281 and 1,038,298 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively (1)

Stockholders’ deficit:

Common Stock, $ 0.001 par value per share, 35,000,000 and 10,000,000 shares authorized at March 31, 2024 and December 31, 2023, respectively, 13,275,702 and 1,702,243 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively (1)

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

4 unchanged sentences

Non-controlling interests

Total liabilities and stockholders’ equity

(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

Total liabilities and stockholders’ deficit

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

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

1 unchanged sentence

thousands, except share and per share data)

Three months ended

September 30,

Nine months ended

September 30,

Three months ended March 31,

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

Cost of goods sold

Gross profit (loss)

General and administrative

2 unchanged sentences

Change in contingent consideration

Gain on disposal

Impairment of goodwill and intangible assets

Total operating expenses

2 unchanged sentences

Change in fair value of warrant liabilities

Loss on extinguishment of notes payable

Other expense, net

Other (expense) income, net

Loss on extinguishment of long-term debt, net

Other income, net

Total other income (expense), net

Net loss before income taxes

Income tax benefit

(Loss) income attributable to non-controlling interest

Income tax benefit (expense)

Net loss attributable to Agrify Corporation

$ ( 130,235 )

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

$ ( 1,003.10 )

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

(1) Periods presented have been adjusted to reflect the 1-for-20 reverse stock split on July 5, 2023.

Additional information regarding reverse

stock splits may be found in Note 1 – Overview, Basis of Presentation, and Significant Accounting Policies, included elsewhere

in the notes to the consolidated financial statements

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.

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Preferred A Stock

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

Stockholders’

Non-Controlling

attributable to

Stockholders’

Paid-in-Capital

Balance at January

Stock-based compensation

Issuance of Common Stock and warrants in private placement

Acquisition of Lab Society

Exercise of options

Exercise of warrants

Balance at June 30, 2022

$ ( 247,148 )

Stock-based compensation

Issuance of Common Stock in connection with acquisition

Reclass of warrant liability

Exercise of warrants

Issuance of restricted stock

Balance at September 30, 2022

Issuance of Common Stock through

an “at the market” offering, net of fees

Issuance of Common Stock to Pure

Vesting of restricted stock units

Proceeds from Employee Stock Purchase

Balance March

$ ( 257,475 )

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

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)

Preferred A Stock

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

Stockholders’

Non-Controlling

attributable to

Stockholders’

Paid-in-Capital

Balance at January 1, 2023

January 1, 2024

$ ( 265,797 )

Stock-based compensation

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

Issuance of held-back shares to Lab Society

Issuance of Common Stock to Pure Pressure

Vesting of restricted stock units

Exercise of prefunded warrants in private placement

Conversion of Exchange Note

Conversion of Convertible Note

Proceeds from Employee Stock Purchase Plan Shares

Balance June 30, 2023

Stock-based compensation

Reverse stock split fractional share settlement

Balance September 30, 2023

Issuance of Common Stock

and prefunded warrants through public offering

Issuance of held-back shares

from Sinclair acquisition

Cashless exercise of High

Trail Warrants

Exercise of Prefunded Warrants issued through

public offering

Conversion of Convertible

Contribution from troubled

debt restructuring with related party

Stock split share adjustment

March 31, 2024

$ ( 265,835 )

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended

September 30,

For the three months ended

Cash flows from operating activities:

Net loss attributable to Agrify Corporation

$ ( 130,235 )

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

Depreciation and amortization

Amortization of premium on investment securities

Amortization of debt (premium) discount

Interest on investment securities

Amortization of issuance costs

Deferred income taxes

Prepaid and refundable taxes

Amortization of right of use assets

Stock based compensation expense

Non-cash interest income

Change in fair value of warrant liabilities

Loss on extinguishment of notes payable, net

Impairment of goodwill and intangible assets

Loss on extinguishment of long-term debt, net

Provision for credit losses

Recovery of provision for credit losses

Recovery of provision for slow-moving inventory

(Gain) loss on disposal of fixed assets

Change in fair value of contingent consideration

(Income) loss attributable to non-controlling interests

Loss on disposal of property and equipment

Gain on supply agreement

Gain on revaluation of contingent liability

Change in accrued acquisition liabilities due to issuance of held-back shares

Changes in operating assets and liabilities, net of acquisitions:

1 unchanged sentence

Prepaid expenses and other current assets

Right of use assets, net

Other non-current assets

6 unchanged sentences

Purchases of property and equipment

Proceeds from disposal of property and equipment

Purchase of securities

Proceeds from sale of securities

Issuance of loans receivable

Proceeds from sale of marketable securities

Proceeds from repayment of loan receivable

Cash paid for business combination, net of cash acquired

Net cash and cash equivalents provided by (used in) investing activities

Issuance of loans receivable

Net cash and cash equivalents provided by investing activities

Cash flows from financing activities:

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

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

Proceeds from “at the market” Program, net

Proceeds from Issuance of Common Stock through an “S-1 and Prefunded Warrants” offering

Proceeds from issuance of Common Stock through an “at the market” offering, net of fees

Proceeds from Employee Stock Purchase Plan Shares

Proceeds from exercise of options

Proceeds from exercise of warrants

Proceeds from issuance of related party note

Repayment of debt in private placement

Proceeds from exercise of S-1 Prefunded Warrants

Proceeds from issuance of related party notes

Repayments of notes payable, other

Repayment of debt in private placement

Payments on other financing loans

1 unchanged sentence

Payments of financing leases

Impact of reverse stock split

Net cash and cash equivalents (used in) provided by financing activities

Net cash and cash equivalents provided

by (used in) financing activities

Net decrease in cash and cash equivalents

1 unchanged sentence

Cash and cash equivalents at the end of period

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

Cash and cash equivalents

Restricted cash

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

Supplemental disclosures

Cash paid for interest

Supplemental disclosures of non-cash flow information

Initial fair value of warrants

Cashless exercise of High-Trail warrants

Financing of prepaid insurance

Transfer of property and equipment to inventory

Trade payables refinanced into consolidated notes payable

Accrued interest consolidated into related party debt

Contribution from troubled debt restructuring with related party

Consolidation of related party debt principal

Conversion of convertible notes

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Overview, Basis of Presentation

and Significant Accounting Policies

Description of Business

Agrify Corporation (“Agrify”

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

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

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

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

consistency, yield, and return investment at scale.

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

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

for premium concentrates.

The Company believes it is

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

The Company’s cultivation and extraction

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

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

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

highly fragmented market.

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

position in the indoor cannabis sector.

The Company was formed in

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

The Company is sometimes

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

The Company has nine wholly-owned

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

Reverse Stock Splits

On October 18, 2022, the

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

All share and per share information has been retroactively adjusted

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

On July 5, 2023, the Company

effected a 1-for-20 reverse stock split of its Common Stock.

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

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

No fractional shares of Common

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

Any fractional shares in connection with these reverse stock splits were

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

The reverse stock splits had no

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

the par value per share of the Common Stock.

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

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

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

equity incentive plan.

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

to reflect the impact of these reverse stock splits.

Confidentially Marketed

Public Offering

On December 16, 2022, the

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

pursuant to which the Company agreed to issue and sell an aggregate of 594,232 shares of its Common Stock, and, in lieu of Common Stock

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

Common Stock, and accompanying warrants (the “December 2022 Warrants”) to purchase 1,338,462 shares of the Company’s

Common Stock (the “Offering”).

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

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

Additional information regarding the Company’s

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

in the notes to the consolidated financial statements.

The aggregate gross proceeds

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

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

The Company has used the net proceeds from the Offering, together with its existing

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

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nasdaq Deficiency Notice

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

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

the Company’s Common Stock had closed below $ 1.00 per share, which is the minimum closing price required to maintain a continued

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

In accordance with

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

compliance with the Minimum Bid Requirement, the closing bid price of the Company’s Common Stock must be at least $ 1.00 per share

for a minimum of 10 consecutive trading days during this 180-day compliance period, unless the Staff exercised its discretion to extend

the minimum trading day period pursuant to Nasdaq Listing Rule 5810(c)(3)(G).

On October 28, 2022, the Staff notified the Company that

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

compliance with the Minimum Bid Requirement.

On January 19, 2023, the

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

days, the bid price for its Common Stock had closed below $ 1.00 per share, which is the minimum closing price required to maintain a continued

listing on The Nasdaq Capital Market under the Minimum Bid Requirement.

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

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

To regain compliance with the Minimum Bid Requirement,

the closing bid price of the Company’s Common Stock must be at least $ 1.00 per share for a minimum of 10 consecutive trading days

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

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

On July 19, 2023, the Company received a notice from Nasdaq confirming its recompliance with the minimum

bid price rule.

As disclosed in the Current

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

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

condensed consolidated interim financial statements as of and for the quarterly periods ended March 31, 2022, June 30, 2022 and September

30, 2022 included in the Company’s Quarterly Reports on Form 10-Q for such periods in amended quarterly reports for the affected

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

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

On April 18, 2023, the Company

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

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

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

that it remained noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of its failure to file its Quarterly Report on Form 10-Q

for the quarter ended March 31, 2023 (the “First Quarter Form 10-Q”) with the SEC by the required due date.

On August 16, 2023, the Company

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

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

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

the “Nasdaq Notices”).

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

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

On October 17, 2023, the

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

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

a result of its failure to file the First Quarter Form 10-Q, the Second Quarter Form 10-Q and the Form 10-K (collectively, the “Delinquent

Reports”) in a timely manner.

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

The Company timely requested

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

In connection

with the hearing request, the Company requested that the stay be extended through the hearing and the expiration of any additional extension

period granted by the Panel following the hearing.

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

extension period.

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

1 — Overview, Basis of Presentation and Significant Accounting Policies

Corporation (“Agrify” or the “Company”) is a 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.

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

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

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

has ownership interests in certain companies.

Deficiency Notice

The Nasdaq Notice

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

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.

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

December 1, 2023, the Company received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) stating that because the Company

reported stockholders’ deficit of $( 17.17 ) million in its Form 10-Q for the quarter ended March 31, 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.

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, which was subsequently extended to May 15, 2024.

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.

could also impair the Company’s ability to raise capital.

March 5, 2024, the Company received a deficiency letter from the Staff 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.

The compliance period for the

Company will expire on September 3, 2024.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Paycheck Protection Program

In May 2020, the Company

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

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

Small Business Administration (the “SBA”).

The Company received total loan proceeds of approximately $ 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

The accompanying consolidated

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

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

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

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

All significant intercompany

transactions and balances are eliminated.

Accounting for Less Than Wholly-Owned Subsidiaries

For the Company’s less

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

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

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

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

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

The financial results of a VIE are consolidated

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

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

to the entity.

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

the fair value of the VIE’s net assets.

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

the Company is the primary beneficiary of the VIE.

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

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

Based on the Company’s

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

primary beneficiary.

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

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

third parties provides the Company with greater voting rights.

Accordingly, the Company consolidates its interest in the financial statements

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

statements as a non-controlling interest.

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

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

and distributions.

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

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

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 deficiency.

The Company also has

an accumulated deficit of $ 266 million as of September 30, 2023.

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

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

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

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

As of September 30, 2023,

of Presentation and Principles of Consolidation

interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited.

In the opinion of management,

all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed

consolidated financial statements have been included.

The results reported in the condensed consolidated financial statements for any

interim periods are not necessarily indicative of the results that may be reported for the entire year.

The accompanying condensed consolidated

financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do

not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting

principles generally accepted in the United States (“U.S.

Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance

GAAP have been condensed or omitted.

These condensed consolidated financial statements should be read in conjunction

with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on

Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission on April 15, 2024.

for Wholly-Owned Subsidiaries

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.

for Less Than Wholly-Owned Subsidiaries

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.

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.

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.

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

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 March 31, 2024.

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 March 31,

2024, the Company had $ 0.1 million of cash, cash equivalents, and marketable securities.

The Company had no restricted cash as of September

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

note (the “Exchange Note”).

Current liabilities were $ 41.4 million as of September 30, 2023.

Additional information regarding

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

The Company had no restricted cash as of March

Current liabilities were $ 27.7 million as of March 31, 2024.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On October 18, 2022, the

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

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

Agent acting as an agent for sales.

The ATM Program allowed the Company to sell shares of Common Stock pursuant to specific parameters

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

In 2022, the Company sold 306,628 shares of

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

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

As of April 1, 2023, after which time

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

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

$ 3.0 million of the proceeds under the ATM Program were used to repay amounts due to High Trail Special Situations LLC (the “Investor”) under the Exchange Note.

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

funding its transformation initiatives and product category expansion efforts and capital expenditures.

Due to the late filing of the

Company’s Annual Report on Form 10-K, the Company is no longer eligible to utilize the registration statement on Form S-3 relating

to the ATM Program.

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.

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.

of February 28, 2024, the company raised net proceeds of $ 2.2 million via the issuance of common stock and prefunded warrants in a public

offering through Alexander Capital and is recorded within common stock and additional paid-in capital on the Company’s condensed consolidated

balance sheet.

The Company intends to raise additional capital later this year to support its 2024 and 2025 funding needs.

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.

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.

preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and

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

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

Significant estimates include

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

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

The Company bases

its estimates on historical experience, known trends and other market-specific information, other relevant factors that it believes to

be reasonable under the circumstances, and management’s judgement.

On an ongoing basis, management evaluates its estimates when

there are changes in circumstances, facts, and experience.

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

Actual financial results could differ from

those estimates.

Reclassifications

Certain amounts in the Company’s

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

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

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

September 30, 2023 and 2022.

In addition, the Company

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

on July 5, 2023.

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

periods presented unless otherwise indicated.

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

Accordingly, the Stockholders’

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

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

Cash and Cash Equivalents

Cash and cash equivalents

consist principally of cash and deposits with maturities of three months or less as of September 30, 2023 and December 31, 2022.

equivalents are carried at cost, which approximates fair value.

Marketable Securities

The Company’s marketable

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

The mutual funds are recorded

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

The municipal and corporate bonds

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

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

The Company considers

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

Accounts Receivable, Net

Accounts receivable, net,

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

Accounts receivable balances are

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

In determining the

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

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

financial conditions.

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

is determined to be probable.

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

consolidated statements of operations.

Actual financial results could differ from those estimates.

Receivable, Net and Loans Receivable, Net

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

composition of loan receivable, net is detailed in Note 5.

In accordance with ASC 310-10, accounts receivable and loan

receivable balances are presented net of an allowance for credit losses, which are 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

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

statements of operations.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Concentration of Credit Risk and Significant

Concentration

of Credit Risk and Significant Customer

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

7 unchanged sentences

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

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

receivable for the periods presented:

For the three and nine months

ended September 30, 2023 and 2022, the Company’s customers that accounted for 10 % or more of the total revenue were as follows:

Three months ended

September 30, 2023

Three months ended

September 30, 2022

Nine months ended

September 30, 2023

Nine months ended

September 30, 2022

(In thousands)

Company Customer Number - 136

Company Customer Number - 125

Company Customer Number - 139

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

Accounts Receivable,

As of September 30, 2023

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

As of September 30, 2023

As of December 31, 2022

(In thousands)

Company Customer Number – 15095

Company Customer Number – 15874

Company Customer Number - 16491

Company Customer Number – 10888

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

The Company values all its

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

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

Write-offs of potentially slow-moving

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

AGRIFY CORPORATION

NOTES TO CONDENSED 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

Furniture and fixtures

Research and development of laboratory equipment

Machinery and equipment

Leased equipment

Trade show assets

Leasehold improvements

Lower of estimated useful life or remaining lease term

The estimated useful lives

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

The Company charges maintenance

and repairs to expense as incurred.

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

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

statements of operations in the period of retirement or disposal.

Costs for capital assets

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

During construction,

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

Upon completion, costs are transferred to the appropriate

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

Goodwill is defined as the

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

Goodwill is tested for impairment

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

The Company has determined that it

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

A goodwill impairment charge is recorded

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

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

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

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

During the quarter ended

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

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

Due to these factors,

the Company deemed that there was an impairment to the carrying value of its 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 in 2022.

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.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The useful lives are as follows:

Acquired developed technology

Non-compete agreements

Customer relationships

Capitalized website costs

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 in 2022.

Additional information regarding the

Company’s interim testing on intangible assets may be found in Note 7 – Goodwill and Intangible Assets, Net, included

elsewhere in the notes to the consolidated financial statements.

Convertible Notes Payable

The Company evaluates its

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

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

The accounting treatment

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

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

balance sheet date.

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

balance sheet date.

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

If the classification

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

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

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

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.

For issued or modified warrants

that meet all of the criteria for equity classification, they are recorded as a component of additional paid-in capital at the time of

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

fair value on the date of issuance and subject to remeasurement on each balance sheet date with changes in the estimated fair value of

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

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Debt Issuance Costs and Debt Discount

The Company may record debt

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

The Company may cover these costs by paying cash or issuing

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

If a conversion of the underlying debt occurs,

a proportionate share of the unamortized amounts is immediately expensed.

Issue Discount

Certain convertible debt

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

The Company would record the original issue discount

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

The Company determines at

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

A contract is or contains a lease if the contract conveys

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

The Company classifies leases

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

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

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

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

The Company’s asset

contracts may contain both lease and non-lease components.

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

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

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

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

Lease liabilities and their

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

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

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

The Company estimates its secured incremental borrowing rate for

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

basis over a similar term.

Certain of the Company’s

leases include options to extend or terminate the lease.

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

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

certain that the Company will exercise such options.

Deferred Revenue

Deferred revenue includes

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

The Company recognizes deferred revenue and non-current

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

The Company records deferred revenue that will be recognized

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

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.

During the year

three -month period ended March 31, 2024, the Company has one customer that comprised approximately 1 % of its revenue and two

customers that comprised approximately 47 % of its accounts receivable balance.

During the year

three -month period ended March 31, 2023, the Company has one customer that comprised approximately 11 % of its revenue and two

customers that comprised approximately 84 % of it accounts receivable balance.

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

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

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

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

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.

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.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation

The Company measures all

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

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

the vesting period of the respective award.

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

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

The Company classifies stock-based

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

are classified.

The Company estimates the

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

Before the IPO, the Company

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

Therefore, it estimates its

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

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

The expected term of the Company’s

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

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

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

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

The expected dividend yield is based on the fact that the

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

Business Combinations

The Company accounts for

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

at their respective fair values at the acquisition date.

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

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

Goodwill represents the excess of the

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

The Company’s management

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

estimated useful lives.

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

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

These judgments may materially impact the

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

and future operating results.

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

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

whichever occurs first.

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

within the Company’s operating results.

For contingent consideration

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

in the consolidated statements of operations.

Additional information regarding the Company’s contingent consideration arrangements

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

Revenue Recognition

The Company generates revenue

from the following sources:

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Value of Financial Instruments

Company’s financial instruments consist of cash, marketable securities, accounts receivable, accounts payable, accrued expenses,

warrant liabilities, and loans receivable.

Refer to Note 4 - Fair Value Measures, included elsewhere in the notes to the consolidated

financial statements for details of the Company’s financial instruments.

Company generates revenue from the following sources:

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

In accordance with ASC 606

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

identify the customer contract;

identify performance obligations that are distinct;

determine the transaction price;

allocate the transaction price to the distinct performance obligations;

recognize revenue as the performance obligations are satisfied.

Identify the customer

A customer contract is generally

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

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

Specifically, the Company obtains written/electronic

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

accordance with ASC 606 “Revenue Recognition”, the Company recognizes revenue from contracts with customers using a five-step

model, which is described below:

the customer contract;

performance obligations that are distinct;

the transaction price;

the transaction price to the distinct performance obligations;

revenue as the performance obligations are satisfied.

the customer contract

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

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

performance obligations that are distinct

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

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

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

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

the transaction price

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

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

the transaction price to distinct performance obligations

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

the goods or services being provided to the customer.

The Company’s contracts typically contain multiple performance obligations,

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

The standalone selling price

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

and to similar customers.

revenue as the performance obligations are satisfied

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

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Identify performance

obligations that are distinct

A performance obligation

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

A good or service that is

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

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

identifiable from other promises in the contract.

Determine the transaction

The transaction price is

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

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

Allocate the transaction

price to distinct performance obligations

The transaction price is

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

being provided to the customer.

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

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

The standalone selling price reflects the price the

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

Recognize revenue as

the performance obligations are satisfied

Revenue is recognized when,

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

Significant Judgments

The Company enters into contracts

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

for as separate performance obligations.

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

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

versus together may require significant judgment.

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

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

The Company then

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

The corresponding revenue is recognized

as the related performance obligations are satisfied.

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.

to variable consideration were not material for the periods presented.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

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

of being distinct and accounted for as separate performance obligations.

Contracts with customers often include promises to transfer

multiple products and services to a customer.

Determining whether products and services are considered distinct performance obligations

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

Once the Company determines the performance

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

transaction price, if any.

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

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

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

The Company determines SSP based on the price at which the

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

If the SSP is not

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

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

The Company licenses its 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.

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.

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

This method is based on the cost

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

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

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

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

Variable consideration is typically not

subject to constraint.

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

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

for those contracts include a significant financing component.

The Company has elected the practical expedient that permits an entity

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

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

be one year or less.

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

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

Accordingly, the Company imputes interest on such

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

As of March 31, 2024

and March 31, 2023, the Company did not have any such financial income.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

component if the Company expects that at the contract inception, the period between when the entity transfers a promised good or service

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

For those contracts in which the period exceeds

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

requires judgment.

Accordingly, the Company imputes interest on such contracts at an agreed-upon interest rate and will present the financing

components separately as financial income.

For the nine months ended September 30, 2023 and 2022, the Company did not have any such financial

Payment terms with customers

typically require payment 30 days from the invoice date.

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

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

In the infrequent instances where customers raise concern

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

insignificant in all periods presented.

The Company has elected to

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

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

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

such contracts not to consider the time value of money.

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

activities are excluded from revenue.

The Company receives payment

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

no contract assets related to performance under the contract.

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

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

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

from the customer.

Accounts 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.

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.

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

The Company’s agreements with its customers do not

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

In the infrequent instances

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

to such matters have been insignificant in all periods presented.

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

not as a promised good or service.

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

consumer goods at the time of shipment.

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

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

Sales, value add, and other taxes the Company collects

concurrent with revenue-producing activities are excluded from revenue.

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

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

The difference in the opening and closing balances

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

customer’s payment.

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

exchange for consideration from the customer.

Accounts 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.

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.

maintains a reserve for warranty returns of $ 0.6 million and $ 0.6 million for September 30, 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

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

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

Research and Development Costs

The Company expenses research

and development costs as incurred.

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

with product development.

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

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

cultivation software (“Agrify Insights™”).

Capitalization of Internal Software Development

The Company capitalizes certain

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

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

Once the application has reached the development

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

the estimated useful life of the software.

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

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

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

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

third-party software developers working on these projects.

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

two to five years.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

determine the annual effective tax rate, the Company estimates both the total income (loss) before income taxes for the full year and

the jurisdictions in which that income (loss) is subject to tax.

The actual effective tax rate for the full year may differ from these

estimates if income (loss) before income taxes is greater than or less than what was estimated or if the allocation of income (loss) to

jurisdictions in which it is taxed is different from the estimated allocations.

The provision for income

taxes represents Federal and state and local income taxes.

The effective rate differs from statutory rates due to the effect of certain

nondeductible expenses.

Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including,

but not limited to, the geographical mix of earnings, enacted tax legislation, and state and local income taxes.

In addition, changes

in judgment from the evaluation of new information resulting in the recognition de-recognition or re-measurement of a tax position taken

in a prior annual period is recognized separately in the quarter of the change.

Tax contingencies are recorded,

if needed, to address potential exposure involving tax positions the Company has taken that could be challenged by tax authorities.

potential exposures could result from applications of various statutes, rules, regulations and interpretations.

Any estimates of tax contingencies

contain assumptions and judgments about potential actions by taxing jurisdictions.

Any interest and penalties related to uncertain tax

positions would be included as part of the income tax provision.

The Company’s conclusions regarding uncertain tax positions may

be subject to review and adjustment at a later date based upon ongoing analysis of or changes in tax laws, regulations and interpretations

thereof as well as other factors.

Net Loss Per Share

The Company presents basic

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

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

of common shares outstanding.

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

by the allocation of earnings to participating securities.

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

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

Diluted loss per share adjusts basic loss per share

for the potentially dilutive impact of stock options and warrants.

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

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

net loss per share.

Net loss per share calculations

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

Net loss per share

was calculated based on the weighted-average number of Common Stock outstanding.

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

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

to invoice practical expedient.

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

as negotiated, and 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

The Company maintained a reserve for warranty returns of $ 0.4 million and $ 0.4 million as of March 31, 2024 and December 31,

2023, 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.

and Development Costs

Company expenses research and development costs as incurred.

Research and development expenses include payroll, employee benefits and

other expenses associated with product development.

The Company incurs research and development costs associated with the development

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

software offering, Agrify Insights™ cultivation software (“Agrify Insights™”).

Loss Per Share

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

for participating securities.

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

weighted-average number of common shares outstanding.

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

Stockholders reduced by the allocation of earnings to participating securities.

Losses are not allocated to participating securities

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

Diluted loss per share adjusts

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

As the Company has reported losses for all periods

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

per share equals diluted net loss per share.

loss per share calculations for all periods have been adjusted to reflect the reverse stock split effected on July 5, 2023.

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

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

The adoption of this standard did not have a material impact on these condensed 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 condensed consolidated financial statements.

Announced Accounting Pronouncements

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.

Company is currently in the process of evaluating the effect of this guidance on its financial statements.

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

The Company sells its equipment

and services to customers under a combination of a contract and purchase order.

Equipment revenue includes sales from proprietary products

designed and engineered by the Company such as Agrify Vertical Farming Units (“VFUs”), container farms, integrated grow racks,

and LED grow lights, and non-proprietary products designed, engineered, and manufactured by third parties such as air cleaning systems

and pesticide-free surface protection.

Construction contracts normally

provide for payment upon completion of specified work or units of work as identified in the contract.

Although there is considerable variation

in the terms of these contracts, they are primarily structured as time-and-material contracts.

The Company enters into time-and-materials

contracts under which the Company is paid for labor and equipment at negotiated hourly billing rates and other expenses, including materials,

as incurred at rates agreed to in the contract.

The Company uses three main sub-contractors to execute the construction contracts.

The following table provides

the Company’s revenue disaggregated by the timing of revenue recognition:

2 — Revenue and Deferred Revenue

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.

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-materials contracts.

enters into time-and-materials contracts under which the Company is paid for labor and equipment at negotiated hourly billing rates and

other expenses, including materials, as incurred at rates agreed to in the contract.

The Company uses three main sub-contractors to execute

the construction contracts.

following table provides the Company’s revenue disaggregated by the timing of revenue recognition:

Three months ended

September 30,

Nine months ended

September 30,

(In thousands)

2 unchanged sentences

Total revenue

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.

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.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Deferred Revenue

Changes in the Company’s

current deferred revenue balance for the three months ended September 30, 2023 and the year ended December 31, 2022 were as follows:

in the Company’s current deferred revenue balance for the three months ended March 31, 2024 and the year ended December 31, 2023

were as follows:

(In thousands)

Three months ended

September 30,

Deferred revenue – beginning of period

Deferred revenue – end of period

Deferred revenue balances

primarily consist of customer deposits on the Company’s cultivation and extraction solutions equipment.

As of September 30, 2023

and December 31, 2022, all of the Company’s deferred revenue balances were reported as current liabilities in the accompanying consolidated

balance sheets.

Note 3 — Supplemental Consolidated Balance Sheet Information

Accounts Receivable

Accounts receivable consisted of the following

as of September 30, 2023 and December 31, 2022:

revenue balances primarily consist of customer deposits on the Company’s cultivation and extraction solutions equipment.

31, 2024 and December 31, 2023, all of the Company’s deferred revenue balances were reported as current liabilities in the accompanying

consolidated balance sheets.

3 — Supplemental Consolidated Balance Sheet Information

receivable consisted of the following as of March 31, 2024 and December 31, 2023:

(In thousands)

September 30,

Accounts receivable, gross

1 unchanged sentence

Accounts receivable, net

The changes in the allowance for credit losses

accounts consisted of the following:

changes in the allowance for credit losses accounts consisted of the following:

(In thousands)

Nine months ended

September 30,

Allowance for credit losses - beginning of period

1 unchanged sentence

Write-offs of uncollectible accounts

Other adjustments

Allowance for credit losses - end of period

The Company recognized a

net recovery of bad debt income of $ 0.4 million, relative to a bad debt expense of $ 0.4 million, for the three months ended September

30, 2023 and 2022, respectively, and a net recovery of bad debt of $ 1.0 million, relative to a bad debt expense of $ 1.9 million, for the

nine months ended September 30, 2023 and 2022, respectively.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted

of the following as of September 30, 2023 and December 31, 2022:

Expenses and Other Current Assets

expenses and other current assets consisted of the following as of March 31, 2024 and December 31, 2023:

(In thousands)

September 30,

Legal settlement receivables

Prepaid settlement asset

Other receivables, other

Prepaid insurance

2 unchanged sentences

Prepaid materials

Deferred issuance costs, net

Other receivables, other

Total prepaid expenses and other current assets

Property and Equipment, Net

Property and equipment, net consisted of the following

as of September 30, 2023 and December 31, 2022:

and Equipment, Net

and equipment, net consisted of the following as of March 31, 2024 and December 31, 2023:

(In thousands)

September 30,

Leased equipment

9 unchanged sentences

Total property and equipment, net

Depreciation expense for the three months ended

September 30, 2023 and 2022 was $ 0.5 million and $ 0.4 million, respectively, and $ 1.5 million and $ 1.2 million for the nine months ended

September 30, 2023 and 2022, respectively.

Depreciation expense is recorded within general and administrative expenses, research and development

expenses, and selling and marketing expenses depending on the nature of the property and equipment depreciated.

Other Non-Current Assets

Other non-current assets consisted of the following

as of September 30, 2023 and December 31, 2022:

(In thousands)

September 30,

Security deposits

Long-term deferred commissions expense

Total other non-current assets

expense for the three months ended March 31, 2024 and 2023 was $ 0.4 million and $ 0.4 million, respectively, and included within general

and administrative, selling and marketing, and research and development depending on the nature of the related property and equipment.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities

consisted of the following as of September 30, 2023 and December 31, 2022:

Expenses and Other Current Liabilities

expenses and other current liabilities consisted of the following as of March 31, 2024 and December 31, 2023:

(In thousands)

September 30,

Sales tax payable (1)

7 unchanged sentences

Accrued consulting fees

Financing lease liabilities

Other current liabilities

Total accrued expenses and other current liabilities

(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:

(In thousands)

September 30,

Warranty accrual – beginning of period

Liabilities accrued for warranties issued during the period

Warranty accruals paid during the during

Warranty accrual – end of period

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:

tax payable primarily represents identified sales and use tax liabilities arising from our acquisition of Precision and Cascade.

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.

acquisition liabilities represents the value of held back Common Stock associated with the 2021 acquisitions of Precision and Cascade.

4 — Fair Value Measures

Values of Assets and Liabilities

accordance with ASC Topic 820 “Fair Value Measurement”, the Company measures fair value at the price that would be received

to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

In determining

fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair

value hierarchy consisting of three levels, as follows:

Observable inputs such as quoted prices for identical assets or liabilities in active markets.

Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active.

Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions about how market participants would price the asset or liability.

Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for

similar markets that are not active.

Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions about how

market participants would price the asset or liability.

techniques for assets and liabilities include methodologies such as the market approach, the income approach or the cost approach, and

may use unobservable inputs such as projections, estimates and management’s interpretation of current market data.

