RYTHM, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The information contained in this Quarterly Report on Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities And Exchange Commission (the “SEC”) on April 15, 2024, as amended on April 29, 2024 (the “Form 10-K”) and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the risk factors described in our Annual Report on Form 10-K in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this Quarterly Report on Form 10-Q. The following should also be read in conjunction with the unaudited financial statements and notes thereto that appear elsewhere in this report. Except as otherwise indicated herein or as the context otherwise requires, references in this quarterly report to “we,” “us,” “our,” “Company,” and “Agrify” refer to Agrify Corporation, a Nevada corporation and its consolidated subsidiaries. Overview We are a developer of proprietary precision hardware and software grow solutions for the indoor commercial agriculture industry and provide equipment and solutions for cultivation, extraction, post-processing, and testing for the cannabis and hemp industries. We believe we are the only company with an automated and fully integrated grow solution in the industry. Our Agrify “Precision Elevated™” cultivation solution seamlessly combines our integrated hardware and software offerings with a broad range of associated services including consulting, engineering, and construction and is designed to deliver the most complete commercial indoor farming solution available from a single provider. The totality of our product offerings and service capabilities forms an unrivaled ecosystem in what has historically been a highly fragmented market. Agrify Corporation was incorporated in the state of Nevada on June 6, 2016, originally incorporated as Agrinamics, Inc. (or “Agrinamics”). On September 16, 2019, Agrinamics amended its articles of incorporation to reflect a name change to Agrify Corporation. Our corporate headquarters are located in Troy, Michigan. We also lease properties located within various geographic regions in which we conduct business, including Colorado, Georgia, and Michigan. Reverse Stock Split On July 5, 2023, we effected a 1-for-20 reverse stock split of our Common Stock. On October 8, 2024, we effected a 1-for-15 reverse stock split of our Common Stock. All share and per share information has been retroactively adjusted to give effect to the reverse stock splits for all periods presented unless otherwise indicated. 37 Recent Developments Business Developments At the beginning of 2023, we announced a strategic plan to foster sustainable long-term growth through cost efficiencies and enhanced sales and growth initiatives. We have been focused on growing our cultivation business by helping our existing Agrify Total Turn-Key customers to bring their facilities online and driving additional sales through our rapid deployment pack program. As a result, we have successfully installed Agrify total turn-key solution program (“TTK Solution”) equipment for and commenced our Las Vegas customer, Nevada Holistic Medicine, our Denver Colorado customer, Denver Greens, and signed several new customers such as Golden Lake Business Park in California, and Harvest Works in New Jersey. As a testimony to the Agrify Vertical Farming Unit’s (“VFU”) ability to produce high quality flower, Nevada Holistic Medicine is already consistently harvesting 9 pounds of A-grade flower per VFU, or roughly 64 grams per canopy square foot, and seeing 90%+ A-grade flower produced with exceptional color, trichome, and terpene levels. Similarly, because we have streamlined our expansive extraction portfolio of technologies, we have successfully supported the deployment of several turnkey solvent-based and solventless extraction packages to customers in California, Michigan, and the East Coast. In addition, we have released several new technologies and products into the market based on customer feedback, including our first peer-reviewed Cannabeast 13 Distillation Unit, a Diamond Miner, Stitch-less Double Filtration Rosin Bags, and the revamped PX30 Hydrocarbon Extractor. We have also made significant strides to receive Underwriters Laboratories Compliance for Precision Extractions’ EXP Explosion Proof Rooms in an effort to continue our commitment to safety and quality within cannabis extraction facilities. These developments illustrate our continuous innovation, and commitment to safety within the cannabis sector as we adapt to evolving market demands. More importantly, we believe our growing partnership across the Country is a strong testimony to operators’ continued trust in Agrify’s team and technologies in the most competitive markets. Note Amendment, Consolidation and Conversion On January 25, 2024, following stockholder approval at an annual meeting of stockholders on January 8, 2024, we and CP Acquisitions LLC (“CP Acquisitions”) consolidated the outstanding principal and interest due under the junior secured promissory note (the “Junior Secured Note”) to CP Acquisitions and a promissory note with an original principal amount of $35.0 million (the “Exchange Note”) to High Trail Special Situations LLC (the “Original Lender”) into a convertible note (the “Convertible Note”) and amended and restated the Convertible Note (as amended and restated, the “Restated Note”), with an outstanding principal amount of approximately $18.3 million at the time of issuance of the Restated Note. The Restated Note amended the terms of the Convertible Note by, among other things, (i) reducing the conversion price to $1.46 per share of Common Stock, (ii) increasing the beneficial ownership limitation to 49.99% with respect to any individual or group, provided that CP Acquisitions may assign its right to receive shares upon conversion to Raymond Chang, the former Chairman and Chief Executive Officer of the Company and/or I-Tseng Jenny Chan, a former member of the board of directors of the Company (the “Board”) or their affiliates, in which case the 49.99% beneficial ownership limitation will apply to each of them individually, (iii) extending the maturity date to December 31, 2025, (iv) increasing the interest rate from 9% to 10% per annum, (v) increasing the default interest from 15% to 18% per annum, and (vi) providing for the payment of interest every six months, or in lieu of cash interest payments, we may issue shares as payments-in-kind at a conversion price equal to the higher of (i) $1.46 or (ii) a 20% discount to our trailing seven-day volume weighted average price as of the date of interest payment. Immediately following the execution of the Restated Note, CP Acquisitions immediately elected to convert approximately $3.9 million of outstanding principal into an aggregate of 2,671,633 shares of Common Stock, and assigned its rights to receive such shares to entities affiliated with Mr. Chang and Ms. Chan. Following the conversion, there was $15.0 million in principal amount outstanding under the Restated Note. 38 Nasdaq Compliance On March 5, 2024, we received a deficiency letter from the staff (“Staff”) of the Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, for the last 30 consecutive business days, the bid price for our Common Stock had closed below $1.00 per share, which is the minimum closing price required to maintain continued listing on the Nasdaq Stock Market under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had 180 calendar days to regain compliance with the Minimum Bid Requirement. The compliance period would have expired on September 3, 2024. On September 4, 2024, the Staff notified us in writing that we were eligible for an additional 180-day compliance period, or until March 3, 2025, to regain compliance with the Minimum Bid Requirement. On October 8, 2024, we completed a 1-for-15 reverse stock split of our Common Stock, in which each fifteen shares of Common Stock issued and outstanding was combined and converted into one share of Common Stock to regain compliance with the Minimum Bid Requirement. On October 22, 2024, the Staff notified us that we had regained compliance with the Minimum Bid Requirement. We can provide no assurances that we will continue to meet Nasdaq listing requirements and otherwise remain listed on Nasdaq. If we fail to continue to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the Minimum Bid Requirement, Nasdaq will take steps to delist our Common Stock. Such a de-listing would likely have a negative effect on the price of our Common Stock and would impair stockholders’ ability to sell or purchase our Common Stock when they wish to do so, as well as adversely affect our ability to issue additional securities and obtain additional financing in the future. Public Offering On February 27, 2024, we entered into a placement agency agreement with Alexander Capital, LP as placement agent, pursuant to which we agreed to issue and sell an aggregate of 2,760,000 shares of Common Stock, and, in lieu of Common Stock to certain investors that so chose, Pre-Funded Warrants (“Pre-Funded Warrants”) to purchase 3,963,684 shares of Common Stock. The public offering price for each share of Common Stock was $0.38, and the offering price for each Pre-Funded Warrant was $0.379, which equals the public offering price per share of the Common Stock, less the $0.001 per share exercise price of each Pre-Funded Warrant. The Offering was made pursuant to a registration statement on Form S-1 that we filed with the SEC on January 26, 2024 and was declared effective on February 14, 2024. Raymond Chang, our former Chairman and Chief Executive Officer, participated in the offering on the same terms as other investors. The net proceeds from the public offering were approximately $2.2 million, after deducting placement agent fees and commissions and expenses. The public offering closed on February 28, 2024. Debt Modification; Warrant Amendments On May 21, 2024, we and CP Acquisitions entered into an amendment to the Convertible Note (the “Consolidated Note Amendment”), pursuant to which CP Acquisitions may elect, in lieu of shares of Common Stock issuable upon conversion of the Convertible Note, to instead receive Pre-Funded Warrants. The conversion price applicable to the Pre-Funded Warrants will remain unchanged at $21.90. Immediately following the execution of the Consolidated Note Amendment, CP Acquisitions elected to convert $11.5 million of outstanding principal into a Pre-Funded Warrant exercisable at issuance for up to 525,114shares of Common Stock having a fair value of approximately $2.9 million (the “CP Warrant Conversion”). On May 21, 2024, we and GIC Acquisition, LLC (“GIC”), the holder of an unsecured promissory note (the “GIC Note”), amended and restated the GIC Note (the “Restated GIC Note”) to increase the aggregate principal amount to approximately $2.29 million, extend the maturity date to December 31, 2025, and provide that the Restated Junior Note may be converted into Common Stock of the Company or, at GIC’s election, Pre-Funded Warrants, in each case at a conversion price of $4.65. Immediately following the execution of the Restated GIC Note, GIC elected to convert all of the outstanding principal under the Restated GIC Note into a Pre-Funded Warrant exercisable at issuance for up to 492,204 shares of Common Stock having a fair value of approximately $2.7 million (the “GIC Warrant Conversion”, and, collectively with the CP Warrant Conversion, the “Related Party Warrant Conversions”). 39 On June 30, 2024, we executed an amendment to the Pre-Funded Warrants, pursuant to which we revised certain provisions of the Pre-Funded Warrants to (i) remove the adjustment to the exercise price of the Pre-Funded Warrants when there is a bona fide equity financing with the primary purpose of raising capital (the “Adjustment Provisions”) and (ii) increase the threshold for a change of control from 50% to greater than 50%. On August 12, 2024, our stockholders approved a proposal to amend the Pre-Funded Warrants to add the Adjustment Provisions at a future date. Pursuant to that approval, on August 28, 2024, we entered into amendments to the Pre-Funded Warrants to insert the Adjustment Provisions. As a result of the warrant amendments and the subsequent issuance of 189,645 shares of Common Stock to Ionic Ventures, LLC (“Ionic”) at an effective purchase price of approximately $2.109 per share of Common Stock, the number of shares of Common Stock underlying the Pre-Funded Warrant held by CP Acquisitions was adjusted to 5,452,288 and the number of shares of Common Stock underlying the Pre-Funded Warrant held by GIC was adjusted to 1,085,122. On August 30, 2024, CP Acquisitions partially exercised its Pre-Funded Warrant and entities affiliated with Mr. Chang and Ms. Chan received an aggregate of 383,127 shares of Common Stock upon the exercise. On September 27, 2024, we further amended the Pre-Funded Warrants to remove the Adjustment Provisions from each warrant and (ii) preventing the holders from any additional exercise of either of the Pre-Funded Warrants at any time between September 27, 2024 and October 9, 2024. Change in Accounting Firm On June 20, 2024 after an evaluation process, the audit committee of our Board (the “Audit Committee”) dismissed Marcum LLP as our independent registered public accounting firm and appointed MATSUURA (“Matsuura”) as our independent registered public accounting firm for the fiscal year ending December 31, 2024, in each case effective as of June 25, 2024. On June 30, 2024, the audit practice of Matsuura was combined in a transaction pursuant to which Matsuura merged its operations with GuzmanGray, a professional corporation (“GuzmanGray”). On July 19, 2024, Matsuura resigned as our auditors and the Audit Committee appointed GuzmanGray as our independent registered public accounting firm effective as of the Effective Date. Equity Line of Credit Facility On August 28, 2024, we entered into the Purchase Agreement and a registration rights agreement with Ionic pursuant to which Ionic committed to purchase up to an aggregate of $15.0 million of our Common Stock, subject to certain limitations, from time to time and at our sole discretion over the 36-month term of the Purchase Agreement. From and after the date the registration statement relating to the resale of the shares sold to Ionic is declared effective, we may from time to time on any business day, by written notice delivered by us to Ionic, direct Ionic to purchase between $250,000 and $750,000 of shares of Common Stock on such business day, at a purchase price per share that will be equal to 93% (or 80% if the Common Stock is not then trading on the Nasdaq Capital Market) of the lowest daily VWAP over a specified measurement period beginning after the delivery of the purchase notice, as described further in the Purchase Agreement (each, a “Regular Purchase”). The Purchase Agreement also permitted us to deliver an exemption purchase notice for $400,000 on the date of signing, with the shares so purchased to be delivered following the Commencement Date, and we delivered an exemption purchase notice for $400,000 for the purchase by Ionic of 189,645 shares of Common Stock. We will control the timing and amount of any sales of Common Stock to Ionic pursuant to the Purchase Agreement. Ionic has no right to require us to sell any shares of Common Stock to Ionic, but Ionic is obligated to make purchases as we direct, subject to certain conditions. Issuance of Junior Note On August 14, 2024, we issued the 2024 CP Note to CP Acquisitions. Pursuant to the 2024 CP Note, CP Acquisitions would lend up to $1,500,000 to the Company. The 2024 CP Note bears interest at a rate of 10% per annum, will mature in full on July 1, 2025, and may be prepaid without any fee or penalty. The 2024 CP Note is secured by our assets and ranks junior to existing secured indebtedness. The 2024 CP Note may be converted into Common Stock of the Company or, at CP Acquisitions’ election, Pre-Funded Warrants with an exercise price of $0.001 per share, in each case at a conversion price of $3.9495. 40 Mack Molding Modification Agreement On October 27, 2023, and effective as of October 18, 2023, we entered into a Modification and Settlement Agreement (the “Modification Agreement”) with Mack Molding Company (“Mack”) with respect to a dispute with Mack under an existing supply agreement. On February 29, 2024, we met our contractual obligations under the terms of the Modification Agreement. In settlement of the dispute, we made cash payments of $500,000 and $250,000 to Mack and issued to Mack a warrant to purchase 750,000 shares of Common Stock. On August 30, 2024, we entered into an amendment to the Modification Agreement with Mack, which modified the payment terms and VFU purchase requirements under the Modification Agreement. Pursuant to the amendment, we agreed to make payments of $1.0 million prior to October 31, 2024 and an additional $1.0 million prior to December 31, 2024. We also agreed to purchase at least 25 VFUs prior to October 31, 2024 and a further 25 VFUs between November 1, 2024 and December 31, 2024. Upon payment in accordance with the terms of the amendment, we will be entitled to certain residual inventory in the possession of Mack, and the warrant issued to Mack will be terminated. Convertible Note Amendment On October 18, 2024, we entered into an amendment with CP Acquisitions to the 2024 CP Note, pursuant to which the maximum principal sum of the 2024 CP Note was increased from $1,500,000 to $3,000,000. The conversion price applicable to the 2024 CP Note will remain unchanged with an exercise price of $0.001 per share, in each case at a conversion price of $3.9495 (as may be adjusted per the 2024 CP Note). Issuance of Convertible Note; Board and Management Changes On November 5, 2024, we issued a Secured Convertible Note (the “Green Thumb Note”) to RSLGH, LLC (the “Investor”), a subsidiary of Green Thumb Industries Inc. (“Green Thumb”). The Green Thumb Note is a secured obligation and ranks senior to all indebtedness of the Company except for indebtedness held by CP Acquisitions and Mack. The Green Thumb Note will mature on November 5, 2025 and has a 10.0% annualized interest rate, with interest to be paid on the first calendar day of each September and March while the Green Thumb Note is outstanding, in cash, beginning January 1, 2025. The principal amount of the Green Thumb Note will be payable on the maturity date. The Green Thumb Note provides for advances of up to $20.0 million in the aggregate, of which $10.0 million was advanced upon issuance. If the Investor elects to convert the Green Thumb Note, the conversion price per share will be $3.158, subject to customary adjustments for certain corporate events. The conversion of the Green Thumb Note will be subject to certain customary conditions and the receipt of stockholder approval to the extent necessary under Nasdaq listing rules. Immediately prior to the issuance of the Green Thumb Note, Raymond Chang, I-Tseng Jenny Chan and entities affiliated with each of them sold shares of Common Stock and Pre-Funded Warrants to the Investor. Immediately following the issuance of the Green Thumb Note, Mr. Chang resigned as our Chairman and Chief Executive Officer, and Ms. Chan resigned as a member of our Board of Directors. The Board of Directors appointed Benjamin Kovler as our Chairman and Interim Chief Executive Officer and Armon Vakili and Richard Drexler as members of the Board of Directors to fill the vacancies resulting from Mr. Chang’s and Ms. Chan’s resignations. Plans to Acquire the Señorita Brand of THC Beverages On November 12, 2024, we announced that we signed a non-binding letter of intent to acquire certain assets from Double or Nothing LLC, the owner and creator of the Señorita brand of hemp-derived legal THC (“HDLT”) drinks, in exchange for 530,000 shares of Agrify common stock or common stock equivalents (the “Transaction”). The Transaction would involve the acquisition of assets involved in the operation of Señorita’s HDLT business. There can be no assurances that we will reach a binding agreement and if we do, the terms could differ from those stated above. 41 Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include assumptions about collection of accounts and notes receivable, the valuation and recognition of stock-based compensation expense, valuation allowance for deferred tax assets and useful life of fixed assets and intangible assets. Financial Overview Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial position and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate estimates, which include estimates related to accruals, stock-based compensation expense, and reported amounts of revenues and expenses during the reported period. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions. 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 Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC Topic 815, Derivatives and Hedging (“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 marked-to-market each reporting period with the changes in fair value of warrant liabilities recorded in other income (expense), net in the accompanying unaudited condensed 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. The estimated fair value of the warrant liabilities 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. Revenue Recognition Overview We generate revenue from the following sources: (1) equipment sales, (2) providing services and (3) construction contracts. 42 In accordance with ASC Topic 606, Revenue Recognition (“ASC 606”), we recognize revenue from contracts with customers using a five-step model, which is described below: ● identify the customer contract; ● identify performance obligations that are distinct; ● determine the transaction price; ● allocate the transaction price to the distinct performance obligations; 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 use and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability, and consideration is probable. Specifically, we obtain written/electronic signatures on contracts and a purchase order, if said purchase orders are issued in the normal course of business by the customer. Identify performance obligations that are distinct A performance obligation is a promise by us to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and our promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Determine the transaction price The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies. Allocate the transaction price to distinct performance obligations The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer. Our contracts typically contain multiple performance obligations, for which we account for individual performance obligations separately, if they are distinct. The standalone selling price reflects the price we would charge for a specific piece of equipment or service if it was sold separately in similar circumstances and to similar customers. Recognize revenue as the performance obligations are satisfied Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer. 43 Significant Judgments We enter into contracts that may include various combinations of equipment, services and construction, which are generally capable of being distinct and accounted for as separate performance obligations. Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once we determine the performance obligations, the transaction price is determined, which includes estimating the amount of variable consideration to be included in the transaction price, if any. We then allocate the transaction price to each performance obligation in the contract based on the SSP. The corresponding revenue is recognized as the related performance obligations are satisfied. Judgment is required to determine the SSP for each distinct performance obligation. We determine SSP based on the price at which the performance obligation is sold separately and the methods of estimating SSP under the guidance of ASC 606-10-32-33. If the SSP is not observable through past transactions, we estimate the SSP, taking into account available information such as market conditions, expected margins, and internally approved pricing guidelines related to the performance obligations. We license our software as a SaaS type subscription license, whereby the customer only has a right to access the software over a specified time period. The full value of the contract is recognized ratably over the contractual term of the SaaS subscription, adjusted monthly if tiered pricing is relevant. We typically satisfy our performance obligations for equipment sales when equipment is made available for shipment to the customer; for services sales as services are rendered to the customer and for construction contracts both as services are rendered and when contract is completed. We utilize the cost-plus margin method to determine the SSP for equipment and build-out services. This method is based on the cost of the services from third parties, plus a reasonable markup that we believe is reflective of a market-based reseller margin. We determine the SSP for services in time and materials contracts by observable prices in standalone services arrangements. We estimate variable consideration in the form of royalties, revenue share, monthly fees, and service credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Variable consideration is typically not subject to constraint. 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, we will assess whether the transaction price for those contracts include a significant financing component. We have elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if we expect that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service, will be one year or less. For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative estimate of the financing component and its relative significance, requires judgment. Accordingly, we impute interest on such contracts at an agreed upon interest rate and will present the financing components separately as financial income. For the nine months ended September 30, 2024 and 2023, we did not have any such financial income. Payment terms with customers typically require payment in advance or payment 30 days from invoice date. Our agreements with customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise a concern over delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented. We have elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service. Accordingly, we will accrue all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. We have payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. 44 We receive payment from customers based on specified terms that are generally less than 30 days from the satisfaction of performance obligations. There are no contract assets related to performance under the contract. The difference in the opening and closing balances of our contract liabilities primarily results from the timing difference between our performance and the customer’s payment. We fulfill obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. Accounts receivables are recorded when the customer has been billed or the right to consideration is unconditional. We recognize contract liabilities when consideration has been received or an amount of consideration is due from the customer, and we have a future obligation to transfer certain proprietary products. In accordance with ASC 606-10-50-13, we are required to include disclosure on our remaining performance obligations as of the end of the current reporting period. Due to the nature of our contracts, these reporting requirements are not applicable. The majority of our remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the right to invoice practical expedient. We generally provide a one-year warranty on our products for materials and workmanship but may provide multiple year warranties as negotiated, and will pass on the warranties from its vendors, if any, which generally covers this one-year period. In accordance with ASC 450-20-25, we accrue for product warranties when the loss is probable and can be reasonably estimated. The reserve for warranty returns is included in accrued expenses and other current liabilities in our unaudited condensed consolidated balance sheets. Income Taxes We account for income taxes pursuant to the provisions of ASC Topic 740, Income Taxes , (“ASC 740”) which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized. We follow the provisions of ASC 740-10-25-5, “Basic Recognition Threshold.” When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10-25-6, the benefit of a tax position is recognized in the unaudited condensed consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. We believe our tax positions are all highly certain of being upheld upon examination. As such, we have not recorded a liability for unrecognized tax benefits. We recognize the benefit of a tax position when it is effectively settled. ASC 740-10-25-10, “Basic Recognition Threshold” provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. ASC 740-10-25-10 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority. For tax positions considered effectively settled, we recognize the full amount of the tax benefit. 45 Accounting for Stock-Based Compensation We follow the provisions of ASC Topic 718, Compensation — Stock Compensation ,(“ASC 718”) establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC Topic 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as options issued under our Stock Option Plans. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying Common Stock, expected option life, and expected volatility in the market value of the underlying Common Stock. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options and warrants have characteristics different from those of our traded stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the expected term. The expected dividend yield is based upon our history of having never issued a dividend and management’s current expectation of future action surrounding dividends. We calculate the expected volatility of the stock price based on the corresponding volatility of our peer group stock price for a period consistent with the underlying instrument’s expected term. The expected lives for such grants were based on the simplified method for employees and directors. In arriving at stock-based compensation expense, we estimate the number of stock-based awards that will be forfeited due to employee turnover. Our forfeiture assumption is based primarily on its turn-over historical experience. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in our financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized in our financial statements. The expense we recognize in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed above. 46 Results of Operations Comparison of the Three and Nine Months Ended September 30, 2024 and 2023 The following table summarizes our results of operations for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Revenue (including $0, $0, $0, and $46 from related parties, respectively) $ 1,934 $ 3,139 $ 7,526 $ 14,009 Cost of goods sold 1,709 2,165 6,009 11,447 Gross profit 225 974 1,517 2,562 General and administrative 3,364 4,321 9,726 16,066 Selling and marketing 348 812 1,204 3,522 Research and development 168 486 628 1,864 (Gain) loss on settlement of contingent liabilities — — (5,935 ) — Gain on early termination of lease — — (39 ) — (Gain) loss on disposal of property and equipment 10 (67 ) 1 (62 ) Change in contingent consideration — — (2,180 ) (1,322 ) Total operating expenses 3,890 5,552 3,405 20,068 Operating (loss) income (3,665 ) (4,578 ) (1,888 ) (17,506 ) Interest income (expense), net (38 ) (363 ) (166 ) (1,562 ) Change in fair value of warrant liabilities (15,098 ) 1,975 (15,502 ) 3,599 Loss on extinguishment of long-term debt, net — — — (4,631 ) Other income (expense), net 150 874 169 874 Total other expense, net (14,986 ) 2,486 (15,499 ) (1,720 ) Net (loss) income (18,651 ) (2,092 ) (17,387 ) (19,226 ) Loss attributable to non-controlling interest — — — 2 Net (loss) income attributable to Agrify Corporation $ (18,651 ) $ (2,092 ) $ (17,387 ) $ (19,224 ) Net (loss) income per share attributable to Common Stockholders – basic (1) $ (17.31 ) $ (19.02 ) $ (16.82 ) $ (202.21 ) Weighted average common shares outstanding – basic 1,077,780 109,983 1,033,582 95,068 Revenues Our goal is to provide our customers with a variety of products to address their entire indoor agriculture needs. Our core product offering includes our VFUs and Agrify Integrated Grow Racks with our Agrify Insights ™ software, which are supplemented with environmental control products, grow lights, facility build-out services and extraction equipment. We generate revenue from sales of cultivation solutions, including ancillary products and services, Agrify Insights ™ software, facility build-outs and extraction equipment and solutions. We believe that our product mix form an integrated ecosystem which allows us to be engaged with our potential customers from early stages of the grow cycle — first during the facility build-out; to the choice of cultivation solutions, running the grow business with our Agrify Insights ™ software and finally, our extraction, post-processing and testing services to transform harvest into a sellable product. We believe that delivery of each solution in the various stages in the process will generate sales of additional solutions and services. 47 The following table provides a breakdown of our revenue for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, (In thousands) 2024 2023 Change % Change 2024 2023 Change % Change Cultivation solutions, including ancillary products and services $ 281 $ 138 $ 143 104 % $ 1,719 $ 633 $ 1,086 172 % Agrify Insights™ software 70 58 12 21 % 200 123 77 63 % Facility build-outs — — — 0 % — 882 (882 ) (100 )% Extraction solutions 2,171 3,335 (1,164 ) (35 )% 7,737 13,499 (5,762 ) (43 )% Sales discounts on cultivation and extraction solutions (588 ) (392 ) (196 ) (50 )% (2,130 ) (1,128 ) (1,002 ) 89 % Total revenue $ 1,934 $ 3,139 $ (1,205 ) (38 )% $ 7,526 $ 14,009 $ (6,483 ) (46 )% Revenues decreased by $1.2 million, or 38%, for the three months ended September 30, 2024 compared to the same period in 2023. Revenues decreased by $6.4 million, or 46%, for the nine months ended September 30, 2024 compared to the same period in 2023. The comparative decrease in revenue was generated primarily from decreases in revenue from facility build-outs and extraction solutions. Extraction division revenues decreased by $1.2 million and $5.8 million for the three and nine months ended September 30, 2024, respectively, primarily due to changes in contract terms with customers which expedited cash flows but reduced overall demand. Additionally, design and build revenues decreased by $0 and $0.9 million for the three and nine months ended September 30, 2024, respectively due to the discontinued build-out of facilities under our TTK Solutions. Cost of Goods Sold Cost of goods sold represents a combination of the following: construction-related costs associated with our facility build-outs, internal and outsourced labor and material costs associated with the assembly of both cultivation equipment (primarily VFUs) and extraction equipment, as well as labor and parts costs associated with the sale or provision of other products and services. The following table provides a breakdown of our cost of goods sold for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, (In thousands) 2024 2023 Change % Change 2024 2023 Change % Change Cultivation solutions, including ancillary products and services $ 197 $ 556 $ (359 ) (65 )% $ 1,186 $ 1,579 $ (393 ) (25 )% Facility build-outs 36 3 33 1100 % 48 971 (923 ) (95 )% Extraction solutions 1,476 1,606 (130 ) (8 )% 4,775 8,897 (4,122 ) (46 )% Total cost of goods sold $ 1,709 $ 2,165 $ (456 ) (21 )% $ 6,009 $ 11,447 $ (5,438 ) (48 )% 48 Cost of goods sold decreased by $0.5 million, or 21%, for the three months ended September 30, 2024 compared to the same period in 2023. Cost of goods sold decreased by $5.4 million, or 48%, for the nine months ended September 30, 2024 compared to the same period in 2023. The comparative quarterly decrease in cost of goods sold is associated with decreases in cost of goods sold related to facility build-outs and extraction solutions which aligns with the reduction in revenue over the same period for each of these revenue streams. Gross Profit Three months ended September 30, Nine months ended September 30, (In thousands) 2024 2023 Change % Change 2024 2023 Change % Change Gross profit $ 225 $ 974 $ (749 ) (77 )% $ 1,517 $ 2,562 $ (1,045 ) (41 )% Gross profit totaled $0.2 million, or 11.6%, of total revenue during the three months ended September 30, 2024 compared to $1.0 million, or 31.0%, of total revenue during the three months ended September 30, 2023. Gross profit totaled $1.5 million, or 20.2% of total revenue during the nine months ended September 30, 2024 compared to a gross profit of $2.6 million, or 18.3% of total revenue during the nine months ended September 30, 2023. The comparative $0.8 million third-quarter year over year decrease in gross profit, as well as the comparative decrease in gross profit margin, is primarily attributable to a smaller decrease in costs of goods sold relative to the decrease in revenue for the period. During the third quarter of 2024, we realized a gross profit margin of 32% associated with our extraction solutions revenue, while we realized a gross profit margin of 45% on our extraction solution revenues for the third quarter of 2023. General and Administrative Three months ended September 30, Nine months ended September 30, (In thousands) 2024 2023 Change % Change 2024 2023 Change % Change General and administrative $ 3,364 $ 4,321 $ (957 ) (22 )% $ 9,726 $ 16,066 $ (6,340 ) (39 )% General and administrative (“G&A”) expenses consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses, associated with executive and other administrative functions. Other G&A expenses include, but are not limited to, professional fees for legal, consulting, depreciation and amortization and accounting services, as well as facility-related costs. G&A expense decreased by $1.0 million, or 22%, for the three months ended September 30, 2024, compared to the same period in 2023. G&A expense decreased by $6.3 million, or 39%, for the nine months ended September 30, 2024, compared to the same period in 2023. The decrease for the nine months ended September 30, 2024 is primarily attributable to a decrease in payroll expense of $2.9 million, a decrease in insurance of $1.5 million, a decrease in stock based compensation of $1.3 million, and a decrease in sales tax expense of $0.5 million. 49 Research and Development Three months ended September 30, Nine months ended September 30, (In thousands) 2024 2023 Change % Change 2024 2023 Change % Change Research and development $ 168 $ 486 $ (318 ) (65 )% $ 628 $ 1,864 $ (1,236 ) (66 )% Research and development (“R&D”) expenses consisted primarily of costs incurred for the development of our Agrify Insights ™ software, next generation VFUs, and new extraction technology and methodology, which includes: ● employee-related expenses, including salaries, benefits, and travel; ● expenses incurred by the subcontractor under agreements to provide engineering work related to the development of our Agrify Insights ™ software and next generation VFUs; ● expenses related to our facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies. R&D expense decreased by $0.3 million, or 65% for the three months ended September 30, 2024, compared to the same period in 2023. R&D expense decreased by $1.2 million, or 66%, for the nine months ended September 30, 2024, compared to the same period in 2023. The decrease is attributable to the reduction in personnel, outsourced consulting and materials purchased. Selling and Marketing Three months ended September 30, Nine months ended September 30, (In thousands) 2024 2023 Change % Change 2024 2023 Change % Change Selling and marketing $ 348 $ 812 $ (464 ) (57 )% $ 1,204 $ 3,522 $ (2,318 ) (66 )% Selling and marketing expenses consist primarily of salaries and related costs of personnel, travel expenses, trade shows and advertising expenses. Selling and marketing expenses decreased by $0.5 million, or 57%, for the three months ended September 30, 2024, compared to the same period in 2023. Selling and marketing expenses decreased by $2.3 million, or 66%, for the nine months ended September 30, 2024, compared to the same period in 2023. The decrease is attributable to a decrease in payroll, consulting services, and travel expenses. Gain on settlement of contingent liabilities Three months ended September 30, Nine months ended September 30, (In thousands) 2024 2023 Change % Change 2024 2023 Change % Change Gain on settlement of contingent liabilities $ — $ — $ — 0 % $ (5,935 ) $ — $ (5,935 ) 100 % Gain on settlement of contingent liabilities relates to the legal settlement effected with Mack as described in Note 14 - Commitments and Contingencies within the unaudited condensed consolidated financial statements for the period ended September 30, 2024. On February 29, 2024, we met our performance obligations in terms of the Modification Agreement with Mack. In the second quarter of 2024, management derecognized the previously recognized contingent liability, resulting in a credit of approximately $5.9 million, increasing the total gain for the nine months ended September 30, 2024 to approximately $5.9 million. The gain was recorded within gain on settlement of contingent liabilities, on the unaudited condensed consolidated statement of operations. 50 Other Income, Net Three months ended September 30, Nine months ended September 30, (In thousands) 2024 2023 Change % Change 2024 2023 Change % Change Interest income (expense), net $ (38 ) $ (363 ) $ 325 (90 )% $ (166 ) $ (1,562 ) $ 1,396 (89 )% Other income (expense), net 150 874 (724 ) (83 )% 169 874 (705 ) (81 )% Change in fair value of warrant liabilities (15,098 ) 1,975 (17,073 ) (864 )% (15,502 ) 3,599 (19,101 ) (531 )% Loss on extinguishment of long-term debt, net — — — 0 % — (4,631 ) 4,631 (100 )% Total other expense, net $ (14,986 ) $ 2,486 $ (17,472 ) (703 )% $ (15,499 ) $ (1,720 ) $ (13,779 ) 801 % Interest expense decreased by $0.3 million, or 90%, for the three months ended September 30, 2024, compared to the same period in 2023. Interest expense decreased by $1.4 million, or 89%, for the nine months ended September 30, 2024, compared to the same period in 2023. The decrease in interest expense is attributable mainly to the decrease in principal balance on outstanding loans. The change in fair value of warrant liabilities decreased by $17.1 million, or 864% during the three months ended September 30, 2024, compared to the same period in 2023. The change in fair value of warrant liabilities decreased by $19.1 million, or 531%, during the nine months ended September 30, 2024, compared to the same period in 2023. The decrease is primarily related to the fair value remeasurement of warrants as a result of amendments to warrant agreements during the third quarter of 2024. Income (Loss) Attributable to Non-Controlling Interest We consolidate the results of operations of two less than wholly-owned entities into our unaudited condensed consolidated results of operations. On December 8, 2019, we formed Agrify Valiant LLC, a joint-venture limited liability company in which we are 60% majority owner and Valiant-America, LLC owns 40%. Agrify Valiant LLC started its operations during the second quarter of 2020. On January 22, 2020, as part of the acquisition of TriGrow, we received TriGrow’s 75% interest in Agrify Brands, LLC (formerly TriGrow Brands, LLC), a licensor of an established portfolio of consumer brands that utilize our grow technology. The license of these brands is ancillary to the sale of our VFUs and provides a means to differentiate customers’ products in the marketplace. It is not a material aspect of our business and we have not realized any royalty income. Accordingly, we are currently evaluating whether to continue this legacy business from an operational standpoint, as well as from a legal and regulatory perspective. Income (Loss) attributable to non-controlling interest represents the portion of profit (or loss) that are attributable to non-controlling interest calculated as a product of the net income of the entity multiplied by the percentage of ownership held by the non-controlling interest. In 2023 and 2024 the profit (or loss) attributable to non-controlling interest is immaterial. See the Condensed Consolidated Statements of Operations for the impact on results. Liquidity and Capital Resources As of September 30, 2024, our principal sources of liquidity were cash and cash equivalents and marketable securities totaling $267 thousand. Our current working capital needs are to support revenue growth, to fund construction and equipment financing commitments associated with our TTK Solutions, manage inventory to meet demand forecasts and support operational growth. Our long-term financial needs primarily include working capital requirements and capital expenditures. We anticipate that we will allocate a significant portion of our current balance of working capital to satisfy the financing requirements of our current and future TTK arrangements. These arrangements require a significant amount of upfront capital necessary to fund construction, associated with facility build-outs, and equipment. There are many factors that may negatively impact our available sources of funds in the future, including the ability to generate cash from operations, raise debt capital and raise cash from the issuance of our securities. The amount of cash generated from operations is dependent upon factors such as the successful execution of our business strategy and general economic conditions. 51 We may opportunistically raise debt capital, subject to market and other conditions. Additionally, as part of our growth strategies, we may also raise debt capital for strategic alternatives and general corporate purposes. If additional financing is required from outside sources, we may not be able to raise such capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected. Indebtedness CP Acquisitions Junior Secured Note On October 27, 2023, CP Acquisitions, an entity affiliated with and controlled by our former Chief Executive Officer and former member of our Board of Directors, purchased the Exchange Note and the Convertible Note from CP Acquisitions (the “Note Purchase”). As part of the same transaction, we issued the Junior Secured Note to CP Acquisitions. Pursuant to the Junior Secured Note, CP Acquisitions would lend up to $3.0 million to us. The Junior Secured Note bears interest at a rate of 10% per annum, would mature in full on December 31, 2023, and may be prepaid without any fee or penalty. On December 4, 2023, CP Acquisitions 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 Acquisitions to us was increased to $4.0 million and extended the maturity date thereon to December 31, 2024. On November 30, 2023, CP Acquisitions agreed to forgive $1.0 million of the principal amount outstanding on the Convertible Note. Consolidated CP Acquisitions Note On January 25, 2024, we and CP Acquisitions 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 with the Restated Note having a total outstanding principal of $18,308,021. The Restated Note bears interest at a rate of 10% per annum and will mature in full on December 31, 2025. We 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. If CP Acquisitions elects to convert the Restated Note, the conversion price per share will be $21.90, 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 CP Acquisitions 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, CP Acquisitions elected to convert approximately $3.9 million of outstanding principal into an aggregate of 178,109 shares of Common Stock. On May 21, 2024, we and CP Acquisitions entered into the Consolidated Note Amendment, pursuant to which CP Acquisitions may elect, in lieu of shares of Common Stock issuable upon conversion of the Restated Note, to instead receive Pre-Funded Warrants. The conversion price applicable to the Pre-Funded Warrants will remain unchanged at $21.90. Immediately following the execution of the Consolidated Note Amendment, CP Acquisitions elected to convert $11.5 million of outstanding principal into the CP Warrant Conversion, exercisable at issuance for up to 525,114 shares of Common Stock having a fair value of approximately $2.9 million. GIC Acquisition Note On July 12, 2023, our Board of Directors approved the issuance of the GIC Note to GIC, an entity that is owned and managed by our former Chairman and Chief Executive Officer. Pursuant to the GIC Note, GIC was obligated to lend us up to $0.5 million, $0.3 million of which was delivered at issuance and the remaining $0.2 million delivered on July 31, 2023. The GIC Note bore interest at a rate of 10% per annum, would mature in full on August 6, 2023, and could be prepaid without any fee or penalty. The GIC Note ranked junior to all existing secured indebtedness. On October 27, 2023, the maturity date of the GIC Note was subsequently amended to December 31, 2024, at which point principal and accrued interest will be repaid in full. 52 On May 21, 2024, GIC and the Company entered into the Restated GIC Note, (the Restated GIC Note collectively with the Consolidated Note Amendment, the “Related Party Debt Amendments”) to increase the aggregate principal amount to approximately $2.29 million, extend the maturity date to December 31, 2025, and provide that the Restated Junior Note may be converted into Common Stock of the Company or, at GIC’s election, Pre-Funded Warrants, in each case at a conversion price of $4.65. Immediately following the execution of the Restated GIC Note, GIC elected to convert all of the outstanding principal under the Restated GIC Note into a Pre-Funded Warrant exercisable at issuance for up to 492,203 shares of Common Stock. CP Acquisitions Promissory Note On August 14, 2024, we issued a junior secured promissory note (the “2024 CP Note”) to CP Acquisitions. Pursuant to the 2024 CP Note, CP Acquisitions would lend us up to $1,500,000. The 2024 CP Note bears interest at a rate of 10% per annum, will mature in full on July 1, 2025, and may be prepaid without any fee or penalty. The 2024 CP Note is secured by the Company’s assets and ranks junior to existing secured indebtedness of the Company. The 2024 CP Note may be converted into Common Stock or, at CP Acquisition’s election, Pre-Funded Warrants with an exercise price of $0.001 per share, in each case at a conversion price of $3.9495. Green Thumb Convertible Note On November 5, 2024, we issued the Green Thumb Note to the Investor. The Green Thumb Note is a secured obligation and ranks senior to all indebtedness of the Company except for indebtedness held by CP Acquisitions and Mack. The Green Thumb Note will mature on November 5, 2025 and has a 10.0% annualized interest rate, with interest to be paid on the first calendar day of each September and March while the Green Thumb Note is outstanding, in cash, beginning January 1, 2025. The principal amount of the Green Thumb Note will be payable on its maturity date. The Green Thumb Note provides for advances of up to $20.0 million in the aggregate, of which $10.0 million was advanced upon issuance. If the Investor elects to convert the Green Thumb Note, the conversion price per share will be $3.158, subject to customary adjustments for certain corporate events. The conversion of the Green Thumb Note will be subject to certain customary conditions and the receipt of stockholder approval to the extent necessary under Nasdaq listing rules. Cash Flows The following table presents the major components of net cash flows from and used in operating, investing, and financing activities for the nine months ended September 30, 2024, and 2023: (In thousands) September 30, 2024 September 30, 2023 Net cash (used in) provided by: Operating activities $ (6,250 ) $ (25,940 ) Investing activities 340 25,235 Financing activities 5,743 (9,598 ) Net decrease in cash and cash equivalents $ (167 ) $ (10,303 ) Cash Flow from Operating Activities For the nine months ended September 30, 2024, our operating cash flows included a net loss of $17.4 million, a $15.5 million change in the fair value of warrant liabilities, $2.2 million decrease related to accrued acquisition liabilities due to issuance of held-back-shares, $1.8 million decrease related to recovery of provision for slow-moving inventory, $7.1 gain on a supply agreement $1.1 million related to depreciation and amortization, and $0.9 million of stock based compensation expense. Net cash was increased by changes in operating assets and liabilities of $3.3 million. For the nine months ended September 30, 2023, our operating cash flows included a net loss of $19.2 million, a change in the provision for credit losses of $14.8 million, a $4.6 million loss on extinguishment of notes payable, and $1.4 million of depreciation and amortization expense, $2.1 million in stock based compensation expense, a $2.9 million decrease to inventory reserves, and a $3.6 million credit related to the change in fair value of warrant liabilities. Net cash increased by changes in operating assets and liabilities of $6.2 million. 53 Cash Flow from Investing Activities For the nine months ended September 30, 2024, net cash provided in investing activities was $0.3 million, which primarily resulted from cash inflows of $0.3 million in proceeds from the repayment of a loan receivable. For the nine months ended September 30, 2023, net cash provided by investing activities was $25.3 million, which primarily included cash inflows of $10.5 million in proceeds from the sale of securities and $15.3 million in proceeds from the repayment of a loan receivable, partially offset by cash outflows of $0.6 million in costs related to the issuance of loans. Cash Flow from Financing Activities For the nine months ended September 30, 2024, net cash provided by financing activities was $5.7 million. Net cash provided by financing activities was primarily driven by proceeds from issuance of related party notes of $4.0 million and proceeds from an issuance of Common Stock through an S-1 and Pre-Funded Warrants offering of $2.1 million, offset by $0.4 million in payments on insurance financing loans. For the nine months ended September 30, 2023, net cash used in financing activities was $9.6 million, which was primarily driven by repayment of debt in a private placement of $10.3 million and payments on insurance financing loans of $1.2 million, partially offset by proceeds from the ATM Program of $1.5 million. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market, or credit risk that could arise if we had engaged in those types of relationships. Critical Accounting Policies and Estimates Part I, Item, 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. These estimates are based on our knowledge and understanding of current conditions and actions that we may take in the future. Changes in these estimates will occur as a result of the passage of time and the occurrence of future events. Subsequent changes in these estimates may have a significant impact on our financial condition and results of operations and are recorded in the period in which they become known. We have identified the following estimates that, in our opinion, are subjective in nature, require the exercise of judgment and involve complex analysis: the fair value of derivative assets and liabilities, goodwill impairment assessment, revenue recognition and cost of goods sold. The significant accounting policies and estimates that have been adopted and followed in the preparation of our condensed consolidated financial statements are detailed in Note 1 - Overview, Basis of Presentation and Significant Accounting Policies included in our 2023 Annual Report and Note 1 - Overview, Basis of Presentation and Significant Accounting Policies to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no changes in these policies and estimates that had a significant impact on the financial condition and results of operations for the periods covered in this Quarterly Report. 54 Recently Issued Accounting Pronouncements Adopted For more information on recently issued accounting pronouncements are included within Note 1 - Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to unaudited condensed consolidated financial statements covered under Part I, Item 1 of this Quarterly Report on Form 10-Q. New Accounting Pronouncements Not Yet Adopted For more information on new accounting pronouncements not yet adopted are included within Note 1 - Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to unaudited condensed consolidated financial statements covered under Part I, Item 1 in this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk As a “smaller reporting company” as defined by 17 C.F.R. § 229.10, the Company is not required to provide information required by this Item.