RYTHM, Inc. 10-Q

Item 1. Financial Statements AGRIFY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) March 31, December 31, 2024 2023 (Unaudited) Assets Current assets: Cash and cash equivalents $ 95 $ 430 Marketable securities 4 4 Accounts receivable, net of allowance for credit losses of $ 2,512 and $ 1,887 at March 31, 2024 and December 31, 2023, respectively 211 1,149 Inventory, net of reserves of $ 17,184 and $ 17,599 at March 31, 2024 and December 31, 2023, respectively 18,862 19,094 Loan receivable, current 692 — Prepaid expenses and other current assets 1,028 3,332 Total current assets 20,892 24,009 Loan receivable, net of allowance for credit losses of $ 18,885 and $ 19,215 at March 31, 2024 and December 31, 2023, respectively, net of current 10,891 11,583 Property and equipment, net 7,328 7,734 Operating lease right-of-use assets 1,651 1,803 Other non-current assets 99 141 Total assets $ 40,861 $ 45,270 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 12,428 $ 20,766 Accrued expenses and other current liabilities 7,843 10,655 Operating lease liabilities, current 615 599 Notes payable, current 1,374 — Long-term debt, current 696 766 Related party debt, current 1,000 4,444 Deferred revenue 3,784 4,019 Total current liabilities 27,740 41,249 Warrant liabilities 417 1,290 Operating lease liabilities, net of current 1,235 1,394 Notes payable, net of current 3,464 — Related party debt, net of current 17,683 — Long-term debt, net of current 47 16,047 Total liabilities 50,586 59,980 Commitments and contingencies (Note 14) Stockholders’ deficit: Common Stock, $ 0.001 par value per share, 35,000,000 and 10,000,000 shares authorized at March 31, 2024 and December 31, 2023, respectively, 13,275,702 and 1,702,243 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively (1) 13 2 Preferred Stock, $ 0.001 par value per share, 2,895,000 shares authorized, no shares issued or outstanding — — Preferred A Stock, $ 0.001 par value per share, 105,000 shares authorized, no shares issued or outstanding — — Additional paid-in capital 255,867 250,855 Accumulated deficit ( 265,835 ) ( 265,797 ) Total stockholders’ deficit attributable to Agrify ( 9,955 ) ( 14,940 ) Non-controlling interests 230 230 Total liabilities and stockholders’ deficit $ 40,861 $ 45,270 (1) Periods presented have been adjusted to reflect the 1-for-20 reverse stock split on July 5, 2023. Additional information regarding the reverse stock splits may be found in Note 1 – Overview, Basis of Presentation, and Significant Accounting Policies , included in the notes to the consolidated financial statements The accompanying notes are an integral part of these condensed consolidated financial statements. 1 AGRIFY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) (Unaudited) Three months ended March 31, 2024 2023 Revenue (including $ 0 and $46 from related parties, respectively) $ 2,598 $ 5,804 Cost of goods sold 1,869 4,816 Gross profit 729 988 General and administrative 2,952 6,931 Selling and marketing 462 1,590 Research and development 275 735 Change in contingent consideration ( 2,180 ) ( 684 ) Total operating expenses 1,509 8,572 Loss from operations ( 780 ) ( 7,584 ) Interest expense, net ( 145 ) ( 799 ) Change in fair value of warrant liabilities 873 2,672 Loss on extinguishment of long-term debt, net — ( 4,620 ) Other income, net 14 4 Total other income (expense), net 742 ( 2,743 ) Net loss before income taxes ( 38 ) ( 10,327 ) Income tax benefit (expense) — — Net loss ( 38 ) ( 10,327 ) Net loss attributable to Agrify Corporation $ ( 38 ) $ ( 10,327 ) Net loss per share attributable to Common Stockholders – basic and diluted (1) $ — $ ( 9.63 ) Weighted average common shares outstanding - basic and diluted (1) 8,894,229 1,072,292 (1) Periods presented have been adjusted to reflect the 1-for-20 reverse stock split on July 5, 2023. Additional information regarding reverse stock splits may be found in Note 1 – Overview, Basis of Presentation, and Significant Accounting Policies , included elsewhere in the notes to the consolidated financial statements. The accompanying notes are an integral part of these condensed consolidated financial statements. 2 AGRIFY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (In thousands) (Unaudited) Common Stock Preferred Stock Preferred A Stock Additional Paid-In- Accumulated Total Stockholders’ Deficit attributable to Non- Controlling Total Stockholders’ Shares Amount Shares Amount Shares Amount Capital Deficit Agrify Interests Deficit Balance at January 1, 2023 1,038,298 $ 1 — $ — — $ — $ 237,875 $ ( 247,148 ) $ ( 9,272 ) $ 231 $ ( 9,041 ) Stock-based compensation — — — — — — 859 — 859 — 859 Issuance of Common Stock through an “at the market” offering, net of fees 323,082 — — — — — 1,545 — 1,545 — 1,545 Issuance of Common Stock to Pure Pressure 366 — — — — — — — — — — Vesting of restricted stock units 17 — — — — — — — — — — Proceeds from Employee Stock Purchase Plan Shares 2,500 — — — — — 25 — 25 — 25 Net loss — — — — — — — ( 10,327 ) ( 10,327 ) — ( 10,327 ) Balance March 31, 2023 1,364,263 $ 1 — $ — — $ — $ 240,304 $ ( 257,475 ) $ ( 17,170 ) $ 231 $ ( 16,939 ) 3 AGRIFY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (In thousands) (Unaudited) Common Stock Preferred Stock Preferred A Stock Additional Paid-In- Accumulated Total Stockholders’ Deficit attributable to Non- Controlling Total Stockholders’ Shares Amount Shares Amount Shares Amount Capital Deficit Agrify Interests Deficit Balance at January 1, 2024 1,701,243 $ 2 — $ — — $ — $ 250,855 $ ( 265,797 ) $ ( 14,940 ) $ 230 $ ( 14,710 ) Stock-based compensation — — — — — — 490 — 490 — 490 Issuance of Common Stock and prefunded warrants through public offering 2,760,000 3 — — — — 2,120 — 2,123 — 2,123 Issuance of held-back shares from Sinclair acquisition 588 — — — — — — — — — — Cashless exercise of High Trail Warrants 3,132,217 3 — — — — ( 3 ) — — — — Exercise of Prefunded Warrants issued through public offering 3,010,000 3 — — — — — — 3 — 3 Conversion of Convertible Note 2,671,633 2 — — — — 1,729 — 1,731 — 1,731 Contribution from troubled debt restructuring with related party — — — — — — 676 — 676 — 676 Stock split share adjustment 21 — — — — — — — — — — Net loss — — — — — — — ( 38 ) ( 38 ) — ( 38 ) Balance March 31, 2024 13,275,702 $ 13 — $ — — $ — $ 255,867 $ ( 265,835 ) $ ( 9,955 ) $ 230 $ ( 9,725 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 4 AGRIFY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) For the three months ended March 31, 2024 2023 Cash flows from operating activities: Net loss attributable to Agrify Corporation $ ( 38 ) $ ( 10,327 ) Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities: Depreciation and amortization 406 445 Amortization of debt (premium) discount — 147 Amortization of issuance costs — 24 Amortization of right of use assets 152 ( 133 ) Stock based compensation expense 490 859 Change in fair value of warrant liabilities ( 873 ) ( 2,672 ) Loss on extinguishment of long-term debt, net — 4,620 Provision for credit losses 642 — Recovery of provision for credit losses ( 330 ) — Recovery of provision for slow-moving inventory ( 415 ) — Loss on disposal of property and equipment 2 — Gain on supply agreement ( 1,142 ) — Gain on revaluation of contingent liability ( 564 ) — Change in accrued acquisition liabilities due to issuance of held-back shares ( 2,180 ) — Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 296 ( 127 ) Inventory 1,211 1,401 Prepaid expenses and other current assets 2,321 ( 31 ) Other non-current assets 42 173 Accounts payable ( 2,361 ) 585 Accrued expenses and other current liabilities ( 268 ) ( 3,744 ) Operating lease liabilities ( 143 ) 184 Deferred revenue ( 235 ) ( 873 ) Net cash and cash equivalents used in operating activities ( 2,987 ) ( 9,469 ) Cash flows from investing activities: Purchases of property and equipment ( 2 ) ( 59 ) Proceeds from sale of marketable securities — 10,446 Proceeds from repayment of loan receivable 330 — Issuance of loans receivable — ( 592 ) Net cash and cash equivalents provided by investing activities 328 9,795 Cash flows from financing activities: Proceeds from Issuance of Common Stock through an “S-1 and Prefunded Warrants” offering 2,123 — Proceeds from issuance of Common Stock through an “at the market” offering, net of fees — 1,478 Proceeds from Employee Stock Purchase Plan Shares — 25 Proceeds from exercise of S-1 Prefunded Warrants 3 — Proceeds from issuance of related party notes 355 — Repayments of notes payable, other — ( 71 ) Repayment of debt in private placement — ( 10,307 ) Payments on other financing loans — ( 1 ) Payments on insurance financing loans ( 157 ) ( 396 ) Payments of financing leases — ( 35 ) Net cash and cash equivalents provided by (used in) financing activities 2,324 ( 9,307 ) Net decrease in cash and cash equivalents ( 335 ) ( 8,981 ) Cash and cash equivalents at the beginning of period 430 10,457 Cash and cash equivalents at the end of period $ 95 $ 1,476 Supplemental disclosures Cash paid for interest $ 47 $ — Supplemental disclosures of non-cash flow information Cashless exercise of High-Trail warrants $ 3 $ — Financing of prepaid insurance $ 17 $ 1,820 Trade payables refinanced into consolidated notes payable $ 4,838 $ — Accrued interest consolidated into related party debt $ 364 $ — Contribution from troubled debt restructuring with related party $ 676 $ — Consolidation of related party debt principal $ 3,799 $ — Conversion of convertible notes $ 1,731 $ — The accompanying notes are an integral part of these condensed consolidated financial statements. 5 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 — Overview, Basis of Presentation and Significant Accounting Policies Description of Business Agrify Corporation (“Agrify” or the “Company”) is a provider of innovative cultivation and extraction solutions for the cannabis industry, bringing data, science, and technology to the forefront of the market. The Company’s proprietary micro-environment-controlled Agrify Vertical Farming Units (or “VFUs”) enable cultivators to produce the highest quality products with what we believe to be unmatched consistency, yield, and return investment at scale. The Company’s comprehensive extraction product line, which includes hydrocarbon, alcohol, solventless, post-processing, and lab equipment, empowers producers to maximize the quantity and quality of extract required for premium concentrates. The Company was formed in the State of Nevada on June 6, 2016 as Agrinamics, Inc., and subsequently changed its name to Agrify Corporation. The Company is sometimes referred to herein by the words “we,” “us,” “our,” and similar terminology. The Company has nine wholly-owned subsidiaries, which are collectively referred to as the “Subsidiaries” and the Company also has ownership interests in certain companies. Nasdaq Deficiency Notice The Nasdaq Notice had no immediate effect on the listing of the Company’s Common Stock on The Nasdaq Stock Market LLC. On October 17, 2023, the Company received a Staff Delisting Determination (the “Staff Determination”) from the Listing Qualifications Department of Nasdaq notifying the Company that it was not in compliance with Nasdaq’s continued listing requirements under the Listing Rule as a result of its failure to file the First Quarter Form 10-Q, the Second Quarter Form 10-Q and the Form 10-K (collectively, the “Delinquent Reports”) in a timely manner. On November 16, 2023, the Company received a notice from Nasdaq that the Company remains noncompliant with the Listing Rule as a result of its failure to file its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2023 with the SEC by the required filing date. On December 1, 2023, the Company received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) stating