These unobservable

inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

AGRIFY CORPORATION

NOTES TO CONDENSED 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 September 30, 2023 and

December 31, 2022, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:

September 30, 2023

March 31, 2024 and December 31, 2023, the Company’s assets and liabilities measured at fair value on a recurring basis were as

March 31, 2024

December 31, 2023

Fair Value Measurements Using Input Types

Fair Value Measurements

Using Input Types

Fair Value Measurements

Using Input Types

(In thousands)

Mutual funds (included in cash and cash equivalents)

Money market funds

Corporate bonds

Warrant liabilities - January 2022 warrants

3 unchanged sentences

Total liabilities

Fair Value of Financial Instruments

The Company has certain financial

instruments which consist of cash and cash equivalents, marketable securities, warrant liabilities, and contingent consideration.

value information for each of these instruments as well as other balances of the Company are as follows:

Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and deferred revenue liabilities approximate their fair values, based on the short-term nature of these instruments.

Marketable securities classified as current held-to-maturity securities are recorded at amortized cost, which at September 30, 2023, approximated fair value.

The Company’s deferred consideration was recorded in connection

with acquisitions during the six months ended September 30, 2023 and fiscal 2022 using an estimated fair value discount at the time of

the transactions.

As of September 30, 2023 and December 31, 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 September 30, 2023,

the Company held investments in municipal bonds and corporate bonds.

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

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

The fair values of these investments were

estimated using recently executed transactions and market price quotations.

The Company considers current assets as those investments

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

Value of Financial Instruments

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:

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.

securities classified as current held-to-maturity securities are recorded at amortized cost, which at March 31, 2024 and December 31,

2023, approximated fair value.

Company’s deferred consideration was recorded in connection with acquisitions during the three months ended March 31, 2024 and

fiscal 2023 using an estimated fair value discount at the time of the transactions.

As of March 31, 2024 and December 31, 2023, the carrying

value of the deferred consideration approximated fair value.

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.

fair value of the warrant liabilities are estimated using a Black-Scholes option-pricing model.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The composition of the Company’s marketable

securities are as follows:

of March 31, 2024 and December 31, 2023, the Company held investments in money market funds.

They are valued using quoted market prices

in active markets and are classified under Level 1 within the fair value hierarchy.

composition of the Company’s marketable securities are as follows:

(In thousands)

September 30,

Current marketable securities:

Money market funds

Corporate bonds

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 nine months ended September 30, 2023.

The contingent earn-out

payments to the sellers for each acquisition are based on the achievement of certain revenue thresholds.

(In thousands)

Contingent consideration – beginning of period

Accrued contingent consideration

Accretion of contingent consideration

Payments made on contingent liabilities

Change in estimated fair value

Contingent consideration – end of period

The Company included contingent consideration

within accrued expenses and other current liabilities on its consolidated balance sheets as of September 30, 2023 and December 31, 2022.

See below for additional information related to

each acquisition’s contingent consideration.

Contingent Consideration

– PurePressure

Company, in its review of actual revenue performance as compared to its originally projected revenue estimates, noted that PurePressure’s

revenue trend is materially below the originally estimated revenue trends incorporated into the Company’s original fair value estimates

at the time of the acquisition.

As a result, the Company has reduced its fair value estimate of achievement for PurePressure’s first

earn-out period.

During the third quarter ended September 30, 2022, the Company reduc ed the estimated fair value of the contingent

consideration liability associated with PurePressure’s first earn-out period by approximately $ 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

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.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 m embers of Precision and Cascade.

Warrant Liabilities

The estimated fair value

of the warrant liabilities on September 30, 2023 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.

estimated fair value of the warrant liabilities on March 31, 2024 and 2023 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.

inherent uncertainties are involved.

If factors or assumptions change, the estimated fair values could be materially different.

January 2022 Warrants

The following table summarizes

the Company’s assumptions used in the valuation as of September 30, 2023 and for the year ended December 31, 2022:

September 30,

Exercise price

Expected term (in years)

Discount rate - treasury yield

The following table sets forth a summary of the

changes in the fair value of the Level 3 warrant liabilities for the nine months ended September 30, 2023:

(In thousands)

September 30,

Warrant liabilities – beginning of period

Change in estimated fair value

Warrant liabilities - March 31, 2023

Change in estimated fair value

Warrant liabilities –June 30, 2023

Change in estimated fair value

Warrant liabilities –September 30, 2023

March 2022 Warrants

The following table summarizes the Company’s

assumptions used in the valuation as of September 30, 2023 and for the year ended December 31, 2022:

September 30,

Exercise price

Expected term (in years)

Discount rate - treasury yield

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth a summary of the

changes in the fair value of the Level 3 warrant liabilities for the nine months ended September 30, 2023:

(In thousands) Nine Months

September 30,

Warrant liabilities – beginning of period $ 34

Change in estimated fair value 5

Warrant liabilities - March 31, 2023 39

Change in estimated fair value ( 7 )

Warrant liabilities – June 30, 2023 32

Change in estimated fair value ( 17 )

Warrant liabilities –September 30, 2023 $ 15

August 2022 Warrants

The following table summarizes the Company’s

assumptions used in the valuation as of September 30, 2023 and for the year ended December 31, 2022:

September 30,

Exercise price

Expected term (in years)

Discount rate - treasury yield

The following table sets forth a summary of the

changes in the fair value of the Level 3 warrant liabilities for the nine months ended September 30, 2023:

(In thousands)

September 30,

Warrant liabilities – beginning of period

Change in estimated fair value

Warrant liabilities - March 31, 2023

Change in estimated fair value

Warrant liabilities – June 30, 2023

Change in estimated fair value

Warrant liabilities –September 30, 2023

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 2022 Warrants

The following table summarizes the Company’s

assumptions used in the valuation as of September 30, 2023 and for the year ended December 31, 2022:

September 30,

following table summarizes the Company’s assumptions used in the valuations as of March 31, 2024 and December 31, 2023:

2022 Warrants

March 31, 2024

December 31, 2023

Exercise price

1 unchanged sentence

Discount rate - treasury yield

The following table sets forth a summary of the

changes in the fair value of the Level 3 warrant liabilities for the nine months ended September 30, 2023:

following table sets forth a summary of the changes in the fair value of the Level 3 warrant liabilities for the three months ended March

31, 2024 and for the year ended December 31, 2023:

(In thousands)

September 30,

Warrant liabilities – beginning of period

Change in estimated fair value

Warrant liabilities - March 31, 2023

Change in estimated fair value

Warrant liabilities – June 30, 2023

Change in estimated fair value

Warrant liabilities –September 30, 2023

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

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.

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.

Warrant liabilities –end of period

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the year ended December

31, 2022, the Company established a reserve of approximately $ 12.5 million specifically related to Greenstone.

Greenstone is a related

party because one of the Company’s former Agrify Brands employees and its VP of Engineering had a minority ownership.

established the reserve based upon its review of Greenstone’s financial stability, which would impact collectability, which is primarily

the result of unfavorable market conditions within the Colorado market.

The Company will continue to monitor the operations of Greenstone

in an effort to collect all outstanding receivables but due to the uncertain nature of Greenstone’s business at this time the Company

has made the decision to place a reserve against the receivables.

During the quarter ended 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 September 30, 2023 and December 31, 2022 were as follows:

5 — Loans Receivable

portion of the capital raised from the Company’s IPO was allocated to launch the Company’s TTK Solution program.

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.

Bud & Mary’s Cultivation, Inc.

& Mary’s”) - Customer 139

The initial payment date

on the loan receivable from Bud & Mary’s is the first business day of the first full month following the commencement of commercial

products sales and the maturity date is 24 months from the initial payment date.

The interest rate is 16 % per annum.

In Q3 2022, Agrify became

aware that Bud & Mary’s was not in compliance with all debt covenants as defined in the loan agreement which resulted in Agrify issuing

a loan acceleration letter to Bud & Mary’s on September 15, 2022, demanding full repayment of the construction loan under the loan

agreement dated May 12, 2021.

Consequently, the Company established a reserve of $ 14.7 million specifically related to Bud & Mary’s.

Hannah Industries (“Hannah”) -

As of December 31, 2022,

the Company was unable to provide additional financing to Hannah Industries under the TTK Solution program to complete the build out and

development of Hannah’s cultivation business.

As a result, the Company concluded that the existing receivable due from Hannah was impaired

as of this date.

Given the uncertainty around the customer’s ability to repay the outstanding balance of the loan as well as the absence

of value attributed to any collateral from Hannah, an allowance for credit losses was recognized for 50 % of the total outstanding receivable

balance as of December 31, 2022.

The Company recognized an allowance for credit losses related to the Hannah loan receivable in the amount

of $ 4.5 million as of December 31, 2022.

This allowance remains at $ 4.5 million as of March 31, 2024.

Once the project is completed,

the customer will begin making monthly payments based on the harvest.

Nevada Holistics (“Tree house”)

- Customer 24096

As of March 2024, Nevada

Holistics has a current balance of $ 692 due in relation to the TTK loan.

The project went live in Q2 2023.

After the 90 day period for

the first harvest, the customer was given an additional 6-month grace period which ended in Q1 2024.

Upon completion of this grace period,

the Company began invoicing the customer each month for a portion of the outstanding loan balance.

The borrower will begin making monthly

payments in Q2 2024 based on what is produced through harvests.

Monthly payments are calculated based off of the Production Success Fees

(‘PSF”) generated from each harvest.

Upon issuance of each invoice, that portion of the loan is reclassified into loan receivable,

current on the condensed consolidated balance sheets.

breakdown of loans receivable by customer as of March 31, 2024 and December 31, 2023 were as follows:

(In thousands)

September 30,

Customer 24096

Other – Non-TTK Solution (1)

Allowance for credit losses (1)

Total loan receivable

(1) The current portion of loan receivable is included within Note 3 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements.

(2) The balance was written off at December 31, 2022 due to the cancellation of this TTK Solution project.

(3) The Company established an allowance for credit losses of approximately $ 14.7 million related to Bud & Mary’s ongoing litigation.

Total loan receivable, net of allowance for credit losses

current portion

Total loan receivable, net of current

December 31, 2023, 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.

At this time, the Company

is not aware of, nor has it identified any risk or potential performance failure associated with any of its TTK Solution arrangements,

other than the noted exceptions of Bud & Mary’s TTK Solution and Greenstone TTK Solution, which is a related party, as described

The Company analyzed whether

any of the above customers are a VIE in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation.

Based on the Company’s analysis, the Company has determined that Greenstone, which is a related party because one of the Company’s

former Agrify Brands employees and its VP of Engineering had a minority ownership, is a VIE.

The Company’s loan receivable from

Greenstone was written off in full during the quarter ending June 30, 2023.

This reserve still remains in the allowance as of March 31, 2024.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Inventory

5 unchanged sentences

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 September

applied to the purchase of products once they are delivered.

Inventory consisted of the following as of March

31, 2024 and December 31, 2023:

(In thousands)

September 30,

March 31, 2024

December 31, 2023

Raw materials

5 unchanged sentences

Total inventory, net

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Inventory Reserves

8 unchanged sentences

(In thousands)

September 30,

Three months ended March 31, 2024

Year ended December 31,

Inventory reserves – beginning of period

(Decrease) increase

in inventory reserves

(Decrease) increase in inventory reserves

Inventory reserves – end of period

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 if

circumstances were to occur that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying

The Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s

fair value, not to exceed the total amount of goodwill.

The Company has concluded

that there was an impairment-triggering event during the 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)

Goodwill - beginning of period

Goodwill acquired during period

Goodwill purchase accounting adjustment

Goodwill impairment loss

Goodwill - end of period

Intangible assets, net as of December 31, 2022

were as follows:

Intangible Assets, Gross

Accumulated Amortization

Intangible Assets, Net

(In thousands)

Additions and

Customer relationships

Acquired developed Technology

Capitalized website costs

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 7 – Debt

1 unchanged sentence

(In thousands)

September 30,

Note payable – Exchange Note

Related party debt

March 31, 2024

Exchange Note

Convertible Note

Consolidated CP Acquisitions Note

CP Acquisitions Junior Secured Note

GIC Acquisition Note

Mack Molding Co.

Other notes payable (1)

Unamortized debt premium (discount)

Total debt, net of debt discount

current portion, net of current unamortized debt discount

Unamortized debt premium

Total debt, gross of debt premium

current portion

Long-term debt, net of current

(1) Other notes payable relates to a one-year insurance premium that was financed over nine-months.

Securities Purchase Agreement

On March 14, 2022, the Company

entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with the Investor, pursuant to which the

Company agreed to issue and sell to the Investor, in a private placement transaction, in exchange for the payment by the Investor of $ 65.0

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

principal amount of $ 65.0 million (the “SPA Note”), and a SPA Warrant to purchase up to an aggregate of 34,406 shares of Common

August 2022 Securities Exchange Agreement

On August 18, 2022, the Company

reached an agreement with the Investor to amend its existing senior SPA Note and entered into the August 2022 Exchange Agreement.

to the August 2022 Exchange Agreement, the Company partially paid $ 35.2 million along with approximately $ 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.

(1) Other notes payable relates to a one-year insurance premium that was financed over nine-months and incurred interest expense of approximately $ 7 thousand for the three months ended March 31, 2024.

Other notes payable also includes the Navitas Loan with a balance of $ 5 thousand as of March 31, 2024.

Exchange Note

The Exchange Note is a senior

4 unchanged sentences

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

holder will be entitled to a cash sweep of 20 % of the proceeds received by 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 holder 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 holder can elect to redeem the Exchange Note for cash equal to 115 % of the then-outstanding principal amount of the Note (or

such lesser principal amount accelerated by the 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.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Until the date the Exchange Note

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

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

other instrument or security, of 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

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 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 Investor.

Pursuant to the Exchange Agreement, at closing

the Company prepaid 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 remained outstanding with

a remaining balance of $ 11.7 million.

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

As a result, the Company recognized a loss on the extinguishment of debt of $ 4,619,846 .

Convertible Notes

On March 8, 2023, as a result of the Exchange Agreement, the Company issued

a Convertible Note to the Investor 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 holder will be entitled to a cash sweep of 30 % of the proceeds of any at-the-market equity offering and

20 % of the proceeds received by the Company in connection with any other equity financing, which will reduce the outstanding principal

amount under the August 2022 Note or the Convertible Note.

At any time, the Company may prepay all of the Convertible Note by redemption

at a price equal to 102.5 % of the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest.

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.

Lender was 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.

Convertible Note

On March 8, 2023, as a result

of the Exchange Agreement, the Company issued a Convertible Note to 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 was 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 would reduce the outstanding principal amount under the August 2022 Note or the Convertible Note.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Convertible Note will impose

NOTES TO CONDENSED 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 had 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 imposed

certain customary affirmative and negative covenants upon the Company, as well as covenants that will (i) restrict the Company and its

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If an event of default under the Convertible Note occurs, the

holder can elect to redeem the Convertible Note for cash equal to (A) 115 % of the then-outstanding principal amount of the Convertible

Note (or such lesser principal amount accelerated by the Investor), plus accrued and unpaid interest, including default interest, which

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 Lender), 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 holder delivers a notice of acceleration;

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

(b) the total then outstanding principal

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per share of Common Stock occurring during the fifteen consecutive trading days ending on, and including, the trading day immediately

before the date the holder delivers such notice and (2) the highest daily VWAP per share of Common Stock occurring during the fifteen

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

1 unchanged sentence

Until the date the Convertible

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

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

stock or other instrument or security, of the Company or its subsidiaries.

If the holder elects to convert

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

Note is fully repaid, the Lender had, 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 elected to convert

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

conversion of the Convertible Note will be subject to certain customary conditions.

The Convertible Note may not be converted into shares

of Common Stock if such conversion would result in the holder and its affiliates owning an aggregate of in excess of 4.99 % of the then-outstanding

shares of Common Stock, provided that upon 61 days’ notice, such ownership limitation may be adjusted by the holder, but in any

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 %.

1 unchanged sentence

and separately measured at fair value.

Interest expense related to

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

Accrued interest totaled $ 1,041,388

as of September 30, 2023.

Aggregate interest expense

related to the Convertible Note and Exchange Note described above was $ 116 thousand as of March 31, 2024.

Note Conversion

Pursuant to the Exchange Agreement

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

$ 1.6 million of the remaining outstanding principal amount on the Convertible Note for 153,617 shares of Common Stock of the Company.

On May 1, 2023, the Company entered

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

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

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

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

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

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

The following table summarizes the short-term

and long-term portions of the Exchange Note as of September 30, 2023:

(In thousands)

Unamortized premium

Net carrying amount

As of September 30, 2023, future minimum payments

were as follows:

Years ending December 31 (In thousands),

Remaining 2023

Total future payments

the Company entered into with the Lender 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.

The total aggregated Exchange Note and Convertible

Note is classified as long-term as of March 31, 2024.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Related party debt

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Convertible Note Forgiveness

On November 30, 2023, the

New Lender 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.

CP Acqusitions Junior Secured Note

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.

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

Consolidated CP Acquisitions 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 as well

as the interest due under the Convertible Note into the Convertible Note (collectively, with the Junior Secured Note and the Exchange

Note, the “Consolidated Notes”), and amended and restated the Convertible Note under a Senior Secured Amended, Restated, and

Consolidated Convertible Note agreement (the “Restated Note”) having a total outstanding principal of $ 18,717,973 (the “New

Lender Debt Consolidation”).

The Restated Note bears interest at a rate of 10 % per annum and will mature in full on December 31,

The Company may redeem all or a portion not less than $ 5.0 million of principal at any time at a price equal to 102.5 % of the redeemed

principal amount plus accrued but unpaid interest.

The Restated Note imposes

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 Restricted Note occurs, then

the then outstanding principal and all accrued and unpaid interest on the Restated Note will immediately become due and payable.

If the New Lender elects to

convert the Restated Note, the conversion price per share will be $ 1.46 , subject to customary adjustments for certain corporate events.

The conversion of the Restated Note will be subject to certain customary conditions.

The Restated Note may not be converted into shares

of Common Stock if such conversion would result in the New Lender and its affiliates owning an aggregate of in excess of 49.99 % of the

then-outstanding shares of Common Stock.

Immediately following the

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

of 2,671,633 shares of common stock (the “January Conversion”) having a fair value of approximately $ 1.7 million.

As the January

Conversion was exercised by the New Lender in conjunction and in connection with the Debt Consolidation, the two transactions combined

were considered a modification of the total debt outstanding with the New Lender (the “New Lender Debt Restructuring”).

The New Lender Debt Restructuring

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 New Lender Debt Restructuring was deemed to result in a concession by the New Lender.

The Company performed

a comparison of the undiscounted cash flows associated with the Restructured Note subsequent to the New Lender Debt Restructuring to the

carrying value of the Consolidated Notes as of the New Lender Debt Restructuring date.

The net carrying value of the Consolidated Notes

was determined to exceed the undiscounted future cash flows of the Restated Note after consideration of the January Conversion by approximately

$ 675,000 (the “Excess Carrying Value”).

The Restated Note was thus written down to the amount of the undiscounted future cash

flows on the Restated Note from the New Lender Restructuring date to maturity.

Further, as the New Lender is a related party of the Company,

the Excess Carrying Value was accounted for as a capital transaction and no gain or loss was recognized related to the restructuring.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

GIC Acquisition Note

On July 12, 2023, the Board

1 unchanged sentence

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 $ 500,000 to the Company, $ 300,000 of which was delivered at issuance

and the remaining $ 200,000 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.

The maturity date of the Related Party Note was subsequently amended to December 31, 2023 at which point principal and

accrued interest will be repaid in full.

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 .

applied for forgiveness on the $ 0.8 million of PPP loan, but forgiveness was denied by the SBA.

On June 23, 2022, the Company received

a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and the loan bears interest at a rate of 1.00 % per year.

The PPP loan is payable in 34 equal combined monthly principal and interest payments of approximately $ 24 thousand that commenced on August

The breakdown of PPP Loan balances by current and

non-current as of September 30, 2023 and December 31, 2022 were as follows:

(In thousands)

Balance Sheet

September 30,

PPP Loan, current

Long-term debt, current

PPP Loan, non-current

Long-term debt

Total PPP Loan outstanding

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 $ 24 thousand for the three months ended March 31, 2024.

As of March 31, 2024, the Company has borrowed approximately

$ 1.0 million under the Related Party Note agreement.

As of March 31, 2024, future minimum payments

on all debt positions were as follows:

Years ending December 31 (In thousands),

Remaining 2024

Total future payments

Note 8 — Leases

10 unchanged sentences

of determining the present value of its lease liabilities.

At September 30, 2023, the Company’s weighted-average discount rate utilized

for its leases was 7.39 %.

At March 31, 2024 and 2023, the Company’s weighted-average discount rate

utilized for its leases was 7.50 % and 7.33 %, respectively.

When a contract contained

2 unchanged sentences

finance leases for machinery and equipment.

The Company’s finance leases have remaining lease terms of one year to five years.

The Company had several non-cancelable

operating leases for corporate offices, warehouses, showrooms, research and development facilities and vehicles.

The Company’s leases

have remaining lease terms of one year to five years, some of which include options to extend.

Some leases include payment for common

area maintenance associated with the property.

As of March 31, 2024 the Company had no active finance leases.

The Company had several non-cancellable

1 unchanged sentence

The Company’s leases

have remaining lease terms of one year to five years, some of which include options to extend.

have remaining lease terms of one year to four years, some of which include options to extend.

Some leases include payment for communal

1 unchanged sentence

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Additional information on the Company’s

1 unchanged sentence

Three months ended

September 30,

Nine months ended

September 30,

(In thousands)

4 unchanged sentences

Total lease cost

September 30,

(In thousands)

March 31, 2024

December 31, 2023

Weighted-average remaining lease term – operating leases

4 unchanged sentences

Balance Sheet Location

September 30,

March 31, 2024

December 31, 2023

Right-of-use assets, net

Right-of-use, net

Finance lease assets

Property and equipment, net

Total lease assets

Operating lease liabilities, current

3 unchanged sentences

Total operating lease liabilities

Finance lease liabilities, current

Accrued expenses and other current liabilities

Finance lease liabilities, non-current

Other non-current liabilities

Total finance lease liabilities

Maturities of operating and finance lease liabilities

as of September 30, 2023 are as follows:

Maturities of operating lease liabilities as of

March 31, 2024 are as follows:

Years ending December 31 (In thousands),

Operating lease

Remaining 2024

3 unchanged sentences

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10 — Stockholders’ Equity

On July 11, 2022, the Company

increased its authorized number of shares to 8,000,000 , consisting of:

5,000,000 shares of Common Stock, par value $ 0.001 per share and

3,000,000 shares of preferred stock, par value $ 0.001 per share.

On January 9, 2020, the Company designated 105,000 shares of the 3,000,000

authorized shares of Preferred Stock, as Series A Convertible Preferred Stock (“Series A Preferred Stock”).

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.

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.

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.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 9 — Stockholders’ Deficit

Public Offerings

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 to purchase 3,963,684 shares of its common

stock (the “S-1 Offering”).

The public offering price for each share of common stock is $ 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 S-1 Offering was made pursuant to a registration statement on Form S-1 (File No.

333-276724) that

was filed by the Company with the Securities and Exchange Commission (“SEC”) on January 26, 2024 and declared effective by

the SEC on February 14, 2024.

Pursuant to the terms of the

Agency Agreement, the Company paid the Placement Agent a cash transaction fee equal to 7.0 % of the aggregate gross proceeds to us from

the sale of the securities in the S-1 Offering.

In addition, the Company reimbursed the Placement Agent for a certain amount of its accountable

expenses, including the fees and disbursements of the Placement Agent’s counsel, not to exceed $ 100,000 in the aggregate.

Additionally,

at closing the Company issued to the Placement Agent common stock purchase warrants (the “Placement Agent Warrants”) covering

a number of securities equal to one percent ( 1.0 %) of the total number of securities being sold and/or issued in the S-1 Offering.

Placement Agent Warrants are non-exercisable for one hundred eighty (180) days beginning on the date of commencement of sales of the securities

being offered in this offering.

Following this one hundred eighty (180) day period, the Placement Agent Warrants will be exercisable until

the fifth (5th) year anniversary of commencement of sales of the securities being offered in this offering.

The Placement Agent Warrants

will be exercisable at a price per share of $ 0.38 , which is equal to 100 % of the price of the securities paid by the purchasers in connection

with this offering.

The Placement Agent Warrants are not redeemable.

The Placement Agent Warrants (and the underlying securities) may

not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction

that would result in the effective economic disposition of the Placement Agent Warrants (or the underlying securities) for a period of

one hundred eighty (180) days beginning on the date of commencement of sales of the securities being offered in the offering.

The Placement

Agent Warrants, however, may be assigned, in whole or in part, to any successor, officer or member of the Placement Agent (or to officers

or partners of any such successor or member) pursuant to FINRA Rule 5110(e)(2).

There are no registration rights associated with the Placement

Agent Warrants.

Additionally, the Company granted a six-month right of first refusal for certain financings to the Placement Agent.

The Company issued 67,237

warrants to purchase common stock to Alexander Capital, L.P., referred to as the Placement Agents Warrants above.

The warrants were classified

as equity warrants and recorded under additional paid-in capital in the condensed consolidated balance sheets.

The warrants have a five-year

term and exercise price of 100 % of the offering price, 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 issuance 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 Alexander Capital election.

The measurement of fair value

of the Alexander Capital Warrants were determined utilizing a Black-Scholes model considering

all relevant assumptions current at the date of issuance (i.e., share price of $ 0.52 , exercise price of $ 0.38 , term of five years , volatility

of 128 %, risk-free rate of 4.32 %, and expected dividend rate of 0 %).

The grant date fair value of these Alexander

Capital Warrants was estimated to be $ 31 thousand on February 27, 2024 and is reflected

within additional paid-in capital as of March 31, 2024.

AGRIFY CORPORATION

NOTES TO CONDENSED 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, 2022,

the Company valued the December 2022 Warrants using the Black-Scholes option-pricing model and determined the fair value at $ 5.9 million.

The key inputs to the valuation model included the annualized volatility of 98.0 % and the expected term of about 5 years.

Raymond Chang, Chairman and

CEO, participated in the Offering and purchased 115,385 shares of Common Stock and 230,769 December 2022 Warrants for an aggregate purchase

price of approximately $ 1.5 million.

Additional information regarding

the Company’s December 2022 Warrants may be found in Note 1 – Overview, Basis

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

elsewhere in the notes to the consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 10 — Stock-Based

9 unchanged sentences

grant and issuance under the 2022 Plan is 26,483 shares, which includes the 10,000 shares authorized under the 2022 Plan, plus the rollover

of 16,483 issued and outstanding awards under the 2020 Plan.

Shares will be deemed to have been issued under the 2022 Plan solely to the

extent actually issued and delivered pursuant to an award.

If any award granted under the 2020 Plan or the 2022 Plan expires, is canceled,

terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2022 Plan.

Plan shall continue in effect, unless sooner terminated, until the tenth anniversary of the date on which it is adopted by the Board of

As of September 30, 2023, there were 13,198 shares of Common Stock available to be granted under the Company’s 2022 Plan.

Company’s stock compensation expense was $ 0.5 million and $ 1.6 million for the three months ended September 30, 2023 and

2022, respectively.

The Company’s stock compensation expense was $ 2.1 million and $ 3.5 million for the nine months ended

September 30, 2023 and 2022 , respectively.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

of 16,483 issued and outstanding awards under the 2020 Plan and 250,000 additional shares issued upon approval by the Board of Directors

on January 8, 2024.

Shares will be deemed to have been issued under the 2022 Plan solely to the extent actually issued and delivered pursuant

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 March 31, 2024, there were

57,719 shares of Common Stock available to be granted under the Company’s 2022 Plan.

The Company’s stock

compensation expense was $ 0.5 million an d $ 0.9 million for the three months ended March 31,

2024 and 2023 , respectively.

Stock Options

Stock options granted under

the Company’s 2022 Plan are generally non-qualified and are granted with an exercise price equal to the market price of the Company’s

Common Stock on the date of grant.

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes

option-pricing model.

This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend

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

No stock options were granted during the three and nine months ended September 30, 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

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 three and six months ended September 30, 2023:

(In thousands, except share and per share data)

Exercise Price

Intrinsic Value

Options outstanding at January 1, 2023

Options outstanding at September 30, 2023

Options vested and exercisable as of September 30, 2023

Options vested and expected to vest as of September 30, 2023

As of September 30, 2023,

total unrecognized compensation expense related to unvested options under the Company’s 2022 Plan was $ 1.3 million, which is expected

For the three months ended

March 31, 2024, there were no options granted, exercised, forfeited or expired under the Company’s stock option plans.

10,310 options outstanding with a weighted average exercise price of $ 1,595.92 as of March 31, 2024 and December 31, 2023.

10,206 options vested and exercisable with a weighted average exercise price of $ 1,594.66 as of March 31, 2024.

There were 10,310 options

vested and expected to vest with a weighted average exercise price of $ 1,595.92 as of March 31, 2024

As of March 31, 2024, total

unrecognized compensation expense related to unvested options under the Company’s 2022 Plan was $ 1.5 thousand, which is expected

to be recognized over a weighted average period of 0.06 years.

The following table summarizes information about

options vested and exercisable at September 30, 2023:

options vested and exercisable at March 31, 2024:

Options Vested and Exercisable

Number of Options

Weighted-Average

Remaining Contractual

Weighted-Average Remaining Contractual Life (Years)

Weighted-Average

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Exercise Price

The following table summarizes information about

options expected to vest after September 30, 2023:

options vested and expected to vest after March 31, 2024:

Options Vested and Expected to Vest

Number of Options

Weighted-Average

Remaining Contractual

Weighted-Average Remaining Contractual Life (Years)

Weighted-Average

Exercise Price

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Restricted Stock Units

Under the 2022 Plan, the

Company may grant restricted stock units to employees, directors and officers.

The restricted stock units granted generally vest equally

over periods ranging from one to three years.

The fair value of restricted stock units is determined based on the closing market price

of the Company’s Common Stock on the date of grant.

Compensation expense related to the restricted stock units is recognized using

a straight-line attribution method over the vesting period.

The following table presents restricted stock

unit activity under the 2022 Plan for the three months ended March 31, 2024:

Number of Shares

Weighted-Average

Grant Date Fair Value

Unvested at December 31, 2023

Unvested at September 30, 2023

As of September 30, 2023,

total unrecognized compensation expense related to unvested restricted stock units was $ 0.7 million, which is expected to be recognized

over a weighted average period of 2.10 years.

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

The Company has initially reserved 2,500 shares of Common Stock for issuance under the ESPP.

On September 30, 2023,

2,500 shares were available for future issuance.

Under the ESPP, eligible

employees are granted options to purchase shares of Common Stock at the lower of 85 % of the fair market value of the stock at the time

of grant or 85 % of the fair market value at the time of exercise.

Options to purchase shares are granted twice yearly on or about August

1 and February 1 and are exercisable on or about the succeeding January 31 and July 31, respectively, of each year.

No participant may

purchase more than $ 25 thousand worth of Common Stock annually.

No Common Stock was granted under the 2022 ESPP during the three and nine

months ended September 30, 2023.

Employee Benefit Plan

The Company maintains an

employee’s savings and retirement plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”).

All full-time

employees become eligible to participate in the 401(k) Plan.

The Company’s contribution to the 401(k) Plan is discretionary.

During the three and nine months ended September 30, 2023, the Company did not contribute to the 401(k) Plan.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unvested at March 31, 2024

As of March 31, 2024, total

unrecognized compensation expense related to unvested restricted stock units was $ 139 thousand, which is expected to be recognized over

a weighted average period of 1.12 years.

Note 11 — Stock Warrants

The following tables present all warrant activity

of the Company for the nine months ended September 30, 2023 and 2022:

Exercise Price

Warrants outstanding at December 31, 2022

Warrants outstanding at September 30, 2023

Exercise Price

of the Company for the three months ended March 31, 2024:

Number of Warrants

Weighted-Average

Warrants outstanding at December 31, 2023

Warrants outstanding at September 30, 2022

The Company received proceeds from the exercise

of cashless warrants of $ 0 for the three and nine months ended September 30, 2023, and $ 1 thousand and $ 2 thousand for the three and nine

months ended September 30, 2022, respectively.

( 6,142,217 )

Warrants outstanding at March 31, 2024

The Company received proceeds

from the exercise of warrants of $ 3 thousand for the three months ended March 31, 2024.

Note 12 — Income Taxes

The Company’s effective

income tax rate was 0.0 % and 0.2 % for the nine months ended September 30, 2023 and 2022, respectively.

income tax rate was 0.0 % and 0.0 % for the three months ended March 31, 2024 and 2023, respectively.

The provision for (benefit

from) income taxes was $ 0 and $ 0.2 million for the nine months ended September 30, 2023 and 2022, respectively.

The difference between

the Company’s effective tax rates for the 2023 and 2022 periods and the U.S.

statutory tax rate of 21 % was primarily due a valuation

allowance recorded against certain deferred tax assets.

The change in the provision for (benefit from) income taxes for the nine months

ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to a recording of a valuation allowance

on the company’s net deferred tax assets.

from) income taxes was $0 and $0 for the three months ended March 31, 2024 and 2023, respectively.

There is no difference between

the Company’s effective tax rates for the 2024 and 2023 periods.

There was no change in the provision for (benefit from) income

taxes for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 13 — Net Loss Per Share

13 unchanged sentences

share were as follows:

Three months ended

September 30,

Nine months ended

September 30,

Three months ended March 31,

(In thousands, except share and per share data)

Net loss attributable to Agrify Corporation

Weighted-average common shares outstanding –

Net loss available for common shareholders

Weighted-average common shares outstanding – basic and diluted

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

$ ( 1,003.10 )

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Company’s potential dilutive securities, which include stock options, restricted stock units, and warrants, have been excluded from

5 unchanged sentences

them would have had an anti-dilutive effect:

Nine months ended

September 30,

Nine months ended

September 30,

Three months ended March 31,

Shares subject to outstanding stock options

1 unchanged sentence

Shares subject to outstanding warrants

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 14 — 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.

Bud & Mary’s Litigation

On September 15, 2022, the

Company provided a notice of default to Bud & Mary’s and certain related parties notifying such parties that Bud & Mary’s

was in default of its obligations under the Bud & Mary TTK Agreement.

On October 5, 2022, Bud & Mary’s filed a complaint

in the Superior Court of Massachusetts in Suffolk County, naming the Company as the defendant.

Bud & Mary’s is seeking, among

other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion arising

from the Agreement.

While the Company believes the claim is without merit and will continue to vigorously defend itself against Bud &

Mary’s allegations, litigation is inherently unpredictable and there can be no assurance that the Company will prevail in this matter.

During the third quarter of

2022, the Company deemed it necessary to fully reserve for the outstanding $ 14.7 million note receivable balance due to the current litigation

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

The $ 14.7 million represents the amount of the contingent loss

that the Company has determined to be reasonably possible and estimable.

The actual cost of resolving this matter may be higher or lower

than the amount the Company has reserved.

If the Company is unable

to realize revenue from its TTK Solution offerings on a timely basis or at all, or if it incurs an additional loss as a result of the

Bud & Mary’s claim, the Company’s business and financial performance will be adversely affected.

On November 14, 2022,

the Company filed its answers and affirmative defenses to the Bud & Mary’s complaint and counterclaims.

The Company is seeking,

among other relief, monetary damages in connection with the breach of contract, breach of the implied covenant of good faith and fair

dealing, unjust enrichment, and enforcement of the guarantees.

Bud & Mary’s is permitted to file an amended complaint during

October 2023, and Agrify will be permitted to make responsive filings, which may include an answer and counterclaim.

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.

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.

million represents the amount of the contingent loss that the Company has determined to be reasonably possible and estimable.

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.

4 unchanged sentences

Agrify Corporation, Bud & Mary’s Cultivation, Inc.

and BMLC2, LLC ,

The Bowdoin Complaint relates to a construction contract between Bowdoin and the Company relating to the property

that is the subject of the Bud & Mary’s Complaint, and alleges breach of contract by Bud & Mary’s and by the Company

due to nonpayment of approximately $ 6.3 million due under the contract and related indemnification claims and mechanics’ liens.

The Company is entitled to indemnification by Bud & Mary’s and intends to vigorously defend this claim.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

and BMLC2, LLC, case no.

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.

$ 6.3 million is included in accounts payable in the consolidated balance sheet.

of Bowdoin’s subs, Hannon Electric, Inc.

has filed a separate suit against Agrify in the amount of $ 1.498 million.

The amount is

part of the $ 6.3 million claimed in Bowdoin’s complaint.

The Company is entitled to indemnification by Bud & Mary’s and

intends to vigorously defend this claim .

Mack Molding Co.

15 unchanged sentences

terms of the supply agreement with Mack.

On October 11, 2022, the

Company received a $ 9.4 million invoice from Mack for inventory purchased on the Company’s behalf to build VFUs.

As part of the

terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had aged greater

than nine months.

Due to the slowdown in the demand for the VFUs and the lack of a demand forecast that the Company could provide to the

vendor, Mack exercised the right to invoice the Company for the slow-moving inventory.

As of December 31, 2022, the Company owed Mack

$ 8.4 million for purchased inventory on behalf of the Company to produce VFUs, which is included in accounts payable in the consolidated

balance sheet.

On March 2, 2023, Mack filed

an arbitration action seeking the amounts owed to Mack for purchased inventory.

On October 27, 2023, and effective as of October 18, 2023,

Mack and the Company entered into a Modification and Settlement Agreement with respect to the dispute.

See Note 17 –

Subsequent Events.

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

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.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

On February 29, 2024, the

Company met its performance obligations in terms of the Modification Agreement and a gain of $ 1,141,587 was recorded, within general and

administrative expenses, on the Consolidated Statement of Operations during the three months ended March 31, 2024, representing the difference

between the carrying value of the Contract liability owing by Agrify to Mack, prior to the execution of the Modification Agreement, and

the aggregate of (a) the present value of the minimum cash payments required to be made by the Company over the term of the Modification

Agreement, and (b) the fair value of the warrants issued to Mack by the Company, in terms of the Modification Agreement.

The recognition

of this gain also resulted in the derecognition of the Prepaid settlement asset balance, and the reduction of the outstanding accounts

payable balance based on the terms of the Modification Agreement.

At this time, the outstanding accounts payable balance owing to Mack,

was reclassified from Accounts payable to Notes payable, current in the amount of $ 1,374 and Notes payable, net of current in the amount

of $ 3,464 , per the face of the condensed consolidated balance sheet, as of March 31, 2024.

Further, following the meeting

of certain conditions, including making predetermined quarterly payments to Mack in terms of the Modification Agreement, the Company is

entitled to take possession of certain VFUs that were assembled under the Supply Agreement.

These quarterly payments relate to the purchase

from Mack of 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.

In the first quarter of 2024, the Company recognized a gain of $ 564,277 , within general and administrative

expenses, associated with the revaluation of the contingent liability, originally recognized on losing control of this inventory and offset

against the inventory balance during the fiscal year ended December 31, 2022, on regaining control of 25 units of the VFU inventory.

The Company is also required

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

TRC Electronics Litigation

10 unchanged sentences

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.

The Company and Precision filed an

answer to the counterclaims denying all liability on the claims and discovery in the Delaware Action has recently commenced.

McCutchan, Inc.

In December 2021, the Company

entered into a Standard Form of Agreement (“Agreement”) between Owner and Contractor whereby Valiant Group LLC (“Valiant”)

is the general contractor for tenant improvements on certain real property located in Bellevue, Washington (the “Project”).

McCutchan, Inc.

(“McCutchan”) agreed to be a subcontractor on the Project and engaged various other subcontractors.

terminated Valiant as the general contractor for, among other allegations, breach of contract and unjust enrichment.

Following the termination

of Valiant, in October 2022, the Agreement was assigned and accepted (the “Assignment”) to Agxion, LLC, a wholly owned subsidiary

of the Company.

The Assignment contemplates that, as a subcontractor to the Agreement, McCutchan is still bound to the subcontract agreement

and will continue construction operations on the Project.

The Company is pursuing Valiant in a separate litigation (the “Valiant

Litigation”) to collect no less than approximately $ 1.4 million alleging overbilling, breach of the Agreement, and violation of

Chapter 18.27 and 19.86 RCW in Washington.

On March 5, 2024, McCutchan, Inc.

(“McCutchan”) filed a complaint in the Superior

Court of Washington for King County naming the Company, Valiant, and certain related parties as defendants.

In the Complaint, McCutchan

asserts two causes of action against the Company:

(1) breach of contract, (2) voidable contract, (3) interference with business or economic

expectancy, (4) unjust enrichment, and (5) defamation.

McCutchan’s claims are based on allegations of misrepresentations made by

the Company to pay McCutchan for work completed on the Project as well as a failure to pay under the Agreement.

In the alternative, McCutchan

is alleging the Assignment is void and not a valid contract.

McCutchan is seeking to collect no less than $3 million against the Company

and all other named defendants.

The Company, Valiant, and McCutchan have all agreed to mediate the matter.

McCutchan has asked to postpone

the original scheduled May 7 th mediation date, and the Company, Valiant and McCutchan are collectively working to set up a

new three-way mediation date.

In the event the parties cannot reach an agreement in the mediation, this matter will be moved to arbitration

pursuant to the mandatory arbitration clause in the Agreement.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Valiant Grouop LLC

Agrify filed a separate complaint against Valiant

for overbilling, misrepresentation, and breach for the Treehouse project in Nevada.

Valiant has failed to respond and Agrify has since

submitted an entry of default to the court and is currently seeking for award in the amount of $ 1.5 million.

However, there is no guarantee

that the Court would award the full amount and no guarantee that Agrify would be able to successfully collect the full amount from Valiant.

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 expense, net per the Condensed Consolidated Statement of Operations for the quarter ended September

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,

This gain was recognized as part of other income, net per the consolidated statement of operations for the three months ended March

31, 2024, with the approximate $ 0.9 million receivable balance recognized as part of prepaid expenses and other current assets, per the

Condensed Consolidated Balance Sheet, as of September 30, 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 quarter ended September 30, 2023, which resulted in an aggregate gain

being recognized for the quarter ended September 30, 2023, and a corresponding reduction in accounts payable owing by the Company, as

of September 30, 2023, of approximately $ 1 million.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Supply Agreement with Mack Molding Co.

In December 2020, the Company

entered into a five-year supply agreement with Mack Molding Co.

(“Mack”) pursuant to which Mack would become a key supplier

In February 2021, the Company placed a purchase order with Mack amounting to approximately $ 5.2 million towards the initial production

of VFUs during 2021.

Since February 2021, the Company increased the purchase order with Mack to approximately $ 26.5 million towards production

of VFUs during 2021 and 2022.

The Company believed the supply agreement with Mack would provide the Company with increased scaling capabilities

and the ability to meet the potential future demand of its customers more efficiently.

The supply agreement contemplates that, following

an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack

each year based on the agreed-upon pricing formula.

The introductory period is not time-based but rather refers to the production of an

initial number of units, after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage.

The Company believed this approach would result in both parties making a more informed decision with respect to the pricing and other

terms of the supply agreement with Mack.

On October 11, 2022, the

Company received a $ 9.4 million invoice from Mack for inventory purchased on the Company’s behalf to build VFUs.

As part of the

terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had aged greater

than nine months.

Due to the slowdown in the demand for the VFUs and the lack of a demand forecast that the Company could provide to the

vendor, Mack exercised the right to invoice the Company for the slow-moving inventory.

As of June 30, 2023, the Company owed Mack $ 8.4

million for purchased inventory on behalf of the Company to produce VFUs, which is included in accounts payable in the consolidated balance

On October 27, 2023, and effective as of October 18, 2023, Mack and the Company entered into a Modification and Settlement Agreement

with respect to the dispute.

See Note 17 – Subsequent Events.

Distribution Agreements with Related Party

– Bluezone Products, Inc.

On September 7, 2019, the

Company entered into a distribution agreement with Bluezone Products, Inc.

(“Bluezone”) for distribution rights to the Bluezone

products with certain exclusivity rights.

The agreement requires minimum purchases amounting to $ 0.5 million and $ 0.6 million for the

first and second contract anniversary years.

The agreement auto-renews for successive one-year periods unless earlier terminated.

2021, the Company notified Bluezone of the non-renewal of the agreement which means it ended on May 31, 2021.

The Company exceeded the

minimum purchase amount for the first year and purchased approximately $ 0.3 million of the committed $ 0.7 million second-year purchases

through December 31, 2021.

Bluezone is a related party to the Company.

Committed Purchase Agreement with Related

Party – 4D Bios, Inc.

On September 18, 2021, the

Company entered into an amended purchase agreement with 4D Bios, Inc.

(“4D”) to secure purchases of horticultural equipment.

The original agreement required minimum purchases of between $ 577 dollars and $ 607 dollars per unit of 4D products until December 31,

The amended agreement requires minimum purchases of $ 582 dollars per unit with a final payment of approximately $ 0.9 million paid

4D is a related party to the Company.

The Company settled all outstanding commitments, leaving no open committed purchases as of

December 31, 2021.

Committed Purchase Agreement with Related

Party – Ora Pharm

In June 2022, the Company

entered into an agreement with Ora Pharm (“Ora”) pursuant to which Ora will purchase approximately $ 1.6 million in equipment

from the Company, and Ora may purchase software services from the Company in the future.

Stuart Wilcox, the Company’s former Chief

Operating Officer, is the Chairman of Ora.

consolidated balance sheet, as of March 31, 2024.

The settlement also resulted in the return of equipment to the Company in October 2023.

The Company is currently

pursuing 10 separate legal proceedings in attempting to collect approximately $ 2.5 million outstanding receivables.

The Company is not

confident that all legal proceedings and collection efforts will yield in positive results or return of equipment.

On April 25, 2024, Medical

Investor Holdings, LLC dba Vertical Companies (“MIH”) filed a complaint against Agrify demanding $ 288,000 .

MIH purchased an

XMU hydrocarbon extraction system from Precision in October 2021.

MIH chose to not include installation and training in the original purchase

but is now having problems with this equipment.

The Company this is a meritless case.

The Company is also a defendant

or plaintiff in a variety of other litigation matters that are individually insignificant.

The timing and amount of any settlements, including

potential payments made or received, is uncertain.

Nonetheless, management currently estimates that the Company’s aggregate net loss exposure

with respect to these cases is within the range of approximately $ 150,000 to $ 300,000 .

On July 2022, claimant, an ex-sales

VP is claiming he is owed back wages, commission and is entitled to equity in the company, under theories of liability under Massachusetts

labor laws including retaliation, breach of contract, breach of covenant of good faith and fair dealing, fraudulent inducement, tortious

interference & unjust enrichment.

Company has filed its answer to the initial complaint in January 2023.

The Company believes this

is a meritless case and has responded to various discovery requests.

Other Commitments and Contingencies

4 unchanged sentences

pursue these claims, the Company could be subject to additional tax liabilities.

Refer to Note 8 – Debt, included elsewhere

in the notes to the consolidated financial statements for details of the Company’s future minimum debt payments.

Refer to Note 9

– Leases, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum

lease payments under operating and financing lease liabilities.

Refer to Note 13 – Income Taxes, included elsewhere in the notes

to the consolidated financial statements for information regarding income tax contingencies.

Refer to Note 7 – Debt,

included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum debt payments.

Refer to Note 8 – 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 12 – Income Taxes, included elsewhere

in the notes to the consolidated financial statements for information regarding income tax contingencies.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 15 — 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.

Some of the officers and

directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities

that become available.

The following table describes the net purchasing

(sales) activity with entities identified as related parties to the Company:

Three months ended

September 30,

Nine months ended

September 30,

ended March 31,

(In thousands)

Cannae Policy Group

Topline Performance Group

Greenstone Holdings

Valiant Americas, LLC

The following table summarizes net related party

(payable) receivable as of September 30, 2023 and December 31, 2022:

(payable) receivable as of March 31, 2024 and December 31, 2023:

(In thousands)

September 30,

March 31, 2024

December 31, 2023

Valiant Americas, LLC

Topline Performance Group

On July 12, 2023, the Company

1 unchanged sentence

and Chief Executive Officer.

Refer to footnote 8 for further disclosure related to this Related Party Note.

Refer to Note 7 - 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 7 - Debt for further disclosure related

to this Related Party Note.

Note 16— Subsequent Events

The Company evaluated subsequent

events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued.

Nasdaq Deficiency Notices

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

(the “Delayed Reports”).

The Nasdaq Notice had no immediate effect on the listing of the Company’s Common Stock on The

Nasdaq Stock Market LLC.

The Company filed its 2022 Form 10-K, First Quarter 2023 Form 10-Q and Second Quarter 2023 Form 10-Q,

on November 28, 2023, November 28, 2023 and December 12, 2023, respectively.

On October 17, 2023, the

Company received the Staff Determination from the Listing Qualifications Department of Nasdaq notifying the Company that it was not in

compliance with Nasdaq’s continued listing requirements under the Listing Rule as a result of its failure to file the Delinquent

Reports in a timely manner.

The Company timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”), and the

Panel scheduled a hearing for January 11, 2024.

Mack Molding Modification Agreement

On October 27, 2023, and

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

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

Pursuant to the Modification Agreement, the Company and Mack agreed

to settle an outstanding dispute under the Supply Agreement between the parties dated December 7, 2020 (the “Supply Agreement”).

The Modification Agreement requires the Company to make payments of $ 500,000 and $ 250,000 to Mack on or before November 1, 2023 and February

15, 2024, respectively.

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

Supply Agreement.

The Modification Agreement also requires the Company to purchase from Mack a minimum of 25 VFUs per quarter for each

quarter during 2024 and a minimum of 50 VFUs per quarter for the six quarters beginning with the first quarter of 2025.

The Company is

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

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Additionally, as part of

the Modification Agreement, the Company agreed to issue to Mack a warrant to purchase 750,000 shares of Common Stock.

The warrant has

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

on a cash basis unless at the time of exercise there is no effective registration statement for the resale of the underlying shares, in

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

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

Chief Executive Officer, purchased the Exchange Note and the Convertible Note from their holder (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 and to enter into an agreement with the Company to extend the maturity date thereon to December 31, 2025.

Warrant Issuance

On October 27, 2023, as a

condition precedent to the Note Purchase, the Company entered into a letter agreement (the “Letter Agreement”) with the holder

of the Exchange Note and the Convertible Note.

Pursuant to the agreement, the Company agreed to exchange $ 3.0 million in principal and

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

(the “Exchange Warrant”).

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

for the Investor under the terms of the Letter Agreement for a warrant to purchase 375,629 shares of common stock (the “Abeyance Warrant”).

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

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

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

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

of common stock underlying Exchange Warrant will be increased to an amount equal to $ 3.0 million divided by such purchase or conversion

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

Additionally, in the event that

the Company has not issued equity securities in exchange for gross proceeds of at least $ 3.0 million to Mr.

Chang or his affiliates (subject

to certain offsets) by the third calendar day after the date when the Company receives stockholder approval, then on December 26, 2023,

the number of shares of common stock underlying Exchange Warrant will be increased to an amount equal to $ 3.0 million divided by the Minimum

Price as defined under Nasdaq listing rules, subject to proportional adjustment in the event the Exchange Warrant has been partially exercised.

Letter Agreement requires that the Company issue equity securities to Mr.

Chang or his affiliates for aggregate gross proceeds of at least

$ 3.0 million, minus any funds advanced by Mr.

Chang to the Company since July 1, 2023.

Note Amendment and Secured Promissory Note

On October 27, 2023, GIC

and the Company amended and restated the Related Party Note (the “Restated Related Party Note”).

Pursuant to the terms of

the Restated Related Party Note, the Maturity Date was extended until December 31, 2023 and the Company granted a security interest in

the Company’s assets that ranks junior to the Exchange Note and the Convertible Note.

Concurrent with the Restated

Related Party Note, the Company issued a junior secured promissory note (the “Junior Secured Note”) to the New Lender.

to the Junior Secured Note, the New Lender will lend up to $ 3,000,000 to the Company, of which $ 2,000,000 was drawn.

The Junior Secured

Note bears interest at a rate of 10 % per annum, will mature in full on December 31, 2023 , and may be prepaid without any fee or penalty.

The Junior Secured Note is a secured obligation of the Company that ranks junior to the notes acquired in the Note Purchase

On December 4, 2023, the

New Lender and the Company amended and restated the Junior Secured Note (the “Junior Secured Note Amendment”).

the terms of the Junior Secured Note Amendment, the maximum principal amount that may be loaned by CP to the Company was increased to

$ 4,000,000 .

events and transactions that occurred after the balance sheet date up to the date that the condensed consolidated financial statements

Exercise of Company Issued Prefunded Warrants

In April 2024, a holder of

953,684 of the Company’s previously issued prefunded warrants exercised such warrants for the purchase of 953,684 of the Company’s common

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements