Blog: AGRIFY CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q) – Marketscreener.com

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, 2021 filed with the Securities and Exchange Commission on
March 31, 2022 (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 factors described in our Annual Report
on Form 10-K in the section entitled "Risk Factors" in the Annual Report on Form
10-K 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.



Overview



We are one of the most innovative providers of advanced cultivation and
extraction solutions for the cannabis industry, bringing data, science, and
technology to the forefront of the market. Our proprietary
micro-environment-controlled Agrify Vertical Farming Units (or "VFUs") enable
cultivators to produce the highest quality products with what we believe to be
an unmatched consistency, yield, and Return on Investment at scale. Our
comprehensive extraction product line, which includes hydrocarbon, ethanol,
solventless, post-processing, and lab equipment, empowers producers to maximize
the quantity and quality of extract required for premium concentrates.



We believe we are the only company with an automated and fully integrated grow
solution in the industry. Our cultivation and extraction solutions seamlessly
combine our integrated hardware and software offerings with a broad range of
associated services including consulting, engineering, and construction and are
designed to deliver the most complete commercial indoor farming solution
available from a single provider. The totality of our product offerings and
service capabilities forms an unrivaled ecosystem in what has historically been
a highly fragmented market. As a result, we believe we are well situated to
create a dominant market position in the indoor agriculture sector.



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 Billerica, Massachusetts. We also
lease properties located within various geographic regions in which we conduct
business, including Colorado, Georgia, Massachusetts, and Michigan.

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Reverse Stock Split



On January 12, 2021, we effected a 1-for-1.581804 reverse stock split on our
Common Stock. All share and per share information has been retroactively
adjusted to give effect to the reverse stock split for all periods presented,
unless otherwise indicated.



On October 18, 2022, we effected a 1-for-10 reverse stock split on our Common
Stock. All share and per share information has been retroactively adjusted to
give effect to the reverse stock split for all periods presented, unless
otherwise indicated.



Recent Business Developments



Private Placement



On January 25, 2022, we entered into a Securities Purchase Agreement (the
"Securities Agreement") with an institutional investor and other accredited
investors for the sale by us of (i) 245,035 shares (the "SA Shares") of the our
Common Stock, (ii) pre-funded warrants (the "Pre-Funded Warrants") to purchase
up to an aggregate of 157,064 shares of Common Stock and (iii) warrants to
purchase up to an aggregate of 301,575 shares of Common Stock (the "Common
Warrants" and, collectively with the Pre-Funded Warrants, the "SA Warrants"), in
a private placement offering. The combined purchase price for one share of
Common Stock (or one Pre-Funded Warrant) and the accompanying fraction of a
Common Warrant was $68.00 per share.



Subject to certain ownership limitations, the SA Warrants are exercisable six
months from issuance. Each Pre-Funded Warrant is exercisable into one share of
Common Stock at a price per share of $0.001 (as adjusted from time to time in
accordance with the terms thereof). Each Common Warrant is exercisable into one
share of Common Stock at a price per share of $74.80 (as adjusted from time to
time in accordance with the terms thereof) and will expire on the fifth
anniversary of the initial exercise date. The institutional investor that
received the Pre-Funded Warrants fully exercised such warrants in March 2022.



Raymond Chang, our Chairman and Chief Executive Officer, and Stuart Wilcox, who
is currently our Chief Operating Officer, and at the time was a member of our
Board of Directors, participated in the private placement on essentially the
same terms as other investors, except for having a combined purchase price
of
$69.00 per share.


The gross proceeds to us from the private placement were approximately $27.3
million, before deducting the placement agent’s fees and other offering
expenses, and excluding the proceeds, if any, from the exercise of the SA
Warrants.




Acquisition of Lab Society



On February 1, 2022, we entered into an Agreement and Plan of Merger (the
"Merger Agreement") with LS Holdings Corp. ("Lab Society"), Lab Society NewCo,
LLC, a newly-formed wholly-owned subsidiary of us ("Merger Sub"), Michael S.
Maibach Jr. as the Owner Representative thereunder, and each of the shareholders
of Lab Society (collectively, the "Owners"), pursuant to which we agreed to
acquire Lab Society. Concurrently with the execution of the Merger Agreement, we
consummated the merger of Lab Society with and into Merger Sub, with Merger Sub
surviving such merger as a wholly-owned subsidiary of us (the "Lab Society
Acquisition").



The aggregate consideration for the Lab Society Acquisition consisted of: $4.0
million in cash, subject to certain adjustments for working capital, cash and
indebtedness of Lab Society at closing; 42,561 shares of Common Stock (the
"Buyer Shares"); and the Earn-out Consideration (as defined below), to the
extent earned.



We withheld 12,768 of the Buyer Shares issuable to the Owners (the "Holdback Lab
Buyer Shares") for the purpose of securing any post-closing adjustment owed to
us and any claim for indemnification or payment of damages to which we may be
entitled under the Merger Agreement. During the third quarter of 2022, 2,785 of
the Holdback Lab Buyer Shares were forfeited after the finalization of the net
working capital settlement. The remaining 9,983 Holdback Lab Buyer Shares will
be released following the twelve-month anniversary of the Closing Date in
accordance with and subject to the conditions of the Merger
Agreement. Additional information regarding our contingent consideration
arrangements may be found in Note 4 - Fair Value Measures, included elsewhere in
the notes to the consolidated financial statements.



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The Merger Agreement includes customary post-closing adjustments,
representations and warranties and covenants of the parties. The Owners may
become entitled to additional consideration with a value of up to $3.5 million
based on the eligible net revenues achieved by the Lab Society business during
the fiscal years ending December 31, 2022, and December 31, 2023, of which 50%
will be payable in cash and the remaining 50% will be payable by issuing shares
of Common Stock.



Based upon the combined first and second-quarter actual revenue performance, Lab
Society's revenue trend is significantly below the originally estimated revenue
trends incorporated into our original fair value estimates at the time of the
acquisition. We have concluded Lab Society will not achieve any contingent
earn-out consideration in connection with its first earn-out period.
Accordingly, we reversed the current accrued contingent consideration liability
associated with Lab Society's first earn-out period as of September 30, 2022.
The reversal of this liability of approximately $1.0 million, as required by ASC
Topic 805 Business Combination ("ASC805"), was recorded as a reduction in
operating expenses during the second quarter of 2022.



The purchase price allocation for the business combination has been prepared on
a preliminary basis and changes to those allocations may occur as additional
information becomes available during the respective measurement period (up to
one year from the acquisition date). The estimated fair value at acquisition is
$7.9 million and may be adjusted upon further review of the values assigned to
identifiable intangible assets and goodwill.



Our initial fair value estimates related to the various identified intangible
assets were determined under various valuation approaches including the Income
Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These
valuation methods require management to project revenues, operating expenses,
working capital investment, capital spending and cash flows for the reporting
unit over a multiyear period, as well as determine the weighted-average cost of
capital to be used as a discount rate.



During the three-month period ended June 30, 2022, we identified an
impairment-triggering event associated with both a sustained decline in our
stock price and associated market capitalization, as well as a second-quarter
slowdown in the cannabis industry as a whole. Due to these factors, we deemed
that there was an impairment to the carrying value of its long-lived assets and
accordingly performed interim testing as of June 30, 2022. Based on its interim
testing, we noted that the entire carrying value of its goodwill and intangible
assets should be impaired. Additional information regarding our interim testing
on goodwill and intangible assets may be found in Note 7 - Goodwill and
Intangible Assets, Net, included elsewhere in the notes to the consolidated
financial statements.



Securities Purchase Agreement




On March 14, 2022, we entered into a Securities Purchase Agreement (the
"Securities Purchase Agreement") with an accredited investor (the "Investor"),
we agreed to issue and sell to the Investor, in a private placement transaction,
in exchange for the payment by the Investor of $65 million, less applicable
expenses as set forth in the Securities Purchase Agreement, a senior secured
promissory note in an aggregate principal amount of $65 million (the "SPA
Note"), and a warrant (the "SPA Warrant") to purchase up to an aggregate
of 688,111 shares of Common Stock.



Securities Exchange Agreement

On August 18, 2022, we reached an agreement with its Investor to amend its
existing SPA Note and entered into a Securities Exchange Agreement (the
"Exchange Agreement"). Pursuant to the Exchange Agreement, we partially paid
$35.2 million under the SPA Note and exchanged the remaining balance of the SPA
Note for a new senior secured note (the "Exchange Note") with an aggregate
original principal amount of $35.0 million and a new warrant to purchase
1,422,764 shares of Common Stock (the "Note Exchange Warrant"). Additionally, we
exchanged the SPA Warrant for a new warrant for the same number of underlying
shares but with a reduced exercise price (the "Modified Warrant" and,
collectively with the Note Exchange Warrant, the "Warrant Liabilities").
Additional information regarding our Warrant Liabilities may be found in Note 1
- Overview, Basis of Presentation and Significant Accounting Policies and Note 4
- Fair Value Measures, included elsewhere in the notes to the condensed
consolidated financial statements.



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The Exchange Note is a senior secured obligation of us and ranks senior to all
indebtedness of us. The Exchange Note will mature on the three-year anniversary
of its issuance (the "Maturity Date") and contains a 9.0% annualized interest
rate, with interest to be paid monthly, in cash, beginning September 1, 2022.
The principal amount of the Exchange Note will be payable on the Maturity Date,
provided that the Investor will be entitled to a cash sweep of 20% of the
proceeds received by us in connection with any equity financing, which will
reduce the outstanding principal amount under the Exchange Note.



At any time, we may prepay all of the Exchange Note by redemption at a price
equal to 102.5% of the then-outstanding principal amount under the Note plus
accrued but unpaid interest. The Investor will also have the option of requiring
us to redeem the Exchange Note on the one-year or two-year anniversaries of
issuance at a price equal to the then-outstanding principal amount under the
Exchange Note plus accrued but unpaid interest, or if we undergo a fundamental
change at a price equal to 102.5% of the then-outstanding principal amount under
the Exchange Note plus accrued but unpaid interest.



The Exchange Note imposes certain customary affirmative and negative covenants
upon us, as well as covenants that restrict us and our subsidiaries from
incurring any additional indebtedness or suffering any liens, subject to
specified exceptions, restrict the ability of us and our subsidiaries from
making certain investments, subject to specified exceptions, restrict the
declaration of any dividends or other distributions, subject to specified
exceptions, requires us not to exceed maximum levels of allowable cash spend
while the Exchange Note is outstanding, and requires us to maintain minimum
amounts of cash on hand. If an event of default under the Exchange Note occurs,
the Investor can elect to redeem the Exchange Note for cash equal to 115% of the
then-outstanding principal amount of the Note (or such lesser principal amount
accelerated by the Investor), plus accrued and unpaid interest, including
default interest, which accrues at a rate per year equal to 15% from the date of
a default or event of default. As of September 30, 2022, we are in compliance
with the financial debt covenants associated with our Exchange Note.



Until the date the Exchange Note is fully repaid, the Investor has, subject to
certain exceptions, the right to participate for up to 30% of any offering of
debt, equity (other than an offering of solely Common Stock), or equity-linked
securities, including without limitation any debt, preferred stock or other
instrument or security, of us or our subsidiaries.



The Modified Warrant has an exercise price of $21.50 per share, subject to
adjustment for stock splits, reverse stock splits, stock dividends and similar
transactions, will be exercisable on and after the six-month anniversary of
issuance, has a term of five and one-half years from the date of issuance and
will be exercisable on a cash basis, unless there is not an effective
registration statement covering the resale of the shares issuable upon exercise
of the Modified Warrant (the "Modified Warrant Shares"), in which case the
Modified Warrant will also be exercisable on a cashless exercise basis at the
Investor's election.



The Note Exchange Warrant has an exercise price of $12.30 per share, subject to
adjustment for stock splits, reverse stock splits, stock dividends and similar
transactions, was exercisable upon issuance, and has a term of five and one-half
years from the date of issuance and is exercisable on a cash basis, unless there
is not an effective registration statement covering the resale of the shares
issuable upon exercise of the Warrant (the "Note Exchange Warrant Shares" and,
together with the Modified Warrant Shares, the "Exchange Warrant Shares"), in
which case the Note Exchange Warrant will also be exercisable on a cashless
exercise basis at the Investor's election. Until we complete a qualified equity
financing of at least $15.0 million, which requirement was satisfied with sales
under the ATM Program, the Note Exchange Warrant's exercise price would have
been reduced to the extent we issue securities for a lower purchase price. The
Note Exchange Warrant also prohibited us, until following the completion of such
qualified equity financing, from issuing warrants with more favorable or
preferential terms and/or provisions.



The Warrant Liabilities will each provide that in no event will the number of
shares of Common Stock issued upon exercise of such warrant result in the
Investor's beneficial ownership exceeding 4.99% of our shares of Common Stock
outstanding at the time of exercise (which percentage may be decreased or
increased by the Investor, but to no greater than 9.99%, and provided that any
increase above 4.99% will not be effective until the sixty-first day after
notice of such request by the Investor to increase its beneficial ownership
limit has been delivered to us). Additionally, the Warrant Liabilities could not
be exercised for more than an aggregate of 530,858 shares of Common Stock unless
and until shareholder approval is obtained, which approval was obtained on
October 14, 2022.



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Impact of coronavirus pandemic (“COVID-19”)




The extensive impact of the pandemic caused by COVID-19 has resulted and will
likely continue to result in significant disruptions to the global economy, as
well as businesses and capital markets around the world. In an effort to halt
the outbreak of COVID-19, a number of countries, states, counties, and other
jurisdictions have imposed, and may impose in the future, various measures,
including but not limited to, voluntary and mandatory quarantines, stay-at-home
orders, travel restrictions, limitations on gatherings of people, reduced
operations, and extended closures of businesses.



To date, although all of our operations are functioning, COVID-19 has continued
to cause some disruptions to our business, such as some temporary delays in the
delivery of our inventory. Although the ability of our suppliers to timely ship
their goods has affected some of our deliveries, currently the difficulties
experienced by our suppliers have not yet materially impacted our ability to
deliver products to our customers. However, if this continues, it may negatively
affect any inventory we may have and more significantly delay the delivery of
merchandise to our customers, which in turn will adversely affect our revenues
and results of operations.


The extent to which COVID-19 and the related global economic crisis, affect our
business, results of operations and financial condition, will depend on future
developments that are highly uncertain and cannot be predicted, including the
scope and duration of the pandemic and any recovery period, future actions taken
by governmental authorities, central banks and other third parties (including
new financial regulation and other regulatory reform) in response to the
pandemic, and the effects on our produce, clients, vendors and employees. We
continue to service our customers amid uncertainty and disruption linked to
COVID-19 and we are actively managing our business to respond to its impact.



Nasdaq Deficiency Notice


On October 4, 2022, we received a deficiency letter (the "Notice") from the
Listing Qualifications Department (the "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
Capital 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. To regain
compliance with the Minimum Bid Requirement, the closing bid price of our Common
Stock must be at least $1.00 per share for a minimum of 10 consecutive trading
days during this 180-day compliance period, unless the Staff exercises its
discretion to extend the minimum trading day period pursuant to Nasdaq Listing
Rule 5810(c)(3)(G). On October 28, 2022, the Staff notified us that the closing
bid price of our Common Stock was more than $1.00 for 10 consecutive trading
days, and that we therefore regained compliance with the Minimum Bid
Requirement.



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 the 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 ("GAAP"). The preparation of financial statements in conformity with
GAAP requires us to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. On an ongoing
basis, we evaluate estimate, which include estimates related to accruals,
stock-based compensation expense, and reported amounts of revenues and expenses
during the reported period. We base our estimates on historical experience and
other market-specific or other relevant assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from
those estimates or assumptions.



Revenue Recognition



Overview


We generate revenue from the following sources: (1) equipment sales,
(2) providing services and (3) construction contracts.



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In accordance with ASC 606 “Revenue Recognition”, we recognize revenue from
contracts with customers using a five-step model, which is described below:



  ? identify the customer contract;

  ? identify performance obligations that are distinct;




  ? determine the transaction price;

? allocate the transaction price to the distinct performance obligations; 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 us 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.



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, it
determines the transaction price, which includes estimating the amount of
variable consideration to be included in the transaction price, if any. We then
allocate the transaction price to each performance obligation in the contract
based on the SSP. The corresponding revenue is recognized as the related
performance obligations are satisfied.



                                       54





Judgment is required to determine the SSP for each distinct performance
obligation. We determine SSP based on the price at which the performance
obligation is sold separately and the methods of estimating SSP under the
guidance of Accounting Standards Codification ("ASC") 606-10-32-33. If the SSP
is not observable through past transactions, we estimate the SSP, considering
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
includes a significant financing component. We have elected the practical
expedient that permits an entity to not adjust for the effects of a significant
financing component if we expect that at the contract inception, the period
between when the entity transfers a promised good or service to a customer and
when the customer pays for that good or service, will be one year or less. For
those contracts in which the period exceeds the one-year threshold, this
assessment, as well as the quantitative estimate of the financing component and
its relative significance, requires judgment. Accordingly, we impute interest on
such contracts at an agreed-upon interest rate and will present the financing
components separately as financial income. For the three and nine months ended
September 30, 2022 and 2021, we did not have any such financial income.



Payment terms with customers typically require payment 30 days from the 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.



We receive payment from customers based on specified terms that are generally
less than 30 days from the satisfaction of performance obligations. There are no
contract assets related to performance under the contract. The difference in the
opening and closing balances of our deferred revenue primarily results from the
timing difference between our performance and the customer's payment. We fulfill
obligations under a contract with a customer by transferring products and
services in exchange for consideration from the customer. Accounts receivables
are recorded when the customer has been billed or the right to consideration is
unconditional. We recognize deferred revenue when consideration has been
received or an amount of consideration is due from the customer, and we have a
future obligation to transfer certain proprietary products.



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In accordance with ASC 606-10-50-13, we are required to include disclosure on
its remaining performance obligations as of the end of the current reporting
period. Due to the nature of our contracts, these reporting requirements are not
applicable. The majority of our remaining contracts meet certain exemptions as
defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance
obligation is part of a contract that has an original expected duration of one
year or less and (ii) the right to invoice practical expedient.



We generally provide a one-year warranty on our products for materials and
workmanship but may provide multiple-year warranties as negotiated, and will
pass on the warranties from its vendors, if any, which generally covers this
one-year period. In accordance with ASC 450-20-25, we accrue for product
warranties when the loss is probable and can be reasonably estimated. The
reserve for warranty returns is included in accrued expenses and other current
liabilities in our consolidated balance sheets.



Accounting for Business Combinations




We allocated the purchase price of acquired companies to the tangible and
intangible assets acquired, including in-process research and development
assets, and liabilities assumed, based upon their estimated fair values at the
acquisition date. These fair values are typically estimated with assistance from
independent valuation specialists. The purchase price allocation process
requires us to make significant estimates and assumptions, especially at the
acquisition date with respect to intangible assets, contractual support
obligations assumed, contingent consideration arrangements, and pre-acquisition
contingencies.


Although we believe the assumptions and estimates we have made in the past have
been reasonable and appropriate, they are based in part on historical experience
and information obtained from the management of the acquired companies and
are
inherently uncertain.


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

? future expected cash flows from software license sales, support

agreements, consulting contracts, other customer contracts, and acquired

developed technologies;

? expected costs to develop in-process research and development into

commercially viable products and estimated cash flows from the projects

when completed;

? the acquired company’s brand and competitive position, as well as

assumptions about the period of time the acquired brand will continue to

        be used in the combined company's product portfolio;

    ?   cost of capital and discount rates; and

? estimating the useful lives of acquired assets as well as the pattern or

        manner in which the assets will amortize.




The fair value estimates related to the various identified intangible assets
were determined under various valuation approaches including the Income
Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These
valuation methods require management to project revenues, operating expenses,
working capital investment, capital spending and cash flows for the reporting
unit over a multiyear period, as well as determine the weighted-average cost of
capital to be used as a discount rate.



Goodwill and Intangible Assets

Amortization of acquired intangible assets is the result of the acquisition of
TriGrow Systems, LLC ("TriGrow"), which occurred in 2020, the acquisition of
Precision Extraction NewCo, LLC ("Precision") and Cascade Sciences, LLC
("Cascade") which occurred in 2021, the acquisition of PurePressure, LLC
("PurePressure"), which also occurred in 2021, and the acquisition of Lab
Society, which occurred in 2022. As a result of these transactions, customer
relationships, acquired developed technology, non-compete agreements and trade
names were identified as intangible assets, and are amortized over their
estimated useful lives.



                                       56





We recognize the excess of the purchase price over the fair value of
identifiable net assets acquired as goodwill. Goodwill is not amortized but is
tested for impairment annually on December 2 or more frequently if events or
changes in circumstances indicate that the carrying amount of the goodwill may
not be recoverable. We have determined it is a single reporting unit for the
purpose of conducting the goodwill impairment assessment. A goodwill impairment
charge is recorded if the amount by which our carrying value exceeds its fair
value, not to exceed the carrying amount of goodwill. Factors that could lead to
a future impairment include material uncertainties such as a significant
reduction in projected revenues, a deterioration of projected financial
performance, future acquisitions and/or mergers, and a decline in our market
value as a result of a significant decline in our stock price.



During the three-month period ended June 30, 2022, we identified an
impairment-triggering event associated with both a sustained decline in our
stock price and associated market capitalization, as well as a second-quarter
slowdown in the cannabis industry as a whole. Due to these factors, we deemed
that there was an impairment to the carrying value of its long-lived assets and
accordingly performed interim testing as of June 30, 2022. Based on its interim
testing, we noted that the entire carrying value of its goodwill and intangible
assets should be impaired. Additional information regarding our interim testing
on goodwill and intangible assets may be found in Note 7 - Goodwill and
Intangible Assets, Net, included elsewhere in the notes to the consolidated
financial statements.



Capitalization of Internal Software Development Costs




We capitalize on certain software engineering efforts related to the continued
development of Agrify Insights™ cultivation software under ASC 985-20. Costs
incurred during the application development phase are only capitalized
once technical feasibility has been established and the work performed
will result in new or additional functionality. The types of costs capitalized
during the application development phase include employee compensation, as well
as consulting fees for third-party software developers working on these
projects. Costs related to the research and development are expensed as incurred
until technical feasibility is established as well as post-implementation
activities. Internal-use software is amortized on a straight-line basis over the
estimated useful life of the asset, which ranges from two to five years.



Income Taxes



We account for income taxes pursuant to the provisions of ASC Topic 740, "Income
Taxes," which requires, among other things, an asset and liability approach to
calculating deferred income taxes. The asset and liability approach requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. A valuation allowance is provided to offset any
net deferred tax assets for which management believes it is more likely than not
that the net deferred asset will not be realized.



We follow the provisions of ASC 740-10-25-5, "Basic Recognition Threshold." When
tax returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. In accordance with the guidance of
ASC 740-10-25-6, the benefit of a tax position is recognized in the consolidated
financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. 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.



Accounting for Stock-Based Compensation




We follow the provisions of ASC Topic 718, "Compensation-Stock Compensation."
ASC Topic 718 establishes standards surrounding the accounting for transactions
in which an entity exchanges its equity instruments for goods or services. ASC
Topic 718 focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions, such as options
issued under our Stock Option Plans.



The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model. This model incorporates certain assumptions
for inputs including a risk-free market interest rate, expected dividend yield
of the underlying Common Stock, expected option life, and expected volatility in
the market value of the underlying Common Stock.



                                       57




The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
our stock options and warrants have characteristics different from those of our
traded stock, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
such stock options. The risk-free interest rate is based upon quoted market
yields for United States Treasury debt securities with a term similar to the
expected term. The expected dividend yield is based upon our history of having
never issued a dividend and management's current expectation of future action
surrounding dividends. We calculate the expected volatility of the stock price
based on the corresponding volatility of our peer group stock price for a period
consistent with the underlying instrument's expected term. The expected lives
for such grants were based on the simplified method for employees and directors.



In arriving at stock-based compensation expense, we estimate the number of
stock-based awards that will be forfeited due to employee turnover. Our
forfeiture assumption is based primarily on its turn-over historical experience.
If the actual forfeiture rate is higher than the estimated forfeiture rate, then
an adjustment will be made to increase the estimated forfeiture rate, which will
result in a decrease to the expense recognized in our financial statements. If
the actual forfeiture rate is lower than the estimated forfeiture rate, then an
adjustment will be made to lower the estimated forfeiture rate, which will
result in an increase to expense recognized in our financial statements. The
expense we recognize in future periods will be affected by changes in the
estimated forfeiture rate and may differ significantly from amounts recognized
in the current period.


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



Results of Operations



We have incurred recurring losses to date. Our financial statements have been
prepared assuming that we will continue as a going concern and, accordingly, do
not include adjustments relating to the recoverability and realization of assets
and classification of liabilities that might be necessary should we be unable to
continue in operation.



We expect we will require additional capital to meet our long-term operating
requirements. We expect to raise additional capital through, among other things,
the sale of equity or debt securities.



Comparison of the Three and Nine Months Ended September 30, 2022 and 2021

The following table summarizes our results of operations for the three and nine
months ended September 30, 2022 and September 30, 2021:



                                              Three Months Ended           Nine Months Ended
                                                September 30,                September 30,
(In thousands, except share and per
share data)                                   2022          2021           2022          2021
Revenue                                    $    7,019     $  15,751     $   52,369     $  34,584
Cost of goods sold                             11,135        16,131         50,703        34,977
Gross (loss) profit                            (4,116 )        (380 )        1,666          (393 )

General and administrative                     24,126         7,705         53,263        16,562
Selling and marketing                           2,160           890          6,582         2,288
Research and development                        1,747           827          6,269         2,483
Change in contingent consideration               (602 )           -         (1,509 )           -
Impairment of goodwill and intangible
assets                                              -             -         69,904             -
Total operating expenses                       27,431         9,422        134,509        21,333
Loss from operations                          (31,547 )      (9,802 )     (132,843 )     (21,726 )
Interest (expense) income, net                 (3,979 )          45         (5,224 )          68
Other income (expense)                          1,506           (15 )        1,506           (78 )
Change in fair value of warrant
liability                                       5,686             -          5,686             -
(Loss) gain on extinguishment of notes
payable                                       (17,933 )           -        (17,933 )       2,685
Other (expense) income, net                   (14,720 )          30        (15,965 )       2,675
Net loss before income taxes                  (46,267 )      (9,772 )     (148,808 )     (19,051 )
Income tax benefit                                  -             -           (262 )           -
Net loss                                      (46,267 )      (9,772 )     (148,546 )     (19,051 )
Income (loss) attributable to
non-controlling interests                           1           (14 )            5           153
Net loss attributable to Agrify
Corporation                                $  (46,268 )   $  (9,758 )   $ (148,551 )   $ (19,204 )




                                       58





Revenue


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



We continue to monitor and address the COVID-19 pandemic impacts on our supply
chain. Although the availability of various products is dependent on our
suppliers, their locations, and the extent to which they are impacted by the
COVID-19 pandemic, we are proactively working with manufacturers to meet the
needs of our customers during the pandemic. Product shortages have generally led
to increases in prices globally, with significant impacts to sales and interim
profits.



We generate revenue from sales of cultivation solutions, including ancillary
products and services, Agrify Insights™ cultivation software, facility
build-outs and extraction equipment and solutions. We believe that our product
mix forms an integrated ecosystem that allows us to be engaged with our
potential customers from the 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™ cultivation software and finally, our
extraction, post-processing and testing services to transform harvest into a
sellable product. We believe that the delivery of each solution in the various
stages of the process will generate sales of additional solutions and services.



The following table provides a breakdown of our revenue for the three and nine
months ended September 30, 2022 and 2021:




                                                                                             Nine Months Ended
                     Three Months Ended September 30,                                          September 30,
(In thousands)           2022                  2021         Change        % Change         2022            2021         Change      % Change
Cultivation
solutions,
including
ancillary
products and
services            $             4         $    2,756     $  (2,752 )         (100 )%   $     707       $   4,110     $ (3,403 )         (83 )%
Agrify Insights™
cultivation
software                          1                  -             1            100 %           46               8           38           475 %
Facility
build-outs                    1,334             12,995       (11,661 )          (90 )%      23,551          30,466       (6,915 )         (23 )%
Extraction
solutions                     5,680                  -         5,680            100 %       28,065               -       28,065           100 %
Total revenue       $         7,019         $   15,751     $  (8,732 )          (55 )%   $  52,369       $  34,584     $ 17,785            51 %




Revenues decreased by $8.7 million, or 55.4% for the three months ended
September 30, 2022, as compared to the same period in 2021. The comparative
decrease in revenue was primarily related to a reduction in facility build-outs
of $11.7 million and a reduction in our cultivation solution sales of $2.8
million, partially offset by the sale of extraction solutions equipment and
services from our acquisition of Lab Society in 2022 and the acquisitions of
Precision, Cascade and PurePressure in 2021, which contributed $5.7 million in
revenue for the three months ended September 30, 2022. The $11.7 million
decrease in facility build-out revenue was the result of the completed build-out
of two facilities under our TTK Solutions, the deferral of $5.3 million of
revenue for the Bud & Mary's Cultivation, Inc. ("Bud & Mary's") project due to
pending litigation and a decrease in cultivation products and service sales of
$2.8 million primarily due to migrating to a VFU leasing model. Additional
information regarding Bud & Mary's pending litigation may be found in Note 5 -
Loan Receivable and Note 19 - Subsequent Events, included elsewhere in the notes
to the consolidated financial statements.



Revenues increased by $17.8 million, or 51.4% for the nine months ended
September 30, 2022, as compared to the same period in 2021. The comparative
increase in revenue was generated primarily from extraction solutions sales of
equipment and services from our acquisition of Lab Society in 2022 and the
acquisitions of Precision, Cascade and PurePressure in 2021, which contributed
$28.1 million in revenue for the nine months ended September 30, 2022. This was
partially offset by a reduction of $6.9 million in facility build-out revenue
resulting from the completed build-out of two facilities under our TTK Solutions
which includes the deferral of $5.3 million of revenue resulting from Bud &
Mary's pending litigation and a decrease in cultivation products and service
sales of $3.4 million primarily due to migrating to a VFU leasing model.



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.



                                       59




The following table provides a breakdown of our cost of goods sold for the three
and nine months ended September 30, 2022 and 2021:




                       Three Months Ended                                         Nine Months Ended
                          September 30,                                             September 30,
(In thousands)        2022            2021         Change      % Change         2022            2021         Change      % Change
Cultivation
solutions,
including
ancillary
products and
services            $     572       $   3,570     $ (2,998 )         (84 )%   $   2,312       $   5,456     $ (3,144 )         (58 )%
Agrify Insights™
cultivation
software                    -               -            -             - %            -               -            -             - %
Facility
build-outs              6,429          12,561       (6,132 )         (49 )%      28,217          29,521       (1,304 )          (4 )%
Extraction
solutions               4,134               -        4,134           100 %       20,174               -       20,174           100 %
Total cost of
goods sold          $  11,135       $  16,131     $ (4,996 )         (31 )%   $  50,703       $  34,977     $ 15,726            45 %



Cost of goods sold decreased by $5.0 million, or 31%, for the three months ended
September 30, 2022 as compared to the same period in 2021. The comparative
quarterly decrease in the cost of goods sold is related to a decrease of $6.1
million related to costs for facility build-outs and a decrease of $3.0 million
of costs for cultivation product and service sales. This was partially offset by
an increase of $4.1 million in expenses associated with the sales of our
extraction-related equipment, for which there was no associated revenue or
expense in the prior year quarterly period. The cost of goods sold related to
facility build-outs decreased disproportionately as compared to revenue in the
period as we have included $5.1 million of facility build-out expenses related
to the Bud & Mary's project for which revenue has been deferred in the period.



Cost of goods sold increased by $15.7 million, or 45%, for the nine months ended
September 30, 2022 compared to the same period in 2021. The comparative
quarterly increase in the cost of goods sold is associated with the introduction
of our extraction-related equipment sales in the year-to-date 2022 fiscal
period. Costs associated with extraction equipment-related equipment sales
accounted for $20.2 million of the comparative year-to-date fiscal 2022 increase
in the cost of goods sold. This increase was partially offset by a decrease of
$1.3 million in facility build-outs and a decrease of $3.1 million in
cultivation product and service sales. The cost of goods sold related to
facility build-outs decreased disproportionately as compared to revenue in the
period as we have included $5.1 million of facility build-out expenses related
to the Bud & Mary's project for which revenue has been deferred in the period.



Gross (Loss) Profit



                         Three Months Ended                                        Nine Months Ended
                           September 30,                                             September 30,
(In thousands)           2022           2021        Change       % Change          2022          2021       Change      % Change
Gross (loss) profit   $    (4,116 )    $  (380 )   $ (3,736 )         (983 )%   $    1,666      $  (393 )   $ 2,059           524 %




Gross loss totaled $(4.1) million, or (58.6)% of total revenue during the three
months ended September 30, 2022 compared to a gross loss of $(380) thousand, or
(2.4)% of total revenue during the three months ended September 30, 2021. During
the three months ended September 30, 2022, we realized a gross profit margin of
27% associated with our extraction solutions revenue. The negative gross margin
on the cultivation-related revenue is primarily related to $5.1 million of
facility build-out costs recognized for the Bud & Mary's project for which $5.3
million of revenue has been deferred due to pending litigation and $568 thousand
of overhead expenses for cultivation solutions expenses. This was partially
offset by $1.5 million of contribution related to extraction solutions equipment
and service sales from our acquisition of Lab Society in 2022 and the
acquisitions of Precision, Cascade and PurePressure in 2021.



                                       60




Gross profit totaled $1.7 million, or 3.2% of total revenue during the nine
months ended September 30, 2022 compared to a gross loss of $(393) thousand, or
(1.1)% of total revenue during the nine months ended September 30, 2021. The
comparative $2.1 million year-over-year improvement in gross profit, as well as
the comparative improvement in gross profit margin, is primarily attributable to
the introduction of our extraction solutions revenue during the first nine
months of 2022. No extraction solutions-related revenues were recognized during
the first nine months of 2021. Extraction solutions revenue contributes a higher
gross profit and gross profit margins than those realized on our
cultivation-related revenue, which includes our TTK Solutions build-out revenue.
During the first nine months of 2022, we realized a gross profit margin of 28%
associated with our extraction solutions revenue, while we realized a gross loss
of approximately (26)% on our cultivation-related revenues. The negative gross
margin on the cultivation-related revenue is primarily related to $5.1 million
of facility build-out costs recognized for the Bud & Mary's project for which
$5.3 million of revenue has been deferred due to pending litigation.



Operating Expenses



                      Three Months Ended September 30,                                   Nine Months Ended September 30,
(In thousands)          2022                 2021            Change       % Change          2022               2021           Change        % Change
General and
administrative       $   24,126         $         7,705     $ 16,421            213 %    $   53,263       $       16,562     $  36,701            222 %
Selling and
marketing                 2,160                     890        1,270            143 %         6,582                2,288         4,294            188 %
Research and
development               1,747                     827          920            111 %         6,269                2,483         3,786            152 %
Change in
contingent
consideration              (602 )                     -         (602 )         (100 )%       (1,509 )                  -        (1,509 )         (100 )%
Impairment of
goodwill and
intangible assets             -                       -            -              - %        69,904                    -        69,904            100 %
Total operating
expenses             $   27,431         $         9,422     $ 18,009            191 %    $  134,509       $       21,333     $ 113,176            531 %




General and administrative



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 increased by $16.4 million, or 213%, for the three months ended
September 30, 2022, compared to the same period in 2021. The primary drivers of
the increase in comparative G&A expense in the third quarter of 2022 is largely
the result of a $14.7 million increase in loan receivable allowances recorded
during the quarter, a $1.4 million increase in payroll and employee-related
expenses, a $597 thousand increase in subscription, facilities and other
expenses, an increase of $151 thousand of investor related and compliance
expenses and an additional $1.9 million of G&A expenses related to our
acquisition of Lab Society in 2022 and the acquisitions of Precision, Cascade
and PurePressure in 2021. These expenses were partially offset by a decrease of
$2.4 million in consulting expenses that were related to a one-time financing
arrangement cancellation fee in September 2021.



During the third quarter of 2022, we increased our loans receivable reserve by
approximately $14.7 million. We deemed it necessary to fully reserve Bud &
Mary's loan receivable balance due to the current litigation and the uncertainty
of the customer's ability to repay the outstanding balance. We believe the
litigation is without merit and will continue to vigorously defend ourselves.



G&A expense increased by $36.7 million, or 222%, for the nine months ended
September 30, 2022, compared to the same period in 2021. The primary drivers of
the year-over-year increase in the comparative nine-month period of G&A expenses
are largely attributable to an increase in trade and loan receivable allowances
of $23.7 million and $8.8 million of incremental G&A expenses related to our
acquisition of Lab Society in 2022 and the acquisitions of Precision, Cascade
and PurePressure in 2021. Other drivers of the comparative year-over-year
increase in G&A expense included $1.3 million related to legal and accounting
services associated with our acquisition of Lab Society in 2022 and acquisitions
of Precision, Cascade and PurePressure in 2021, $1.8 million in employee-related
expenses, $1.1 million of severance expenses, $800 thousand legal settlement and
$389 thousand of other operating expenses.



                                       61





During the second and third quarter of 2022, we increased our loan receivable
reserve by approximately $7.1 million and $14.7 million, respectively. The $7.1
million increase during the second quarter of 2022, is specifically related to
Greenstone Holdings ("Greenstone"). We specifically established the loan reserve
related to Greenstone based on our review of Greenstone's financial stability,
which would impact collectability and is primarily the result of unfavorable
market conditions within the Colorado market. We will continue to monitor the
operations of Greenstone in an effort to collect all outstanding receivables but
due to the uncertain nature of Greenstone's business at this time we have made
the decision to place a reserve against the loan receivable amounts. Additional
information regarding recent developments with Greenstone may be found in Note 5
- Loan Receivable, included elsewhere in the notes to the consolidated financial
statements. The $14.7 million increase during the third quarter of 2022,
specifically related to Bud & Mary's. We deemed it necessary to fully reserve
Bud & Mary's loan receivable balance due to the current litigation and the
uncertainty of the customer's ability to repay the outstanding balance. We
believe the litigation is without merit and will continue to vigorously defend
ourselves.



Selling and marketing


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

Selling and marketing expenses increased by $1.3 million, or 143%, for the three
months ended September 30, 2022, compared to the same period in 2021. The
increase is attributable to our acquisition of Lab Society in 2022 and the
acquisitions of Precision, Cascade and PurePressure in 2021, which contributed
$972 thousand, an increase in payroll and employee-related expenses of $163
thousand and an increase in advertising and trade show expenses of $147
thousand.



Selling and marketing expenses increased by $4.3 million, or 188%, for the nine
months ended September 30, 2022, compared to the same period in 2021. The
increase is primarily related to our acquisition of Lab Society in 2022 and the
acquisitions of Precision, Cascade, and PurePressure in 2021, which attributed
$3.2 million, an increase in payroll, severance, and related expenses of $540
thousand and an increase in advertising, trade shows and other expenses of
$539
thousand.



Research and development


Research and development (“R&D”) expense consisted primarily of costs incurred
for the development of our Agrify Insights™ cultivation software and
next-generation generation VFUs, which includes:

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

    ?   expenses incurred by the subcontractor under agreements to provide
        engineering work related to the development of our next-generation VFUs;

? 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 increased by $920 thousand, or 111%, for the three months ended
September 30, 2022, compared to the same period in 2021. The increase is
primarily related to an increase in materials and other costs of $565 thousand
and our acquisition of Lab Society in 2022 and the acquisitions of Precision,
Cascade, and PurePressure in 2021, which contributed $470 thousand. These
increases were partially offset by a decrease of $116 thousand in payroll and
employee-related expenses. As a percentage of net revenue, R&D expenses were
24.9% of total revenue for the three months ended September 30, 2022, compared
to 5.3% for the three months ended September 30, 2021.



                                       62





R&D expense increased by $3.8 million, or 152%, for the nine months ended
September 30, 2022, compared to the same period in 2021. The comparative
periodic increase in R&D expense is attributable to third-party consulting
services of $1.4 million, $1.2 million of incremental R&D expense related to the
acquisition of Lab Society in 2022 and the acquisitions of Precision, Cascade
and PurePressure in 2021, increases in wages and benefits-related expenses of
$684 thousand and an increase in materials, supplies and other expenses of $450
thousand. As a percentage of net revenue, R&D expenses were 12.0% of total
revenue for the nine months ended September 30, 2022, compared to 7.1% for the
nine months ended September 30, 2021.



We expect to continue to invest in future developments of our VFUs, Agrify
Insights™ cultivation software and our extraction products. Although we continue
to increase our investment in R&D activities, we expect R&D expenses to decrease
as a percentage of revenue due to our revenue growth.



Change in contingent consideration

Change in contingent consideration resulted in a gain of $602 thousand, or 100%,
for the three months ended September 30, 2022, compared to the same periods in
2021. The change in contingent consideration, which was recognized by us during
the third quarter of 2022, primarily relates to the reduction in the projected
earn-out achievement associated with PurePressure's first twelve-month earn-out
period, for which current revenue projections are trending below our original
earn-out achievement fair value estimates. During the third quarter of 2022, we
reduced the current fair value estimate of contingent consideration to be earned
by the former members of PurePressure by approximately $602 thousand. As per the
guidelines of ASC805, we are required to record subsequent changes to our
original fair value estimates related to contingent consideration as an
operating expense in the period of change and not as an increase to goodwill.



Change in contingent consideration resulted in a gain of $1.5 million, or 100%,
for the nine months ended September 30, 2022, compared to the same periods in
2021. The change in contingent consideration, which was recognized by us during
the second and third quarter of 2022, primarily relates to the reduction in the
projected earn-out achievement associated with Lab Society's and PurePressure's
first twelve-month earn-out period, for which current revenue projections are
trending below our original earn-out achievement fair value estimates. During
the second quarter of 2022, we reduced the current fair value estimate of
contingent consideration to be earned by the former members of Lab Society by
approximately $1.0 million. During the third quarter of 2022, we reduced the
current fair value estimate of contingent consideration to be earned by the
former members of PurePressure by approximately $602 thousand. This was
partially offset by an increase of $121 thousand to the final contingent
consideration amount earned by the former members of Precision and Cascade. As
per the guidelines of ASC805, we are required to record subsequent changes to
our original fair value estimates related to contingent consideration as an
operating expense in the period of change and not as an increase to goodwill.



Impairment of goodwill and intangible assets




During the three months period ended June 30, 2022, we identified an
impairment-triggering event associated with both a sustained decline in our
stock price and associated market capitalization, as well as a second-quarter
slowdown in the cannabis industry as a whole. Due to these factors, we deemed
that there was an impairment to the carrying value of its long-lived assets and
accordingly performed interim testing as of June 30, 2022.



Based on its interim testing, we noted that the current carrying value of equity
significantly exceeded the calculated fair value equity, by an amount greater
than the aggregate value of our goodwill and intangible assets. Accordingly, we
concluded that the entire carrying value of its goodwill and intangible assets
should be impaired, resulting in a second-quarter impairment charge of $69.9
million. Additional information regarding our interim testing on goodwill may be
found in Note 7 - Goodwill and Intangible Assets, Net, included elsewhere in the
notes to the consolidated financial statements.



                                       63





Other Income (Expense), Net



                         Three Months Ended                                         Nine Months Ended
                           September 30,                                              September 30,
(In thousands)           2022            2021        Change       % Change          2022          2021        Change       % Change
Interest (expense)
income, net          $     (3,979 )    $     45     $  (4,024 )      (8,943 )%   $   (5,224 )   $     68     $  (5,292 )      (7,782 )%
Other income
(expense)                   1,506           (15 )       1,521        10,140 %         1,506          (78 )       1,584         2,031 %
Change in fair
value of warrant
liability                   5,686             -         5,686           100 %         5,686            -         5,686           100 %
(Loss) gain on
extinguishment of
notes payable             (17,933 )           -       (17,933 )        (100 )%      (17,933 )      2,685       (20,618 )        (768 )%
Total other
(expense) income,
net                  $    (14,720 )    $     30     $ (14,750 )     (49,165 )%   $  (15,964 )   $  2,675     $ (18,639 )        (697 )%



Interest (expense) income, net

Interest expense increased by $4.0 million, or 8,943%, for the three months
ended September 30, 2022 compared to the same period in 2021. The increase in
interest expense primarily is attributable to an increase in interest expense,
including the amortization of debt discount costs associated with the
outstanding principal balance of our existing debt facility, plus incremental
pre-payment penalty interest incurred in connection with the modification of our
debt facility, of $4.1 million related to our SPA Note and Exchange Note. This
was partially offset by interest income of approximately $100 thousand from
our
TTK Solutions.


Interest expense increased by $5.3 million, or 7,782%, for the nine months ended
September 30, 2022 compared to the same period in 2021. The increase in interest
expense primarily is attributable to an increase in interest expense, including
the amortization of debt discount costs associated with the outstanding
principal balance of our existing debt facility, plus incremental pre-payment
penalty interest incurred in connection with the modification of our debt
facility, of $6.9 million related to our SPA Note and Exchange Note. This was
partially offset by interest income of approximately $1.2 million from our
TTK
Solutions.



Other income (expense)



Other income increased by $1.5 million, or 10,140%, for the three months ended
September 30, 2022 compared to the same period in 2021. The increase in other
income primarily is attributable to the finalization and favorable true-up of
previously estimated acquisition-related net working capital amounts related to
the acquisition of Lab Society in 2022 and the acquisitions of Precision,
Cascade and PurePressure in 2021 of $1.5 million. This partially was offset
by
other expense-related items.



Other expenses increased by $1.6 million, or 2,031%, for the nine months ended
September 30, 2022 compared to the same period in 2021. The increase in other
income primarily is attributable to the finalization and favorable true-up of
previously estimated acquisition-related net working capital amounts related to
the acquisition of Lab Society in 2022 and the acquisitions of Precision,
Cascade and PurePressure in 2021 of $1.5 million. This partially was offset by
other expense-related related items.



Change in fair value of warrant liability




Change in fair value of warrant liability increased by $5.7 million, or 100% for
the three and nine months ended September 30, 2022, compared to $0 for the three
and nine months ended September 30, 2021. During the three months period ended
September 30, 2022, we recorded a non-cash gain of $5.7 million related to
changes in the valuation of our liability-classified warrants issued through a
private placement associated with Warrant Liabilities, which was primarily
driven by movements in our stock price. Additional information regarding the
fair value of our liability-classified warrants issued through a private
placement using a Black-Scholes option-pricing model that makes certain
assumptions may be found in Note 4 - Fair Value Measures, included elsewhere in
the notes to the consolidated financial statements.



                                       64




(Loss) gain on extinguishment of notes payable




Loss on extinguishment of notes payable increased by $17.9 million, or 100%, for
the three months ended September 30, 2022 compared to the same period in 2021.
The loss on extinguishment of notes payable, which was recognized by us during
the third quarter of 2022, relates to the extinguishment of the SPA Note dated
March 14, 2022. We recognized a loss on extinguishment of $17.9 million
(inclusive of $12.4 million of unamortized warrants, $3.0 million default
penalty on the principal amount, $2.3 million of unamortized issuance costs and
$1.2 million of the incremental fair value of warrants modified in exchange of
debt). Additional information relating to our SPA Note may be found in Note 9 -
Debt, included elsewhere in the notes to the consolidated financial statements.



Loss on extinguishment of notes payable increased by $20.7 million, or 768%, for
the nine months ended September 30, 2022 compared to the same period in 2021.
The loss on extinguishment of notes payable, which was recognized by us during
the third quarter of 2022, relates to the extinguishment of the SPA Note. We
recognized a loss on extinguishment of $17.9 million (inclusive of $12.4 million
of unamortized warrants, $3.0 million default penalty on the principal amount,
$2.3 million of unamortized issuance costs and $1.2 million of the incremental
fair value of warrants modified in exchange of debt).



This is compared to a gain on extinguishment of $2.7 million in connection with
the derecognition of the net carrying amount of the extinguished debt of $19.6
million (inclusive of $13.1 million of principal, $7.1 million of derivative
liabilities, less $587 thousand of debt discount) and the recognition of the
$16.9 million fair value of the new convertible notes (including the same
principal amount of $13.1 million plus the $3.8 million fair value of the
beneficial conversion feature) in the nine months ended September 30, 2021.
Additional information relating to our gain on extinguishment of notes payable
may be found in Note 11 - Convertible Promissory Notes, included elsewhere in
the notes to the consolidated financial statements.



Income Tax Benefit



                        Three Months Ended                                         Nine Months Ended
                           September 30,                                             September 30,
(In thousands)         2022            2021         Change        % Change         2022           2021        Change      % Change
Income tax benefit   $       -       $       -     $       -              - %   $     (262 )     $     -     $   (262 )         100 %
Effective tax rate         0.0 %           0.0 %                                       0.2 %         0.0 %




                                       65





The effective income tax rate was 0.0% for both the three months ended September
30, 2022 and 2021. The income tax benefit was $0 for both the three months ended
September 30, 2022 and 2021.



The change in the income tax benefit for the nine months ended September 30,
2022 compared to the nine months ended September 30, 2021 was primarily due to a
discrete income tax benefit of approximately $200 thousand recorded during the
first quarter of 2022, which is attributable to a non-recurring partial release
of our U.S. valuation allowance as a result of the Lab Society acquisition.
Additionally, as a result of the goodwill impairment charge recorded during the
second quarter of 2022, we recognized a small benefit of approximately $62
thousand related to the reversal of our opening deferred tax liability on
indefinite-lived assets.



Income (Loss) Attributable to Non-Controlling Interest




We consolidate the results of operations of two less than wholly-owned entities
into our consolidated statements of operations. On December 8, 2019, we formed
Agrify-Valiant, LLC ("Agrify-Valiant"), a joint-venture limited liability
company in which we are 60% majority owner and Valiant-America, LLC owns 40%.
Agrify-Valiant started its operations during the second quarter of 2020. On
October 27, 2022, we provided notice to Valiant-America, LLC of our intention to
begin winding up of Agrify Valiant, LLC. 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.



Liquidity and Capital Resources

Operating Capital Requirements




We have incurred operating losses since our inception and have negative cash
flows from operations. We have an accumulated deficit of $207.5 million as of
September 30, 2022. Our primary sources of liquidity are cash and cash
equivalents, with additional liquidity accessible, subject to market conditions
and other factors, including limitations that may apply to us under applicable
Securities Exchange Commission ("SEC") regulations, from the capital markets,
including under its ("ATM" or ATM Program").



As of September 30, 2022, we had $12.5 million of cash, cash equivalents,
marketable securities and restricted cash. Our restricted cash of $10.0 million
is associated with the Exchange Note as of September 30, 2022. Current
liabilities were $41.5 million as of September 30, 2022.

In October 2022, we entered into the ATM Program with Canaccord Genuity LLC (the
"Agent") pursuant to which we may issue and sell, from time to time, shares of
our Common Stock having an aggregate offering price of up to $50 million,
depending on market demand, with the Agent acting as an agent for sales. The ATM
Program allows us to sell shares of Common Stock pursuant to specific parameters
defined by us as well as those defined by the SEC and the ATM Program agreement.
Subsequent to the quarter ended September 30, 2022, as of November 7, 2022, we
sold 6,132,565 shares of Common Stock, under the ATM at an average price of
$2.54 per share, resulting in gross proceeds to us of $15.6 million, and net
proceeds of $15.1 million after commissions and fees to the Agent totaling $468
thousand. $3.1 million of the proceeds under the ATM Program were used to repay
amounts due to the Investor under the Exchange Note. The ATM allows for quick
and agile sales of Common Stock to interested investors and provides an
opportunity to raise additional capital for working capital requirements or to
fund strategic opportunities that may present themselves from time to time. We
have used, and intend to continue to use, the net proceeds generated from the
ATM Program for working capital and general corporate purposes, including
repayment of indebtedness, funding its transformation initiatives and product
category expansion efforts and capital expenditures. As of November 7, 2022, we
had $34.4 million of remaining availability for future issuances of Common
Stock
under the ATM Program.



We believe we have sufficient cash on hand to continue operations for the next
six months. Our current working capital needs are to support revenue growth,
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.



                                       66





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.



These financial statements have been prepared on a going concern basis, which
implies we believe these conditions raise substantial doubt about our ability to
continue as a going concern within the next twelve months from the date these
financial statements are available to be issued. Our continuation as a going
concern is dependent upon its ability to obtain the necessary debt or equity
financing to continue operations until we begin generating sufficient cash flows
from operations to meet its obligations.



There is no assurance that we will ever be profitable. The 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 we be unable to continue as a going
concern.



Indebtedness


We entered into one Loan Agreement and Promissory Note with Bank of America
pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus
Aid, Relief, and Economic Security Act ("CARES Act") administered by the U.S.
Small Business Administration. We received total proceeds of approximately $779
thousand from the unsecured PPP Loan which was originally scheduled to mature in
May 2022. We applied for forgiveness on the $779 thousand of our PPP Loan
however was denied by the SBA. On June 23, 2022, we received a letter from Bank
of America agreeing to extend the maturity date to May 7, 2025 and bears
interest at a rate of 1.00% per year. The PPP loan is payable in 34 equal
combined monthly principal and interest payments of approximately $24 thousand
that commenced on August 7, 2022.



On March 14, 2022, we entered into a Securities Purchase Agreement with an
institutional investor. The Purchase Agreement provides for the issuance of a
senior secured note (the "SPA Note") in the aggregate amount of $65 million and
a warrant (the "SPA Warrant") to purchase up to an aggregate of 688,111 shares
of Common Stock, with the potential for two potential subsequent closings for
notes with an original principal amount of $35 million each.



On August 18, 2022, we entered into a Securities Exchange Agreement. Pursuant to
the Exchange Agreement, we have paid $35.2 million under the SPA Note and
exchanged the remaining balance of the SPA Note for a new senior secured note
(the "Exchange Note") with an aggregate original principal amount of $35 million
and a new warrant to purchase 1,422,764 shares of Common Stock (the "Note
Exchange Warrant"). Additionally, we exchanged the SPA Warrant for a new warrant
for the same number of underlying shares but with a reduced exercise price
(the
"Modified Warrant").


The Exchange Note is a senior secured obligation of us and ranks senior to all
indebtedness of us. The Exchange Note will mature on the three-year anniversary
of its issuance (the "Maturity Date") and contains a 9.0% annualized interest
rate, with interest to be paid monthly, in cash, beginning September 1, 2022.
The principal amount of the Exchange Note will be payable on the Maturity Date,
provided that the Investor will be entitled to a cash sweep of 20% of the
proceeds received by us in connection with any equity financing, which will
reduce the outstanding principal amount under the Exchange Note.



At any time, we may prepay all of the Exchange Note by redemption at a price
equal to 102.5% of the then-outstanding principal amount under the Note plus
accrued but unpaid interest. The Investor will also have the option of requiring
us to redeem the Exchange Note on the one-year or two-year anniversaries of
issuance at a price equal to the then-outstanding principal amount under the
Exchange Note plus accrued but unpaid interest, or if we undergo a fundamental
change at a price equal to 102.5% of the then-outstanding principal amount under
the Exchange Note plus accrued but unpaid interest.



                                       67

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