that because the Company reported stockholders’ deficit of $( 17.17 ) million in its Form 10-Q for the quarter ended March 31, 2023, the Company was no longer in compliance with Nasdaq Listing Rule 5550(b)(1) (the “Primary Equity Listing Rule”), which requires that listed companies maintain a minimum of $ 2.5 million in stockholders’ equity. In response, the Company timely requested a hearing before a Nasdaq Hearings Panel (the “Panel”), which stayed any further action by the Listing Qualifications Staff. The hearing was held on January 11, 2024. The Company arrived at the hearing having previously cured any additional grounds for delisting as a result of delinquent periodic filings during 2023 that were filed prior to the hearing. On January 30, 2024, the Company received formal notice that the Panel had granted the Company’s request for an exception through April 15, 2024 to evidence compliance with the Listing Rule, which was subsequently extended to May 15, 2024. Accordingly, there can be no assurance that the Company will be able to regain compliance with the Nasdaq listing rules or maintain its listing on the Nasdaq Capital Market. If the Company’s common stock is delisted, it could be more difficult to buy or sell the Company’s common stock or to obtain accurate quotations, and the price of the Company’s common stock could suffer a material decline. Delisting could also impair the Company’s ability to raise capital. On March 5, 2024, the Company received a deficiency letter from the Staff of Nasdaq notifying the Company that, for the last 30 consecutive business days, the bid price for the Company’s common stock had closed below $ 1.00 per share, which is the minimum closing price required to maintain continued listing on the Nasdaq Stock Market under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”). The Notice has no immediate effect on the listing of the Company’s common stock on Nasdaq. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days to regain compliance with the Minimum Bid Requirement. The compliance period for the Company will expire on September 3, 2024. 6 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation and Principles of Consolidation These interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission on April 15, 2024. Accounting for Wholly-Owned Subsidiaries The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of Agrify Corporation and its wholly-owned subsidiaries, as described above, in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The Company includes results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated. Accounting for Less Than Wholly-Owned Subsidiaries For the Company’s less than wholly-owned subsidiaries, which include, Agrify-Valiant LLC (“Agrify-Valiant”), and Agrify Brands, LLC (“Agrify Brands”), the Company first analyzes whether these entities are a variable interest entity (a “VIE”) in accordance with ASC Topic 810, Consolidation (“ASC 810”), and if so, whether the Company is the primary beneficiary requiring consolidation. The Company continuously re-assesses (i) whether the joint-venture is a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If it is determined that the joint-venture qualifies as a VIE and the Company is the primary beneficiary, the Company’s financial interest in the VIE is consolidated. Based on the Company’s analysis of these entities, the Company has determined that Agrify-Valiant and Agrify Brands are each a VIE, and that the Company is the primary beneficiary. While the Company owns 60 % of Agrify-Valiant’s equity interests and 75 % of Agrify Brand’s equity interests, the remaining equity interests in Agrify-Valiant and Agrify Brands are owned by unrelated third parties, and the agreement with these third parties provides the Company with greater voting rights. Accordingly, the Company consolidates its interest in the financial statements of Agrify-Valiant and Agrify Brands under the VIE rules and reflects the third parties’ interests in the consolidated financial statements as a non-controlling interest. The Company records this non-controlling interest at its initial fair value, adjusting the basis prospectively for the third parties’ share of the respective consolidated investments’ net income or loss or equity contributions and distributions. These non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holders based on its economic ownership percentage. Going Concern In accordance with the FASB Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern”, the Company’s management evaluated whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the financial statements’ issuance date. The following matters raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The Company has incurred operating losses since its inception and has negative cash flows from operations and a working capital deficit. The Company also has an accumulated deficit of $ 265.8 million as of March 31, 2024. The Company’s primary sources of liquidity are its cash and cash equivalents and marketable securities, with additional liquidity accessible, subject to market conditions and other factors, including limitations that may apply to the Company under applicable SEC regulations, from the capital market. As of March 31, 2024, the Company had $ 0.1 million of cash, cash equivalents, and marketable securities. The Company had no restricted cash as of March 31, 2024. Current liabilities were $ 27.7 million as of March 31, 2024. 7 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS These consolidated financial statements have been prepared on a going concern basis, which implies the Company believes these conditions raise substantial doubt about its ability to continue as a going concern within the next twelve-months from the date these consolidated financial statements are available to be issued. The Company’s continuation as a going concern is dependent upon its ability to obtain the necessary debt or equity financing to continue operations until the Company begins generating sufficient cash flows from operations to meet its obligations. If the Company is unable raise additional funds, it may be forced to cease operations. As of February 28, 2024, the company raised net proceeds of $ 2.2 million via the issuance of common stock and prefunded warrants in a public offering through Alexander Capital and is recorded within common stock and additional paid-in capital on the Company’s condensed consolidated balance sheet. The Company intends to raise additional capital later this year to support its 2024 and 2025 funding needs. The Company also continues to make additional adjustments in headcount, salary, travel, sales and marketing spending, but there is no guarantee that these ongoing cost-cutting efforts or capital raises will be sufficient to maintain operations. There is no assurance that the Company will ever be profitable. The consolidated financial statements do not include any adjustments to reflect the potential future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates include assumptions about collection of accounts and notes receivable, the valuation and recognition of stock-based compensation expense, valuation allowance for deferred tax assets, the valuation of inventory, and useful life of fixed assets and intangible assets. The Company bases its estimates on historical experience, known trends and other market-specific information, other relevant factors that it believes to be reasonable under the circumstances, and management’s judgement. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual financial results could differ from those estimates. Accounts Receivable, Net and Loans Receivable, Net Accounts receivable, net, primarily consists of amounts for goods and services that are billed and currently due from customers. The composition of loan receivable, net is detailed in Note 5. In accordance with ASC 310-10, accounts receivable and loan receivable balances are presented net of an allowance for credit losses, which are an estimate of billed or borrowed amounts that may not be collectible. In determining the amount of the allowance at each reporting date, management makes judgments about general economic conditions, historical write-off experience, and any specific risks identified in customer or borrower collection matters, including the aging of unpaid accounts receivable and changes in customer or borrower financial conditions. Accounts and loans receivable balances are written off after all means of collection are exhausted and the potential for non-recovery is determined to be probable. Adjustments to the allowance for credit losses are recorded as general and administrative expenses in the consolidated statements of operations. 8 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Concentration of Credit Risk and Significant Customer Financial instruments that potentially subject the Company to a concentration of credit risk primarily consist of cash, cash equivalents, restricted cash, marketable securities, and accounts receivable. Cash equivalents primarily consist of money market funds with original maturities of three months or less, which are invested primarily with U.S. financial institutions. Cash deposits with financial institutions, including restricted cash, generally exceed federally insured limits. Management believes minimal credit risk exists with respect to these financial institutions and the Company has not experienced any losses on such amounts. During the year three -month period ended March 31, 2024, the Company has one customer that comprised approximately 1 % of its revenue and two customers that comprised approximately 47 % of its accounts receivable balance. During the year three -month period ended March 31, 2023, the Company has one customer that comprised approximately 11 % of its revenue and two customers that comprised approximately 84 % of it accounts receivable balance. Inventories The Company values all its inventories, which consist primarily of significant raw material hardware components, at the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a first-in, first-out basis. Write-offs of potentially slow-moving or damaged inventory are recorded through specific identification of obsolete or damaged material. The Company takes physical inventory at least once annually at all inventory locations. Warrant Liabilities The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all its financial instruments, including issued private placement stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815. The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480 and ASC 815. Management’s assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, whether they meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own Common Stock among other conditions for equity classification. For issued or modified warrants that meet all of the criteria for equity classification, they are recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that are precluded from equity classification, they are recorded as a liability at their initial fair value on the date of issuance and subject to remeasurement on each balance sheet date with changes in the estimated fair value of the warrants to be recognized as an unrealized gain or loss in the consolidated statements of operations. 9 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Fair Value of Financial Instruments The Company’s financial instruments consist of cash, marketable securities, accounts receivable, accounts payable, accrued expenses, warrant liabilities, and loans receivable. Refer to Note 4 - Fair Value Measures, included elsewhere in the notes to the consolidated financial statements for details of the Company’s financial instruments. Revenue Recognition Overview The Company generates revenue from the following sources: (1) equipment sales, (2) providing services and (3) construction contracts. In accordance with ASC 606 “Revenue Recognition”, the Company recognizes revenue from contracts with customers using a five-step model, which is described below: ● identify the customer contract; ● identify performance obligations that are distinct; ● determine the transaction price; ● allocate the transaction price to the distinct performance obligations; and ● recognize revenue as the performance obligations are satisfied. Identify the customer contract A customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability is probable. Specifically, the Company obtains written/electronic signatures on contracts and purchase orders, if said purchase orders are issued in the normal course of business by the customer. Identify performance obligations that are distinct A performance obligation is a promise by the Company to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Determine the transaction price The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies. Allocate the transaction price to distinct performance obligations The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer. The Company’s contracts typically contain multiple performance obligations, for which the Company accounts for individual performance obligations separately, if they are distinct. The standalone selling price reflects the price the Company would charge for a specific piece of equipment or service if it was sold separately in similar circumstances and to similar customers. Recognize revenue as the performance obligations are satisfied Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer. 10 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Significant Judgments The Company enters into contracts that may include various combinations of equipment, services and construction, which are generally capable of being distinct and accounted for as separate performance obligations. Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once the Company determines the performance obligations, it determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on the SSP. The corresponding revenue is recognized as the related performance obligations are satisfied. Judgment is required to determine the SSP for each distinct performance obligation. The Company determines SSP based on the price at which the performance obligation is sold separately and the methods of estimating SSP under the guidance of ASC 606-10-32-33. If the SSP is not observable through past transactions, the Company estimates the SSP, taking into account available information such as market conditions, expected margins, and internally approved pricing guidelines related to the performance obligations. The Company licenses its SaaS type subscription license, whereby the customer only has a right to access the software over a specified time period. The full value of the contract is recognized ratably over the contractual term of the SaaS subscription, adjusted monthly if tiered pricing is relevant. The Company typically satisfies its performance obligations for equipment sales when equipment is made available for shipment to the customer; for services sales as services are rendered to the customer and for construction contracts both as services are rendered and when the contract is completed. The Company utilizes the cost-plus margin method to determine the SSP for equipment and build-out services. This method is based on the cost of the services from third parties, plus a reasonable markup that the Company believes is reflective of a market-based reseller margin. The Company determines the SSP for services in time and materials contracts by observable prices in standalone services arrangements. The Company estimates variable consideration in the form of royalties, revenue share, monthly fees, and service credits at contract inception and updated at the end of each reporting period if additional information becomes available. Variable consideration is typically not subject to constraint. Changes to variable consideration were not material for the periods presented. If a contract has payment terms that differ from the timing of revenue recognition, the Company will assess whether the transaction price for those contracts include a significant financing component. The Company has elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if the Company expects that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service, will be one year or less. For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative estimate of the financing component and its relative significance, requires judgment. Accordingly, the Company imputes interest on such contracts at an agreed-upon interest rate and will present the financing components separately as financial income. As of March 31, 2024 and March 31, 2023, the Company did not have any such financial income. 11 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Payment terms with customers typically require payment 30 days from the invoice date. The Company’s agreements with its customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise concern over delivered products or services, the Company has endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented. The Company has elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service. Accordingly, the Company will accrue all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. The Company has payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company receives payment from customers based on specified terms that are generally less than 30 days from the satisfaction of performance obligations. There are no contract assets related to performance under the contract. The difference in the opening and closing balances of the Company’s deferred revenue primarily results from the timing difference between the Company’s performance and the customer’s payment. The Company fulfills obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional. The Company recognizes deferred revenue when consideration has been received or an amount of consideration is due from the customer, and the Company has a future obligation to transfer certain proprietary products. In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable. The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the right to invoice practical expedient. The Company generally provides a one-year warranty on its products for materials and workmanship but may provide multiple year warranties as negotiated, and generally transfers to its customers the warranties it receives from its vendors, if any, which generally cover this one-year period. In accordance with ASC 450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably estimated. The Company maintained a reserve for warranty returns of $ 0.4 million and $ 0.4 million as of March 31, 2024 and December 31, 2023, respectively. The Company’s reserve for warranty returns is included in accrued expenses and other current liabilities in its consolidated balance sheets. Additional information regarding the Company’s warranty reserve may be found in Note 3 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements. Research and Development Costs The Company expenses research and development costs as incurred. Research and development expenses include payroll, employee benefits and other expenses associated with product development. The Company incurs research and development costs associated with the development and enhancement of both hardware and software products associated with its cultivation and extraction equipment, as well as its SaaS-based software offering, Agrify Insights™ cultivation software (“Agrify Insights™”). Net Loss Per Share The Company presents basic and diluted net loss per share attributable to Common Stockholders in conformity with the two-class method required for participating securities. The Company computes basic loss per share by dividing net loss available to Common Stockholders by the weighted-average number of common shares outstanding. Net loss available to Common Stockholders represents net loss attributable to Common Stockholders reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities as the holders of the participating securities do not have a contractual obligation to share in any losses. Diluted loss per share adjusts basic loss per share for the potentially dilutive impact of stock options and warrants. As the Company has reported losses for all periods presented, all potentially dilutive securities including stock options and warrants, are anti-dilutive, and accordingly, basic net loss per share equals diluted net loss per share. Net loss per share calculations for all periods have been adjusted to reflect the reverse stock split effected on July 5, 2023. Net loss per share was calculated based on the weighted-average number of Common Stock outstanding. 12 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Recently Announced Accounting Pronouncements AS U 2023-09, Improvements to Income Tax Disclosures ∙ On December 14, 2023, the FASB issued, ASU 2023-09, Improvements to Income Tax Disclosures, a final standard on improvements to income tax disclosures. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard applies to all entities subject to income taxes and is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. For public business entities (PBEs), the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. The Company is currently in the process of evaluating the effect of this guidance on its financial statements. Other recent accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements. Note 2 — Revenue and Deferred Revenue Revenue The Company sells its equipment and services to customers under a combination of a contract and purchase order. Equipment revenue includes sales from proprietary products designed and engineered by the Company such a VFUs, container farms, integrated grow racks, and LED grow lights, and non-proprietary products designed, engineered, and manufactured by third parties such as air cleaning systems and pesticide-free surface protection. Construction contracts normally provide for payment upon completion of specified work or units of work as identified in the contract. Although there is considerable variation in the terms of these contracts, they are primarily structured as time-and-materials contracts. The Company enters into time-and-materials contracts under which the Company is paid for labor and equipment at negotiated hourly billing rates and other expenses, including materials, as incurred at rates agreed to in the contract. The Company uses three main sub-contractors to execute the construction contracts. The following table provides the Company’s revenue disaggregated by the timing of revenue recognition: Three months ended March 31, (In thousands) 2024 2023 Transferred at a point in time $ 2,465 $ 4,920 Transferred over time 133 884 Total revenue $ 2,598 $ 5,804 In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable because the majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the right to invoice practical expedient. 13 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Deferred Revenue Changes in the Company’s current deferred revenue balance for the three months ended March 31, 2024 and the year ended December 31, 2023 were as follows: (In thousands) Three months ended March 31, 2024 Year ended December 31, 2023 Deferred revenue – beginning of period $ 4,019 $ 4,112 Additions 1,160 4,905 Recognized ( 1,395 ) ( 4,998 ) Deferred revenue – end of period $ 3,784 $ 4,019 Deferred revenue balances primarily consist of customer deposits on the Company’s cultivation and extraction solutions equipment. As of March 31, 2024 and December 31, 2023, all of the Company’s deferred revenue balances were reported as current liabilities in the accompanying consolidated balance sheets. Note 3 — Supplemental Consolidated Balance Sheet Information Accounts Receivable Accounts receivable consisted of the following as of March 31, 2024 and December 31, 2023: (In thousands) March 31, 2024 December 31, 2023 Accounts receivable, gross $ 2,723 $ 3,036 Less allowance for credit losses ( 2,512 ) ( 1,887 ) Accounts receivable, net $ 211 $ 1,149 The changes in the allowance for credit losses accounts consisted of the following: (In thousands) Three months ended March 31, 2024 Year ended December 31, 2023 Allowance for credit losses - beginning of period $ 1,887 $ 4,605 (Recovery of) allowance for credit losses 642 ( 1,426 ) Write-offs of uncollectible accounts ( 17 ) ( 1,292 ) Allowance for credit losses - end of period $ 2,512 $ 1,887 14 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following as of March 31, 2024 and December 31, 2023: (In thousands) March 31, 2024 December 31, 2023 Prepaid settlement asset $ — $ 2,054 Other receivables, other 536 659 Prepaid insurance 352 454 Prepaid expenses, other 93 82 Prepaid software 31 70 Prepaid materials 16 13 Total prepaid expenses and other current assets $ 1,028 $ 3,332 Property and Equipment, Net Property and equipment, net consisted of the following as of March 31, 2024 and December 31, 2023: (In thousands) March 31, 2024 December 31, 2023 Leased equipment $ 4,465 $ 4,465 Leasehold improvements 702 702 Machinery and equipment 904 904 Software 606 606 Computer and office equipment 588 588 Research and development laboratory equipment 183 183 Furniture and fixtures 116 116 Trade show assets 78 78 Vehicles 43 43 Total property and equipment, gross 7,685 7,685 Accumulated depreciation ( 3,300 ) ( 2,894 ) Construction in progress 2,943 2,943 Total property and equipment, net $ 7,328 $ 7,734 Depreciation expense for the three months ended March 31, 2024 and 2023 was $ 0.4 million and $ 0.4 million, respectively, and included within general and administrative, selling and marketing, and research and development depending on the nature of the related property and equipment. 15 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following as of March 31, 2024 and December 31, 2023: (In thousands) March 31, 2024 December 31, 2023 Sales tax payable (1) $ 5,320 $ 5,338 Accrued acquisition liabilities (2) — 2,180 Accrued construction costs 1,312 1,412 Accrued interest expense 12 321 Compensation related fees 313 474 Accrued warranty expenses 415 420 Accrued professional fees 423 457 Accrued inventory purchases 3 10 Accrued consulting fees 45 43 Total accrued expenses and other current liabilities $ 7,843 $ 10,655 (1) Sales tax payable primarily represents identified sales and use tax liabilities arising from our acquisition of Precision and Cascade. These amounts are included as part of our initial purchase price allocations and are the subject matter of an indemnification claim under the Precision and Cascade acquisition agreement. (2) Accrued acquisition liabilities represents the value of held back Common Stock associated with the 2021 acquisitions of Precision and Cascade. Note 4 — Fair Value Measures Fair Values of Assets and Liabilities In accordance with ASC Topic 820 “Fair Value Measurement”, the Company measures fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows: Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets. Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active. Level 3: Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions about how market participants would price the asset or liability. Valuation techniques for assets and liabilities include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain. 16 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS At March 31, 2024 and December 31, 2023, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows: March 31, 2024 December 31, 2023 Fair Value Measurements Using Input Types Fair Value Measurements Using Input Types (In thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Money market funds 4 — — 4 4 — — 4 Total assets $ 4 $ — $ — $ 4 $ 4 $ — $ — $ 4 Liabilities: Warrant liabilities - January 2022 warrants $ — $ — $ — $ — $ — $ — $ 1 $ 1 Warrant liabilities - March 2022 warrants — — 1 1 — — 7 7 Warrant liabilities - August 2022 warrants — — 3 3 — — 18 18 Warrant liabilities - December 2022 warrants — — 413 413 — — 1,264 1,264 Total liabilities $ — $ — $ 417 $ 417 $ — $ — $ 1,290 $ 1,290 Fair Value of Financial Instruments The Company has certain financial instruments which consist of cash and cash equivalents, marketable securities, warrant liabilities, and contingent consideration. Fair value information for each of these instruments as well as other balances of the Company are as follows: ● Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and deferred revenue liabilities approximate their fair value based on the short-term nature of these instruments. ● Marketable securities classified as current held-to-maturity securities are recorded at amortized cost, which at March 31, 2024 and December 31, 2023, approximated fair value. ● The Company’s deferred consideration was recorded in connection with acquisitions during the three months ended March 31, 2024 and fiscal 2023 using an estimated fair value discount at the time of the transactions. As of March 31, 2024 and December 31, 2023, the carrying value of the deferred consideration approximated fair value. ● The Company’s warrant liabilities are marked-to-market each reporting period with the changes in fair value of warrant liabilities recorded in other income (expense), net in the accompanying consolidated statements of operations until the warrants are exercised. The fair value of the warrant liabilities are estimated using a Black-Scholes option-pricing model. 17 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Marketable Securities As of March 31, 2024 and December 31, 2023, the Company held investments in money market funds. They are valued using quoted market prices in active markets and are classified under Level 1 within the fair value hierarchy. The composition of the Company’s marketable securities are as follows: (In thousands) March 31, 2024 December 31, 2023 Current marketable securities: Money market funds $ 4 $ 4 Warrant Liabilities The estimated fair value of the warrant liabilities on March 31, 2024 and 2023 is determined using Level 3 inputs. Inherent in a Black-Scholes option-pricing model are assumptions used in calculating the estimated fair values that represent the Company’s best estimate. The volatility rate is determined utilizing the Company’s own share price and the share price of competitors over time. However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair values could be materially different. The following table summarizes the Company’s assumptions used in the valuations as of March 31, 2024 and December 31, 2023: January 2022 Warrants March 2022 Warrants August 2022 Warrants December 2022 Warrants January 2022 Warrants March 2022 Warrants August 2022 Warrants December 2022 Warrants March 31, 2024 December 31, 2023 Stock price $ 0.37 $ 0.37 $ 0.37 $ 0.37 $ 1.26 $ 1.26 $ 1.26 $ 1.26 Exercise price $ 1,496 $ 430 $ 246 $ 0.38 $ 1,496 $ 430 $ 246 $ 3.45 Expected term (in Years) 3.32 3.88 3.88 3.88 3.57 4.13 4.13 4.13 Volatility 136.00 % 138.00 % 138.00 % 138.00 % 138.00 % 136.00 % 136.00 % 136.00 % Discount rate - treasury yield 4.37 % 4.32 % 4.32 % 4.32 % 3.96 % 3.91 % 3.91 % 3.91 % The following table sets forth a summary of the changes in the fair value of the Level 3 warrant liabilities for the three months ended March 31, 2024 and for the year ended December 31, 2023: (In thousands) March 31, 2024 For the year ended December 31, 2023 Warrant liabilities – beginning of period $ 1,290 $ 5,985 Change in estimated fair value ( 873 ) ( 4,695 ) Warrant liabilities –end of period $ 417 $ 1,290 18 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 5 — Loans Receivable A portion of the capital raised from the Company’s IPO was allocated to launch the Company’s TTK Solution program. The TTK Solution is the industry’s first-of-its-kind program in which the Company engages with qualified cannabis operators in the early phases of their business plans and provides critical support, typically over a 10 -year period, which includes: access to capital for construction costs, the design and build-out of their cultivation and extraction facilities, state-of-the-art cultivation and extraction equipment, subscription to the Company’s Agrify Insights™, process design, training, implementation, proven grow recipes, product formulations, data analytics, and consumer branding. Bud & Mary’s Cultivation, Inc. (“Bud & Mary’s”) - Customer 139 The initial payment date on the loan receivable from Bud & Mary’s is the first business day of the first full month following the commencement of commercial products sales and the maturity date is 24 months from the initial payment date. The interest rate is 16 % per annum. In Q3 2022, Agrify became aware that Bud & Mary’s was not in compliance with all debt covenants as defined in the loan agreement which resulted in Agrify issuing a loan acceleration letter to Bud & Mary’s on September 15, 2022, demanding full repayment of the construction loan under the loan agreement dated May 12, 2021. Consequently, the Company established a reserve of $ 14.7 million specifically related to Bud & Mary’s. Hannah Industries (“Hannah”) - Customer 125 As of December 31, 2022, the Company was unable to provide additional financing to Hannah Industries under the TTK Solution program to complete the build out and development of Hannah’s cultivation business. As a result, the Company concluded that the existing receivable due from Hannah was impaired as of this date. Given the uncertainty around the customer’s ability to repay the outstanding balance of the loan as well as the absence of value attributed to any collateral from Hannah, an allowance for credit losses was recognized for 50 % of the total outstanding receivable balance as of December 31, 2022. The Company recognized an allowance for credit losses related to the Hannah loan receivable in the amount of $ 4.5 million as of December 31, 2022. This allowance remains at $ 4.5 million as of March 31, 2024. Once the project is completed, the customer will begin making monthly payments based on the harvest. Nevada Holistics (“Tree house”) - Customer 24096 As of March 2024, Nevada Holistics has a current balance of $ 692 due in relation to the TTK loan. The project went live in Q2 2023. After the 90 day period for the first harvest, the customer was given an additional 6-month grace period which ended in Q1 2024. Upon completion of this grace period, the Company began invoicing the customer each month for a portion of the outstanding loan balance. The borrower will begin making monthly payments in Q2 2024 based on what is produced through harvests. Monthly payments are calculated based off of the Production Success Fees (‘PSF”) generated from each harvest. Upon issuance of each invoice, that portion of the loan is reclassified into loan receivable, current on the condensed consolidated balance sheets. The breakdown of loans receivable by customer as of March 31, 2024 and December 31, 2023 were as follows: (In thousands) March 31, 2024 December 31, 2023 Customer 139 $ 14,361 $ 14,691 Customer 125 9,297 9,297 Customer 24096 6,810 6,810 Allowance for credit losses (1) ( 18,885 ) ( 19,215 ) Total loan receivable, net of allowance for credit losses $ 11,583 $ 11,583 Less: current portion ( 692 ) — Total loan receivable, net of current $ 10,891 $ 11,583 (1) At December 31, 2023, the Company established an allowance for credit losses of approximately $ 14.7 million related to Bud & Mary’s ongoing litigation. Approximately $ 4.5 million relates to Hannah. This reserve still remains in the allowance as of March 31, 2024. 19 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 6 — Inventory Inventories are stated at the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a first-in, first-out basis. Such costs include the acquisition cost for raw materials and operating supplies. The Company’s standard payment terms with suppliers may require making payments in advance of delivery of the Company’s products. The Company’s prepaid inventory is applied to the purchase of products once they are delivered. Inventory consisted of the following as of March 31, 2024 and December 31, 2023: (In thousands) March 31, 2024 December 31, 2023 Raw materials $ 22,392 $ 23,449 Prepaid inventory 816 924 Finished goods 8,062 7,438 Inventory for resale 4,776 4,882 Inventory, gross 36,046 36,693 Inventory reserves ( 17,184 ) ( 17,599 ) Total inventory, net $ 18,862 $ 19,094 Inventory Reserves The Company establishes an inventory reserve for obsolete, slow moving, and defective inventory. The Company calculates inventory reserves for obsolete, slow moving, or defective items as the difference between the cost of inventory and its estimated net realizable value. The reserves are based upon management’s expected method of disposition. Changes in the Company’s inventory reserve are as follows: (In thousands) Three months ended March 31, 2024 Year ended December 31, 2023 Inventory reserves – beginning of period $ 17,599 $ 32,422 (Decrease) increase in inventory reserves ( 415 ) ( 14,823 ) Inventory reserves – end of period $ 17,184 $ 17,599 20 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 7 – Debt The Company’s debt consisted of: (In thousands) March 31, 2024 December 31, 2023 Exchange Note $ — $ 6,669 Convertible Note — 7,840 Consolidated CP Acquisitions Note 17,683 — PPP Loan 517 518 CP Acquisitions Junior Secured Note — 3,799 GIC Acquisition Note 1,000 645 Mack Molding Co. Note Payable 4,838 — Other notes payable (1) 226 367 Total debt 24,264 19,838 Unamortized debt premium — 1,419 Total debt, gross of debt premium 24,264 21,257 Less: current portion ( 3,070 ) ( 5,210 ) Long-term debt, net of current $ 21,194 $ 16,047 (1) Other notes payable relates to a one-year insurance premium that was financed over nine-months and incurred interest expense of approximately $ 7 thousand for the three months ended March 31, 2024. Other notes payable also includes the Navitas Loan with a balance of $ 5 thousand as of March 31, 2024. Exchange Note The Exchange Note is a senior secured obligation of the Company and ranks senior to all indebtedness of the Company. The Exchange Note will mature on the three-year anniversary of its issuance (the “Maturity Date”) and contains a 9.0 % annualized interest rate, with interest to be paid monthly, in cash, beginning September 1, 2022. The principal amount of the Exchange Note will be payable on the Maturity Date, provided that the Lender was entitled to a cash sweep of 20 % of the proceeds received by the Company in connection with any equity financing, which will reduce the outstanding principal amount under the Exchange Note. Convertible Note On March 8, 2023, as a result of the Exchange Agreement, the Company issued a Convertible Note to Lender with a principal balance of $ 10 million. The Convertible Note bears a 9.0 % annualized interest rate, with interest to be paid monthly, in cash, beginning April 1, 2023. The principal amount of the Convertible Note will be payable on the Maturity Date, provided that the Lender was entitled to a cash sweep of 30 % of the proceeds of any at-the-market equity offering and 20 % of the proceeds received by the Company in connection with any other equity financing, which would reduce the outstanding principal amount under the August 2022 Note or the Convertible Note. 21 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS At any time, the Company may prepay all of the Convertible Note by redemption at a price equal to 102.5 % of the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest. The Lender had the option of requiring the Company to redeem the Convertible Note (i) on August 19, 2023 or August 19, 2024 at a price equal to the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest, provided that the redemption right on August 19, 2023 will not be exercisable if the Company raises at least $ 8.0 million in gross proceeds from equity offerings prior to such date, or (ii) if the Company undergoes a fundamental change (as defined below) at a price equal to 102.5 % of the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest. The Convertible Note imposed certain customary affirmative and negative covenants upon the Company, as well as covenants that will (i) restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, (ii) restrict the ability of the Company and its subsidiaries from making certain investments, subject to specified exceptions, and (iii) restrict the declaration of any dividends or other distributions, subject to specified exceptions. If an event of default under the Convertible Note occurs, the Lender can elect to redeem the Convertible Note for cash equal to (A) 115 % of the then-outstanding principal amount of the Convertible Note (or such lesser principal amount accelerated by the Lender), plus accrued and unpaid interest, including default interest, which accrues at a rate per annum equal to 15 % from the date of a default or event of default, or, only in connection with certain events of default, (B) the greater of the amount under clause (A) or the sum of (i) 115 % of the product of (a) the conversion rate in effect as of the trading day immediately preceding the date that the Lender delivers a notice of acceleration; (b) the total then outstanding principal amount under the Convertible Note (in thousands); and (c) the greater of (1) the highest daily volume weighted average price (“VWAP”) per share of Common Stock occurring during the fifteen consecutive trading days ending on, and including, the trading day immediately before the date the Lender delivers such notice and (2) the highest daily VWAP per share of Common Stock occurring during the fifteen consecutive trading days ending on, and including, the trading immediately before the date the applicable event of default occurred and (ii) the accrued and unpaid interest on the Convertible Note. Until the date the Convertible Note is fully repaid, the Lender had, subject to certain exceptions, the right to participate for up to 30 % of any offering of debt, equity (other than an offering of solely Common Stock), or equity-linked securities, including without limitation any debt, preferred stock or other instrument or security, of the Company or its subsidiaries. If the Lender elected to convert the Convertible Note, the conversion price per share would be $ 7.64 , subject to customary adjustments for certain corporate events. The conversion of the Convertible Note will be subject to certain customary conditions. The Convertible Note may not be converted into shares of Common Stock if such conversion would result in the Lender and its affiliates owning an aggregate of in excess of 4.99 % of the then-outstanding shares of Common Stock, provided that upon 61 days’ notice, such ownership limitation may be adjusted by the Lender, but in any case, to no greater than 9.99 %. The Company evaluated the embedded features in accordance with ASC 815-15-25 and the determined embedded features are not required to be bifurcated and separately measured at fair value. Aggregate interest expense related to the Convertible Note and Exchange Note described above was $ 116 thousand as of March 31, 2024. Note Conversion Pursuant to the Exchange Agreement the Company entered into with the Lender on March 8, 2023, the Lender elected, on April 26, 2023, to convert $ 1.6 million of the remaining outstanding principal amount on the Convertible Note for 153,617 shares of Common Stock of the Company. On May 1, 2023, the Company entered into a letter agreement with the above referenced accredited Lender (the “Letter Agreement”), pursuant to which the Company and the Lender agreed to exchange or redeem $ 2.0 million of the remaining outstanding principal amount under the Exchange Note for a total of 445,196 shares of Common Stock of the Company, subject to a Beneficial Ownership Limitation of 4.99 % of the Company’s Common Stock. Due to the Beneficial Ownership Limitation of 4.99 %, a total of 69,568 shares of Common Stock of the Company were issued to the Lender, with the remaining 375,629 shares held in abeyance until the balance (or portion thereof) may be issued in compliance with such limitations. As a result, the Company recognized a loss on the redemption of approximately $ 12 thousand. The total aggregated Exchange Note and Convertible Note is classified as long-term as of March 31, 2024. 22 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Convertible Note Forgiveness On November 30, 2023, the New Lender agreed to forgive $ 1.0 million of the principal amount outstanding on the Convertible Note (the “Principal Forgiveness”). The Principal Forgiveness was accounted for as a troubled debt restructuring under ASC 470, as 1) the Company was determined to be experiencing financial difficulties as defined by the ASC, and 2) the Principal Forgiveness was deemed a concession by the New Lender. Per ASC 470-60-35-5, a debtor in a troubled debt restructuring involving only modification of terms of a payable (i.e., not involving a transfer of assets or grant of an equity interest) shall account for the effects of the restructuring prospectively from the time of restructuring and shall not change the carrying amount of the payable at the time of the restructuring unless the carrying amount exceeds the total future cash payments specified by the new terms. As the future undiscounted cash flows were greater than or equal to the net carrying value of the original debt, the carrying amount of the debt at the time of the restructuring was not changed. CP Acqusitions Junior Secured Note On October 27, 2023, CP Acquisitions LLC (the “New Lender” or “CP”), an entity affiliated with and controlled by the Company’s Chief Executive Officer, purchased the Exchange Note and the Convertible Note from their holder (the “Note Purchase”). In connection with the Note Purchase, the New Lender has agreed to waive any events of default under the acquired notes through December 31, 2023. As part of the same transaction, the Company issued a junior secured promissory note (the “Junior Secured Note”) to the New Lender. Pursuant to the Junior Secured Note, the New Lender will lend up to $ 3.0 million to the Company. The Junior Secured Note bears interest at a rate of 10 % per annum, will mature in full on December 31, 2023, and may be prepaid without any fee or penalty. On December 4, 2023, the New Lender and the Company amended and restated the Junior Secured Note agreement. Pursuant to the terms of the amendment, the maximum principal amount that may be loaned by CP to the Company was increased to $ 4.0 million and extended the maturity date thereon to December 31, 2024. Consolidated CP Acquisitions Note On January 25, 2024, the Company and the New Lender consolidated the outstanding principal and interest due under the Junior Secured Note and the Exchange Note as well as the interest due under the Convertible Note into the Convertible Note (collectively, with the Junior Secured Note and the Exchange Note, the “Consolidated Notes”), and amended and restated the Convertible Note under a Senior Secured Amended, Restated, and Consolidated Convertible Note agreement (the “Restated Note”) having a total outstanding principal of $ 18,717,973 (the “New Lender Debt Consolidation”). The Restated Note bears interest at a rate of 10 % per annum and will mature in full on December 31, 2025. The Company may redeem all or a portion not less than $ 5.0 million of principal at any time at a price equal to 102.5 % of the redeemed principal amount plus accrued but unpaid interest. The Restated Note imposes certain customary affirmative and negative covenants upon the Company, as well as covenants that will (i) restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, (ii) restrict the ability of the Company and its subsidiaries from making certain investments, subject to specified exceptions, and (iii) restrict the declaration of any dividends or other distributions, subject to specified exceptions. If an event of default under the Restricted Note occurs, then the then outstanding principal and all accrued and unpaid interest on the Restated Note will immediately become due and payable. If the New Lender elects to convert the Restated Note, the conversion price per share will be $ 1.46 , subject to customary adjustments for certain corporate events. The conversion of the Restated Note will be subject to certain customary conditions. The Restated Note may not be converted into shares of Common Stock if such conversion would result in the New Lender and its affiliates owning an aggregate of in excess of 49.99 % of the then-outstanding shares of Common Stock. Immediately following the execution of the Restated Note, the New Lender elected to convert approximately $ 3.9 million of outstanding principal into an aggregate of 2,671,633 shares of common stock (the “January Conversion”) having a fair value of approximately $ 1.7 million. As the January Conversion was exercised by the New Lender in conjunction and in connection with the Debt Consolidation, the two transactions combined were considered a modification of the total debt outstanding with the New Lender (the “New Lender Debt Restructuring”). The New Lender Debt Restructuring was accounted for as a troubled debt restructuring under ASC 470, as 1) the Company was determined to be experiencing financial difficulties as defined by the ASC, and 2) the New Lender Debt Restructuring was deemed to result in a concession by the New Lender. The Company performed a comparison of the undiscounted cash flows associated with the Restructured Note subsequent to the New Lender Debt Restructuring to the carrying value of the Consolidated Notes as of the New Lender Debt Restructuring date. The net carrying value of the Consolidated Notes was determined to exceed the undiscounted future cash flows of the Restated Note after consideration of the January Conversion by approximately $ 675,000 (the “Excess Carrying Value”). The Restated Note was thus written down to the amount of the undiscounted future cash flows on the Restated Note from the New Lender Restructuring date to maturity. Further, as the New Lender is a related party of the Company, the Excess Carrying Value was accounted for as a capital transaction and no gain or loss was recognized related to the restructuring. 23 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS GIC Acquisition Note On July 12, 2023, the Board of Directors of the Company approved the issuance of an unsecured promissory note (the “Related Party Note”) in favor of GIC Acquisition, LLC (“GIC”), an entity that is owned and managed by the Company’s Chairman and Chief Executive Officer. Pursuant to the Related Party Note, GIC is obligated to lend up to $ 0.5 million to the Company, $ 0.3 million of which was delivered at issuance and the remaining $ 0.2 million delivered on July 31, 2023. The Related Party Note bears interest at a rate of 10 % per annum, will mature in full on August 6, 2023, and may be prepaid without any fee or penalty. The Related Party Note ranks junior to all existing secured indebtedness of the Company. On October 27, 2023, the maturity date of the Related Party Note was subsequently amended to December 31, 2024 at which point principal and accrued interest will be repaid in full. Interest expense incurred on the Related Party Note amounted to approximately $ 24 thousand for the three months ended March 31, 2024. As of March 31, 2024, the Company has borrowed approximately $ 1.0 million under the Related Party Note agreement. As of March 31, 2024, future minimum payments on all debt positions were as follows: Years ending December 31 (In thousands), Remaining 2024 $ 2,487 2025 21,778 Total future payments $ 24,264 Note 8 — Leases The determination if any arrangement contained a lease at its inception was done based on whether or not the Company has the right to control the asset during the contract period. The lease term was determined assuming the exercise of options that were reasonably certain to occur. Leases with a lease term of 12 months or less at inception were not reflected in the Company’s balance sheet and those lease costs are expensed on a straight-line basis over the respective term. Leases with a term greater than 12 months were reflected as non-current right-of-use assets and current and non-current lease liabilities in the Company’s consolidated balance sheets. As the implicit interest rate in its leases was generally not known, the Company’s used its incremental borrowing rate as the discount rate for purposes of determining the present value of its lease liabilities. At March 31, 2024 and 2023, the Company’s weighted-average discount rate utilized for its leases was 7.50 % and 7.33 %, respectively. When a contract contained lease and non-lease elements, both were accounted for as a single lease component. The Company had several non-cancelable finance leases for machinery and equipment. As of March 31, 2024 the Company had no active finance leases. The Company had several non-cancellable operating leases for corporate offices, warehouses, showrooms, research and development facilities and vehicles. The Company’s leases have remaining lease terms of one year to four years, some of which include options to extend. Some leases include payment for communal area maintenance associated with the property. 24 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Additional information on the Company’s operating and financing lease activity was as follows: Three months ended March 31, (In thousands) 2024 2023 Operating lease cost $ 130 $ 236 Finance lease cost: Amortization of right-of-use assets — 45 Interest on lease liabilities — 6 Total lease cost $ 130 $ 287 (In thousands) March 31, 2024 December 31, 2023 Weighted-average remaining lease term – operating leases 2.85 years 3.54 years Weighted-average remaining lease term – finance leases 0 years 2.09 years Weighted-average discount rate – operating leases 7.50 % 6.83 % Weighted-average discount rate – finance leases — % 7.83 % (In thousands) Balance Sheet Location March 31, 2024 December 31, 2023 Assets Right-of-use assets, net Right-of-use, net $ 1,651 $ 1,803 Total lease assets $ 1,651 $ 1,803 Liabilities Operating lease liabilities, current Operating lease liabilities, current $ 615 $ 599 Operating lease liabilities, non-current Operating lease liabilities, non-current 1,235 1,394 Total operating lease liabilities $ 1,850 $ 1,993 Maturities of operating lease liabilities as of March 31, 2024 are as follows: Years ending December 31 (In thousands), Operating lease Remaining 2024 548 2025 748 2026 560 2027 202 Total minimum lease payments 2,058 Less imputed interest ( 208 ) Total lease liabilities $ 1,850 25 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 9 — Stockholders’ Deficit Public Offerings On February 27, 2024, the Company entered into a placement agency agreement (the “Agency Agreement”) with Alexander Capital, LP as placement agent (the “Placement Agent”), pursuant to which the Company agreed to issue and sell an aggregate of 2,760,000 shares of its common stock, and, in lieu of common stock to certain investors that so chose, pre-funded warrants to purchase 3,963,684 shares of its common stock (the “S-1 Offering”). The public offering price for each share of common stock is $ 0.38 , and the offering price for each Pre-Funded Warrant is $0.379, which equals the public offering price per share of the common stock, less the $ 0.001 per share exercise price of each Pre-Funded Warrant. The S-1 Offering was made pursuant to a registration statement on Form S-1 (File No. 333-276724) that was filed by the Company with the Securities and Exchange Commission (“SEC”) on January 26, 2024 and declared effective by the SEC on February 14, 2024. Pursuant to the terms of the Agency Agreement, the Company paid the Placement Agent a cash transaction fee equal to 7.0 % of the aggregate gross proceeds to us from the sale of the securities in the S-1 Offering. In addition, the Company reimbursed the Placement Agent for a certain amount of its accountable expenses, including the fees and disbursements of the Placement Agent’s counsel, not to exceed $ 100,000 in the aggregate. Additionally, at closing the Company issued to the Placement Agent common stock purchase warrants (the “Placement Agent Warrants”) covering a number of securities equal to one percent ( 1.0 %) of the total number of securities being sold and/or issued in the S-1 Offering. The Placement Agent Warrants are non-exercisable for one hundred eighty (180) days beginning on the date of commencement of sales of the securities being offered in this offering. Following this one hundred eighty (180) day period, the Placement Agent Warrants will be exercisable until the fifth (5th) year anniversary of commencement of sales of the securities being offered in this offering. The Placement Agent Warrants will be exercisable at a price per share of $ 0.38 , which is equal to 100 % of the price of the securities paid by the purchasers in connection with this offering. The Placement Agent Warrants are not redeemable. The Placement Agent Warrants (and the underlying securities) may not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the Placement Agent Warrants (or the underlying securities) for a period of one hundred eighty (180) days beginning on the date of commencement of sales of the securities being offered in the offering. The Placement Agent Warrants, however, may be assigned, in whole or in part, to any successor, officer or member of the Placement Agent (or to officers or partners of any such successor or member) pursuant to FINRA Rule 5110(e)(2). There are no registration rights associated with the Placement Agent Warrants. Additionally, the Company granted a six-month right of first refusal for certain financings to the Placement Agent. The Company issued 67,237 warrants to purchase common stock to Alexander Capital, L.P., referred to as the Placement Agents Warrants above. The warrants were classified as equity warrants and recorded under additional paid-in capital in the condensed consolidated balance sheets. The warrants have a five-year term and exercise price of 100 % of the offering price, and are subject to adjustment for stock splits, reverse stock splits, stock dividends, and similar transactions. The warrants will be exercisable on a cash basis, unless there is not an effective registration statement covering the issuance of the shares issuable upon exercise of the warrants or if shareholder approval for the full exercise of the warrants are not received, in which case the Modified Warrant will also be exercisable on a cashless exercise basis at Alexander Capital election. The measurement of fair value of the Alexander Capital Warrants were determined utilizing a Black-Scholes model considering all relevant assumptions current at the date of issuance (i.e., share price of $ 0.52 , exercise price of $ 0.38 , term of five years , volatility of 128 %, risk-free rate of 4.32 %, and expected dividend rate of 0 %). The grant date fair value of these Alexander Capital Warrants was estimated to be $ 31 thousand on February 27, 2024 and is reflected within additional paid-in capital as of March 31, 2024. 26 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 10 — Stock-Based Compensation and Employee Benefit Plans 2022 Omnibus Equity Incentive Plan On April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Omnibus Equity Incentive Plan (the “2022 Plan”), which replaced the 2020 Stock Option Plan (the “2020 Plan”). The 2022 Plan provides for the grant of stock options, stock appreciation right awards, performance share awards, restricted stock awards, restricted stock unit awards, other stock-based awards and cash-based awards. The aggregate number of shares of Common Stock that may be reserved and available for grant and issuance under the 2022 Plan is 26,483 shares, which includes the 10,000 shares authorized under the 2022 Plan, plus the rollover of 16,483 issued and outstanding awards under the 2020 Plan and 250,000 additional shares issued upon approval by the Board of Directors on January 8, 2024. Shares will be deemed to have been issued under the 2022 Plan solely to the extent actually issued and delivered pursuant to an award. If any award granted under the 2020 Plan or the 2022 Plan expires, is canceled, terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2022 Plan. The 2022 Plan shall continue in effect, unless sooner terminated, until the tenth anniversary of the date on which it is adopted by the Board of Directors. As of March 31, 2024, there were 57,719 shares of Common Stock available to be granted under the Company’s 2022 Plan. The Company’s stock compensation expense was $ 0.5 million an d $ 0.9 million for the three months ended March 31, 2024 and 2023 , respectively. Stock Options For the three months ended March 31, 2024, there were no options granted, exercised, forfeited or expired under the Company’s stock option plans. There were 10,310 options outstanding with a weighted average exercise price of $ 1,595.92 as of March 31, 2024 and December 31, 2023. There were 10,206 options vested and exercisable with a weighted average exercise price of $ 1,594.66 as of March 31, 2024. There were 10,310 options vested and expected to vest with a weighted average exercise price of $ 1,595.92 as of March 31, 2024 As of March 31, 2024, total unrecognized compensation expense related to unvested options under the Company’s 2022 Plan was $ 1.5 thousand, which is expected to be recognized over a weighted average period of 0.06 years. The following table summarizes information about options vested and exercisable at March 31, 2024: Options Vested and Exercisable Price ($) Number of Options Weighted-Average Remaining Contractual Life (Years) Weighted-Average Exercise Price $ 456.00 2,884 6.12 $ 456.00 $ 972.00 2,842 6.57 $ 972.00 $ 1,536.00 50 7.00 $ 1,536.00 $ 1,840.00 160 7.75 $ 1,840.00 $ 2,768.00 4,270 6.89 $ 2,768.00 The following table summarizes information about options vested and expected to vest after March 31, 2024: Options Vested and Expected to Vest Price ($) Number of Options Weighted-Average Remaining Contractual Life (Years) Weighted-Average Exercise Price $ 456.00 2,884 6.12 $ 456.00 $ 972.00 2,856 6.57 $ 972.00 $ 1,536.00 50 7.00 $ 1,536.00 $ 1,840.00 250 7.75 $ 1,840.00 $ 2,768.00 4,270 6.89 $ 2,768.00 27 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Restricted Stock Units The following table presents restricted stock unit activity under the 2022 Plan for the three months ended March 31, 2024: Number of Shares Weighted-Average Grant Date Fair Value Unvested at December 31, 2023 2,136 230.80 Granted 201,938 0.76 Vested ( 201,955 ) 0.79 Forfeited ( 284 ) 82.20 Unvested at March 31, 2024 1,835 $ 251.22 As of March 31, 2024, total unrecognized compensation expense related to unvested restricted stock units was $ 139 thousand, which is expected to be recognized over a weighted average period of 1.12 years. Note 11 — Stock Warrants The following tables present all warrant activity of the Company for the three months ended March 31, 2024: Number of Warrants Weighted-Average Exercise Price Warrants outstanding at December 31, 2023 5,380,299 $ 10.83 Granted 4,030,921 0.03 Exercised ( 6,142,217 ) — Forfeited ( 3,081 ) — Warrants outstanding at March 31, 2024 3,265,922 $ 17.50 The Company received proceeds from the exercise of warrants of $ 3 thousand for the three months ended March 31, 2024. Note 12 — Income Taxes The Company’s effective income tax rate was 0.0 % and 0.0 % for the three months ended March 31, 2024 and 2023, respectively. The provision for (benefit from) income taxes was $0 and $0 for the three months ended March 31, 2024 and 2023, respectively. There is no difference between the Company’s effective tax rates for the 2024 and 2023 periods. There was no change in the provision for (benefit from) income taxes for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. 28 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 13 — Net Loss Per Share Net loss per share calculations for all periods have been adjusted to reflect the Company’s reverse stock splits. Net loss per share was calculated based on the weighted-average number of the Company’s Common Stock outstanding. Basic net loss per share is calculated using the weighted-average number of Common Stock outstanding during the periods. Diluted net loss per share is computed by giving effect to all potential shares of Common Stock, including outstanding stock options, stock related to unvested restricted stock units, and outstanding warrants to the extent dilutive. Net loss per share, assuming dilution, is equal to basic net loss per share because the effect of dilutive securities outstanding during the periods, including options and warrants computed using the treasury stock method, is anti-dilutive. The components of basic and diluted net loss per share were as follows: Three months ended March 31, (In thousands, except share and per share data) 2024 2023 Numerator: Net loss available for common shareholders $ ( 38 ) $ ( 10,327 ) Denominator: Weighted-average common shares outstanding – basic and diluted 8,894,229 1,072,292 Net loss per share attributable to Common Stockholders – basic and diluted $ — $ ( 9.63 ) The Company’s potential dilutive securities, which include stock options, restricted stock units, and warrants, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of Common Shares outstanding used to calculate both basic and diluted net loss per share attributable to Common Stockholders is the same. The Company excluded the following potential Common Stock equivalents presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to Common Stockholders for the periods indicated because including them would have had an anti-dilutive effect: Three months ended March 31,   2024 2023 Shares subject to outstanding stock options 10,206 10,562 Shares subject to unvested restricted stock units 1,835 6,307 Shares subject to outstanding warrants 3,265,922 1,495,001   3,277,963 1,511,870   29 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 14 — Commitments and Contingencies Legal Matters From time to time, we may become involved in material legal proceedings or be subject to claims arising in the ordinary course of our business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Bud & Mary’s Litigation On September 15, 2022, the Company provided a notice of default to Bud & Mary’s and certain related parties notifying such parties that Bud & Mary’s was in default of its obligations under the Bud & Mary TTK Agreement. On October 5, 2022, Bud & Mary’s filed a complaint in the Superior Court of Massachusetts in Suffolk County, naming the Company as the defendant. Bud & Mary’s is seeking, among other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion arising from the Agreement. While the Company believes the claim is without merit and will continue to vigorously defend itself against Bud & Mary’s allegations, litigation is inherently unpredictable and there can be no assurance that the Company will prevail in this matter. During the third quarter of 2022, the Company deemed it necessary to fully reserve for the outstanding $ 14.7 million note receivable balance due to the current litigation and the uncertainty of the customer’s ability to repay the balance. The $ 14.7 million represents the amount of the contingent loss that the Company has determined to be reasonably possible and estimable. The actual cost of resolving this matter may be higher or lower than the amount the Company has reserved. If the Company is unable to realize revenue from its TTK Solution offerings on a timely basis or at all, or if it incurs an additional loss as a result of the Bud & Mary’s claim, the Company’s business and financial performance will be adversely affected. On November 14, 2022, the Company filed its answers and affirmative defenses to the Bud & Mary’s complaint and counterclaims. The Company is seeking, among other relief, monetary damages in connection with the breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and enforcement of the guarantees. Bud & Mary’s is permitted to file an amended complaint, and Agrify will be permitted to make responsive filings, which may include an answer and counterclaim. Bowdoin Construction Corp. Litigation On February 22, 2023, Bowdoin Construction Corp. (“Bowdoin”) filed a complaint (the “Bowdoin Complaint”) in the Superior Court of Massachusetts in Norfolk County naming the Company, Bud & Mary’s and certain related parties as defendants, captioned Bowdoin Construction Corp. v. Agrify Corporation, Bud & Mary’s Cultivation, Inc. and BMLC2, LLC, case no. 2382CV00173. The Bowdoin Complaint relates to a construction contract between Bowdoin and the Company relating to the property that is the subject of the Bud & Mary’s Complaint, and alleges breach of contract by Bud & Mary’s and by the Company due to nonpayment of approximately $ 6.3 million due under the contract and related indemnification claims and mechanics’ liens. The $ 6.3 million is included in accounts payable in the consolidated balance sheet. One of Bowdoin’s subs, Hannon Electric, Inc. has filed a separate suit against Agrify in the amount of $ 1.498 million. The amount is part of the $ 6.3 million claimed in Bowdoin’s complaint. The Company is entitled to indemnification by Bud & Mary’s and intends to vigorously defend this claim . Mack Molding Co. In December 2020, the Company entered into a five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack will become a key supplier of VFUs. In February 2021, the Company placed a purchase order with Mack amounting to approximately $ 5.2 million towards the initial production of VFUs during 2021. Since February 2021, the Company increased the purchase order with Mack to approximately $ 26.5 million towards production of VFUs during 2021 and 2022. The Company believed the supply agreement with Mack would provide the Company with increased scaling capabilities and the ability to meet the potential future demand of its customers more efficiently. The supply agreement contemplates that, following an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack each year based on the agreed-upon pricing formula. The introductory period is not time-based but rather refers to the production of an initial number of units after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage. The Company believed this approach would result in both parties making a more informed decision with respect to the pricing and other terms of the supply agreement with Mack. On October 11, 2022, the Company received a $ 9.4 million invoice from Mack for inventory purchased on the Company’s behalf to build VFUs. As part of the terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had aged greater than nine months. Due to the slowdown in the demand for the VFUs and the lack of a demand forecast that the Company could provide to the vendor, Mack exercised the right to invoice the Company for the slow-moving inventory. As of December 31, 2022, the Company owed Mack $ 8.4 million for purchased inventory on behalf of the Company to produce VFUs, which is included in accounts payable in the consolidated balance sheet. On March 2, 2023, Mack filed an arbitration action seeking the amounts owed to Mack for purchased inventory. On October 27, 2023, and effective as of October 18, 2023, Mack and the Company entered into a Modification and Settlement Agreement (the “Modification Agreement”) with respect to the dispute. 30 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS On February 29, 2024, the Company met its performance obligations in terms of the Modification Agreement and a gain of $ 1,141,587 was recorded, within general and administrative expenses, on the Consolidated Statement of Operations during the three months ended March 31, 2024, representing the difference between the carrying value of the Contract liability owing by Agrify to Mack, prior to the execution of the Modification Agreement, and the aggregate of (a) the present value of the minimum cash payments required to be made by the Company over the term of the Modification Agreement, and (b) the fair value of the warrants issued to Mack by the Company, in terms of the Modification Agreement. The recognition of this gain also resulted in the derecognition of the Prepaid settlement asset balance, and the reduction of the outstanding accounts payable balance based on the terms of the Modification Agreement. At this time, the outstanding accounts payable balance owing to Mack, was reclassified from Accounts payable to Notes payable, current in the amount of $ 1,374 and Notes payable, net of current in the amount of $ 3,464 , per the face of the condensed consolidated balance sheet, as of March 31, 2024. Further, following the meeting of certain conditions, including making predetermined quarterly payments to Mack in terms of the Modification Agreement, the Company is entitled to take possession of certain VFUs that were assembled under the Supply Agreement. These quarterly payments relate to the purchase from Mack of a minimum of 25 VFUs per quarter for each quarter during 2024 and a minimum of 50 VFUs per quarter for the six quarters beginning with the first quarter of 2025. In the first quarter of 2024, the Company recognized a gain of $ 564,277 , within general and administrative expenses, associated with the revaluation of the contingent liability, originally recognized on losing control of this inventory and offset against the inventory balance during the fiscal year ended December 31, 2022, on regaining control of 25 units of the VFU inventory. The Company is also required to pay a storage fee of $ 25,000 to Mack, per month, for VFUs subject to the Modification Agreement. TRC Electronics Litigation The Company was named as a defendant in a complaint filed by TRC Electronics, Inc. (“TRC”) on April 13, 2023 in the United States District Court for the Eastern District of Pennsylvania. In the Complaint, TRC asserts two causes of action against the Company: (1) breach of contract, and (2) promissory estoppel. TRC’s claims are based on allegations that the Company failed to make payments due under three purchase orders for commercial electronics parts. TRC seeks damages in the amount of $ 565,210 , plus attorneys’ fees, costs, and post-judgment interest. The Company has filed an answer denying liability on TRC’s claims and is proceeding with discovery. McCutchan, Inc. In December 2021, the Company entered into a Standard Form of Agreement (“Agreement”) between Owner and Contractor whereby Valiant Group LLC (“Valiant”) is the general contractor for tenant improvements on certain real property located in Bellevue, Washington (the “Project”). McCutchan, Inc. (“McCutchan”) agreed to be a subcontractor on the Project and engaged various other subcontractors. The Company terminated Valiant as the general contractor for, among other allegations, breach of contract and unjust enrichment. Following the termination of Valiant, in October 2022, the Agreement was assigned and accepted (the “Assignment”) to Agxion, LLC, a wholly owned subsidiary of the Company. The Assignment contemplates that, as a subcontractor to the Agreement, McCutchan is still bound to the subcontract agreement and will continue construction operations on the Project. The Company is pursuing Valiant in a separate litigation (the “Valiant Litigation”) to collect no less than approximately $ 1.4 million alleging overbilling, breach of the Agreement, and violation of Chapter 18.27 and 19.86 RCW in Washington. On March 5, 2024, McCutchan, Inc. (“McCutchan”) filed a complaint in the Superior Court of Washington for King County naming the Company, Valiant, and certain related parties as defendants. In the Complaint, McCutchan asserts two causes of action against the Company: (1) breach of contract, (2) voidable contract, (3) interference with business or economic expectancy, (4) unjust enrichment, and (5) defamation. McCutchan’s claims are based on allegations of misrepresentations made by the Company to pay McCutchan for work completed on the Project as well as a failure to pay under the Agreement. In the alternative, McCutchan is alleging the Assignment is void and not a valid contract. McCutchan is seeking to collect no less than $3 million against the Company and all other named defendants. The Company, Valiant, and McCutchan have all agreed to mediate the matter. McCutchan has asked to postpone the original scheduled May 7 th mediation date, and the Company, Valiant and McCutchan are collectively working to set up a new three-way mediation date. In the event the parties cannot reach an agreement in the mediation, this matter will be moved to arbitration pursuant to the mandatory arbitration clause in the Agreement. 31 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Valiant Grouop LLC Agrify filed a separate complaint against Valiant for overbilling, misrepresentation, and breach for the Treehouse project in Nevada. Valiant has failed to respond and Agrify has since submitted an entry of default to the court and is currently seeking for award in the amount of $ 1.5 million. However, there is no guarantee that the Court would award the full amount and no guarantee that Agrify would be able to successfully collect the full amount from Valiant. Other Litigation In September 2023, the Company settled a legal dispute with a specific customer which resulted in the recognition of a gain of approximately $ 0.9 million, of which $ 0.3 million was paid in October 2023, with the remaining approximate $ 0.6 million to be paid in equal monthly installments, beginning in January, 2024. This gain was recognized as part of other income, net per the consolidated statement of operations for the three months ended March 31, 2024, with the approximate $ 0.9 million receivable balance recognized as part of prepaid expenses and other current assets, per the consolidated balance sheet, as of March 31, 2024. The settlement also resulted in the return of equipment to the Company in October 2023. The Company is currently pursuing 10 separate legal proceedings in attempting to collect approximately $ 2.5 million outstanding receivables. The Company is not confident that all legal proceedings and collection efforts will yield in positive results or return of equipment. On April 25, 2024, Medical Investor Holdings, LLC dba Vertical Companies (“MIH”) filed a complaint against Agrify demanding $ 288,000 . MIH purchased an XMU hydrocarbon extraction system from Precision in October 2021. MIH chose to not include installation and training in the original purchase but is now having problems with this equipment. The Company this is a meritless case. The Company is also a defendant or plaintiff in a variety of other litigation matters that are individually insignificant. The timing and amount of any settlements, including potential payments made or received, is uncertain. Nonetheless, management currently estimates that the Company’s aggregate net loss exposure with respect to these cases is within the range of approximately $ 150,000 to $ 300,000 . On July 2022, claimant, an ex-sales VP is claiming he is owed back wages, commission and is entitled to equity in the company, under theories of liability under Massachusetts labor laws including retaliation, breach of contract, breach of covenant of good faith and fair dealing, fraudulent inducement, tortious interference & unjust enrichment. Company has filed its answer to the initial complaint in January 2023. The Company believes this is a meritless case and has responded to various discovery requests. Commitments Other Commitments and Contingencies The Company is potentially subject to claims related to various non-income taxes (such as sales, value-added, consumption, and similar taxes) from various tax authorities, including in jurisdictions in which the Company already collects and remits such taxes. If the relevant taxing authorities successfully pursue these claims, the Company could be subject to additional tax liabilities. Refer to Note 7 – Debt, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum debt payments. Refer to Note 8 – Leases, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum lease payments under operating and financing lease liabilities. Refer to Note 12 – Income Taxes, included elsewhere in the notes to the consolidated financial statements for information regarding income tax contingencies. 32 AGRIFY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 15 — Related Parties Some of the officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available. The following table describes the net purchasing (sales) activity with entities identified as related parties to the Company: Three months ended March 31, (In thousands) 2024 2023 Bluezone $ — $ 4 Topline Performance Group — ( 1 ) NEIA — ( 43 ) Greenstone Holdings — ( 2 ) The following table summarizes net related party (payable) receivable as of March 31, 2024 and December 31, 2023: (In thousands) March 31, 2024 December 31, 2023 Bluezone $ — $ (4 ) Valiant Americas, LLC — 1 On July 12, 2023, the Company issued an unsecured promissory note in favor of GIC Acquisition, LLC, an entity that is owned and managed by the Company’s Chairman and Chief Executive Officer. Refer to Note 7 - Debt for further disclosure related to this Related Party Note. On October 27, 2023, CP Acquisitions LLC, an entity affiliated with and controlled by Company’s Chairman and Chief Executive Officer, purchased the Exchange Note and the Convertible Note. In addition, the Company issued to CP a Junior Secured Note. Refer to Note 7 - Debt for further disclosure related to this Related Party Note. Note 16— Subsequent Events The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the condensed consolidated financial statements were issued. Exercise of Company Issued Prefunded Warrants In April 2024, a holder of 953,684 of the Company’s previously issued prefunded warrants exercised such warrants for the purchase of 953,684 of the Company’s common stock. 33