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Item 2. Management’s Discussion and Analysis

2024-05-21 compared with 2024-01-03 · 573 added, 918 removed, 58 unchanged (96% of the section changed)

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

The information contained

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

December 31, 2022 filed with the Securities and Exchange Commission on November 28, 2023 (the “Form 10-K”) and presumes that

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

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

The following discussion and analysis also should be read together

with our financial statements and the notes to the financial statements included elsewhere in this Quarterly Report on Form 10-Q.

The following discussion

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

Reform Act of 1995.

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

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

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

Forward-looking statements

speak only as of the date of this quarterly report.

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

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

10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission on April 15, 2024, as amended on April 29,

2024 (the “Form 10-K”) and presumes that readers have access to, and will have read, the “Management’s Discussion

and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K.

The following

discussion and analysis also should be read together with our financial statements and the notes to the financial statements included

elsewhere in this Quarterly Report on Form 10-Q.

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

Private Securities Litigation Reform Act of 1995.

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

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

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

Forward-looking

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

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

We strongly encourage

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

for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements.

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

Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking

We assume no responsibility to update the forward-looking statements contained in this Quarterly Report on Form 10-Q.

The following should

also be read in conjunction with the unaudited financial statements and notes thereto that appear elsewhere in this report.

Except as otherwise indicated

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

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

We are a developer of proprietary

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

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

We believe we are the only company with an

automated and fully integrated grow solution in the industry.

Our Agrify “Precision Elevated™” cultivation solution

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

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

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

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

Agrify Corporation was incorporated

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

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

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

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

are a developer of proprietary precision hardware and software grow solutions for the indoor commercial agriculture industry and provides

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

We believe we

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

Our Agrify “Precision Elevated™”

cultivation solution seamlessly combines our integrated hardware and software offerings with a broad range of associated services including

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

a single provider.

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

been a highly fragmented market.

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

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

(or “Agrinamics”).

On September 16, 2019,

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

Our corporate headquarters

are located in Troy, Michigan.

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

Colorado, Georgia, Massachusetts, Michigan, and Oregon.

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.

Recent Business Developments

Private Placement

On January 25, 2022, we entered

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

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

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

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

placement offering.

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

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

Subject to certain ownership

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

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

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

Each Common Warrant is exercisable into one share of Common

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

anniversary of the initial exercise date.

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

in March 2022.

Raymond Chang, our Chairman

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

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

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

The gross proceeds to us

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

Acquisition of Lab Society

On February 1, 2022, we entered

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

(“Lab Society”), Lab Society

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

as the Owner Representative

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

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

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

The aggregate consideration

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

of Lab Society at closing;

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

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

to the extent earned.

We withheld 638 of the Buyer

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

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

During the third

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

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

subject to the conditions of the Merger Agreement.

Additional information regarding our contingent consideration arrangements may be found

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

The Merger Agreement includes

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

The Owners may become entitled to additional

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

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

shares of Common Stock.

The purchase price allocation

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

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

The estimated fair value at acquisition

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

Our initial fair value estimates

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

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

These valuation methods require management to project revenues, operating

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

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

We amortize our intangible

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

Purchase Agreement

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

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

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

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

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

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

August 2022 Securities Exchange Agreement

On August 18, 2022, we reached

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

Exchange Agreement”).

Pursuant to the August 2022 Exchange Agreement, we 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 a the Exchange Note with

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

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

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

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

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

included in the notes to the condensed consolidated financial statements.

The Exchange Note is a senior

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

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

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

beginning September 1, 2022.

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

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

outstanding principal amount under the Exchange Note.

At any time, we may prepay

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

but unpaid interest.

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

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

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

but unpaid interest.

The Exchange Note imposes

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

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

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

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

requires us to maintain minimum amounts of cash on hand.

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

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

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

from the date of a default or event of default.

Until the date the Exchange

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

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

other instrument or security, of us or our subsidiaries.

The Modified Warrant has

an exercise price of $430.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions,

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

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

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

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

The Note Exchange Warrant

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

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

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

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

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

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

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

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

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

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

The August 2022 Warrants

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

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

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

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

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

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 will prepay approximately $10.3 million in principal

amount under the August 2022 Note and exchange $10.0 million 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.

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 Note.

the Company recognized a loss on the extinguishment of debt of $4.6 million.

Convertible Notes

On March 8, 2023, as a result

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

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

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.

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

on August 19, 2023 or August 19, 2024 at a price equal to the then-outstanding principal amount under the Convertible Note plus accrued

but unpaid interest, provided that the redemption right on August 19, 2023 will not be exercisable if the Company raises at least $8.0

million in gross proceeds from equity offerings prior to such date, or (ii) if the Company undergoes a fundamental change (as defined

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

The Convertible Note will

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

and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, (ii) restrict

the ability of the Company and its subsidiaries from making certain investments, subject to specified exceptions, and (iii) restrict the

declaration of any dividends or other distributions, subject to specified exceptions.

If an event of default under the Convertible Note

occurs, the 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 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;

(b) the total then outstanding

principal amount under the Convertible Note (in thousands);

and (c) the greater of (1) the highest daily volume weighted average price

(“VWAP”) per share of Common Stock occurring during the fifteen consecutive trading days ending on, and including, the trading

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

the fifteen consecutive trading days ending on, and including, the trading immediately before the date the applicable event of default

occurred and (ii) the accrued and unpaid interest on the Convertible Note.

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.

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

case, to no greater than 9.99%.

Company evaluated the embedded features in accordance with ASC 815-15-25 and the determined embedded features are not required to be bifurcated

and separately measured at fair value.

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.

Note Conversion

Pursuant to the Exchange Agreement

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

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

On May 1, 2023, the Company

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

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

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

Common Stock.

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

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

such limitations.

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

At The Marketing Offering

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 the Company’s 2022 Annual Report on Form 10-K, the Company is no

longer eligible to utilize the registration statement on Form S-3 relating to the ATM Program, and does not anticipate any further sales

under the ATM Program in the foreseeable future.

Confidentially Marketed Public Offering

On December 16, 2022, we

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

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

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

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

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

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

The December 2022 Warrants

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

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

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

The Pre-Funded 2022 Warrants

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

date using a relative fair value allocation method.

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

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

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

In addition, such warrants do not provide any guarantee

of value or return.

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

to our Common Stock.

Raymond Chang, our Chairman

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

of approximately $1.5 million.

We received aggregate gross

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

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

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

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

Use of Estimates

The preparation of financial

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

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

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

Actual results could differ

from those estimates.

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

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

Financial Overview

Critical Accounting Policies and Significant

Judgments and Estimates

Our management’s discussion

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

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

The preparation of financial statements in conformity

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

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

reported amounts of revenues and expenses during the reported period.

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

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

Actual results may differ materially from those

estimates or assumptions.

Revenue Recognition

We generate revenue from

the following sources:

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

corporate headquarters are located in Billerica, Massachusetts.

We also lease properties located within various geographic regions in

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

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.

Business Developments

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

and growth initiatives.

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

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

As a result, we have successfully installed and commenced

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

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

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

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

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

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

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

In addition, we have

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

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

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

our commitment to safety and quality within cannabis extraction facilities.

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

to evolving market demands.

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

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

Amendment, Consolidation and Conversion

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

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

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

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

The Restated Note amended the terms of the Convertible Note

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

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

conversion to Mr.

Chang and/or Ms.

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

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

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

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

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

Immediately following the

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

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

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

Notices and Hearing

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

Department of Nasdaq notifying us that we were not in compliance with Nasdaq’s continued listing requirements under the Listing

Rule as a result of our 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.

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

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

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

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

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

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

On January 30, 2024, we received formal notice

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

subsequently extended to May 15, 2024.

As a result, there can be no assurance that we can regain compliance by the end of the extension

Additionally,

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

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

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

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

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

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

To regain compliance with the Minimum Bid Requirement,

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

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

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

can provide no assurances that the listing of our common stock will be restored or that we otherwise will remain listed on Nasdaq.

we fail to continue to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum

closing bid price requirement, Nasdaq will take steps to delist our common stock.

Such a de-listing would likely have a negative effect

on the price of our common stock and would impair stockholders’ ability to sell or purchase our common stock when they wish to

do so, as well as adversely affect our ability to issue additional securities and obtain additional financing in the future.

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

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

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

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

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

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

The Offering was made pursuant to a registration statement on Form

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

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

The net proceeds

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

offering closed on February 28, 2024.

preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management

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

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

results could differ from those estimates.

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

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

assets and intangible assets.

Accounting Policies and Significant Judgments and Estimates

management’s discussion and analysis of our financial position and results of operations is based on our financial statements,

which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.

The preparation

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

financial statements and accompanying notes.

On an ongoing basis, we evaluate estimates, which include estimates related to accruals,

stock-based compensation expense, and reported amounts of revenues and expenses during the reported period.

We base our estimates on

historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances.

Actual results may differ materially from those estimates or assumptions.

generate revenue from the following sources:

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

In accordance with ASC 606

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

identify the customer contract;

identify performance obligations that are distinct;

determine the transaction price;

allocate the transaction price to the distinct performance obligations;

recognize revenue as the performance obligations are satisfied.

Identify the customer

A customer contract is generally

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

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

Specifically, we obtain written/electronic signatures

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

Identify performance

obligations that are distinct

A performance obligation

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

A good or service that is promised

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

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

other promises in the contract.

Determine the transaction

The transaction price is

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

sales taxes that are collected on behalf of government agencies.

Allocate the transaction

price to distinct performance obligations

The transaction price is

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

being provided to the customer.

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

performance obligations separately, if they are distinct.

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

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

Recognize revenue as

the performance obligations are satisfied

Revenue is recognized when,

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

Significant Judgments

We enter into contracts that

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

for as separate performance obligations.

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

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

versus together may require significant judgment.

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

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

We then allocate the transaction

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

The corresponding revenue is recognized as the related performance

obligations are satisfied.

Judgment is required to determine

the SSP for each distinct performance obligation.

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

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

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

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

We license our software as a SaaS

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

The full value of

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

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

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

is completed.

We utilize the cost-plus

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

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

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

We determine the SSP for

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

We estimate variable consideration

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

of each reporting period if additional information becomes available.

Variable consideration is typically not subject to constraint.

to variable consideration were not material for the periods presented.

If a contract has payment

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

financing component.

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

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

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

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

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

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

as financial income.

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

Payment terms with customers

typically require payment 30 days from invoice date.

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

and therefore no specific reserve for such is maintained.

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

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

We have elected to treat

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

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

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

the time value of money.

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

We receive payment from customers

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

There are no contract

assets related to performance under the contract.

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

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

We fulfill obligations under a contract with

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

Accounts receivables are recorded when

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

We recognize deferred revenue when consideration has been

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

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

which is described below:

the customer contract;

performance obligations that are distinct;

the transaction price;

the transaction price to the distinct performance obligations;

revenue as the performance obligations are satisfied.

the customer contract

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

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

Specifically,

we obtain written/electronic signatures on contracts and a purchase order, if said purchase orders are issued in the normal course of

business by the customer.

performance obligations that are distinct

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

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

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

identifiable from other promises in the contract.

the transaction price

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

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

the transaction price to distinct performance obligations

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

the goods or services being provided to the customer.

Our contracts typically contain multiple performance obligations, for which we

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

The standalone selling price reflects the price we would

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

revenue as the performance obligations are satisfied

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

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

distinct and accounted for as separate performance obligations.

Contracts with customers often include promises to transfer multiple

products and services to a customer.

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

be accounted for separately versus together may require significant judgment.

Once we determine the performance obligations, it determines

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

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

The corresponding revenue is

recognized as the related performance obligations are satisfied.

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

We determine SSP based on the price at which the performance

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

606-10-32-33.

If the SSP is not observable through past transactions, we estimate the SSP, taking into account available information

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

our software as a SaaS type subscription license, whereby the customer only has a right to access the software over a specified time

The full value of the contract is recognized ratably over the contractual term of the SaaS subscription, adjusted monthly if

tiered pricing is relevant.

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

shipment to the customer;

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

are rendered and when contract is completed.

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

This method is based on the cost of the

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

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

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

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

Variable consideration is typically

not subject to constraint.

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

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

contracts include a significant financing component.

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

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

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

For those contracts

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

and its relative significance, requires judgment.

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

will present the financing components separately as financial income.

For the three months ended March 31, 2024 and 2023, we did not

have any such financial income.

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

Our agreements with customers do not provide for any refunds

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

In the infrequent instances where customers raise

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

insignificant in all periods presented.

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

as a promised good or service.

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

at the time of shipment.

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

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

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

activities are excluded from revenue.

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

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

The difference in the opening and closing balances of our deferred

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

We fulfill obligations

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

Accounts receivables

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

We recognize deferred revenue when consideration

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

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

current reporting period.

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

The majority of our remaining

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

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

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

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

In accordance with ASC 450-20-25,

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

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

The majority of our remaining contracts meet certain exemptions

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

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

We generally provide a one-year

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

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

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

when the loss is probable and can be reasonably estimated.

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

current liabilities in our consolidated balance sheets.

Accounting for Business Combinations

We allocated the purchase

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

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

These fair values are typically estimated with assistance

from independent valuation specialists.

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

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

arrangements, and pre-acquisition contingencies.

Although we believe the assumptions

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

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

Examples of critical estimates

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

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

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

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

cost of capital and discount rates;

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

The fair value estimates

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

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

These valuation methods require management to project revenues, operating

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

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

Goodwill and Intangible Assets

Amortization of acquired

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

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

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

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

We recognize the excess of

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

Goodwill is not amortized but is tested for impairment

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

not be recoverable.

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

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

the carrying amount of goodwill.

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

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

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

During the three-month period

ended June 30, 2022, the Company identified a potential 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.

factors, the Company deemed that there may be an impairment to the carrying value of its long-lived assets and accordingly performed interim

testing to determine the proper fair value of its long-lived assets as of June 30, 2022.

Based on its interim testing, the Company noted

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

Additional information regarding the Company’s

interim testing on goodwill and intangible assets may be found in Note 8 – Intangible Assets, Net and Goodwill, included elsewhere

in the notes to the condensed consolidated financial statements.

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

charges were recorded.

Capitalization of Internal Software Development

We capitalize certain software

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

Costs incurred during the application

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

functionality.

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

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

Costs related to the research and development are expensed as incurred

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

Internal-use software is amortized on a straight-line

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

We account for income taxes

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

to calculating deferred income taxes.

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

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

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

the net deferred asset will not be realized.

We follow the provisions

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

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

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

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

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

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

or litigation processes, if any.

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

The reserve for warranty returns is included

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

for Business Combinations

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

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

These fair values are typically

estimated with assistance from independent valuation specialists.

The purchase price allocation process requires us to make significant

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

contingent consideration arrangements, and pre-acquisition contingencies.

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

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

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

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

technologies;

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

acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue

to be used in the combined company’s product portfolio;

of capital and discount rates;

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

fair value estimates related to the various identified intangible assets were determined under various valuation approaches including

the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method.

These valuation methods require management to project

revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period,

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

Capitalization

of Internal Software Development Costs

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

incurred during the application development phase are only capitalized once technical feasibility has been established and the work performed

will result in new or additional functionality.

The types of costs capitalized during the application development phase include employee

compensation, as well as consulting fees for third-party software developers working on these projects.

Costs related to the research

and development are expensed as incurred until technical feasibility is established as well as post-implementation activities.

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

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

an asset and liability approach to calculating deferred income taxes.

The asset and liability approach requires the recognition of deferred

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

bases of assets and liabilities.

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

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

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

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

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

In accordance with the guidance of

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

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

the resolution of appeals or litigation processes, if any.

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

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

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

with the applicable taxing authority.

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

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

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

We believe our tax positions are all

highly certain of being upheld upon examination.

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

We recognize the benefit

of a tax position when it is effectively settled.

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

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

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

positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than

50 percent likely of being realized upon settlement with the applicable taxing authority.

The portion of the benefits associated with

tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits

in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon

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

As such, we have not recorded a liability

for unrecognized tax benefits.

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

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

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

tax benefits.

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

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

Accounting for Stock-Based Compensation

We follow the provisions

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

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

ASC Topic 718 focuses primarily on accounting

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

Option Plans.

The fair value of each option

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

This model incorporates certain assumptions for inputs

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

volatility in the market value of the underlying Common Stock.

The Black-Scholes option-pricing

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

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

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

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

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

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

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

The expected dividend yield is based upon our history

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

We calculate the

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

the underlying instrument’s expected term.

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

and directors.

In arriving at stock-based

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

Our forfeiture assumption

is based primarily on its turn-over historical experience.

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

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

our financial statements.

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

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

The expense we

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

in the current period.

It is important that the

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

Results of Operations

Comparison of the Three and Nine Months

Ended September 30, 2023 and 2022

The following table summarizes

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

Three months ended

September 30,

Nine months ended

September 30,

for Stock-Based Compensation

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

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

ASC Topic 718 focuses primarily

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

under our Stock Option Plans.

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

This model incorporates certain

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

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

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

and are fully transferable.

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

stock price volatility.

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

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

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

The risk-free interest rate is based

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

The expected dividend

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

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

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

The expected lives for such grants were based on the simplified

method for employees and directors.

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

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

If the actual forfeiture rate is higher than the

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

to the expense recognized in our financial statements.

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

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

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

from amounts recognized in the current period.

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

of Operations

of the Three Months Ended March 31, 2024 and 2023

following table summarizes our results of operations for the three months ended March 31, 2024 and 2023:

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

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

$ (1,003.10 )

Net (loss) income per share attributable to Common Stockholders – diluted

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

Our goal is to provide our

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

Our core product offering includes our Agrify Vertical

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

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

We generate revenue from

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

equipment and solutions.

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

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

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

a sellable product.

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

and services.

The following table provides

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

Weighted average common shares outstanding - diluted (1)

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

Our core product offering

includes our Agrify Vertical Farming Units (or “VFUs”) and Agrify Integrated Grow Racks with our Agrify Insights software,

which are supplemented with environmental control products, grow lights, facility build-out services and extraction equipment.

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

and extraction equipment and solutions.

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

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

solutions, running the grow business with our Agrify Insights software and finally, our extraction, post-processing and testing services

to transform harvest into a sellable product.

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

sales of additional solutions and services.

following table provides a breakdown of our revenue for the three months ended March 31, 2024 and 2023:

Three months ended

September 30,

Nine months ended

September 30,

(In thousands)

4 unchanged sentences

Total revenue

Revenues decreased by less

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

Revenues decreased by $38.4

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

The comparative decrease in revenue

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

Extraction division revenues totaled

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

Additionally, design and build revenues

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

decreased by $3.2 million, or 55% for the three months ended March 31, 2024 compared to the same period in 2023.

The comparative decrease

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

Extraction division revenues

totaled $2.5 million in the first quarter of 2024.

Additionally, design and build revenues decreased by $0.6 million due to the discontinued

build-out of facilities under our TTK Solutions.

Cost of Goods Sold

Cost of goods sold represents

a combination of the following:

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

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

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

The following table provides

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

Three months ended September 30,

Nine months ended September 30,

of Goods Sold

of goods sold represents a combination of the following:

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

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

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

following table provides a breakdown of our cost of goods sold for the three months ended March 31, 2024 and 2023:

Three months ended

(In thousands)

4 unchanged sentences

Cost of goods sold decreased

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

Cost of goods sold decreased

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

The comparative quarterly

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

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

and services.

Gross Profit (Loss)

by $2.9 million, or 61%, for the three months ended March 31, 2024 compared to the same period in 2023.

The comparative quarterly decrease

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

Three months ended

September 30,

Nine months ended

September 30,

(In thousands)

Gross profit (loss)

Gross profit totaled $0.7

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

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

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

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

September 30, 2022.

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

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

We realized a gross profit margin

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

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

ended September 30, 2023, respectively.

General and Administrative

million, or 28.1% of total revenue during the three months ended March 31, 2024 compared to a gross loss of $1.0 million, or 17% of total

revenue during the three months ended March 31, 2023.

The comparative $0.3 million first-quarter year over year decrease in gross profit,

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

to the decrease in revenue for the period.

During the first quarter of 2024, we realized a gross profit margin of 33% associated with

our extraction solutions revenue, while we realized a gross profit margin of approximately (169)% on our cultivation-related revenues.

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

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

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

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

fourth quarter of 2024 .

and Administrative

Three months ended

September 30,

Nine months ended

September 30,

(In thousands)

General and administrative

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

travel expenses, associated with executive and other administrative functions.

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

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

G&A expense decreased

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

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

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

Other G&A expenses include, but are

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

G&A expense decreased

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

The decrease for the three

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

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

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

Research and Development

by $4.0 million, or 57%, for the three months ended March 31, 2024, compared to the same period in 2023.

The decrease is attributable

to payroll, benefits and related expenses decrease of $1.8 million, a decrease in consulting and other related expenses of $0.3 million,

a decrease in insurance expenses of $0.5 million, a decrease in legal expense of $0.2 million.

and Development

Three months ended

September 30,

Nine months ended

September 30,

(In thousands)

Research and development

Research and development (“R&D”)

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

products, which includes:

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

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

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

R&D expense decreased

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

R&D expense decreased

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

The decrease for the three

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

associated with the continued development of our VFUs.

We expect to continue to

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

As a percentage of net revenue, R&D

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

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

Selling and Marketing

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

next generation VFUs, and new extraction technology and methodology, which includes:

● employee-related

expenses, including salaries, benefits, and travel;

incurred by the subcontractor under agreements to provide engineering work related to the development of our Agrify Insights software

and next generation VFUs;

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

facilities, insurance and other supplies.

expense decreased by $0.5 million, or 63%, for the three months ended March 31, 2024, compared to the same period in 2023.

is attributable to the reduction in personnel, outsourced consulting and materials purchased.

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

As a percentage

of net revenue, R&D expenses were 10.6% of total revenue for the three months ended March 31, 2024, compared to 12.7% for the three

months ended March 31, 2023.

and Marketing

Three months ended

September 30,

Nine months ended

September 30,

(In thousands)

Selling and marketing

Selling and marketing expenses

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

Selling and marketing expenses

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

Selling and marketing

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

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

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

Other Income (Expense), Net

Three months ended September 30,

Nine months ended September 30,

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

and marketing ex penses decreased by $1.1 million,

or 71% , for the three months ended March 31, 2024 ,

compared to the same period in 2023.

The decrease is attributable to a decrease in payroll, advertising, and trade show expenses.

Three months ended

(In thousands)

Interest income (expense), net

Interest expense, net

Other income, net

Change in fair value of warrant liabilities

Gain on extinguishment of notes payable

Other expense, net

Loss on extinguishment of notes payable

Total other income, net

Interest income (expense),

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

Interest income

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

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

The change in fair value

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

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

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

Income Tax Benefit

The change in the provision for (benefit from)

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

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

Income (Loss) Attributable to Non-Controlling

We consolidate the results

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

On December 8, 2019, we formed Agrify

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

Agrify Valiant

LLC started its operations during the second quarter of 2020.

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

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

brands that utilize our grow technology.

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

customers’ products in the marketplace.

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

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

and regulatory perspective.

Loss attributable to non-controlling

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

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

Liquidity and Capital Resources

As of September 30, 2023,

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

Our current working

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

manage inventory to meet demand forecasts and support operational growth.

Our long-term financial needs primarily include working capital

requirements and capital expenditures.

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

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

These arrangements require a significant amount of upfront

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

There are many factors that may negatively

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

cash from the issuance of our securities.

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

execution of our business strategy and general economic conditions.

We may opportunistically

raise debt capital, subject to market and other conditions.

Additionally, as part of our growth strategies, we may also raise debt capital

for strategic alternatives and general corporate purposes.

If additional financing is required from outside sources, we may not be able

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

If we are unable to raise additional capital when desired, our business, operating

results and financial condition may be adversely affected.

We entered into one Loan

Agreement and Promissory Note with Bank of America pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus

Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S.

expense decreased by $0.7 million, or 82%, for the three months ended March 31, 2024, compared to the same period in 2023.

in interest expense is attributable mainly to the decrease in principal balance on outstanding loans.

change in fair value of warrant liabilities during the three months ended March 31, 2024 for 1.8 million is related to the fair value

remeasurement of warrants issued during March, August, and December, 2022.

(Loss) Attributable to Non-Controlling Interest

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

8, 2019, we formed Agrify Valiant LLC, a joint-venture limited liability company in which we are 60% majority owner and Valiant-America,

LLC owns 40%.

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

On January 22, 2020, as part of the acquisition

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

portfolio of consumer brands that utilize our grow technology.

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

a means to differentiate customers’ products in the marketplace.

It is not a material aspect of our business and we have not realized

any royalty income.

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

as well as from a legal and regulatory perspective.

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

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

and Capital Resources

of March 31, 2024, our principal sources of liquidity were cash and cash equivalents and marketable securities totaling $0.1 million.

Our current working capital needs are to support revenue growth, to fund construction and equipment financing commitments associated

with our TTK Solutions, manage inventory to meet demand forecasts and support operational growth.

Our long-term financial needs primarily

include working capital requirements and capital expenditures.

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

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

These arrangements require

a significant amount of upfront capital necessary to fund construction, associated with facility build-outs, and equipment.

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

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

The amount of cash generated from operations is dependent upon

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

may opportunistically raise debt capital, subject to market and other conditions.

Additionally, as part of our growth strategies, we

may also raise debt capital for strategic alternatives and general corporate purposes.

If additional financing is required from outside

sources, we may not be able to raise such capital on terms acceptable to us or at all.

If we are unable to raise additional capital when

desired, our business, operating results and financial condition may be adversely affected.

entered into one Loan Agreement and Promissory Note with Bank of America pursuant to the Paycheck Protection Program (the “PPP”)

under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S.

Small Business Administration.

We received total

proceeds of approximately $0.8 million from the unsecured PPP Loan which was originally scheduled to mature in May 2022.

We applied for

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

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

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

The PPP loan is payable in 34 equal

combined monthly principal and interest payments of approximately $24 thousand that commenced on August 7, 2022.

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

the Investor.

The Purchase Agreement provides for the issuance of the SPA Note in the aggregate amount of $65.0 million and a SPA Warrant

to purchase up to an aggregate of 34,406 shares of Common Stock, with the potential for two potential subsequent closings for notes with

an original principal amount of $35.0 million each.

On August 18, 2022, we entered

into a Securities Exchange Agreement.

Pursuant to the August 2022 Exchange Agreement, we 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 Note Exchange Warrant to purchase 71,139 shares of Common Stock.

Additionally,

we exchanged the SPA Warrant for a Modified Warrant for the same number of underlying shares but with a reduced exercise price.

On March 8, 2023, the Company

entered into a new Securities Exchange Agreement.

Pursuant to the March 2023 Exchange Agreement, we prepaid approximately $10.3 million

in principal amount under the Exchange Note and exchanged $10.0 million in principal amount of the remaining balance of the Exchange Note

for a new senior secured convertible note (the “Convertible Note”).

The Convertible Note is a senior secured obligation and ranks senior to

all of our indebtedness.

The Convertible Note will mature on August 19, 2025 (the “Maturity Date”) and has a 9.0% annualized

interest rate, with interest to be paid monthly, in cash.

The principal amount of the Convertible Note will be payable on the maturity

date, provided that the holder will be entitled to a cash sweep of 30% of the proceeds of any at-the-market equity offering and 20% of

the proceeds received by us in connection with any other equity financing, which will reduce the outstanding principal amount under the

Exchange Note.

On October 27, 2023, CP Acquisitions LLC, and entity affiliated with and controlled by Raymond Chang, acquired the Exchange

Note and the Convertible Note.

As of October 30, 2023, there was approximately $6.7 million outstanding under the Exchange Note and $8.8

million outstanding under the Convertible Note.

At any time, we may prepay

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

but unpaid interest.

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

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

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

but unpaid interest.

The following table presents

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

30, 2023, and 2022:

We received total proceeds of approximately $779 thousand from the unsecured PPP Loan which was originally scheduled to mature in May

We applied for forgiveness on the $779 thousand of our PPP Loan however was denied by the SBA.

On June 23, 2022, we received a

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

loan is payable in 34 equal combined monthly principal and interest payments of approximately $24 thousand that commenced on August 7,

March 14, 2022, we entered into a Securities Purchase Agreement with the Former Lender.

The Purchase Agreement provides for the issuance

of the SPA Note in the aggregate amount of $65.0 million and a SPA Warrant to purchase up to an aggregate of 34,406 shares of Common

Stock, with the potential for two potential subsequent closings for notes with an original principal amount of $35.0 million each.

August 18, 2022, we entered into a Securities Exchange Agreement.

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

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

the SPA Note for an Exchange Note with an aggregate original principal amount of $35.0 million and a Note Exchange Warrant to purchase

71,139 shares of Common Stock.

Additionally, we exchanged the SPA Warrant for a Modified Warrant for the same number of underlying shares

but with a reduced exercise price.

March 8, 2023, we entered into a new Securities Exchange Agreement.

Pursuant to the March 2023 Exchange Agreement, we prepaid approximately

$10.3 million in principal amount under the Exchange Note and exchanged $10.0 million in principal amount of the remaining balance of

the Exchange Note for a new senior secured convertible note (the “Convertible Note”).

Convertible Note is a senior secured obligation and will rank senior to all of our indebtedness.

The Convertible Note will mature on

August 19, 2025 (the “Maturity Date”) and has a 9.0% annualized interest rate, with interest to be paid monthly, in cash.

The principal amount of the Convertible Note will be payable on the maturity date, provided that the lender will be entitled to a cash

sweep of 30% of the proceeds of any at-the-market equity offering and 20% of the proceeds received by us in connection with any other

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

On October 27, 2023, CP Acquisitions LLC,

and entity affiliated with and controlled by Raymond Chang, acquired the Exchange Note and the Convertible Note.

As of October 30, 2023,

there was approximately $6.7 million outstanding under the Exchange Note and $8.8 million outstanding under the Convertible Note.

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

the Note plus accrued but unpaid interest.

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

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

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

the Exchange Note plus accrued but unpaid interest.

following table presents the major components of net cash flows from and used in operating, investing, and financing activities for the

three months ended March 31, 2024, and 2023:

(In thousands)

September 30,

Net cash (used in) provided by:

2 unchanged sentences

Financing activities

Net decrease in cash, cash equivalents, and restricted cash

Cash Flow from Operating Activities

For the nine months ended

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

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

issuance costs.

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

For the nine months ended

September 30, 2022, cash used in operating activities consists of net income adjusted for non-cash benefits and expenses, and changes

in operating assets and liabilities.

Our primary source of cash provided by operating activities is cash collections from our customers

related to the sale of cultivation and extraction solutions.

Our primary uses of cash from our operating activities include payments for

employee-related expenditures, payments for inventory due to increased demand forecasts, construction costs related to TTK Solutions,

acquisition-related costs and the payment of other operating expenses incurred in the ordinary course of business.

Cash Flow from Investing Activities

For the nine months ended

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

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

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

For the nine months ended

September 30, 2022, cash provided by investing activities consists primarily of maturities and sales of investments in marketable securities.

Cash used in investing activities consists primarily of purchases of marketable securities, cash paid associated with our 2022 acquisition

of Lab Society, the issuance of loans receivable in connection with our financing of construction and equipment under its TTK Solutions

offering and purchases of property and equipment expenditures.

The capital expenditures support growth and investment in property and

equipment, to expand research, development, and testing capabilities and, to a lesser extent, the replacement of existing equipment.

Cash Flow from Financing Activities

For the nine months ended

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

Net cash used in financing activities was primarily driven

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

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

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

For the nine months ended

September 30, 2022, cash provided by financing activities consists primarily of proceeds from the issuance of Common Stock, debt, and

warrants in private placements and proceeds from the initial and secondary public offerings.

Cash used in financing activities consists

primarily of repayment of debt.

Off-Balance Sheet Arrangements

During the periods presented,

we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities

often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating

off-balance sheet arrangements or other contractually narrow or limited purposes.

We are therefore not exposed to the financing, liquidity,

market, or credit risk that could arise if we had engaged in those types of relationships.

Critical Accounting Policies and Estimates

Part I, Item, 2, “Management’s

Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements, which

have been prepared in accordance with GAAP.

The preparation of these consolidated financial statements requires management to make estimates

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

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

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

These estimates are based

on our knowledge and understanding of current conditions and actions that we may take in the future.

Changes in these estimates will occur

as a result of the passage of time and the occurrence of future events.

Subsequent changes in these estimates may have a significant impact

on our financial condition and results of operations and are recorded in the period in which they become known.

We have identified the

following estimates that, in our opinion, are subjective in nature, require the exercise of judgment and involve complex analysis:

fair value of derivative assets and liabilities, goodwill impairment assessment, revenue recognition and cost of goods sold.

The significant accounting

policies and estimates that have been adopted and followed in the preparation of our consolidated financial statements are detailed in

Note 1 - Overview, Basis of Presentation and Significant Accounting Policies included in our 2022 Annual Report and Note 1 - Overview,

Basis of Presentation and Significant Accounting Policies to our consolidated financial statements in Part I, Item 1 of this Quarterly

Net decrease in cash and cash equivalents

Flow from Operating Activities

the three months ended March 31, 2024, we incurred a net loss of $0.04 million, which included $0.4 million related to depreciation and

amortization, $0.5 million of stock based compensation expense, and $0.9 million related to the change in fair value of warrant liabilities.

Net cash was reduced by changes in operating assets and liabilities of $0.9 million.

the three months ended March 31, 2023, we incurred a net loss of $10.3 million, which included $0.4 million related to depreciation and

amortization, $0.9 million of stock based compensation expense, and $2.7 million related to the change in fair value of warrant liabilities.

Net cash was reduced by changes in operating assets and liabilities of $2.4 million.

Flow from Investing Activities

the three months ended March 31, 2024, net cash used in investing activities was $328.0 thousand, which resulted from cash outflows of

$2.0 thousand for purchases of property and equipment.

the three months ended March 31, 2023, net cash provided by investing activities was $9.8 million, which included cash outflows of $0.1

million in net purchases of property, plant and equipment and $0.6 million in issuances of notes receivable and cash inflows of $10.4

million related to proceeds from sales of securities.

Flow from Financing Activities

the three months ended March 31, 2024, net cash provided by financing activities was $2.3 million.

Net cash provided by financing activities

was primarily driven by repayments of notes payable of $0.2 million and proceeds from the issuance of common stock and warrants of $2.1

the three months ended March 31, 2023, net cash used in financing activities was $9.3 million.

Net cash used in financing activities

was primarily driven by repayments of notes payable of $10.8 and offset by proceeds from at-the-market offerings of $1.5 million.

Sheet Arrangements

the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships,

such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose

of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

We are therefore not exposed to the

financing, liquidity, market, or credit risk that could arise if we had engaged in those types of relationships.

Accounting Policies and Estimates

I, Item, 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated

financial statements, which have been prepared in accordance with GAAP.

The preparation of these consolidated financial statements requires

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

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

the reporting period.

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

estimates are based on our knowledge and understanding of current conditions and actions that we may take in the future.

Changes in these

estimates will occur as a result of the passage of time and the occurrence of future events.

Subsequent changes in these estimates may

have a significant impact on our financial condition and results of operations and are recorded in the period in which they become known.

We have identified the following estimates that, in our opinion, are subjective in nature, require the exercise of judgment and involve

complex analysis:

the fair value of derivative assets and liabilities, goodwill impairment assessment, revenue recognition and cost of

significant accounting policies and estimates that have been adopted and followed in the preparation of our consolidated financial statements

are detailed in Note 1 - Overview, Basis of Presentation and Significant Accounting Policies included in our 2023 Annual Report and Note

1 - Overview, Basis of Presentation and Significant Accounting Policies to our consolidated financial statements in Part I, Item 1 of

this Quarterly Report on Form 10-Q.

There have been no changes in these policies and estimates that had a significant impact on the financial

condition and results of operations for the periods covered in this Quarterly Report.

Issued Accounting Pronouncements Adopted

more information on recently issued accounting pronouncements are included within Note 1 - Overview, Basis of Presentation and Significant

Accounting Policies, included elsewhere in the notes to consolidated financial statements covered under Part I, Item 1 of this Quarterly

Report on Form 10-Q.

There have been no changes in these policies and estimates that had a significant impact on the financial condition

and results of operations for the periods covered in this Quarterly Report.

Recently Issued Accounting Pronouncements Adopted

For more information on recently

issued accounting pronouncements are included within Note 1 - Overview, Basis of Presentation and Significant Accounting Policies, included

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

Quantitative and Qualitative Disclosures

About Market Risk

As a “smaller reporting company” as

defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

Accounting Pronouncements Not Yet Adopted

more information on new accounting pronouncements not yet adopted are included within Note 1 - Overview, Basis of Presentation and Significant

Accounting Policies, included elsewhere in the notes to consolidated financial statements covered under Part I, Item 1 in this Quarterly

Report on Form 10-Q.

Quantitative and Qualitative Disclosures About Market Risk

a “smaller reporting company” as defined by 17 C.F.R.

§ 229.10, the Company is not required to provide information required

by this Item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis