UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Washington, D.C. 20549

FORM 10-Q/A

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20222023

or

or

☐

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number: 001-39946

 

 

AGRIFY CORPORATION

AGRIFY CORPORATION

(Exact name of registrant as specified in its charter)

Nevada30-0943453
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)

2468 Industrial Row Dr.,

Troy, Michigan 48084

(Address of principal executive offices, including zip code)

(855) 420-0020

(617) 896-5243

(Registrant’s phone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareAGFYThe NasdaqNASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☐ NO ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES ☐ NO ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer☐Accelerated filer☐
Non-accelerated filer☒Smaller reporting company☒
Emerging growth company☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐ NO ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

ClassOutstanding as of November 10, 2022October 19, 2023
Common Stock, $0.001 par value443,8181,651,281

 

 

 

 

EXPLANATORY NOTE

References throughout this Amendment No. 1 to the Quarterly Report on Form 10-Q to “we,” “us,” the “Company” or “our company” are to Agrify Corporation.

This Amendment No. 1 (“Amendment No. 1”) to the Quarterly Report on Form 10-Q/A amends the Quarterly Report on Form 10-Q of Agrify Corporation for the quarter ended September 30, 2022, as filed with the Securities and Exchange Commission (“SEC”) on November 14, 2022 (the “Original Filing”).

On April 12, 2023, the Audit Committee of the Board of Directors (the “Audit Committee”) of Agrify Corporation (the “Company”), in consultation with management of the Company and the Company’s independent registered public accounting firm, Marcum LLP (“Marcum”), concluded that the Company’s previously issued unaudited condensed consolidated interim financial statements as of and for the fiscal periods ended March 31, 2022, June 30, 2022 and September 30, 2022 included in the Company’s Quarterly Reports on Form 10-Q for such periods should no longer be relied upon. Similarly, earnings releases, and investor communications describing the financial statements for the periods described above should no longer be relied upon. The Company identified errors in the accounting for warrants previously issued by the Company.

Specifically, the Audit Committee concluded 15,097 warrants issued in a private placement on January 28, 2022 and 34,423 warrants issued in a private placement on March 23, 2022 (collectively, the “Warrants”) should have been classified as a liability measured at fair value, with changes in fair value each period reported in earnings, rather than as a component of equity. The change in fair value of the Warrants is a non-cash charge and will be reflected in the Company’s statement of operations. Additionally, the change in long-term debt classification and issuance costs will also be reflected in the Company’s balance sheet.

As such, the Company is restating in this Form 10-Q/A the unaudited consolidated interim financial statements for the three-month and nine-month period ended September 30, 2022.

We are filing this Amendment No. 1 to amend and restate the Original Filing with modification as necessary to reflect the restatement. The following items have been amended to reflect the restatement:

Part I, Item 1, Financial Information

Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations

TABLE OF CONTENTS

  Page
PART IFINANCIAL INFORMATION1
   
ITEM 1.FINANCIAL STATEMENTS1
   
 Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20222023 (unaudited) and December 31, 202120221
   
 Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20222023 (unaudited) and 20212022 (unaudited)2
   
 Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and ninesix months ended SeptemberJune 30, 20222023 (unaudited) and 20212022 (unaudited)3
   
 Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20222023 (unaudited) and 20212022 (unaudited)5
   
 Notes to the Condensed Consolidated Financial Statements6
   
ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS6251
   
ITEM 3.Quantitative and Qualitative Disclosures About Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK8471
   
ITEM 4.Controls and ProceduresCONTROLS AND PROCEDURES8472
   
PART IIOTHER INFORMATION8573
   
ITEM 1.Legal ProceedingsLEGAL PROCEEDINGS8573
   
ITEM 1A.Risk FactorsRISK FACTORS8573
   
ITEM 2.Unregistered Sales of Equity Securities and Use of ProceedsUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS8574
   
ITEM 3.Defaults Upon Senior SecuritiesDEFAULTS UPON SENIOR SECURITIES8674
   
ITEM 4.Mine Safety DisclosuresMINE SAFETY DISCLOSURES8674
   
ITEM 5.Other InformationOTHER INFORMATION8674
   
ITEM 6.ExhibitsEXHIBITS8675
   
SIGNATURES8776

 

i

 

 

PART I —- FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

AGRIFY CORPORATION

AGRIFY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance SheetsCONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 June 30, December 31, 
 

September 30,
2022

(As Restated)

  December 31,
2021		  2023  2022 
 (Unaudited)    (Unaudited)   
Assets          
Current assets:             
Cash and cash equivalents $2,151  $12,014  $308  $10,457 
Restricted cash and restricted marketable securities  10,000   — 
Restricted cash  —   10,000 
Marketable securities  381   44,550   4   460 
Accounts receivable, net of allowance for doubtful accounts of $3,125 and $1,415 at September 30, 2022 and December 31, 2021, respectively  4,559   7,222 
Inventory, net of reserves of $1,909 and $942 at September 30, 2022 and December 31, 2021, respectively  41,791   20,498 
Prepaid and refundable taxes  204   — 
Accounts receivable, net of allowance for doubtful accounts of $4,090 and $4,605 at June 30, 2023 and December 31, 2022, respectively  1,348   1,070 
Inventory, net of reserves of $32,422 and $32,422 at June 30, 2023 and December 31, 2022, respectively  18,736   21,396 
Prepaid expenses and other current assets  4,604   2,452   2,153   1,510 
Total current assets  63,690   86,736   22,549   44,893 
Loan receivable, net of allowance for doubtful accounts of $21,770 and $0 at September 30, 2022 and December 31, 2021, respectively  29,232   22,255 
Loan receivable, net of allowance for doubtful accounts of $19,215 and $33,050 at June 30, 2023 and December 31, 2022, respectively  11,257   12,214 
Property and equipment, net  13,208   6,232   9,123   10,044 
Right-of-use assets, net  2,470   1,479 
Goodwill  —   50,090 
Intangible assets, net  —   14,072 
Operating lease right-of-use assets  2,359   2,210 
Other non-current assets  1,445   1,184   156   326 
Total assets $110,045  $182,048  $45,444  $69,687 
        
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable $9,558  $9,151  $21,859  $20,543 
Accrued expenses and other current liabilities  20,505   28,764   12,109   16,380 
Operating lease liabilities, current  822   814   831   734 
Long-term debt, current  31,814   1,089   1,424   28,833 
Deferred revenue  10,136   3,772   3,593   4,112 
Total current liabilities  72,835   43,590   39,816   70,602 
Warrant liabilities  4,361   5,985 
Other non-current liabilities  187   318   86   147 
Warrant liabilities  5,118   — 
Operating lease liabilities, non-current  1,744   704 
Long-term debt  480   12 
Operating lease liabilities, net of current  1,703   1,587 
Long-term debt, net of current  19,152   407 
Total liabilities  80,364   44,624   65,118   78,728 
Commitments and contingencies (Note 18)        
Stockholders’ equity:        
Common Stock, $0.001 par value per share, 5,000,000 and 2,500,000 shares authorized at September 30, 2022 and December 31, 2021, respectively, 134,550 and 111,035 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively (1)  —   — 
        
Commitments and contingencies (Note 15)        
        
Stockholders’ (deficit) equity:        
Common Stock, $0.001 par value per share, 10,000,000 and 5,000,000 shares authorized at June 30, 2023 and December 31, 2022, respectively, 1,622,946 and 1,038,298 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively (1)  2   1 
Preferred Stock, $0.001 par value per share, 2,895,000 shares authorized, no shares issued or outstanding  —   —   —   — 
Preferred A Stock, $0.001 par value per share, 105,000 shares authorized, no shares issued or outstanding  —   —   —   — 
Additional paid-in capital (1)  218,523   196,034 
Additional paid-in capital  244,373   237,875 
Accumulated deficit  (189,212)  (58,975)  (264,282)  (247,148)
Total stockholders’ equity attributable to Agrify  29,311   137,059 
Total stockholders’ deficit attributable to Agrify  (19,907)  (9,272)
Non-controlling interests  370   365   233   231 
Total liabilities and stockholders’ equity $110,045  $182,048  $45,444  $69,687 

 

(1)Periods presented have been adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021, the 1-for-10 reverse stock split on October 18, 2022, and the 1-for-20 reverse stock split on July 5, 2023. Additional information regarding the reverse stock splits may be found in Note 1 – Overview, Basis of Presentation, and Significant Accounting Policies, included elsewhere in the notes to the condensed consolidated financial statements.

 

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

 


 

 

AGRIFY CORPORATION

AGRIFY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of OperationsCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

 

 Three Months Ended
September 30,		 Nine Months Ended
September 30,		  Three months ended June 30,  Six Months Ended June 30, 
 2022
(As Restated)		 2021  

2022

(As Restated)

  2021  2023  2022  2023  2022 
Revenue (including $0, $5,215, $2,411 and $21,570 from related parties, respectively) $7,019  $15,751  $52,369  $34,584 
Revenue (including $0, $1,129, $46, and $1,763 from related parties, respectively) $5,066  $19,329  $10,870  $45,350 
Cost of goods sold  11,135   16,131   50,703   34,977   4,466   17,717   9,282   39,568 
Gross (loss) profit  (4,116)  (380)  1,666   (393)
Gross profit  600   1,612   1,588   5,782 
                                
General and administrative  24,126   7,705   53,263   16,562   4,819   19,378   11,750   29,137 
Selling and marketing  2,160   890   6,582   2,288   1,120   2,332   2,710   4,422 
Research and development  1,747   827   6,269   2,483   643   2,438   1,378   4,522 
Change in contingent consideration  (602)  —   (1,509)  —   (638)  (907)  (1,322)  (907)
Impairment of goodwill and intangible assets  —   —   69,904   —   —   69,904   —   69,904 
Total operating expenses  27,431   9,422   134,509   21,333   5,944   93,145   14,516   107,078 
Loss from operations  (31,547)  (9,802)  (132,843)  (21,726)  (5,344)  (91,533)  (12,928)  (101,296)
Interest (expense) income, net  (4,654)  45   (7,404)  68 
Other income (expense)  1,506   (15)  1,506   (78)
Interest expense, net  (400)  (3,311)  (1,199)  (2,752)
Change in fair value of warrant liabilities  16,268   —   47,234   —   (1,048)  20,181   1,624   30,966 
(Loss) gain on extinguishment of notes payable  (38,985)  —   (38,985)  2,685 
Gain (loss) on extinguishment of notes payable  (11)  —   (4,631)  — 
Other expense, net  (4)  —   —   — 
Other (expense) income, net  (25,865)  30   2,351   2,675   (1,463)  16,870   (4,206)  28,214 
Net loss before income taxes  (57,412)  (9,772)  (130,492)  (19,051)  (6,807)  (74,663)  (17,134)  (73,082)
Income tax benefit  —   —   (262)  —   —   62   —   262 
Net loss  (57,412)  (9,772)  (130,230)  (19,051)  (6,807)  (74,601)  (17,134)  (72,820)
Income (loss) attributable to non-controlling interests  1   (14)  5   153 
(Income) loss attributable to non-controlling interests  2   (3)  2   (4)
Net loss attributable to Agrify Corporation $(57,413) $(9,758) $(130,235) $(19,204) $(6,805) $(74,604) $(17,132) $(72,824)
Net loss per share attributable to Common Stockholders – basic and diluted (1) $(429.98) $(93.67) $(1,003.10) $(212.57) $(4.39) $(561.31) $(13.05) $(569.13)
Weighted-average common shares outstanding – basic and diluted (1)  133,526   104,172   129,832   90,344 
Weighted average common shares outstanding – basic and diluted (1)  1,549,669   132,911   1,312,299   127,956 

 

(1)Periods presented have been adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021, the 1-for-10 reverse stock split on October 18, 2022, and the 1-for-20 reverse stock split on July 5, 2023. Additional information regarding the reverse stock splits may be found in Note 1 – Overview, Basis of Presentation, and Significant Accounting Policies, included elsewhere in the notes to the condensed consolidated financial statements.statements

 

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


AGRIFY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

(Unaudited)

  Common Stock  Preferred A Stock  Additional
Paid-In		  Accumulated  Total
Stockholders’
Equity
attributable		  Non-
Controlling		  Total
Stockholders’		 
  Shares (1)  Amount (1)  Shares  Amount  Capital (1)  Deficit  to Agrify  Interests  Equity 
Balance at January 1, 2021  21,058  $         —   100,000  $—  $19,831  $(26,510) $(6,679) $225  $(6,454)
Stock-based compensation  —   —   —   —   3,066   —   3,066   —   3,066 
Beneficial conversion feature associated with amended Convertible Promissory Notes  —   —   —   —   3,869   —   3,869   —   3,869 
Conversion of Convertible Notes  8,485   —   —   —   13,100   —   13,100   —   13,100 
Issuance of Common Stock – Initial Public Offering (“IPO”), net of fees  31,050   —   —   —   56,961   —   56,961   —   56,961 
Issuance of Common Stock – Secondary public offering, net of fees  31,945   —   —   —   79,839   —   79,839   —   79,839 
Conversion of Preferred A Stock  6,865   —   (100,000)  —   —   —   —   —   — 
Exercise of options  1,265   —   —   —   721   —   721   —   721 
Exercise of warrants  1,201   —   —   —   5   —   5   —   5 
Net loss  —   —   —   —   —   (9,446)  (9,446)  167   (9,279)
Balance at June 30, 2021  101,869  $—   —  $—  $177,392  $(35,956) $141,436  $392  $141,828 
Stock-based compensation  —   —   —   —   941   —   941   —   941 
Issuance of common shares in connection with acquisition  40   —   —   —   176   —   176   —   176 
Exercise of options  1,829   —   —   —   1,499   —   1,499   —   1,499 
Exercise of warrants  2,569   —   —   —   3   —   3   —   3 
Net loss  —   —   —   —   —   (9,758)  (9,758)  (14)  (9,772)
Balance at September 30, 2021  106,307  $—   —  $—  $180,011  $(45,714) $134,297  $378  $134,675 

 


 

 

  

Common Stock

(As Restated)

  

Preferred A Stock

(As Restated)

  

Additional
Paid-In-

Capital (1)

  

Accumulated

Deficit

  Total
Stockholders’
Equity
attributable
to Agrify		  

Non-
Controlling

Interests		  

Total
Stockholders’

Equity

 
  Shares (1)  Amount (1)  Shares  Amount  

(As Restated)

  

(As Restated)

  

(As Restated)

  

(As Restated)

  

(As Restated)

 
Balance at January 1, 2022  111,035  $       —         —  $     —  $196,034  $(58,975) $137,059  $365  $137,424 
Stock-based compensation  —   —   —   —   1,893   —   1,893   —   1,893 
Issuance of Common Stock and warrants in private placement  12,252   —   —   —   14,800   —   14,800   —   14,800 
Issuance of debt and warrants in private placement  —   —   —   —   —   —   —   —   — 
Acquisition of Lab Society  1,490   —   —   —   1,903   —   1,903   —   1,903 
Exercise of options  42   —   —   —   20   —   20   —   20 
Exercise of warrants  8,138   —   —   —   2   —   2   —   2 
Net loss  —   —   —   —   —   (72,824)  (72,824)  4   (72,820)
Balance at June 30, 2022  132,957  $—   —  $—  $214,652  $(131,799) $82,853  $369  $83,222 
Stock-based compensation  —   —   —   —   1,645   —   1,645   —   1,645 
Issuance of common shares in connection with acquisition  435   —   —   —   2,220   —   2,220   —   2,220 
Reclass of warrant liability  —   —   —   —   4   —   4   —   4 
Exercise of warrants  158   —   —   —   2   —  2   —   2 
Issuance of restricted stock units  1,000   —   —   —   —   —   —   —   — 
Net loss  —   —   —   —   —   (57,413)  (57,413)  1   (57,412)
Balance at September 30, 2022  134,550  $—   —  $—  $218,523  $(189,212) $29,311  $370  $29,681 

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)

(Unaudited)

 

(1)Periods presented have been adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021, the 1-for-10 reverse stock split on October 18, 2022, and the 1-for-20 reverse stock split on July 5, 2023. Additional information regarding the reverse stock splits may be found in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to the condensed consolidated financial statements.
  Common Stock  Preferred A Stock  Additional  Accumulated  Total
Stockholders’
Equity
attributable to		  Non-
Controlling		  Total
Stockholders’		 
  Shares  Amount  Shares  Amount  Paid-in-Capital  Deficit  Agrify  Interests  Equity 
Balance at January 1, 2022  111,035  $—   —  $—  $196,034  $(58,975) $137,059  $365  $137,424 
Stock-based compensation  —   —   —   —   953   —   953   —   953 
Issuance of Common Stock and warrants in private placement  12,252   —   —   —   14,800   —   14,800   —   14,800 
Acquisition of Lab Society  1,490   —   —   —   1,903   —   1,903   —   1,903 
Exercise of options  21   —   —   —   10   —   10   —   10 
Exercise of warrants  7,916   —   —   —   1   —   1   —   1 
Net income  —   —   —   —   —   1,780   1,780   1   1,781 
Balance at March 31, 2022  132,714   —   —   —   213,701   (57,195)  156,506   366   156,872 
Stock-based compensation  —   —   —   —   940   —   940   —   940 
Exercise of options  21   —   —   —   10   —   10   —   10 
Exercise of warrants  222   —   —   —   1   —   1   —   1 
Net loss  —   —   —   —   —   (74,604)  (74,604)  3   (74,601)
Balance at June 30, 2022  132,957  $—   —  $—  $214,652  $(131,799) $82,853  $369  $83,222 

 

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

 


 

AGRIFY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Cash FlowsCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)

(Unaudited)

  Nine Months Ended
September 30,		 
  

2022

(As Restated)

  2021 
Cash flows from operating activities      
Net loss attributable to Agrify Corporation $(130,235) $(19,204)
Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities:        
Depreciation and amortization  2,602   508 
Impairment on goodwill and intangible assets  69,904   — 
Loss (gain) on extinguishment of notes payable, net  38,985   (2,685)
Change in fair value of warrant liabilities  (47,234)  — 
Amortization of premium on investment securities  606   522 
Amortization of debt discount  4,195   — 
Interest on investment securities  (700)  (574)
Provision for doubtful accounts  23,708   — 
Provision for slow-moving inventory  967   — 
Amortization of issuance costs  508   — 
Deferred income taxes  (262)  — 
Prepaid and refundable taxes  (10)  — 
Compensation in connection with the issuance of stock options  3,538   4,007 
Issuance of common shares in connection with acquisition  —   176 
Non-cash interest (income) expense  (1,581)  50 
Loss from disposal of fixed assets  6   25 
Change in fair value of contingent consideration  (1,509)  — 
Income attributable to non-controlling interests  5   153 
Changes in operating assets and liabilities, net of acquisitions:        
Accounts receivable  1,217   (7,861)
Inventory  (20,129)  (5,227)
Prepaid expenses and other current assets  969   (3,523)
Right-of-use assets, net  55   62 
Other non-current assets  (10)  — 
Accounts payable  303   7,906 
Accrued expenses and other current liabilities  (8,165)  7,367 
Deferred revenue, net  4,247   741 
Net cash used in operating activities  (58,020)  (17,557)
         
Cash flows from investing activities        
Purchases of property and equipment  (8,002)  (3,536)
Purchase of securities  (283,271)  (68,461)
Proceeds from the sale of securities  317,593   — 
Issuance of loan receivables  (26,942)  (12,686)
Cash paid for business combination, net of cash acquired  (3,513)  — 
Net cash used in investing activities  (4,135)  (84,683)
         
Cash flows from financing activities        
Proceeds from issuance of debt and warrants in private placement, net  61,891   — 
Proceeds from issuance of Common Stock and warrants in private placement, net of fees  25,797   — 
Proceeds from IPO, net of fees  —   56,961 
Proceeds from Secondary public offering, net of fees  —   79,839 
Proceeds from exercise of options  20   2,220 
Proceeds from exercise of warrants  3   9 
Repayment of debt in private placement  (33,170)  — 
Repayments of notes payable, other  (48)  — 
Payments on insurance financing loans  (1,714)  — 
Payments of other financing loans  (248)  — 
Payments of financing leases  (241)  (154)
Impact of reverse stock split  2   — 
Net cash provided by financing activities  52,292   138,875 
Net increase in cash and cash equivalents  (9,863)  36,635 
Cash and cash equivalents at the beginning of period  12,014   8,111 
Cash and cash equivalents at the end of period $2,151  $44,746 
Cash, cash equivalents, and restricted cash and restricted marketable securities at end of period        
Cash and cash equivalents $2,151  $44,746 
Restricted cash and restricted marketable securities  10,000   — 
Total cash, cash equivalents, and restricted cash  and restricted marketable securities at the end of period $12,151  $44,746 
Supplemental disclosures of non-cash information        
Equipment sold for loan receivable to customer $—  $289 
Initial fair value of warrants $50,705   — 
Financing of prepaid insurance $1,928   — 
  Common Stock  Preferred A Stock  Additional  Accumulated  Total
Stockholders’
Equity
attributable to		  Non-
Controlling		  Total
Stockholders’		 
  Shares  Amount  Shares  Amount  Paid-in-Capital  Deficit  Agrify  Interests  Equity 
Balance at January 1, 2023  1,038,298  $1   —  $—  $237,875  $(247,148) $(9,272) $231  $(9,041)
Stock-based compensation  —   —   —   —   859   —   859   —   859 
Issuance of Common Stock through an “at the market” offering, net of fees  323,082   —   —   —   1,545   —   1,545   —   1,545 
Issuance of Common Stock to Pure Pressure  366   —   —   —   —   —   —   —   — 
Vesting of restricted stock units  17   —   —   —   —   —   —   —   — 
Proceeds from Employee Stock Purchase Plan Shares  2,500   —   —   —   25   —   25   —   25 
Net loss  —   —   —   —   —   (10,327)  (10,327)  —   (10,327)
Balance March 31, 2023  1,364,263   1   —   —   240,304   (257,475)  (17,170)  231   (16,939)
Stock-based compensation  —   —   —   —   752   —   752   —   752 
Issuance of held-back shares to Lab Society  499   —   —   —   —   —   —   —   — 
Exercise of prefunded warrants in private placement  35,000   —   —   —   —   —   —   —   — 
Conversion of Exchange Note  69,567   —   —   —   

2,146

   —   

2,146

   —   

2,146

 
Conversion of Convertible Note  153,617   1   —   —   

1,171

   —   

1,172

   —  

1,172

 
Net loss  —   —   —   —   —   

(6,807

)  

(6,807

)  2   

(6,805

)
Balance June 30, 2023  1,622,946  $2   —  $—  $

244,373

  $

(264,282

) $

(19,907

) $233  $

(19,674

)

 

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


 

AGRIFY CORPORATION

AGRIFY CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Notes to Condensed Consolidated Financial Statements(In thousands)

(Unaudited)

  For the six months ended
June 30,		 
  2023  2022 
Cash flows from operating activities:      
Net loss attributable to Agrify Corporation $(17,132) $(72,824)
Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities:        
Depreciation and amortization  938   2,193 
Amortization of premium on investment securities  —   1,055 
Amortization of debt discount  70   2,735 
Interest on investment securities  —   (1,247)
Amortization of issuance costs  24   370 
Deferred income taxes  —   (262)
Stock based compensation expense  1,611   1,893 
Early termination of lease  —   26 
Non-cash interest income  —   (1,010)
Change in fair value of warrant liabilities  (1,624)  (30,966)
Impairment of goodwill and intangible assets  —   69,904 
Provision for doubtful accounts  (542)  8,630 
Provision for slow-moving inventory  (337)  929 
Loss on disposal of fixed assets  5   8 
Loss on extinguishment of notes payable, net  4,631   — 
Change in fair value of contingent consideration  —   (907)
(Income) Loss attributable to non-controlling interests  (2)  4 
Changes in operating assets and liabilities, net of acquisitions:        
Accounts receivable  264   (4,305)
Inventory  3,030   (20,171)
Prepaid expenses and other current assets  739   785 
Prepaid and refundable taxes  —   (16)
Right of use assets, net  (149)  60 
Other non-current assets  170   — 
Accounts payable  1,237   (2,324)
Accrued expenses and other current liabilities  (4,261)  (4,049)
Operating lease liabilities  213   — 
Deferred revenue  (519)  (1,002)
Net cash and cash equivalents used in operating activities  (11,634)  (50,491)
         
Cash flows from investing activities:        
Purchases of property and equipment  (60)  (9,100)
Proceeds from disposal of property and equipment  5   — 
Purchase of securities  —   (211,030)
Proceeds from sale of securities  10,456   214,449 
Issuance of loan  (591)  (20,443)
Proceeds from repayment of loan receivable  1,548   — 
Cash paid for business combination, net of cash acquired  —   (3,513)
Net cash and cash equivalents provided by (used in) investing activities  11,358   (29,637)
         
Cash flows from financing activities:        
Proceeds from issuance of debt and warrants in private placement, net  —   62,405 
Proceeds from issuance of Common Stock and warrants in private placement, net of fees  —   25,797 
Proceeds from “at the market” Program, net  1,545   — 
Proceeds from Employee Stock Purchase Plan Shares  25   — 
Proceeds from exercise of options  —   19 
Proceeds from exercise of warrants  —   2 
Repayment of debt in private placement  (10,307)  — 
Repayments of notes payable, other  (71)  — 
Payments on other financing loans  (2)  (243)
Payments on insurance financing loans  (999)  (1,071)
Payments of financing leases  (64)  (187)
Net cash and cash equivalents (used in) provided by financing activities  (9,873)  86,722 
Net (decrease) increase in cash and cash equivalents  (10,149)  6,594 
Cash and cash equivalents at the beginning of period  10,457   12,014 
Cash and cash equivalents at the end of period $308  $18,608 
Cash, cash equivalents, and restricted cash at end of period        
Cash and cash equivalents  308   18,608 
Restricted cash  —   30,000 
Total cash, cash equivalents, and restricted cash at the end of period $308  $48,608 
Supplemental disclosures of non-cash flow information        
Initial fair value of warrants $—  $40,496 
Financing of prepaid insurance $1,820  $1,928 
Conversion of private placement debt into Common Stock $3,160  $— 
Transfer of property and equipment to inventory $33  $— 

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


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — Overview, Basis of Presentation and Significant Accounting Policies

 

Description of Business

 

Agrify Corporation (“Agrify” or the “Company”) is onea leading provider 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. The Company’s proprietary micro-environment-controlled Agrify Vertical Farming Units (or “VFUs”) enable cultivators to produce the highest quality products with what it believeswe believe to be an unmatched consistency, yield, and Return on Investmentreturn investment at scale. The Company’s comprehensive extraction product line, which includes hydrocarbon, ethanol,alcohol, solventless, post-processing, and lab equipment, empowers producers to maximize the quantity and quality of extract required for premium concentrates.

 

The Company believes it is the only company with an automated and fully integrated grow solution in the industry. The Company’s cultivation and extraction solutions seamlessly combines its integrated hardware and software offerings with a broad range of associated services including consulting, engineering, and construction and is designed to deliver the most complete commercial indoor farming solution available from a single provider. The totality of its product offerings and service capabilities forms an unrivaled ecosystem in what has historically been a highly fragmented market. As a result, the Company believes it is well situatedwell-positioned to capture market share and create a dominant market position in the indoor agriculturecannabis sector.

 

The Company was formed in the State of Nevada on June 6, 2016 as Agrinamics, Inc., and subsequently changed its name to Agrify Corporation. The Company is sometimes referred to herein by the words “we,” “us,” “our,” and similar terminology.

 

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

●AGM Service Corp LLC (formerly AGM Service Corp Inc.);

●TriGrow Systems, LLC (“TriGrow”, which acted as and the Company’s exclusive distributor and which was acquired in January 2020 as TriGrow Systems, Inc. and converted to TriGrow Systems, LLC in May 2020);

●Ariafy Finance, LLC;

●Agxiom, LLC;

●Harbor Mountain Holdings, LLC (“HMH”) (acquired in July 2020);

●Cascade Sciences, LLC (“Cascade”) (which was acquired by the Company on October 1, 2021);

●Precision Extraction NewCo, LLC (“Precision”) (which was a newly formed subsidiary in connection with the October 1, 2021 acquisition of Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions and Cascade); and

●PurePressure, LLC (“PurePressure”) (which was acquired by the Company on December 31, 2021); and

●Lab Society NewCo, LLC (“Lab Society”) (which was a newly formed subsidiary in connection with the February 1, 2022 acquisition of LS Holdings Corp).


The Company also has ownership interests in the following companies:certain companies.

●Teejan Podoponics International LLC (“TPI”) (the Company has owned 50% of TPI since December 2018);

●Agrify-Valiant, LLC (“Agrify-Valiant”) (the Company is 60% majority owner and Valiant-America, LLC owns 40%, which was formed in December 2019. Subsequent to September 30, 2022, On October 27, 2022, the Company provided notice to Valiant-America, LLC of our intention to begin winding up of Agrify-Valiant); and

●Agrify Brands, LLC (“Agrify Brands”) (formerly TriGrow Brands, LLC) (the Company owns 75% of Agrify Brands, which ownership position was created as part of the January 2020 acquisition of TriGrow).

 

Reverse Stock Split

On January 12, 2021, the Company effected a 1-for-1.581804 reverse stock split of its Common Stock, $0.001 par value per share (“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.Splits

 

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

 

On July 5, 2023, the Company effected a 1-for-20 reverse stock split of its Common Stock, All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented unless otherwise indicated.

 

No fractional shares of Common Stock were issued as a result of these reverse stock splits. Any fractional shares in connection with these reverse stock splits were rounded up to the nearest whole share and no stockholders received cash in lieu of fractional shares. The reverse stock splits had no impact on the number of shares of Common Stock that the Company is authorized to issue pursuant to its articles of incorporation or on the par value per share of the Common Stock. Proportional adjustments were made to the number of shares of Common Stock issuable upon exercise or conversion of the Company’s outstanding stock options and warrants, the exercise price or conversion price (as applicable) of the Company’s outstanding stock options and warrants, and the number of shares reserved for issuance under the Company’s equity incentive plan. All share and per share information included in this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the impact of these reverse stock splits.

 

Initial Public Offering and SecondaryConfidentially Marketed Public Offering

On February 1, 2021,December 16, 2022, the Company closed its initial public offering, or (“IPO”entered into an underwriting agreement (the “Underwriting Agreement”), with Canaccord Genuity LLC as the underwriter, pursuant to which the Company agreed to issue and sell an aggregate of 31,050594,232 shares of its Common Stock, (inclusiveand, in lieu of 4,050Common Stock to certain investors that so chose, pre-funded warrants (the “Pre-Funded 2022 Warrants”) to purchase 75,000 shares of our Common Stock, and accompanying warrants (the “December 2022 Warrants”) to purchase 1,338,462 shares of the Company’s Common Stock (the “Offering”). The shares of Common Stock from(or Pre-Funded 2022 Warrants) and the full exercise ofaccompanying December 2022 Warrants will be issued separately but can only be purchased together in this Offering. Additional information regarding the over-allotment option of shares grantedCompany’s December 2022 Warrants may be found in Note 4 – Fair Value Measures and Note 10 – Stockholders’ Equity, included elsewhere in the notes to the underwriters). The offer and sale of all of the shares in the IPO were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File Nos. 333- 251616 and 333-252490), which was declared effective by the Securities Exchange Commission (“SEC”) on January 27, 2021. In the IPO, Maxim Group LLC and Roth Capital Partners acted as the underwriters. The IPO price for shares of Common Stock was $2,000.00 per share. The total gross proceeds from the IPO were $62.1 million.

After deducting underwriting discounts and commissions of $4 million and offering expenses paid or payable by us of approximately $1 million, the net proceeds from the IPO were approximately $57 million. The Company used the net proceeds from the IPO for its current working capital needs, to support revenue growth, increase inventory to meet customer demand forecasts, and support operational growth.

On February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) of 27,778 shares of its Common Stock for a price of $2,700.00 per share, less certain underwriting discounts, and commissions. On March 22, 2021, the Company closed on the sale of an additional 4,167 shares of Common Stock on the same terms and conditions pursuant to the exercise of the underwriters’ over-allotment option. The exercise of the over-allotment option brought the total number of shares of Common Stock sold by the Company in connection with the February Offering to 31,944 shares and the total net proceeds received in connection with the February Offering to approximately $80 million, after deducting underwriting discounts and estimated offering expenses. The Company used the net proceeds from the IPO for its current working capital needs, to support revenue growth, increase inventory, meet customer demand forecasts, and support operational growth.consolidated financial statements.

 


 

 

Coronavirus (“COVID-19”) Pandemic ImpactAGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The aggregate gross proceeds to the Company from the Offering were approximately $8.7 million including offering costs of approximately $0.5 million for broker fees and Uncertainties

The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility that may negatively affect its business operations and financial results. As a result, if the pandemic or its effects persist or worsen, its accounting estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant (although the potential effects cannot be estimated at this time).legal expenses, for net proceeds of $8.2 million. The Company has experienced minimalused the net proceeds from the Offering, together with its existing cash resources, for working capital and general corporate purposes, which may include capital expenditures and repayment of debt.

Nasdaq Deficiency Notice

On October 4, 2022, the Company received a deficiency letter from the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business interruptiondays, the bid price for the Company’s Common Stock had closed below $1.00 per share, which is the minimum closing price required to maintain a continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company had 180 calendar days to regain compliance with the Minimum Bid Requirement. To regain compliance with the Minimum Bid Requirement, the closing bid price of the Company’s Common Stock must be at least $1.00 per share for a minimum of 10 consecutive trading days during this 180-day compliance period, unless the Staff exercised its discretion to extend the minimum trading day period pursuant to Nasdaq Listing Rule 5810(c)(3)(G). On October 28, 2022, the Staff notified the Company that the closing bid price for its Common Stock was more than $1.00 for 10 consecutive trading days, and that the Company therefore regained compliance with the Minimum Bid Requirement.

On January 19, 2023, the Company received a new deficiency letter from the Staff of Nasdaq notifying the Company that, for the previous 30 consecutive business days, the bid price for its Common Stock had closed below $1.00 per share, which is the minimum closing price required to maintain a continued listing on The Nasdaq Capital Market under the Minimum Bid Requirement. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company had 180 calendar days to regain compliance with the Minimum Bid Requirement. To regain compliance with the Minimum Bid Requirement, the closing bid price of the Company’s Common Stock must be at least $1.00 per share for a minimum of 10 consecutive trading days during this 180-day compliance period, unless the Staff exercises its discretion to extend the minimum trading day period pursuant to Nasdaq Listing Rule 5810(c)(3)(G). On July 19, 2023, the Company received a notice from Nasdaq confirming its recompliance with the minimum bid price rule.

As disclosed in the Current Report on Form 8-K filed on April 17, 2023, the Company’s audit committee concluded that, as a result of inadvertent errors in the COVID-19 pandemic. The COVID-19 pandemicaccounting for warrants previously issued by the Company, it was appropriate to date has resultedrestate the Company’s previously issued unaudited condensed consolidated interim financial statements as of and for the quarterly periods ended March 31, 2022, June 30, 2022 and September 30, 2022 included in supply chain delaysthe Company’s Quarterly Reports on Form 10-Q for such periods in amended quarterly reports for the affected periods. As a result of such restatements, the Company was unable to timely file the 2022 Form 10-K, the First Quarter 2023 Form 10-Q and the Second Quarter 2023 Form 10-Q without unreasonable effort or expense.

On April 18, 2023, the Company received a notice from Nasdaq (the “April Nasdaq Notice”) that it was noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of its inventory, higher operating costs and increased shipping costs, among other impacts. As events surroundingfailure to file its Annual Report on Form 10-K (the “Form 10-K”) with the COVID-19 pandemic can change rapidly,SEC by the required due date.

On May 17, 2023, the Company cannot predict howreceived a second notice from Nasdaq (the “May Nasdaq Notice”) that it may disruptremained noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of its operations orfailure to file its Quarterly Report on Form 10-Q for the full extentquarter ended March 31, 2023 (the “First Quarter Form 10-Q”) with the SEC by the required due date.

On August 16, 2023, the Company received a third notice from Nasdaq that it remain noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of its failure to file its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 (the “Second Quarter Form 10-Q”) with the SEC by the required filing date (the “August Nasdaq Notice” and, together with the April Nasdaq Notice and the May Nasdaq Notice, the “Nasdaq Notices”).

The Nasdaq granted the Company an exception until October 16, 2023, to file its 2022 Form 10-K and First and Second Quarter 2023 Forms 10-Q. The Nasdaq Notice had no immediate effect on the listing of the disruption.Company’s Common Stock on The Nasdaq Stock Market LLC.

 

On October 17, 2023, the Company received a Staff Delisting Determination (the “Staff Determination”) from the Listing Qualifications Department of Nasdaq notifying the Company that it was not in compliance with Nasdaq’s continued listing requirements under the Listing Rule as a result of its failure to file the First Quarter Form 10-Q, the Second Quarter Form 10-Q and the Form 10-K (collectively, the “Delinquent Reports”) in a timely manner.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On November 16, 2023, the Company received a notice from Nasdaq that the Company remains noncompliant with the Listing Rule as a result of its failure to file its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2023 with the SEC by the required filing date (the “November Nasdaq Notice” and, together with the April Nasdaq Notice, the May Nasdaq Notice, and the August Nasdaq Notice, the “Nasdaq Notices”).

The Company timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”), and the Panel scheduled a hearing for January 11, 2024. In connection with the hearing request, the Company requested that the stay be extended through the hearing and the expiration of any additional extension period granted by the Panel following the hearing. In that regard, pursuant to the Nasdaq Listing Rules, the Panel granted the additional extension period. However, there can be no assurance that the Company will be able to regain compliance by the end of any additional extension period.

The Paycheck Protection Program

 

In May 2020, the Company received an unsecured Paycheck Protection Program Loan (“PPP Loan”) from the Bank of America pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), administered by the U.S. Small Business Administration (the “SBA”). The Company received total loan proceeds of approximately $779 thousand from the PPP Loan. The SBA deniedOn February 18, 2022, the Company’s applicationCompany applied for the forgiveness of the outstanding balance of the PPP Loan. OnLoan and the application was denied by the SBA on March 18,2022. However, on June 23, 2022, the Company received a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and bearsthe loan will bear interest at a rate of 1.00% per year. The PPP loan is payable in 34 equal combined monthly principal and interest payments of approximately $24 thousand that commenced on August 7, 2022.

 

Preparation of Condensed Consolidated Financial Statements

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and filed with the SEC (“Form 10-K”), except for the recently adopted accounting pronouncements described below.

The condensed consolidated financial statements included herein reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021, condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, and the condensed consolidated cash flows for the nine months ended September 30, 2022 and 2021.

The condensed consolidated balance sheet as of December 31, 2021 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 31, 2022. The results for interim periods are not necessarily indicative of a full year’s results.

Basis of Presentation and Principles of Consolidation

 

Accounting for Wholly-Owned Subsidiaries

 

The accompanying consolidated financial statements have been prepared in accordance with GAAPaccounting principles generally accepted in the United States (“GAAP”) and include the accounts of Agrify Corporation and its wholly-owned subsidiaries, as described above, in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies, in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The Company includes results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.

 


Accounting for Less Than Wholly-Owned Subsidiaries

 

For the Company’s less than wholly-owned subsidiaries, which include, TPI, Agrify-Valiant LLC (“Agrify-Valiant”), and Agrify Brands, LLC (“Agrify Brands”), the Company first analyzes whether these entities are a variable interest entity (a “VIE”) in accordance with ASC Topic 810, Consolidation (“ASC810”ASC 810”), and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. The financial results of a VIE are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets. The Company continuously re-assesses (i) whether the joint-venture is a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If it is determined that the joint-venture qualifies as a VIE and the Company is the primary beneficiary, the Company’s financial interest in the VIE is consolidated.

 

Based on the Company’s analysis of these entities, the Company has determined that Agrify-Valiant and Agrify Brands are each a VIE, and that the Company is the primary beneficiary. While the Company owns 60% of Agrify-Valiant’s equity interests and 75% of Agrify Brand’s equity interests, the remaining equity interests in Agrify-Valiant and Agrify Brands are owned by unrelated third parties, and the agreement with these third parties provides the Company with greater voting rights. Accordingly, the Company consolidates its interest in the financial statements of Agrify-Valiant and Agrify Brands under the VIE rules and reflects the third parties’ interests in the consolidated financial statements as a non-controlling interest. The Company records this non-controlling interest at its initial fair value, adjusting the basis prospectively for the third parties’ share of the respective consolidated investments’ net income or loss or equity contributions and distributions. These non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holders based on its economic ownership percentage. The investment in 50% of the shares of TPI is treated as an equity investment as the Company cannot exercise significant influence.

  


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Going Concern

 

In accordance with the FASB Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern”, the Company’s management evaluated whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the financial statements’ issuance date. The following matters raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.

 

The Company has incurred operating losses since its inception and has negative cash flows from operations.operations and a working capital deficiency. The Company also has an accumulated deficit of $189.2$264 million as of SeptemberJune 30, 2022.2023. The Company’s primary sources of liquidity are its cash and cash equivalents and marketable securities, with additional liquidity accessible, subject to market conditions and other factors, including limitations that may apply to the Company under applicable SEC regulations, from the capital markets, including under its at-the-market continuous equity offering (“ATM” or ATM“ATM Program”).

 

As of SeptemberJune 30, 2022,2023, the Company had $12.5 million$312 thousand of cash, cash equivalents, marketable securities, and restricted cash and restricted marketable securities. The Company had no restricted cash as of June 30, 2023. As of December 31, 2022 the Company’s restricted cash and restricted marketable securities isbalance of $10.0 million was associated with its new senior secured note (the “Exchange Note”) was $10.0. Current liabilities were $39.8 million as of SeptemberJune 30, 2022. Current liabilities were $72.8 million as of September 30, 2022.2023. Additional information regarding the Company’s Exchange Note may be found in Note 108 – Debt, included elsewhere in the notes to the consolidated financial statements.

 

Subsequent to the end of the third quarter ofOn October 18, 2022, the Company entered into an agreement for the ATM Program with Canaccord Genuity LLC (the “Agent”), pursuant to which the Companyit may issue and sell, from time to time, shares of its Common Stock having an aggregate offering price of up to $50 million, depending on market demand, with the Agent acting as an agent for sales. The ATM allows for quick and agile salesProgram allowed the Company to sell shares of Common Stock pursuant to interested investorsspecific parameters defined by the Company as well as those defined by the SEC and providesthe ATM Program agreement. In 2022, the Company sold 306,628 shares of Common Stock under the ATM at an opportunityaverage price of $50.85, resulting in gross proceeds of $15.6 million and net proceeds $15.1 million after commissions and fees to raisethe Agent totaling $468 thousand and legal fees totaling $75 thousand. As of April 1, 2023, after which time the ATM program was discontinued, the Company sold an additional capital for working capital requirements or323,082 shares of Common Stock under the ATM at an average price of $4.93, resulting in gross proceeds of $1.6 million and net proceeds of $1.6 million after commissions and fees to fund strategic opportunities that may present themselves from timethe Agent totaling $48 thousand. $3.0 million of the proceeds under the ATM Program were used to time.repay amounts due to the Investor under the Exchange Note. The Company has used and intends to continue to use, the $15.1 million in net proceeds generated from the ATM Program as of November 7, 2022 for working capital and general corporate purposes, including repayment of indebtedness, funding the Company’sits transformation initiatives and product category expansion efforts and capital expenditures. AsDue to the late filing of November 7,the Company’s 2022 Annual Report on Form 10-K, the Company had $34.4 million of remaining availability for future issuances of Common Stock underis no longer eligible to utilize the registration statement on Form S-3 relating to the ATM Program.


Additional information regarding the Company’s ATM Program and proceeds received subsequent to September 30, 2022, may be found in Note 20 – Subsequent Events, included elsewhere in the notes to the consolidated financial statements.

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

There is no assurance that the Company 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 the Company be unable to continue as a going concern.

 

Use of Estimates

 

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates include assumptions about collection of accounts and assumptions reflected in these consolidated financial statements include, but are not limited to,notes receivable, the accrualvaluation and recognition of expenses.stock-based compensation expense, valuation allowance for deferred tax assets, the valuation of inventory, and useful life of fixed assets and intangible assets. The Company bases its estimates on historical experience, known trends and other market-specific information, other relevant factors that it believes to be reasonable under the circumstances, and management’s judgement. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual financial results could differ from those estimates.

 

Fiscal Year

For the Company and its Subsidiaries, the fiscal year ends on December 31, each year.

Emerging Growth Company

The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, (“JOBS Act”). As a result, the Company is permitted to, and intends to, rely on exemptions from certain disclosure requirements that are applicable to companies that are not emerging growth companies. 

In addition, the JOBS Act provides that an “emerging growth company” can use the extended transition period for complying with new or revised accounting standards.

The Company will remain an “emerging growth company” until the earliest to occur of:

●reporting $1.0 billion or more in annual gross revenues;

●the issuance, in a three-year period, of more than $1.0 billion in non-convertible debt;


 

 

●the end of the fiscal year in which the market value of Common Stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter; or

AGRIFY CORPORATION

 

●December 31, 2026.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2022, the market value of Common Stock held by non-affiliates did not exceed $700 million.

Reclassifications

 

Certain amounts in the Company’s prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. In this Form 10-Q, the Company has reclassified selling, general and administrative expenses to two separate line items in the accompanying consolidated statements of operations as general and administrative expenses and selling and marketing expenses for the three and nine months ended SeptemberJune 30, 20222023 and 2021.2022.

 

On January 12, 2021, the Company effected a 1-for-1.581804 reverse stock split (“Reverse Stock Split”) of its Common Stock, $0.001 par value per share (“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,In addition, the Company effected a 1-for-10 reverse stock split of its Common Stock.Stock on October 18, 2022 and a 1-for-20 reverse stock split of its Common Stock on July 5, 2023. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented unless otherwise indicated.

On July 5, 2023, the Company effected a 1-for-20 reverse stock split The shares of its Common Stock All share andretained a par value of $0.001 per share information has been retroactively adjusted to give effect toshare. Accordingly, the Stockholders’ equity section of the Consolidated Balance Sheet reflects the reverse stock split for all periods presented unless otherwise indicated.

No fractional shares of Common Stock were issued as a result of these reverse stock splits. Any fractional shares in connection with these reverse stock splits were rounded upby reclassifying from “Common Stock” to the nearest whole share and no stockholders received cash in lieu of fractional shares. The reverse stock splits had no impact on the number of shares of Common Stock that the Company is authorized“Additional paid-in capital” an amount equal to issue pursuant to its articles of incorporation or on the par value per share of the Common Stock. Proportional adjustments were made todecreased shares resulting from the number of shares of Common Stock issuable upon exercise or conversion of the Company’s outstanding stock options and warrants, the exercise price or conversion price (as applicable) of the Company’s outstanding stock options and warrants, and the number of shares reserved for issuance under the Company’s equity incentive plan. All share and per share information included in this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the impact of these reverse stock splits.split.

 

Cash and Cash Equivalents and Restricted Cash and Restricted Marketable Securities

 

Cash and cash equivalents consist principally of cash and deposits with maturities of three months or less as of SeptemberJune 30, 20222023 and December 31, 2021.2022. All cash equivalents are carried at cost, which approximates fair value. Restricted cash and restricted marketable securities represents cash required to be held as collateral for the Company’s Exchange Note. Accordingly, these balances contain restrictions as to their availability and usage and are classified as restricted cash and restricted marketable securities in the consolidated balance sheets. Additional information relating to the Company’s Exchange Note may be found in Note 10 – Debt, included elsewhere in the notes to the consolidated financial statements.

 

Cash deposits with financial institutions, including restricted cash and restricted marketable securities, generally exceed federally insured limits. Management believes minimal credit risk exists with respect to these financial institutions and the Company has not experienced any losses on such amounts. Balances held in a brokerage account are disclosed on the balance sheet as restricted cash.

Marketable Securities

 

The Company’s marketable security investments primarily include investments held in mutual funds, municipal bonds, and corporate bonds. The mutual funds are recorded at fair value in the accompanying consolidated balance sheets as part of cash and cash equivalents. The municipal and corporate bonds are considered to be held-to-maturity securities and are recorded at amortized cost in the accompanying consolidated balance sheets. The fair value of these investments was estimated using recently executed transactions and market price quotations. The Company considers current assets to be those investments that will mature within the next 12 months, including interest receivable on long-term bonds.

 


Accounts Receivable, Net

 

Accounts receivable, net, primarily consists of amounts for goods and services that are billed and currently due from customers. Accounts receivable balances are presented net of an allowance for credit losses, which is an estimate of billed amounts that may not be collectible. In determining the amount of the allowance at each reporting date, management makes judgments about general economic conditions, historical write-off experience, and any specific risks identified in customer collection matters, including the aging of unpaid accounts receivable and changes in customer financial conditions. Accounts receivable balances are written off after all means of collection are exhausted and the potential for non-recovery is determined to be probable. Adjustments to the allowance for credit losses are recorded as general and administrative expenses in the consolidated statements of operations.

 

Concentration of Credit Risk and Significant Customer

 

Financial instruments that potentially subject the Company to a concentration of credit risk primarily consist of cash, cash equivalents, restricted cash, and restricted marketable securities, and accounts receivable. Cash equivalents primarily consist of money market funds with original maturities of three months or less, which are invested primarily with U.S. financial institutions. Cash deposits with financial institutions, including restricted cash, and restricted marketable securities, generally exceed federally insured limits. Management believes minimal credit risk exists with respect to these financial institutions and the Company has not experienced any losses on such amounts.

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Revenue

 

For the three and six months ended SeptemberJune 30, 20222023 and 2021,2022, the Company’s customers that accounted for 10% or more of the total revenue were as follows:

 

  Three Months Ended
September 30, 2022		  Three Months Ended
September 30, 2021		 
(In thousands) Amount  % of Total
Revenue		  Amount  % of Total
Revenue		 
New England Innovation Academy (“NEIA”) – Related Party  *   *  $3,217   20.4%
Greenstone Holdings (“Greenstone”) – Related Party  *   *  $1,998   12.7%
Company Customer Number – 71  *   *  $3,174   20.2%
Company Customer Number – 136 $908   12.9% $2,480   15.7%
Company Customer Number – 139  *   *  $4,006   25.4%

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


For the nine months ended September 30, 2022 and 2021, the Company’s customers that accounted for 10% or more of the total revenue were as follows:

  Nine Months Ended
September 30, 2022		  Nine Months Ended
September 30, 2021		 
(In thousands) Amount  % of Total
Revenue		  Amount  % of Total
Revenue		 
NEIA – Related Party  *   *  $19,572   56.6%
Company Customer Number – 71  *   *  $3,520   10.2%
Company Customer Number – 136 $7,054   13.5%  *   * 
Company Customer Number – 139 $8,590   16.4% $4,006   11.6%
  Three months ended
June 30, 2023		 Three months ended
June 30, 2022		  Six months ended
June 30, 2023		  Six months ended
June 30, 2022		 
(In thousands) Amount % of Total
Revenue		 Amount  % of Total
Revenue		  Amount  % of Total
Revenue		  Amount  % of Total
Revenue		 
Customer A * * $4,835   25.0% $627   5.8% $8,628   19.0%
Customer C * *  *   *   *   *  $6,146   13.6%

 

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

 

Accounts Receivable, Net

As of SeptemberJune 30, 20222023 and December 31, 2021,2022, the Company’s customers that accounted for 10% or more of the total accounts receivable, net, were as follows:

 

  As of
September 30, 2022		  As of
December 31, 2021		 
(In thousands) Amount  % of Total
Accounts
Receivable		  Amount  % of Total
Accounts
Receivable		 
NEIA – Related Party  *   *  $3,498   48.4%
Company Customer Number - 126 $1,541   33.8% $1,541   21.3%
Company Customer Number - 15989 $600   13.2%  *   * 
Company Customer Number - 16540 $573   12.6%  *   * 
Company Customer Number - 185 $526   11.5%  *   * 
Company Customer Number - 12237 $510   11.2%  *   * 
  As of June 30, 2023  As of December 31, 2022 
(In thousands) Amount  % of Total
Accounts
Receivable		  Amount  % of Total
Accounts
Receivable		 
Company Customer Number - 10888-1 $189   14.0%  *   * 
Company Customer Number – 15095 $718   53.3% $352   32.9%
Company Customer Number - 16491  *   *  $123   11.5%
Company Customer Number - 10888  *   *  $251   23.5%

 

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

 

Inventories

 

The Company values all of its inventories, which consist primarily of significant raw material hardware components, at the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a First-In, First-Outfirst-in, first-out basis. Write-offs of potentially slow-moving or damaged inventory are recorded through specific identification of obsolete or damaged material. The companyCompany takes physical inventory at least once annually at all inventory locations.

 


 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are recognized using the straight-line method over the estimated useful life of each asset, as follows:

 

 Estimated Useful Life
Life (Years)
Computer and office equipment2 to 3
Furniture and fixtures2
Software3
Vehicles5
Research and development of laboratory equipment5
Machinery and equipment3 to 5
Leased equipment at customer5 to 13
Trade show assets3 to 5
Leasehold improvementsLower of estimated useful life or remaining lease term

 

The estimated useful lives of the Company’s property and equipment are periodically assessed to determine if changes are appropriate. The Company charges maintenance and repairs to expensesexpense as incurred. When the Company retires or disposes of assets, the carrying cost of these assets and related accumulated depreciation or amortization are eliminated from the consolidated balance sheet and any resulting gain or loss are included in the consolidated statements of operations in the period of retirement or disposal.

Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service. During construction, costs are accumulated in a construction-in-progress account, with no depreciation. Upon completion, costs are transferred to the appropriate asset account, and depreciation begins when the asset is placed into service.

 

Goodwill

 

Goodwill is defined as the excess of cost over the fair value of assets acquired and liabilities assumed in a business combination. Goodwill is tested for impairment annually, and more frequently if events and circumstances indicate that the asset might be impaired. The Company has determined that it is a single reporting unit for the purpose of conducting the goodwill impairment assessment. A goodwill impairment charge is recorded if the amount by which the Company’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. 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/or a decline in the Company’s market value as a result of a significant decline in the Company’s stock price.

 

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

 

Based on its interim testing, the Company noted that the carrying value of equity exceeded the calculated fair value by an amount greater than the aggregate value of our goodwill and intangible assets.goodwill. Accordingly, the Company concluded that the entire carrying value of its goodwill and intangible assets should bewas impaired, resulting in a second-quarter impairment charge of $69.9$54.7 million. Additional information regarding the Company’s interim testing on goodwill may be found in Note 87 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

 


Intangible Assets

 

The Company initially records intangible assets at their estimated fair values and reviews these assets periodically for impairment. Identifiable intangible assets, which consist principally of acquired customer-related acquired assets, acquired and/or developed technology, non-compete agreements, and trade names, are reported net of accumulated amortization, and are being amortized over their estimated useful lives at amortization rates that are proportional to each asset’s estimated economic benefit. The Company’s intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. The Company reviews the carrying value of these intangible assets annually, or more frequently if indicators of impairment are present.

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The finite-lived useful lives are as follows:

 

Trade names5 to 7 years
Acquired developed technology5 to 8 years
Non-compete agreements5 years
Customer relationships5 to 8 years
Capitalized website costs3 to 5 years

 

In performing the review of the recoverability of intangible assets, the Company considers several factors, including whether there have been significant changes in legal factors or the overall business climate that could affect the underlying value of an asset. The Company also considers whether there is an expectation that the asset will be sold or disposed of before the end of its remaining estimated useful life. If, as the result of examining any of these factors, the Company concludes that the carrying value of the intangible asset exceeds its estimated fair value, the Company recognizes an impairment charge and reduces the carrying value of the asset to its estimated fair value.

 

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

 

Based on its interim testing, the Company noted that the carrying value of equity exceeded the calculated fair value by an amount greater than the aggregate value of our goodwill and intangible assets. Accordingly, the Company 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$15.2 million. Additional information regarding the Company’s interim testing on intangible assets may be found in Note 87 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

 

Convertible Notes Payable

 

The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with ASC Topic 815, Derivatives and Hedging (“ASC815”ASC 815”). The accounting treatment of derivative financial instruments requires that the Company identify and record certain embedded conversion options (“ECOs”),ECOs, certain variable-share settlement features, and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Bifurcated embedded conversion options, variable-share settlement features, and any related freestanding instruments are recorded as a discount to the host instrument which is amortized to interest expense over the life of the respective note using the effective interest method.

 

If the Company determines that an instrument is not a derivative liability, it then evaluates whether there is a beneficial conversion feature (“BCF”),BCF, by comparing the commitment date fair value to the effective current conversion price of the instrument. The Company records a BCF as a debt discount which is amortized to interest expense over the life of the respective note using the effective interest method. BCFs that are contingent upon the occurrence of a future event are recognized when the contingency is resolved.

 


 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Warrant Liabilities

 

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued private placement stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity (“ASC480”ASC 480”) and ASC815.ASC 815. The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC480ASC 480 and ASC815.ASC 815. Management’s assessment considers whether the warrants are freestanding financial instruments pursuant to ASC480,ASC 480, whether they meet the definition of a liability pursuant to ASC480,ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC815,ASC 815, including whether the warrants are indexed to the Company’s own Common Stock among other conditions for equity classification.

 

For issued or modified warrants that meet all of the criteria for equity classification, they are recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that are precluded from equity classification, they are recorded as a liability at their initial fair value on the date of issuance and subject to remeasurement on each balance sheet date with changes in the estimated fair value of the warrants to be recognized as an unrealized gain or loss in the condensed consolidated statements of operations.

On January 25, 2022, the Company entered into a Securities Purchase Agreement (the “Securities Agreement”) with an institutional investor and other accredited investors for the sale by the Company of (i) 12,252 shares (the “SA Shares”) of Common Stock, (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to an aggregate of 7,853 shares of Common Stock and (iii) warrants to purchase up to an aggregate of 15,079 shares of Common Stock (the “Common Warrants” and, collectively with the Pre-Funded Warrants, the “PIPE Warrants”), in a private placement offering.

On March 14, 2022, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with an accredited investor (the “Investor”), pursuant to which the Company agreed to issue and sell to the Investor, in a private placement transaction, in exchange for the payment by the Investor of $65 million, less applicable expenses, as set forth in the Securities Purchase Agreement, (i) a SPA Note in an aggregate principal amount of $65 million, and (ii) a warrant (the “SPA Warrant”) to purchase up to an aggregate of 34,406 shares of Common Stock.

 

On August 18, 2022, the Company reached an agreement with its institutional lender to amend its existing Securities Purchase Agreement and entered into a Securities Exchange Agreement (the “Exchange“August 2022 Exchange Agreement”). Pursuant to the August 2022 Exchange Agreement, the Company issued a new warrant to purchase 71,13871,139 shares of Common Stock (the “Note Exchange Warrant”) and modified thean existing SPA Warrant.warrant (the “SPA Warrant”) to purchase up to an aggregate of 34,406 shares of Common Stock. The Company exchanged the SPA Warrant for a new warrant for the same number of underlying shares but with a reduced exercise price (the “Modified Warrants” and, collectively with the Note Exchange Warrant, the “Warrant Liabilities”“August 2022 Warrants”). As of September 30, 2022, the Company had outstanding liability-classified Warrant Liabilities that allows the accredited investor (the “Investor”) to purchase the Company’s Common Stock. Additional information regarding the August 2022 Exchange Agreement and Warrant LiabilitiesAugust 2022 Warrants may be found in Note 54 – Fair Value Measures and Note 109 – Debt, included elsewhere in the notes to the condensed consolidated financial statements.

 

Additionally, on April 18, 2023, the Company undertook a warrant exercise inducement program, which it later cancelled. As a result, the warrant exercise price was reduced from $13.00 per share to $3.45 per share.

Debt IssueIssuance Costs and Debt Discount

 

The Company may record debt issuance costs and/or debt discounts in connection with issuingthe issuance of debt. The Company may cover these costs by paying cash or issuing warrants. These costs are amortized to interest expense over the expected life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

 

Original Issue Discount

 

For certainCertain convertible debt issued by the Company, it may provide the debt holder with an original issue discount. The Company would record the original issue discount to debt discount, reducing the face amount of the note, and is then amortized to interest expense over the life of the debt.

 


Leases

 

The Company determines at the inception of a right-of-usean asset contract if such arrangement is or contains a lease. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company classifies leases at the lease commencement date as operating or finance leases and records a right-of-use asset and a lease liability on its consolidated balance sheet for all leases with an initial lease term of greater than 12 months. A lease with an initial term of 12 months or less is not recorded on the balance sheet, but related payments are recognized as an expense on a straight-line basis over the lease term.

 

The Company’s right-of-use asset contracts may contain both lease and non-lease components. Non-lease components may include maintenance, utilities, and other operating costs. The Company combines the lease and non-lease components of fixed costs in its lease arrangements as a single lease component. Variable costs, such as utilities or maintenance costs, are not included in the measurement of right-of-use assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs.

 

Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term. The Company determines the present value of future lease payments by using its estimated secured incremental borrowing rate for that lease term as the interest rate implicit in the lease is not readily determinable. The Company estimates its secured incremental borrowing rate for each lease based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.

 

Certain of the Company’s right-of-use asset leases include options to extend or terminate the lease. The amounts determined for the Company’s right-of-use assets and lease liabilities generally do not assume that renewal options or early-termination provisions, if any, are exercised unless it is reasonably certain that the Company will exercise such options.

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Deferred Revenue

 

Deferred revenue includes amounts collected or billed in excess of revenue that itthe Company can recognize. The Company recognizes deferred revenue and non-current deferred revenue as revenue as the related performance obligation is satisfied. The Company records deferred revenue that will be recognized during the succeeding twelve-month period as a current liability on the consolidated balance sheet.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses. The estimated fair valuevalues of the accounts receivable and accounts payable approximatesapproximate their carrying valuevalues due to the short-term nature of these instruments.

 

Stock-Based Compensation

 

The Company measures all stock options and other stock-based awards granted to employees, directors and directorsconsultants based on the fair value on the date of the grant and recognizes compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Historically, the Company has issued stock options to employees, directors and consultants with only service-based vesting conditions and records the expense for these awards using the straight-line method.

 

The Company classifies stock-based compensation expense in its consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified.

 

The Company estimates the fair value of each stock option grant on the date of the grant using the Black-Scholes option-pricing model. Before the IPO, the Company was a private company and therefore lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of similar publicly-traded companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

 


Business Combinations

 

The Company accounts for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.

 

The Company’s management exercises significant judgments in determining the fair value of assets acquired and liabilities assumed, as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company’s current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to the fair value of assets and liabilities made after the end of the measurement period are recorded within the Company’s operating results.

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For contingent consideration arrangements, the Company recognizes a liability at fair value as of the acquisition date with subsequent fair value adjustments recorded in the consolidated statements of operations. Additional information regarding the Company’s contingent consideration arrangements may be found in Note 54 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements.

 

Revenue Recognition

 

Overview

 

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

 

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

 

 ●identify the customer contract;

 

 ●identify performance obligations that are distinct;

 

 ●determine the transaction price;

 

 ●allocate the transaction price to the distinct performance obligations; and

 

 ●recognize revenue as the performance obligations are satisfied.

 


Identify the customer contract

A customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability and consideration is probable. Specifically, the Company obtains written/electronic signatures on contracts and a purchase order,orders, if said purchase orders are issued in the normal course of business by the customer.

 

Identify performance obligations that are distinct

 

A performance obligation is a promise by the Company to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

 

Determine the transaction price

 

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies.

 

Allocate the transaction price to distinct performance obligations

 

The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer. The Company’s contracts typically contain multiple performance obligations, for which the Company accounts for individual performance obligations separately, if they are distinct. The standalone selling price reflects the price the Company would charge for a specific piece of equipment or service if it was sold separately in similar circumstances and to similar customers.

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recognize revenue as the performance obligations are satisfied

 

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

Significant Judgments

The Company enters into contracts that may include various combinations of equipment, services and construction, which are generally capable of being distinct and accounted for as separate performance obligations. Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once the Company determines the performance obligations, it determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on the SSP. The corresponding revenue is recognized as the related performance obligations are satisfied.

Judgment is required to determine the SSP for each distinct performance obligation. The Company determines SSP based on the price at which the performance obligation is sold separately and the methods of estimating SSP under the guidance of ASC 606-10-32-33. If the SSP is not observable through past transactions, the Company estimates the SSP, taking into account available information such as market conditions, expected margins, and internally approved pricing guidelines related to the performance obligations. The Company licenses its 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. The Company typically satisfies its performance obligations for equipment sales when equipment is made available for shipment to the customer; for services sales as services are rendered to the customer and for construction contracts both as services are rendered and when the contract is completed.

 


The Company utilizes the cost-plus margin method to determine the SSP for equipment and build-out services. This method is based on the cost of the services from third parties, plus a reasonable markup that the Company believes is reflective of a market-based reseller margin.

 

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

 

The Company estimates variable consideration in the form of royalties, revenue share, monthly fees, and service credits at contract inception and updated at the end of each reporting period if additional information becomes available. Variable consideration is typically not subject to constraint. Changes to variable consideration were not material for the periods presented.

 

If a contract has payment terms that differ from the timing of revenue recognition, the Company will assess whether the transaction price for those contracts include a significant financing component. The Company has elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if the Company expects that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service, will be one year or less. For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative estimate of the financing component and its relative significance, requires judgment. Accordingly, the Company imputes interest on such contracts at an agreed-upon interest rate and will present the financing components separately as financial income. For the three months and ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, the Company did not have any such financial income.

 

Payment terms with customers typically require payment 30 days from the invoice date. The Company’s agreements with its customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise concern over delivered products or services, the Company has endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented.

 

The Company has elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service. Accordingly, the Company will accrue all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. The Company has payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

The Company generally provides a one-year warranty on its products for materials and workmanship but may provide multiple-yearmultiple year warranties as negotiated, and will pass ongenerally transfers to its customers the warranties it receives from its vendors, if any, which generally coverscover this one-year period. In accordance with ASC 450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably estimated. The Company maintains a reserve for warranty returns of $592 thousand and $553 thousand for June 30, 2023 and December 31, 2022, respectively. The Company’s reserve for warranty returns is included in accrued expenses and other current liabilities in the Company’sits consolidated balance sheets. Additional information regarding the Company’s warranty reserve may be found in Note 3 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements.

 


Research and Development Costs

 

The Company expenses research and development costs as incurred. Research and development expenses include payroll, employee benefits and other expenses associated with product development. The Company incurs research and development costs associated with the development and enhancement of both hardware and software products associated with its cultivation and extraction equipment, as well as its SaaS-based software offering, Agrify Insights™ cultivation software.software (“Agrify Insights™”).

 

Capitalization of Internal Software Development Costs

 

The Company capitalizes certain software engineering efforts related to the continued development of Agrify Insights™ cultivation software under ASC 985-20. CostsTopic 350-40 The costs incurred duringin the preliminary stages of development are expensed as incurred as research costs. Once the application has reached the development phasestage, internal and external costs incurred to develop internal-use software are only capitalized once technical feasibility has been established and amortized on a straight-line basis over the work performed willestimated useful life of the software. Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the software that result in new or additional functionality.added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful life of the software. The types of costs capitalized during the application development phase include employee compensation, as well as consulting fees for third-party software developers working on these projects. 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 theThe estimated useful life of the asset, whichcapitalized internal-use software ranges from two to five years.

Shipping and Handling Charges

The Company incurs costs related to shipping and handling of its manufactured products. These costs are expensed as incurred as a component of cost of goods sold. Shipping and handling charges related to the receipt of raw materials are also incurred, which are recorded as a cost of the related inventory.

Equity Method Investments

Investments in affiliates that are 50% or less owned by the Company for which the Company exercises significant influence but does not have control are accounted for on the equity method. The Company has investments in equity investments without readily determinable fair values, which represents investments in entities where the Company does not have the ability to significantly influence the operations of the entities.

An assessment of whether or not the Company (as a holder of 50% of TPI) has the power to direct activities that most significantly impact TPI’s economic performance and to identify the party that obtains the majority of the benefits of the investment was performed as of September 30, 2022 and December 31, 2021 and will be performed as of each subsequent reporting date. After each of these assessments, the Company concluded that the activities that most significantly impact TPI’s economic performance are the growth, marketing, sale, and distribution of products using TPI’s technology and IP, each of which is solely directed by TPI. Based on the consideration of these assessments, the Company concluded that the Company’s investment in TPI should be accounted for under the equity method.

The carrying value of the Company’s investment in TPI was $0 as of September 30, 2022 and December 31, 2021. The Company did not recognize revenue from TPI for the three and nine months ended September 30, 2022 and September 30, 2021.

 

Income Taxes

 

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

 


 

 

The Company follows the provisions of ASC 740-10-25-5, “Basic Recognition Threshold.” AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10-25-6, the benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of September 30, 2022, tax years 2017 through 2021 remain open for IRS audit. The Company has received no notice of audit from the IRS for any of the open tax years.

 

The Company recognizes 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, the Company recognizes the full amount of the tax benefit.

 

Net Loss Per Share

 

The Company presents basic and diluted net loss per share attributable to Common Stockholders in conformity with the two-class method required for participating securities. The Company computes basic loss per share by dividing net loss available to Common Stockholders by the weighted-average number of common shares outstanding. Net loss available to Common Stockholders represents net loss attributable to Common Stockholders reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities as the holders of the participating securities do not have a contractual obligation to share in any losses. Diluted loss per share adjusts basic loss per share for the potentially dilutive impact of stock options and warrants. As the Company has reported losses for all periods presented, all potentially dilutive securities including stock options and warrants, are anti-dilutive, and accordingly, basic net loss per share equals diluted net loss per share.

 

Net loss per share calculations for all periods have been adjusted to reflect the reverse stock splits effected on January 12, 2021,October 18, 2022 and July 5, 2023. Net loss per share was calculated based on the weighted-average number of Common Stock outstanding.

 

Recently Adopted Accounting Pronouncements

 

In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt—Debt with Conversion and Other Options (Subtopic 470-20), and Derivatives and Hedging - Hedging—Contracts in an Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in ASU No. 2020-06 simplify the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exceptions for contracts in an entity’s own equity. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The adoption of this new accounting guidance had no impact on the Company’s consolidated financial position.


Pending Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities and accounts receivable. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. ASU 2016-13 is effective in the first quarter offor fiscal 2024.years beginning after December 15, 2022. The Company is currently evaluating the potential impactadopted ASU 2016-13 on January 1, 2023. The adoption of this adoptionstandard did not have a material impact on itsthese condensed consolidated financial statements and related disclosures.statements.

 

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 606): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with GAAP. The amendment in this update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The guidance should be applied prospectively to business combinations occurringCompany adopted ASU 2021-08 on or after the effective date of the amendment in this update.January 1, 2023. The Company is currently evaluating the potential impactadoption of this adoptionstandard did not have a material impact on itsthese condensed consolidated financial statements and related disclosures.statements.

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

Note 2 — Restatement of Current Period

The Company’s financial statements as of and for the three and nine months ended September 30, 2022 have been restated due to the following errors:

Pipe Warrants/Original SPA Warrants Classification and Measurement

During the nine months ended September 30, 2022 the Company entered into several debt and equity financing transactions including i) the issuance of common stock and warrants in a private placement on January 25, 2022 (the “PIPE Warrants”), ii) the issuance of a note payable (the “SPA Note”) with associated warrants on March 14, 2022 (the “SPA Warrants”), iii) the prepayment of the SPA Note on August 18, 2022 and the exchange of the remaining balance for a new note payable (the “Exchange Note”), the modification of the SPA Warrants (the “Modified Warrants”), and the issuance of new warrants (the “New Warrants”).

In connection with the aforementioned transactions, the Company determined that the PIPE Warrants and the SPA Warrants were incorrectly classified as equity and must be reclassified to liabilities measured at fair value upon issuance and remeasured to fair value at each reporting date. In addition, the Company used an incorrect volatility percentage when calculating the value of the PIPE Warrants, the SPA Warrants, and the New Warrants upon issuance. As a result of these errors:

●Additional paid-in capital was overstated by $24.0 million as of September 30, 2022 due to the incorrect classification of the SPA Warrants and the PIPE Warrants as equity rather than liabilities;

●Warrant liabilities was understated by the fair value of the PIPE Warrants, the Modified SPA Warrants, and New Warrants of $4.1 million as of September 30, 2022;

●Long-term debt and Long-term debt, current was understated by $29.9 million and overstated by $31.3 million, respectively, as of September 30, 2022 due to the incorrect allocation of the debt discount in connection with the issuance of debt and SPA Warrants, as a result of the improper classification of the SPA Warrants as equity rather than liabilities;


●Accumulated deficit as of September 30, 2022 was overstated by $18.3 million as a result of the net impact of the following errors in the consolidated statement of operations:

οThe change in fair value of warrant liabilities was understated by $10.6 million and $41.5 million during the three and nine months ended September 30, 2022, respectively due to the fact that the Company did not appropriately remeasure the fair value of the warrant liabilities as of September 30, 2022 through earnings;

οInterest expense, net was understated by $675 thousand and $2.2 million during the three and nine months ended September 30, 2022, respectively due to incorrect debt discount amortization in connection with the issuance of debt and SPA Warrants, as a result of the improper classification of the SPA Warrants as equity rather than liabilities.

οThe gain on extinguishment of notes payable was understated by $21.1 million during the three and nine months ended September 30, 2022

Long-term Debt Classification

The Company incorrectly classified the Exchange Note as long-term debt. However, as the Investor has the option of requiring the Company to redeem the Exchange Note on the one-year or two-year anniversaries of issuance subject to certain conditions, the Exchange Note must be classified as a current liability. As a result of this error:

●Long-term debt, current was understated by $31.3 million as of September 30, 2022;

●Long-term debt was overstated by $29.9 million as of September 30, 2022

Debt Issuance Costs Classification

The Company incorrectly classified debt issuance costs as an asset rather than as a contra-liability as of September 30, 2022. As a result of this error:

●Prepaid expenses and other current assets were understated by $308 thousand as of September 30, 2022;

●Other non-current assets were overstated by $454 thousand as of September 30, 2022

Reverse Stock Split

On October 18, 2022, the Company effected a 1-for-10 reverse stock split of its Common. All owners of record as of October 18, 2022 received one issued and outstanding share of the Company’s Common Stock in exchange for ten outstanding shares of the Company’s Common Stock. Additionally, On October 18, 2022, the Company effected a 1-for-20 reverse stock split of its Common Stock on July 5, 2023. All owners of record as of July 5, 2023 received one issued and outstanding share of the Company’s Common Stock in exchange for twenty outstanding shares of the Company’s Common Stock. Additional information regarding the reverse stock splits may be found in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to the consolidated financial statements.

The impact of these/this adjustment(s) is/are shown below in the restated and reclassified consolidated balance sheet, consolidated statement of operations, and consolidated statement of cash flows for the quarter-ended September 30, 2022.


The following is a summary of the impact of the restatement and reclassifications on the Company’s condensed consolidated balance sheet:

  September 30, 2022 
     Adjustments    
  Previously
Reported		  Warrants  Debt
Issuance
Costs		  Debt Classification 
 Reverse
Stock Split		  Restated 
Assets                  
Current assets:                  
Cash and cash equivalents $2,151   —   —   —   —  $2,151 
Restricted cash and restricted marketable securities  10,000   —   —   —   —   10,000 
Marketable securities  381   —   —   —   —   381 
Accounts receivable, net of allowance for doubtful accounts of $2,740  4,559   —   —   —   —   4,559 
Inventory, net of reserves of $1,871  41,791   —   —   —   —   41,791 
Prepaid and refundable taxes  204   —   —   —   —   204 
Prepaid expenses and other current assets  4,296   —   308  —   —   4,604 
Total current assets  63,382   —       —       63,690 
Loan receivable, net of allowance for doubtful accounts of $7,079  29,232   —   —   —   —   29,232 
Property and equipment, net  13,208   —   —   —   —   13,208 
Right-of-use assets, net  2,470   —   —   —   —   2,470 
Goodwill  —   —   —   —   —   - 
Intangible assets, net  —   —   —   —   —   - 
Other non-current assets  1,899   —   (454)  —   —   1,445 
Total assets $110,191                  $110,045 
                         
Liabilities and Stockholders’ Equity                        
Current liabilities:                        
Accounts payable $9,558   —   —   —   —  $9,558 
Accrued expenses and other current liabilities  20,505   —   —   —   —   20,505 
Operating lease liabilities, current  822   —   —   —   —   822 
Long-term debt, current  492   (981)  146   32,157   —   31,814 
Deferred revenue  10,136   —   —   —   —   10,136 
Total current liabilities  41,513               —   72,835 
Other non-current liabilities  187   —   —   —   —   187 
Warrant liabilities  971   4,147   —   —   —   5,118 
Operating lease liabilities, non-current  1,744   —   —   —   —   1,744 
Long-term debt  30,380   2,887   —   (32,787)  —   480 
Total liabilities  74,795                   80,364 
                         
Commitments and Contingencies (Note 18)                        
                         
Stockholders’ equity:                        
Common Stock, $0.001 par value per share, 5,000,000 shares authorized, 134,550 shares issued and outstanding  3   —   —   —   (3)  - 
Preferred Stock, $0.001 par value per share, 2,895,000 shares authorized, no shares issued or outstanding  —   —   —   —   —   — 
Preferred A Stock, $0.001 par value per share, 105,000 shares authorized, no shares issued or outstanding  —   —   —   —   —   — 
Additional paid-in capital  242,549   (24,029)  —   —   3   218,523 
Accumulated deficit  (207,526)  17,684   —   630   —   (189,212)
Total stockholders’ equity attributable to Agrify  35,026                   29,311 
Non-controlling interests  370   —   —   —   —   370 
Total liabilities and stockholders’ equity $110,191                  $110,045 


The following is a summary of the impact of the restatement and reclassifications on the Company’s condensed consolidated statement of operations:

  Three Months ended September 30, 2022  Nine Months ended September 30, 2022 
     Adjustment        Adjustment    
  Previously
Reported		  Warrants  Reverse
Stock Split		  Restated  Previously
Reported		  Warrants  Reverse
Stock Split		  Restated 
Revenue including $0 and $2,411 from related parties, respectively) $7,019   —   —  $7,019  $52,369   —   —  $52,369 
Cost of goods sold  11,135   —   —   11,135   50,703   —   —   50,703 
Gross profit (loss)  (4,116)          (4,116)  1,666           1,666 
                                 
General and administrative  24,126   —   —   24,126   53,263   —   —   53,263 
Selling and marketing  2,160   —   —   2,160   6,582   —   —   6,582 
Research and development  1,747   —   —   1,747   6,269   —   —   6,269 
Change in contingent consideration  (602)  —   —   (602)  (1,509)  —   —   (1,509)
Impairment of goodwill and intangible assets  —   —   —   —   69,904   —   —   69,904 
Total operating expenses  27,431           27,431   134,509           134,509 
Loss from operations  (31,547)          (31,547)  (132,843)          (132,843)
Interest (expense) income, net  (3,979)  (675)  —   (4,654)  (5,224)  (2,180)  —   (7,404)
Other income (expense)  1,506   —   —   1,506   1,506   —   —   1,506 
Change in fair value of warrant liabilities  5,686   10,582   —   16,268   5,686   41,548   —   47,234 
Loss (gain) on extinguishment of notes payable  (17,933)  (21,052)  —   (38,985)  (17,933)  (21,052)  —   (38,985)
Other (expense) income, net  (14,720)  (11,145)      (25,865)  (15,965)  18,316       2,351 
Net loss before income taxes  (46,267)  (11,145)      (57,412)  (148,808)  18,316       (130,492)
Income tax benefit  —   —   —   —   (262)  —   —   (262)
Net loss  (46,267)  (11,145)      (57,412)  (148,546)  18,316       (130,230)
Income (loss) attributable to non-controlling interests  1   —   —   1   5   —       5 
Net loss attributable to Agrify Corporation $(46,268) $(11,145)     $(57,413) $(148,551) $18,316      $(130,235)
Net loss per share attributable to Common Stockholders – basic and diluted (1) $(17.33) $(15.33)  (397.33) $(429.98) $(57.21) $7.05   (952.94) $(1,003.10)
Weighted-average common shares outstanding – basic and diluted (1)  2,670,501   —  (2,536,975)  133,526   2,596,649   —  (2,466,817)  129,832 


The following is a summary of the impact of the restatement and reclassifications on the Company’s condensed consolidated statement of cash flows:

  Nine Months ended September 30, 2022 
     Adjustment    
  Previously       
Cash flows from operating activities Reported  Warrants  Restated 
Net loss attributable to Agrify Corporation $(148,551)  18,316  $(130,235)
Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities:            
Depreciation and amortization  2,602   —   2,602 
Impairment on goodwill and intangible assets  69,904   —   69,904 
Loss (gain) on extinguishment of notes payable, net  14,933   24,052   38,985 
Change in fair value of Warrant liabilities  (5,686)  (41,548)  (47,234)
Amortization of premium on investment securities  606   —   606 
Amortization of debt discount  1,990   2,205   4,195 
Interest on investment securities  (759)  59   (700)
Provision for doubtful accounts  23,708   —   23,708 
Provision for slow-moving inventory  967   —   967 
Debt issuance costs paid  (665)  665   — 
Amortization of issuance costs  389   119   508 
Deferred income taxes  (262)  —   (262)
Prepaid and refundable taxes  —   (10)  (10)
Compensation in connection with the issuance of stock options  3,538   —   3,538 
Issuance of common shares in connection with acquisition  —   —   — 
Non-cash interest (income) expense  (1,522)  (59)  (1,581)
Loss from disposal of fixed assets  6   —   6 
Change in fair value of contingent consideration  (1,509)  —   (1,509)
Income (loss) attributable to non-controlling interests  5   —   5 
Changes in operating assets and liabilities, net of acquisitions:            
Accounts receivable  1,217   —   1,217 
Inventory  (20,129)  —   (20,129)
Prepaid expenses and other current assets  (2,760)  3,729   969 
Prepaid and refundable taxes  (10)  10   — 
Right-of-use assets, net  55   —   55 
Other non-current assets  (1,275)  1,265   (10)
Accounts payable  378   (75)  303 
Accrued expenses and other current liabilities  (8,128)  (37)  (8,165)
Deferred (expense) revenue, net  4,843   (596)  4,247 
Net cash used in operating activities  (66,115)  8,095   (58,020)
             
Cash flows from investing activities            
Purchases of property and equipment  (8,002)  —   (8,002)
Purchase of securities  (283,271)  —   (283,271)
Proceeds from the sale of securities  317,593   —   317,593 
Issuance of loan receivable  (26,942)  —   (26,942)
Cash paid for business combination, net of cash acquired  (3,513)  —   (3,513)
Net cash used in investing activities  (4,135)  —   (4,135)
             
Cash flows from financing activities            
Proceeds from issuance of debt and warrants in private placement, net  65,000   (3,109)  61,891 
Proceeds from issuance of Common Stock and warrants in private placement, net of fees  25,770   27   25,797 
Proceeds from IPO, net of fees  —   —   — 
Proceeds from Secondary public offering, net of fees  —   —   — 
Proceeds from exercise of options  19   1   20 
Proceeds from exercise of warrants  2   1   3 
Short-term loan payable  2,522   (2,522)  — 
Repayments of debt in private placement  (30,000)  (3,170)  (33,170)
Repayments of notes payable, other  (2,685)  2,637   (48)
Payments on insurance financing loans  —   (1,714)  (1,714)
Payments on other financing loans  —   (248)  (248)
Payments of financing leases  (241)  —   (241)
Impact from reverse stock split  —   2   2 
Net cash provided by financing activities  60,387   (8,095)  52,292 
Net increase in cash and cash equivalents  (9,863)      (9,863)
Cash and cash equivalents at the beginning of period  12,014   —   12,014 
Cash and cash equivalents at the end of period $2,151   —  $2,151 
Cash, cash equivalents, and restricted cash at end of period            
Cash and cash equivalents $2,151      $2,151 
Restricted cash and restricted marketable securities  10,000       10,000 
Total cash, cash equivalents, and restricted cash and restricted marketable securities at the end of period $12,151      $12,151 
Supplemental disclosures of non-cash information            
Initial fair value of warrants  —   50,705  $50,705 
Financing of prepaid insurance  —   

1,928

  $

1,928

 


The following is a summary of the impact of the restatement and reclassifications on the Company’s condensed consolidated statement of stockholders’ equity/deficit as of September 30, 2022:

  Common Stock
(Previously
Reported)		  Common Stock
(Restated)		  Additional
Paid-In
Capital
(Previously
Reported)		  Additional
Paid-In
Capital
(Restated)		  Accumulated
Deficit
(Previously
Reported)		  Accumulated
Deficit
(Restated)		  Total
Stockholders’
Equity
attributable
to Agrify
(Previously
Reported)		  Total
Stockholders’
Equity
attributable
to Agrify
(Restated)		  Non-Controlling Interests (Previously Reported)  Non-
Controlling
Interests
(Restated)		  Total
Stockholders’
Equity
(Previously
Reported)		  Total
Stockholders’
Equity
(Restated)		 
  Shares  Amount  Shares  Amount                               
Balance at January 1, 2022  2,220,710  $2  $111,035  $—  $196,032  $196,034  $(58,975) $(58,975) $137,059  $137,059  $365  $365  $137,424  $137,424 
Stock-based compensation  —   —   —   —   1,893   1,893   —   —   1,893   1,893   —   —   1,893   1,893 
Issuance of Common Stock and warrants in private placement  245,035   —   12,252   —   25,797   14,800   —   —   25,797   14,800   —   —   25,797   14,800 
Issuance of debt and warrants in private placement  —   —   —   —   13,230   —   —   —   13,230   —   —   —   13,230   — 
Acquisition of Lab Society  29,793   —   1,490   —   1,903   1,903   —   —   1,903   1,903   —   —   1,903   1,903 
Exercise of options  851   —   42   —   20   20   —   —   20   20   —   —   20   20 
Exercise of warrants  162,754   —   8,138   —   2   2   —   —   2   2   —   —   2   2 
Net loss  —   —   —   —   —   —   (102,283)  (72,824)  (102,283)  (72,824)  4   4   (102,279)  (72,820)
Balance at June 30, 2022  2,659,143  $2   132,957  $—  $238,877  $214,652  $(161,258) $(131,799) $77,621  $82,853  $369  $369  $77,990  $83,222 
Stock-based compensation  —   —   —   —   1,645   1,645   —   —  $1,645  $1,645   —   —  $1,645  $1,645 
Issuance of common shares in connection with acquisition  8,704   —   435   —   2,220   2,220   —   —   2,220   2,220   —   —   2,220   2,220 
Reclass of warrant liabilities  —   —   —   —   (194)  4   —   —   (194)  4   —   —   (194)  4 
Exercise of warrants  3,161   1   158   —   1   2   —   —   2   2   —   —   2   2 
Issuance of restricted stock units  20,000   —   1,000   —   —   —   —   —   —   -   —   —   —   — 
Net loss  —   —   —   —   —   —   (46,268)  (57,413)  (46,268)  (57,413)  1   1   (46,267)  (57,412)
Balance at September 30, 2022  2,691,008  $3   134,550  $—  $242,549  $218,523  $(207,526) $(189,212) $35,026  $29,311  $370  $370  $35,396  $29,681 

The related notes to the condensed and consolidated financial statements have also been restated to reflect the error corrections described above.


Note 3 — Revenue and Deferred Revenue

 

Revenue

During the three and nine months ended September 30, 2022 and 2021, the Company generated revenue from the following sources: (1) equipment sales, (2) services sales and (3) construction contracts.

 

The Company sells its equipment and services to customers under a combination of a contract and purchase order. Equipment revenue includes sales from proprietary products designed and engineered by the Company such as Agrify Vertical Farming Units (“VFUs”), container farms, integrated grow racks, and LED grow lights, and non-proprietary products designed, engineered, and manufactured by third parties such as air cleaning systems and pesticide-free surface protection.

 

Construction contracts normally provide for payment upon completion of specified work or units of work as identified in the contract. Although there is considerable variation in the terms of these contracts, they are primarily structured as time-and-material contracts. The Company enters into time-and-materials contracts under which the Company is paid for labor and equipment at negotiated hourly billing rates and other expenses, including materials, as incurred at rates agreed to in the contract. The Company uses three main sub-contractors to execute the construction contracts.

 

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

 

 Three Months Ended
September 30,		  Nine Months Ended
September 30,		  Three months ended
June 30,		  Six months ended
June 30,		 
(In thousands) 2022  2021  2022  2021  2023  2022  2023  2022 
Transferred at a point in time $5,657  $2,757  $28,675  $4,110  $4,583  $10,244  $9,553  $23,018 
Transferred over time  1,362   12,994   23,694   30,474   483   9,085   1,317   22,332 
Total revenue $7,019  $15,751  $52,369  $34,584  $5,066  $19,329  $10,870  $45,350 

 

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

 

The Company generally provides a one-year warranty on its products for materials and workmanship but may provide multiple year warranties as negotiated, and generally transfers to its customers the warranties it receives from its vendors, if any, which generally cover this one-year period. In accordance with ASC 450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably estimated. The Company maintains a reserve for warranty returns of $540 thousand and $398 thousand for September 30, 2022 and December 31, 2021, respectively. The Company’s reserve for warranty returns is included in accrued expenses and other current liabilities in its consolidated balance sheets. Additional information regarding the Company’s warranty reserve may be found in Note 4 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements.


Deferred Revenue

 

Changes in the Company’s current deferred revenue balance for the ninesix months ended SeptemberJune 30, 20222023 and the year ended December 31, 20212022 were as follows:

 

(In thousands) Nine Months Ended
September 30,
2022		  Year
Ended
December 31,
2021		  Six months
ended
June 30,
2023		  Year ended
December 31,
2022		 
Deferred revenue – beginning of period $3,772  $152  $4,112  $3,772 
Additions  18,167   3,758   2,340   13,392 
Interest income on deferred revenue  —   4 
Recognized  (11,803)  (142)  (2,859)  (13,052)
Deferred revenue – end of period $10,136  $3,772  $3,593  $4,112 

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Deferred revenue balances primarily consist of customer deposits on itsthe Company’s cultivation and extraction solutions equipment. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, all of the Company’s deferred revenue balances were reported as current liabilities in the accompanying consolidated balance sheets.

 

Note 43 — Supplemental Consolidated Balance Sheet Information

 

Accounts Receivable

 

Accounts receivable consisted of the following as of SeptemberJune 30, 20222023 and December 31, 2021: 2022:

 

(In thousands) September 30,
2022		  December 31,
2021		 
Accounts receivable, gross $7,684  $8,637 
Less allowance for doubtful accounts  (3,125)  (1,415)
Accounts receivable, net $4,559  $7,222 

NEIA, a related party, accounted for $0 and $3.5 million of the Company’s accounts receivable, net as of September 30, 2022 and December 31, 2021, respectively.

(In thousands) June 30,
2023		  December 31,
2022		 
Accounts receivable, gross $5,438  $5,675 
Less allowance for doubtful accounts  (4,090)  (4,605)
Accounts receivable, net $1,348  $1,070 

 

The changes in the allowance for doubtful accounts consisted of the following:

 

(In thousands) Nine Months Ended
September 30,
2022		  Year
Ended
December 31,
2021		  Six months
ended
June 30,
2023		  Year ended
December 31,
2022		 
Allowance for doubtful accounts - beginning of period $1,415  $54  $4,605  $1,415 
Provision for doubtful accounts  1,938   1,187 
(Recovery of) Provision for doubtful accounts  (542)  4,928 
Write-offs of uncollectible accounts  —   (1,510)
Other adjustments  (228)  174   27   (228)
Allowance for doubtful accounts - end of period $3,125  $1,415  $4,090  $4,605 

 

Bad debt expense was $385$362 thousand and $0$1.6 million for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, and $1.9$542 thousand and $1.6 million and $0 for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively.

 

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of June 30, 2023 and December 31, 2022:

(In thousands) June 30,
2023		  December 31,
2022		 
Other receivables, other $431  $424 
Prepaid expenses, other  235   230 
Prepaid insurance  1,377   219 
Deferred issuance costs, net  —   463 
Prepaid software  83   129 
Prepaid materials  27   45 
Total prepaid expenses and other current assets $2,153  $1,510 


 

 

Prepaid Expenses and Other Current Receivables

AGRIFY CORPORATION

 

Prepaid expenses and other current receivables consisted of the following as of September 30, 2022 and December 31, 2021:NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands) September 30,
2022		  December 31,
2021		 
Deferred costs $1,108  $353 
Prepaid insurance  931   492 
Other receivables, other  603   86 
Other note receivables (1)  584   807 
Prepaid expenses, other  929   541 
Prepaid materials  261   — 
Prepaid software  188   173 
Total prepaid expenses and other current assets $4,604  $2,452 

(1)Other note receivables relate to the current portion of one of its loan receivable balances related to the total turn-key solution (“TTK Solution”) program.

Property and Equipment, Net

 

Property and equipment, net consisted of the following as of SeptemberJune 30, 20222023 and December 31, 2021:2022:

 

(In thousands) September 30,
2022		  December 31,
2021		  June 30,
2023		  December 31,
2022		 
Leasehold improvements $1,048  $841  $1,171  $1,111 
Machinery and equipment  1,048   898   1,060   1,049 
Software  606   606 
Computer and office equipment  624   473   651   627 
Leased equipment at customer  602   619 
Leased equipment  5,067   602 
Furniture and fixtures  504   385   498   504 
Software  300   174 
Research and development of laboratory equipment  260   163 
Research and development laboratory equipment  183   260 
Vehicles  143   143   136   136 
Trade show assets  79   80   78   78 
Total property and equipment, gross  4,608   3,776   9,450   4,973 
Accumulated depreciation  (1,930)  (780)  (3,280)  (2,372)
Construction in progress  10,530   3,236   2,953   7,443 
Total property and equipment, net $13,208  $6,232  $9,123  $10,044 

 

Depreciation expense for the three months ended SeptemberJune 30, 2023 and 2022 and 2021 was $409$493 thousand and $139$438 thousand, respectively, and $1.2 million$938 thousand and $337$817 thousand for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively.

 

Other Non-Current Assets

 

Other non-current assets consisted of the following as of SeptemberJune 30, 20222023 and December 31, 2021:2022:

 

(In thousands) September 30,
2022		  December 31,
2021		  June 30,
2023		  December 31,
2022		 
Security deposits $156  $153 
Long-term deferred commissions expense $1,293  $1,101   —   173 
Security deposits  152   83 
Total other non-current assets $1,445  $1,184  $156  $326 

 


 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following as of SeptemberJune 30, 20222023 and December 31, 2021: 2022:

 

(In thousands) September 30,
2022		  December 31,
2021		  June 30,
2023		  December 31,
2022		 
Sales tax payable (1) $5,756  $5,290 
Accrued acquisition liabilities (1) $2,180  $3,502 
Sales tax payable (2)  5,927   5,950 
Accrued construction costs  5,661   8,803   1,499   2,669 
Accrued acquisition liability (2)  4,145   9,198 
Compensation related fees  3,141   3,491   628   2,285 
Accrued warranty costs  540   398 
Accrued professional fees  448   1,104   449   313 
Accrued warranty expenses  592   553 
Accrued consulting fees  3   20 
Accrued inventory purchases  80   569 
Accrued interest expense  263   —   609   240 
Accrued inventory purchases  243   201 
Financing lease liabilities  153   156   142   152 
Accrued consulting fees  90   75 
Accrued non-income taxes  —   48 
Other current liabilities  65   —   —   127 
Total accrued expenses and other current liabilities $20,505  $28,764  $12,109  $16,380 

 

(1)Accrued acquisition liabilities includes both the contingent consideration and the value of held back Common Stock associated with the 2022 acquisition of Lab Society and the 2021 acquisitions of Precision, Cascade and PurePressure.

(2)Sales tax payable primarily represents identified sales and use tax liabilities arising from theour acquisition of Precision and Cascade. These amounts are included as part of theour initial purchase price allocations and are the subject matter of an indemnification claim under the Precision and Cascade acquisition agreement.

 

(2)

Accrued acquisition liabilities include both the contingent consideration and the value of held-back Common Stock associated with the 2022 acquisition of Lab Society and the 2021 acquisition of PurePressure.

Warranty AccrualCosts

 

The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs:

 

(In thousands) Nine Months
Ended
September 30,
2022		  Year Ended
December 31,
2021		  June 30,
2023		  December 31,
2022		 
Warranty accrual – beginning of period $398  $—  $553  $398 
Liabilities accrued for warranties issued during period  142   398 
Liabilities accrued for warranties issued during the period  39   155 
Warranty accrual – end of period $540  $398  $592  $553 

 


 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 54 — Fair Value Measures

Fair Values of Assets and Liabilities

 

In accordance with ASC Topic 820 “Fair Value Measurement”, the Company measures fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows:

 

 Level 1:Observable inputs such as quoted prices for identical assets or liabilities in active markets.
   
 Level 2:Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active.
   
 Level 3:Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions about how market participants would price the asset or liability.

 

Valuation techniques for assets and liabilities include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

 

At SeptemberJune 30, 20222023 and December 31, 2021,2022, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:

 

 September 30, 2022  December 31, 2021  June 30, 2023  December 31, 2022 
 Fair Value Measurements Using Input
Types		  Fair Value Measurements Using Input
Types		  Fair Value Measurements Using Input Types  Fair Value Measurements Using Input Types 
(In thousands) Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
Assets                 
Assets:                 
Mutual funds (included in cash and cash equivalents) $—  $—  $—  $—  $178  $—  $—  $178  $—  $—  $—  $—  $33  $—  $—  $33 
Municipal bonds  —   —   —   —   9,961   —   —   9,961 
Money market funds  4   —   —   4   —   —   —   — 
Corporate bonds  381   —   —   381   34,589   —   —   34,589   —   —   —   —   427   —   —   427 
Total assets $381  $—  $—  $381  $44,728  $—  $—  $44,728  $4  $—  $—  $4  $460  $—  $—  $460 
Liabilities                                
Contingent consideration $—  $—  $643  $643  $—  $—  $6,137  $6,137 
Warrant liabilities  —   —   5,118   5,118   —   —   —   — 
Liabilities:                                
Warrant liabilities - January 2022 warrants  —   —   6   6   —   —   4   4 
Warrant liabilities - March 2022 warrants  —   —   32   32   —   —   34   34 
Warrant liabilities - August 2022 warrants  —   —   77   77   —   —   93   93 
Warrant liabilities - December 2022 warrants  —   —   4,246   4,246   —   —   5,854   5,854 
Total liabilities $—  $—  $5,761  $5,761  $—  $—  $6,137  $6,137  $—  $—  $4,361  $4,361  $—  $—  $5,985  $5,985 

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

The Company has certain financial instruments which consist of cash and cash equivalents, marketable securities, warrant liabilities, and contingent consideration. Fair value information for each of these instruments isas well as other balances of the Company are as follows:

 

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

 

 ●Marketable securities classified as current held-to-maturity securities are recorded at amortized cost, which at SeptemberJune 30, 2022,2023, approximated fair value.

 


 ●The Company’s deferred consideration was recorded in connection with acquisitions during the first quarter of 2022six months ended June 30, 2023 and fiscal 20212022 using an estimated fair value discount at the time of the transaction.transactions. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, the carrying value of the deferred consideration approximated fair value, respectively.value.  

 ●The Company’s warrant liabilities are marked-to-market each reporting period with the changes in fair value of warrant liability areliabilities recorded toin other income (expense), net in the accompanying consolidated statements of operations until the warrants are exercised. The fair value of the warrant liability isliabilities are estimated using a Black-Scholes option-pricing model.

 

Marketable Securities

 

As of SeptemberJune 30, 2022,2023, the Company held investments in mutual funds, municipal bonds and corporate bonds. The Company records mutual funds at fair value in the accompanying consolidated balance sheet as part of cash and cash equivalents. The municipal and corporate bonds are considered held-to-maturity securities and are recorded at amortized cost in the accompanying consolidated balance sheet. The fair values of these investments were estimated using recently executed transactions and market price quotations. The Company considers current assets as those investments which will mature within the next 12 months including, interest receivable on long-term bonds.

 

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

 

(In thousands) September 30,
2022		  December 31,
2021		 
Current marketable securities      
Municipal bonds $—  $9,961 
Corporate bonds  381   34,589 
  $381  $44,550 

At September 30, 2022, marketable securities consisted of the following:

(In thousands) Amortized
Cost		  Unrealized
Loss		  Estimated
Fair Value		 
Current marketable securities         
Corporate bonds  381   (10)  371 
  $381  $(10) $371 

At December 31, 2021, marketable securities consisted of the following:

(In thousands) Amortized
cost		 Unrealized
loss		 Estimated
fair value		  June 30,
2023		  December 31,
2022		 
Current marketable securities (due within 1 year)       
Municipal bonds $9,961 $(9) $9,952 
Current marketable securities:        
Money market funds $4  $— 
Corporate bonds  34,589  (72)  34,517   —   427 
Mutual funds  —   33 
 $44,550 $(81) $44,469  $4  $460 

 


 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Contingent Consideration

 

The Company has classified its net liability for contingent earn-out considerations to the sellers relating to one acquisition completed during the first quarter of 2022 and two acquisitions completed during fiscal 2021. The fair value for the contingent consideration associated with these acquisitions is within Level 3 of the fair value hierarchy because the associated fair value is determined using significant unobservable inputs, which included the key assumptions to model future revenue, costs of goods sold and operating expense projections. A description ofThe company recorded no change in contingent consideration for the Company’s acquisitions completed during the first quarter of 2022 and fiscal 2021 are included within Note 9 – Business Combinations, included elsewhere in the notessix months ended June 30, 2023. The contingent earn-out payments to the consolidated financial statements.sellers for each acquisition are based on the achievement of certain revenue thresholds.

 

(In thousands) Nine Months
Ended
September 30,
2022		  Year
Ended
December 31,
2021		 
Contingent consideration – beginning of period $6,137  $— 
Accrued contingent consideration  1,420   4,725 
Accretion of contingent consideration  145   — 
Payments made on contingent liabilities  (5,550)  — 
Change in estimated fair value  (1,509)  1,412 
Contingent consideration – end of period $643  $6,137 

The Company included contingent consideration within accrued expenses and other current liabilities in its consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.

(In thousands) Year ended
December 31,
2022		 
Contingent consideration – beginning of period $6,137 
Accrued contingent consideration  1,420 
Accretion of contingent consideration  149 
Payments made on contingent liabilities  (5,550)
Change in estimated fair value  (2,156)
Contingent consideration – end of period $— 

 

See below for additional information related to each acquisition’s contingent consideration.

 

Contingent Consideration – PurePressure

 

The Company, in its review of actual revenue performance as compared to its originally projected revenue estimates, noted that PurePressure’s revenue trend is materially below the originally estimated revenue trends incorporated into the Company’s original fair value estimates at the time of the acquisition. As a result, the Company has reduced its fair value estimate of achievement for PurePressure’s first earn-out period. During the third quarter ended September 30, 2022, the Company reduced the estimated fair value of the contingent consideration liability associated with PurePressure’s first earn-out period by approximately $602 thousand and their second earn-out by approximately $170 thousand. As required by ASC Topic 805 Business Combination (“ASC805”ASC 805”), the change in contingent consideration was recorded as a reduction in operating expenses during the third quarterand fourth quarters of 2022.2022, respectively.

Contingent Consideration – Lab Society

 

The Company, in its review of actual revenue performance as compared to its originally projected revenue estimates, noted that Lab Society’s revenue trend is materially below the originally estimated revenue trends incorporated into the Company’s original fair value estimates at the time of the acquisition. As a result, the Company has reduced its fair value estimate of achievement for Lab Society’s first earn-out period. During the second quarter ended June 30, 2022, the Company reduced the estimated fair value of the contingent consideration liability associated with Lab Society’s first earn-out period by approximately $1.0 million.million and their second earn-out by approximately $484 thousand. As required by ASC805,ASC 805, the change in contingent consideration was recorded as a reduction in operating expenses during the second quarterand fourth quarters of 2022.2022, respectively.

 

Contingent Consideration – Precision and Cascade

 

The earn-out period for the potential contingent consideration to be earned by the former members of Precision and Cascade concluded on December 31, 2021. The Company, during the second quarter of 2022, increased the amount of the contingent consideration earned by the former members of Precision and Cascade by approximately $121 thousand, to reflect the final contingent consideration amount due. This amount as required by ASC805, was recorded as an increase in operating expenses during the second quarter of 2022. During the three-month period ended September 30,December 31, 2022, the Company made the final payment on the contingent consideration of approximately $5.6 million to the members of Precision and Cascade. Additional information regarding the Company’s final payment to Precision and Cascade may be found in Note 9 – Business Combination, included elsewhere in the notes to the consolidated financial statements.

 


 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Warrant liabilitiesLiabilities

The estimated fair value of the warrant liabilities on SeptemberJune 30, 20222023 is determined using Level 3 inputs. Inherent in a Black-Scholes option-pricing model are assumptions used in calculating the estimated fair values that represent the Company’s best estimate. The volatility rate is determined utilizing the Company’s own share price and the share price of competitors over time.

However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair values could be materially different.

 

The fair value was remeasured and was determined to be $5,122 thousand at September 30,January 2022 using an option-pricing model based on the following inputs:Warrants

 

  PIPE  Modified
SPA		  New SPA 
  Warrants  Warrants  Warrants 
Stock price $8.80  $8.80  $8.80 
Exercise price $149.60  $43.00  $24.60 
Expected term (in years)  4.83   5.38   5.38 
Annualized volatility  88.15%  87.83%  87.83%
Annual rate of quarterly dividends  0.00%  0.00%  0.00%
Discount rate -bond equivalent yield  4.09%  4.04%  4.04%

The following table summarizes the Company’s assumptions used in the valuation as of June 30, 2023 and for the year ended December 31, 2022:

  As of
June 30,
2023		  December 31,
2022		 
Stock price $3.80  $6.66 
Exercise price $1,496.00  $1,496.00 
Expected term (in years)  4.07   4.58 
Volatility  126.00%  98.30%
Discount rate - treasury yield  4.30%  4.05%

 

The following table sets forth a summary of the changes in the fair value of the Level 3 Warrant Liabilitieswarrant liabilities for the ninethree and six months ended SeptemberJune 30, 2023:

(In thousands) Three and Six
Months Ended
June 30,
2023		 
Warrant liabilities – beginning of period $                 4 
Change in estimated fair value  3 
Warrant liabilities - March 31, 2023  7 
Change in estimated fair value  (1)
Warrant liabilities –June 30, 2023 $6 

March 2022 Warrants

The following table summarizes the Company’s assumptions used in the valuation as of June 30, 2023 and for the year ended December 31, 2022:

 

(In thousands) Nine Months
Ended
September 30,
2022		 
Warrant liabilities – beginning of period $— 
Initial fair value of warrant liabilities  50,705 
Change in estimated fair value  (47,234)
Gain on extinguishment of debt  1,647 
Warrant liabilities – end of period $5,118 
  As of
June 30,
2023		  December 31,
2022		 
Stock price $3.80  $6.66 
Exercise price $430.00  $430.00 
Expected term (in years)  4.63   5.13 
Volatility  124.00%  97.96%
Discount rate - treasury yield  4.20%  3.99%


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth a summary of the changes in the fair value of the Level 3 warrant liabilities for the three and six months ended June 30, 2023:

(In thousands) Three and Six
Months Ended
June 30,
2023		 
Warrant liabilities – beginning of period $34 
Change in estimated fair value  5 
Warrant liabilities - March 31, 2023  39 
Change in estimated fair value  (7)
Warrant liabilities – June 30, 2023 $32 

August 2022 Warrants

The following table summarizes the Company’s assumptions used in the valuation as of June 30, 2023 and for the year ended December 31, 2022:

  As of
June 30,
2023		  December 31,
2022		 
Stock price $3.80  $6.66 
Exercise price $246.00  $246.00 
Expected term (in years)  4.63   5.13 
Volatility  124.00%  97.96%
Discount rate - treasury yield  4.20%  3.99%

The following table sets forth a summary of the changes in the fair value of the Level 3 warrant liabilities for the three and six months ended June 30, 2023:

(In thousands) Three and Six
Months Ended
June 30,
2023		 
Warrant liabilities – beginning of period $         93 
Change in estimated fair value  (4)
Warrant liabilities - March 31, 2023  89 
Change in estimated fair value  (12)
Warrant liabilities – June 30, 2023 $77 

December 2022 Warrants

The following table summarizes the Company’s assumptions used in the valuation as of June 30, 2023 and for the year ended December 31, 2022:

  As of
June 30,
2023		  December 31,
2022		 
Stock price $3.80  $6.66 
Exercise price $3.40  $13.00 
Expected term (in years)  4.63   4.98 
Volatility  124.00%  98.00%
Discount rate - treasury yield  4.20%  3.99%


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth a summary of the changes in the fair value of the Level 3 warrant liabilities for the three and six months ended June 30, 2023:

(In thousands) Three and Six
Months Ended
June 30,
2023		 
Warrant liabilities – beginning of period $5,854 
Change in estimated fair value  (3,493)
Warrant liabilities - March 31, 2023  2,361 
Change in estimated fair value  1,885 
Warrant liabilities – June 30, 2023 $4,246 

 

Note 65 — LoanLoans Receivable

 

A portion of the capital raised from the Company’s IPO has beenwas allocated to launch the Company’s TTK Solution program. The TTK Solution is the industry’s first-of-its-kind program in which the Company engages with qualified cannabis operators in the early phases of their business plans and provides critical support, typically over a 10-year period, which includes: access to capital for construction costs, the design and build-out of their cultivation and extraction facilities, state-of-the-art cultivation and extraction equipment, subscription to the Company’s Agrify Insights™ cultivation software,, process design, training, implementation, proven grow recipes, product formulations, data analytics, and consumer branding, which will enable the Company’s customers to go to market faster and better.branding.

 

The loan agreements entered into with customers receiving the TTK Solution generally provide for loans with maturity dates of approximately two to three years after the completion of the construction projects. Typically, the TTK Solution construction loans have interest rates ranging from 12% to 18% per year.


During the quarter endedOn September 30,15, 2022, the Company provided a notice of default under the term loan agreement between the Company and Bud & Mary’s (the “Bud & Mary’s TTK Agreement”). On October 5, 2022, Bud & Mary’s Cultivation, Inc. (the “Bud & Mary’s”) filed a complaint in the Superior Court of Massachusetts in Suffolk County naming the Company as defendant. Bud & Mary’s is seeking, among other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion arising from the Bud & Mary’s TTK Agreement. In response, the Company established a reserve of $14.7 million specifically related to Bud & Mary’s. The Company deemed it necessary to fully reserve the $14.7 million outstanding balance in the third quarter of 2022 due to the current litigation and the uncertainty of the customer’s ability to repay the outstanding balance. In addition, $5.3 million of the notes receivable balance for work performed during the third quarter of 2022 has been recorded as an unbilled note receivable and deferred the revenue to a future period. The Company has recognized the expenses associated with the work completed in the current period due to the uncertainty of the Company’s ability to recover the funds owed by the customer and its obligations to the vendors that have performed this work. The Company determined that it will only recognize unbilled notes receivable revenue if cash is collected from the customer in a future period. The Company believes that Bud & Mary’s claims have no merit and intends to defend itself vigorously. The Company is taking all necessary steps to pursue repayment from Bud & Mary’s and is taking all actions necessary to protect its shareholders’ interests.

 

During the quarteryear ended June 30,December 31, 2022, the Company established a reserve of approximately $7.1$12.5 million specifically related to Greenstone. Greenstone is a related party because one of the Company’s former Agrify Brands employees and its VP of Engineering had a minority ownership. The Company established the reserve based upon its review of Greenstone’s financial stability, which would impact collectability, which is primarily the result of unfavorable market conditions within the Colorado market. The Company will continue to monitor the operations of Greenstone in an effort to collect all outstanding receivables but due to the uncertain nature of Greenstone’s business at this time the Company has made the decision to place a reserve against the receivables. During the quarter ended June 30, 2023 the Greenstone isloan was fully written off against the reserve as a related party asresult of September 30, 2022 and December 31, 2021.the sale of Greenstone to Denver Greens. It was agreed that Denver Greens would not have to pay back Greenstone’s Loan.

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The breakdown of loans receivable by customer as of SeptemberJune 30, 20222023 and December 31, 2021 is2022 were as follows:

 

(In thousands) September 30,
2022		  December 31,
2021		 
Bud & Mary’s – TTK Solution $14,691  $5,542 
Greenstone – TTK Solution – Related Party  12,457   11,177 
Company Customer Number 136 – TTK Solution  10,329   2,439 
Company Customer Number 125 – TTK Solution  5,563   1,105 
Company Customer Number 71 – Non-TTK Solution (1)  2,542   1,946 
Company Customer Number 140 – TTK Solution  46   46 
Other – Non-TTK Solutions  5,374   — 
TTK Solution – Allowance for doubtful accounts (2)  (21,770)  — 
Total loan receivable $29,232  $22,255 
(In thousands) June 30,
2023		  December 31,
2022		 
Customer 139 $14,691  $14,691 
Customer 136  —   12,457 
Customer 125  9,012   9,048 
Customer 24096  6,769   5,890 
Other – Non-TTK Solution (1)  —   3,178 
Allowance for doubtful accounts (2)(3)  (19,215)  (33,050)
Total loan receivable $11,257  $12,214 

 

(1)The current portion of loan receivable areis included within Note 43 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements.

(2)The balance was written off at December 31, 2022 due to the cancellation of this TTK Solution project.
(3)The Company established an allowance for doubtful accounts of approximately $14.7 million related to Bud & Mary’s ongoing litigation. The remaining balance of approximately $7.1Approximately $12.5 million relates to Greenstone, which is a related party because one of the Company’s former Agrify Brands employees and its VP of Engineering had a minority ownership, consisting of capital advances, accrued interest, and VFUs sales. Approximately $4.5 million relates to Hannah, and $1.4 million relates to WhiteCloud.

 

At this time, the Company is not aware of, nor has it identified any risk or potential performance failure associated with any of its other TTK Solution arrangements, withother than the noted exceptionexceptions of Bud & Mary’s TTK Solution and Greenstone TTK Solution, which is a related party, as described above.

 

The Company analyzed whether any of the above customers are a VIE in accordance with ASC810ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. Based on the Company’s analysis, the Company has determined that Greenstone, which is a related party because one of the Company’s former Agrify Brands employees and its VP of Engineering had a minority ownership, is a VIE. As of SeptemberJune 30, 2022,2023, two of the Company’s employees own approximately 36.6% of the equity of Greenstone, however, since the Company is not the primary beneficiary and does not hold significant influence over Greenstone business decisions, the Company is not required to consolidate Greenstone.

 


Note 76 — Inventory

 

Inventories are stated at the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a First-In, First-Outfirst-in, first-out basis. Such costs include the acquisition cost for raw materials and operating supplies. The Company’s standard payment terms with suppliers may require making payments in advance of delivery of the Company’s products. The Company’s prepaid inventory is a short-term, non-interest-bearing asset that is applied to the purchase of products once they are delivered.

 

Inventory consisted of the following as of SeptemberJune 30, 20222023 and December 31, 2021:2022:

 

(In thousands) September 30,
2022		  December 31,
2021		  June 30,
2023		  December 31,
2022		 
Raw materials $17,130  $6,393  $25,059  $24,960 
Prepaid inventory  4,827   2,237   13,325   15,506 
Finished goods  21,743   12,810   7,651   13,689 
Inventory for resale  5,123   — 
Inventory, gross  43,700   21,440   51,158   54,155 
Inventory reserves  (1,909)  (942)  (32,422)  (32,759)
Total inventory, net $41,791  $20,498  $18,736  $21,396 

 

Inventory Reserves

The Company establishes an inventory reserve for obsolete, slow-moving,slow moving, and defective inventory. The Company calculates inventory reserves for obsolete, slow-moving,slow moving, or defective items as the difference between the cost of inventory and its estimated net realizable value. The reserves are based upon management’s expected method of disposition.

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Changes in the Company’s inventory reserve are as follows:

 

(In thousands) Nine Months
Ended
September 30,
2022		  Year
Ended
December 31,
2021		  Six Months Ended
June 30,
2023		  Year Ended
December 31,
2022		 
Inventory reserves – beginning of period $942  $—  $32,759  $942 
Increase in inventory reserves  967   942 
(Decrease) increase in inventory reserves  (337)  31,817 
Inventory reserves – end of period $1,909  $942  $32,422  $32,759 

 

Note 87 — Goodwill and Intangible Assets, Net

 

Intangible assets are initially recorded at fair value and tested periodically for impairment. Goodwill represents the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination and is tested at least annually for impairment. The Company performs its goodwill impairment testing annually during the fourth quarter, or sooner if indicators or if circumstances were to occur that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying amount. The Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill.

 

The Company has concluded that there was an impairment-triggering event during the three monthsquarter ended June 30, 2022 that required the Company to perform a detailed analysis of the current carrying value of its goodwill and intangible assets. For goodwill and intangible asset and goodwill impairment testing purposes, the Company has one reporting unit.

 

During the three-month periodquarter ended June 30, 2022, the Company’s market capitalization fell below total net assets. In addition, financial performance continued to weaken during the quarter, which iswas contrary to prior experience. Management reassessed business performance expectations following persistent adverse developments in equity markets, deterioration in the environment in which the Company operates, lower-than-expected sales, and an increase in operating expenses. These indicators, in the aggregate, required impairment testing for goodwill and intangible assets and goodwill.assets.

 


Based on the results of this testing, the Company determined that the carrying values of the aggregate value of its goodwill and intangible assets were not recoverable. The Company recorded impairment charges during the second quarter of 2022, representing a full impairment of the carrying value of its goodwill and intangible assets. The Company recorded an impairment charge of approximately $69.9 million, representing the carrying values of goodwill and intangible assets, and goodwill, which totaled $15.2$54.7 million and $54.7$15.2 million, respectively.

 

GoodwillChanges in goodwill consisted of the following:

 

(In thousands) Nine Months
Ended
September 30,
2022		  Year
Ended
December 31,
2021		 
Goodwill - beginning of period $50,090  $632 
Goodwill acquired during period  4,368   49,458 
Goodwill impairment loss  (54,747)  — 
Goodwill purchase accounting adjustment  289   — 
Goodwill - end of period $—  $50,090 

Intangible assets, net as of September 30, 2022 was as follows:

  Intangible Assets, Gross  Accumulated Amortization and Impairment  Intangible Assets, Net 
(In thousands) January 1,
2022		  Additions  September 30,
2022		  January 1,
2022		  Expense and
Impairments, net		  September 30,
2022		  January 1,
2022		  September 30,
2022		 
Trade names $2,418  $317  $2,735  $(227) $(2,508) $(2,735) $2,191  $— 
Customer relationships  6,176   713   6,889   (302)  (6,587)  (6,889)  5,874   — 
Acquired developed technology  4,911   1,432   6,343   (191)  (6,152)  (6,343)  4,720   — 
Non-compete agreements  1,202   —   1,202   (60)  (1,142)  (1,202)  1,142   — 
Capitalized website costs  245   —   245   (100)  (145)  (245)  145   — 
Total intangible assets, net $14,952  $2,462  $17,414  $(880) $(16,534) $(17,414) $14,072  $— 

Intangible assets, net as of December 31, 2021 was as follows:

  Intangible Assets, Gross  Accumulated Amortization  Intangible Assets, Net 
(In thousands) January 1,
2021		  Additions  December 31,
2021		  January 1,
2021		  Expense  December 31,
2021		  January 1,
2021		  December 31,
2021		 
Trade names $930  $1,488  $2,418  $(88) $(139) $(227) $842  $2,191 
Customer relationships  850   5,326   6,176   (89)  (213)  (302)  761   5,874 
Acquired developed technology  —   4,911   4,911   —   (191)  (191)  —   4,720 
Non-compete agreements  —   1,202   1,202   —   (60)  (60)  —   1,142 
Capitalized website costs  139   106   245   (48)  (52)  (100)  91   145 
Total intangible assets, net $1,919  $13,033  $14,952  $(225) $(655) $(880) $1,694  $14,072 
(In thousands) Year ended
December 31,
2022		 
Goodwill - beginning of period $50,090 
Goodwill acquired during period  4,368 
Goodwill purchase accounting adjustment  289 
Goodwill impairment loss  (54,747)
Goodwill - end of period $— 

 


 

 

AGRIFY CORPORATION

Amortization expense recorded in general and administrative in the consolidated statementsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Intangible assets, net as of operationsDecember 31, 2022 were $0 and $57 thousand for the three months ended September 30, 2022 and 2021, respectively, and $1.4 million and $172 thousand for the nine months ended September 30, 2022 and 2021, respectively.as follows:

  Intangible Assets, Gross  Accumulated Amortization and
Impairment		  Intangible Assets, Net 
  January 1,  Additions and
Retirements,		  December 31,  January 1,  Expense and
Retirements,		  December 31,  January 1,  December 31, 
(In thousands) 2022  net  2022  2022  net  2022   2022  2022 
Trade names $2,418  $317  $2,735  $(227) $(2,508) $(2,735) $2,191  $     — 
Customer relationships  6,176   713   6,889   (302)  (6,587)  (6,889)  5,874       — 
Acquired developed technology  4,911   1,432   6,343   (191)  (6,152)  (6,343)  4,720   — 
Non-compete  1,202   —   1,202   (60)  (1,142)  (1,202)  1,142   — 
Capitalized website costs  245   —   245   (100)  (145)  (245)  145   — 
Total $14,952  $2,462  $17,414  $(880) $(16,534) $(17,414) $14,072  $— 

 

Note 98 — Business Combination

Acquisition of Lab Society

On February 1, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lab Society, a newly-formed wholly-owned subsidiary of the Company (“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 the Company agreed to acquire Lab Society. Concurrently with the execution of the Merger Agreement, the Company consummated the merger of Lab Society with and into Merger Sub, with Merger Sub surviving such merger as a wholly-owned subsidiary of the Company (the “Lab Society Acquisition”).

The aggregate consideration for the Lab Society Acquisition consisted of: $4.0 million in cash, subject to certain adjustments for working capital, cash, and indebtedness of Lab Society at closing; 2,128 shares of Common Stock (the “Buyer Shares”); and the Earn-out Consideration (as defined below), to the extent earned.

The Company withheld 638 of the Buyer Shares issuable to the Owners (the “Holdback Lab Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Merger Agreement. During the third quarter of 2022, 139 of the Holdback Lab Buyer Shares were forfeited after the finalization of the net working capital settlement. The remaining 499 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.

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. Additional information regarding the Company’s contingent consideration arrangements may be found in Note 5 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements. 

Transaction and related costs, consisting primarily of professional fees, related to the acquisition, totaled approximately $0 and $66 thousand for the three months and nine months ended September 30, 2022, respectively. All transaction and related costs were expensed as incurred and are included in general and administrative expenses.

The Company has prepared purchase price allocations for the business combination with Lab Society on a preliminary basis. 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 following table sets forth the components and the allocation of the purchase price for the business combination:

(In thousands)   
Purchase price consideration   
Estimated closing proceeds $4,002 
Transaction expenses  80 
Closing buyer shares  1,904 
Holdback buyer shares  816 
Earn-out consideration  1,420 
Estimated working capital adjustment  (255)
Fair value of total consideration transferred  7,967 
Total purchase price, net of cash acquired $7,402 
     
Fair value allocation of purchase price    
Cash and cash equivalents $565 
Accounts receivable  511 
Inventory  2,130 
Prepaid expenses and other current receivables  55 
Right - of-use assets, net  304 
Property and equipment, net  177 
Prepaid and refundable taxes  194 
Accounts payable, accrued expenses, and other current liabilities  (1,244)
Deferred revenue  (963)
Deferred tax liability  (237)
Finance lease liabilities, current  (36)
Finance lease liabilities, non-current  (35)
Operating lease liabilities, current  (112)
Operating lease liabilities, non-current  (192)
Acquired intangible assets  2,462 
Goodwill  4,388 
Total purchase price $7,967 

Identified intangible assets consist of trade names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC805 and are outlined in the table below:

(In thousands) Asset
Value		  Useful Life
Identified intangible assets     
Trade names $317  5 years
Acquired developed technology  1,432  8 years
Customer relationships  713  6 years
Total identified intangible assets $2,462   


The Company’s initial fair value estimates related to the various identified intangible assets of Lab Society 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, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 8 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

The amount of revenue of Lab Society included in the consolidated statements of operations from the acquisition date of February 1, 2022 to September 30, 2022 was $4.0 million.

Acquisition of Precision and Cascade 

On September 29, 2021 (the “Execution Date”), the Company entered into a Plan of Merger and Equity Purchase Agreement, as amended by an amendment dated October 1, 2021 (as amended, the “Purchase Agreement”), with Sinclair Scientific, LLC, a Delaware limited liability company (“Sinclair”), Mass2Media, LLC, Precision, a Michigan limited liability company; and each of the equity holders of Sinclair named therein (collectively, the “Sinclair Members”). On October 1, 2021, the Company consummated the transactions contemplated by the Purchase Agreement.

Subject to the terms and conditions set forth in the Purchase Agreement, (1) Sinclair transferred, to the Company, and the Company purchased (the “Interest Purchase”) from Sinclair, 100% of the equity interests of Cascade, a Delaware limited liability company, such that immediately after the consummation of such Interest Purchase, Cascade became a wholly-owned subsidiary of the Company, and (2) Precision merged (the “Merger”) with and into a newly-formed wholly-owned subsidiary of the Company, Precision Extraction NewCo, LLC.

The aggregate consideration for the Interest Purchase and the Merger consisted of: (a) the sum of $30 million in cash, plus consideration payable to holders of outstanding Sinclair equity awards, subject to certain adjustments for working capital, cash and indebtedness, payable in connection with the Interest Purchase; (b) the number of shares of Common Stock, subject to adjustment, equal to the quotient of (i) $20.0 million divided by (ii) the volume weighted-average price per share of Common Stock on The Nasdaq Capital Market for the 30 consecutive trading days ending on the Execution Date (the “VWAP Price”), issuable in connection with the Merger; and (c) the True-Up Buyer Shares, if any (as defined below), issuable in connection with the Merger.

The Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Sinclair Members may become entitled to additional shares of Common Stock (the “True-Up Buyer Shares”) and cash (together with the True-Up Buyer Shares, the “Aggregate True-Up Payment) based on the eligible net revenues (as defined in the Purchase Agreement) achieved by the Cascade and Precision businesses during the fiscal year ending December 31, 2021. However, in no event shall the aggregate purchase price paid by the Company pursuant to the terms of the Purchase Agreement, taking into account any Aggregate True-Up Payment in favor of the Sinclair Members, exceed $65.0 million.

On August 10, 2022, the Company entered into a post-closing adjustment settlement agreement (“Agreement”) with Sinclair. The Agreement was entered into in connection with the Purchase Agreement. According to the Purchase Agreement, $2.5 million was held by the escrow agent as the Adjustment Escrow Amount, $4.5 million was held by the escrow agent as the Indemnity Escrow Amount and 588 Buyer Shares were held by the Company as the Holdback Buyer Shares. During the three-month period ended September 30, 2022, the Company made the final Aggregate True-up Payment of approximately $5.6 million, of which, $3.3 million was paid in cash and 435 Holdback Buyer Shares were released to the Sinclair Members and the Company received $1.4 million from the Adjustment Escrow Amount, and the remaining $1.1 million balance of the Adjustment Escrow Amount became part of the Indemnity Escrow Amount.

Transaction and related costs, consisting primarily of professional fees, related to the acquisition, totaled approximately $0 and $63 thousand for the three and nine months ended September 30, 2022, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.


The following table sets forth the components and the allocation of the purchase price for the business combination:

(In thousands)   
Purchase price consideration   
Cash paid to Sinclair Members at the close $23,000 
Cash contributed to escrow accounts at the close  7,000 
Cash paid for excess net working capital  1,430 
Stock issued at the close  14,535 
Fair value of contingent consideration to be achieved  3,953 
Fair value of total consideration transferred  49,918 
Total purchase price, net of cash acquired $48,630 
     
Fair value allocation of purchase price    
Cash and cash equivalents $1,288 
Accounts receivable  897 
Inventory  6,761 
Prepaid expenses and other current receivables  1,736 
Property and equipment, net  970 
Right-of-use assets, net  730 
Capitalized web costs, net  2 
Accounts payable and accrued expenses  (9,223)
Deferred revenue  (5,419)
Long-term debt  (1,961)
Operating lease liabilities, current  (392)
Operating lease liabilities, non-current  (362)
Acquired intangible assets  9,889 
Goodwill  45,002 
Total purchase price $49,918 

Identified intangible assets consist of trade names, technology, non-compete agreements, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC805 and are outlined in the table below:

(In thousands) Asset
Value		  Useful Life
Identified intangible assets     
Trade names $1,260  6 to 7 years
Acquired developed technology  3,818  5 years
Non-compete agreements  1,202  5 years
Customer relationships  3,609  7 to 8 years
Total identified intangible assets $9,889   


The Company’s 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, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 8 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

Acquisition of PurePressure

On December 31, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Pure Purchase Agreement”) with PurePressure, LLC, a Colorado Limited liability company (“PurePressure”), and the members of PurePressure (collectively, the “Members”), Benjamin Britton as the Member Representative thereunder, and each of the Members. Concurrently with the execution of the Pure Purchase Agreement, the Company consummated the acquisition of all the outstanding equity interests of PurePressure, such that immediately after the consummation of such purchase, PurePressure became a wholly-owned subsidiary of the Company (the “Acquisition”).

The aggregate consideration for the Acquisition consisted of: (a) $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness of PurePressure at closing; (b) 1,646 shares of Common Stock (the “Buyer Shares”); and (c) the Earn-out Consideration (as defined below), to the extent earned.

The Company withheld 444 of the Buyer Shares issuable to certain Members (the “Holdback Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Pure Purchase Agreement. During the third quarter of 2022, 72 of the Holdback Buyer Shares were forfeited after the finalization of the net working capital settlement. The remaining 371 of the Holdback Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions of the Pure Purchase Agreement.

The Pure Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Members may become entitled to additional consideration with a value of up to $3.0 million based on the eligible net revenues achieved by the PurePressure business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 40% will be payable in cash and the remaining 60% will be payable by issuing shares of Common Stock (collectively, the “Earn-out Consideration”). Additional information regarding the Company’s contingent consideration arrangements may be found in Note 5 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements.

Subject to certain customary limitations, (i) the Members will indemnify the Company and its affiliates, officers, directors and other agents against certain losses related to, among other things, breaches of the Members’ and PurePressure’s representations and warranties, indebtedness, transaction expenses, pre-closing taxes and the failure to perform covenants or obligations under the Pure Purchase Agreement, and (ii) the Company will indemnify the Members and their respective affiliates, officers, directors and other agents against certain losses related to, among other things, breaches of the Company’s representations and warranties and the failure to perform covenants or obligations under the Pure Purchase Agreement.

Transaction and related costs, consisting primarily of professional fees, related to the acquisition, totaled approximately $0 and $563 thousand for the three and nine months ended September 30, 2022, respectively. All transaction and related costs were expensed as incurred and are included in general and administrative expenses.

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 following table sets forth the components and the allocation of the purchase price for the business combination:

(In thousands)   
Purchase price consideration   
Estimated closing proceeds $3,613 
Indebtedness paid  320 
Transaction expenses  115 
Closing buyer shares  2,211 
Holdback buyer shares  654 
Earn-out consideration  707 
Estimated working capital adjustments  330 
Fair value of total consideration transferred  7,950 
Total purchase price, net of cash acquired $7,647 
     
Fair value allocation of purchase price    
Cash and cash equivalents $303 
Accounts receivable, net  48 
Inventory  1,537 
Property and equipment, net  219 
Right-of-use assets, net  191 
Prepaid expenses and other current receivables  61 
Other non-current assets  16 
Accounts payable and accrued expenses  (765)
Deferred revenue  (762)
Operating lease liabilities, current  (117)
Operating lease liabilities, non-current  (74)
Finance lease liabilities, current  (4)
Finance lease liabilities, non-current  (10)
Notes payable, current  (260)
Notes payable, non-current  (12)
Acquired intangible assets  3,037 
Goodwill  4,542 
Total purchase price $7,950 

Identified intangible assets consist of trade names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC805 and are outlined in the table below:

(In thousands) Asset
Value		  Useful Life
Identified intangible assets     
Trade name $227  5 years
Acquired developed technology  1,093  8 years
Customer relationships  1,717  5 years
Total identified intangible assets $3,037   

During the three-month period ended June 30, 2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 8 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.


Note 10 – Debt

 

The Company’s debt consisted of:

 

(In thousands) September 30,
2022		  December 31,
2021		  June 30,
2023		  December 31,
2022		 
Note payable – Exchange Note $35,000  $—  $18,509  $31,975 
PPP Loan  726   804   541   656 
Navitas Loan  27   — 
Navitas loan  —   23 
Other notes payable (1)  218   297   836   — 
Total debt  35,971   1,101   19,886   32,654 
Less: unamortized debt discount  (3,677)  —   690   (3,415)
Total debt, net of debt discount  32,294   1,101   20,576   29,239 
Less: current portion, net of current unamortized debt discount  (31,814)  (1,089)  (1,424)  (28,832)
Long-term debt $480  $12 
Long-term debt, net of current $19,152  $407 

 

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

 

Note Payable

 

Securities Purchase Agreement

 

On March 14, 2022, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with the Investor, pursuant to which the Company agreed to issue and sell to the Investor, in a private placement transaction, in exchange for the payment by the Investor of $65$65.0 million, less applicable expenses, as set forth in the Securities Purchase Agreement, a senior secured promissory note in an aggregate principal amount of $65$65.0 million (the “SPA Note”), and a SPA Warrant to purchase up to an aggregate of 34,40534,406 shares of Common Stock.

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 2022 Securities Exchange Agreement

 

On August 18, 2022, the Company reached an agreement with itsthe Investor to amend its existing senior SPA Note and entered into the August 2022 Exchange Agreement. Pursuant to the August 2022 Exchange Agreement, the Company partially paid $35.2 million along with approximately $300 thousand in repayments for other fees under the SPA Note and exchanged the remaining balance of the SPA Note for an Exchange Note with an aggregate original principal amount of $35.0 million and a new Note Exchange Warrant to purchase 71,13871,139 shares of Common Stock and modified an existing SPA Warrants to purchase up to an aggregate of 34,40534,406 shares of Common Stock. The Company exchanged the SPA Warrant for a new warrant for the same number of underlying shares but with a reduced exercise price (the “Modified Warrants” and, collectively with the Note Exchange Warrant, the “Warrant Liabilities”). As of September 30,August 2022 the Company had outstanding liability-classified Warrant Liabilities that allows the Investor to purchase shares 105,543 of the Company’s Common Stock. Additional information regarding the Company’s Warrant Liabilities may be found in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies and Note 5 – Fair Value Measures, included elsewhere in the notes to the condensed consolidated financial statements.Warrants.

 

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

 

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

 


The Exchange Note imposes certain customary affirmative and negative covenants upon the Company, as well as covenants that restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, restrict the ability of the Company and its subsidiaries from making certain investments, subject to specified exceptions, restrict the declaration of any dividends or other distributions, subject to specified exceptions, require the Company not to exceed maximum levels of allowable cash spend while the Exchange Note is outstanding, and require the Company to maintain minimum amounts of cash on hand. If an event of default under the Exchange Note occurs, the 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, the Company is in compliance with the financial debt covenants associated with its 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 the Company or its subsidiaries.

 

The Modified Warrant havehas an exercise price of $430.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be exercisable on and after the six-month anniversary of issuance, have a term of five and one-half years from the date of issuance and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Modified Warrant (the “Modified Warrant Shares”) or if shareholder approval for the full exercise of the Modified Warrant is not received, in which case the Modified Warrant will also be exercisable on a cashless exercise basis at the Investor’s election.

 

The Note Exchange Warrant havehas an exercise price of $246.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends, and similar transactions, were exercisable upon issuance, and have a term of five and one-half years from the date of issuance and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Warrant (the “Note Exchange Warrant Shares” and, together with the Modified Warrant Shares, the “Exchange Warrant Shares”) or if shareholder approval for the full exercise of the Note Exchange Warrant is not received, in which case the Note Exchange Warrant will also be exercisable on a cashless exercise basis at the Investor’s election. Until the Company completescompleted a qualified equity financing of at least $15.0 million, which requirement was satisfied with sales under the ATM Program, the Note Exchange Warrant’s exercise price would have been reduced to the extent the Company issuesissued securities, subject to certain exceptions, for a lower purchase price. The Note Exchange Warrant also prohibited the Company, until following the completion of such qualified equity financing, from issuing warrants with more favorable or preferential terms and/or provisions.

 

The Warrant LiabilitiesAugust 2022 Warrants 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 the Company’s shares of Common Stock outstanding at the time of exercise (which percentage may be decreased or increased by the Investor, but to no greater than 9.99%, and provided that any increase above 4.99% will not be effective until the sixty-first day after notice of such request by the Investor to increase its beneficial ownership limit has been delivered to the Company). Additionally, the Warrant Liabilities could be exercised for more than an aggregate of 26,542 shares of Common Stock unless and until shareholder approval is obtained, which approval was obtained on October 14, 2022.

 The following table provides a breakdown of the SPA Note balances as of September 30, 2022:

(In thousands) Balance at
January 1,
2022		  Additions  Payments  Amortization
of Debt
Discount		  Balance at
September 30,
2022		 
Accrued interest expense $—   (1,195)  829   —  $(366)
                     
Principal $—  $65,000  $—  $—  $65,000 
Notes payable, discount  —   (32,196)  —   (3,677)  (35,873)
Net carrying amount $—  $32,804  $—  $(3,677) $29,127 

 


 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Modification of Notes Payable

On March 8, 2023, the Company entered into a Securities Exchange Agreement (the “Exchange Agreement” or “Second Amendment”) with the High Trail Special Situations LLC. Pursuant to the Exchange Agreement, at closing the Company will prepay approximately $10.3 million in principal amount under the August 2022 Note and exchange $10.0 in principal amount of the remaining balance of the August 2022 Note for a new senior secured convertible note (the “Convertible Note”) with an original principal amount of $10.0 million. After the closing of the Exchange Agreement, the August 2022 Note will remain outstanding with a remaining balance of $11.7 million (the “Modified August 2022 Note” and, collectively with the Convertible Note, the “Notes”).

This exchange was deemed to be an extinguishment under ASC 470, as the modified debt added a substantive conversion option that was not inherent in the August 2022 Note. As a result, the Company recognized a loss on the extinguishment of debt of $4,619,846.

Convertible Notes

On March 8, 2023, as a result of the Exchange Agreement, the Company issued a Convertible Note to High Trail Special Situations LLC (the “Lender”) with a principal balance of $10 million. The Convertible Note bears a 9.0% annualized interest rate, with interest to be paid monthly, in cash, beginning April 1, 2023. The principal amount of the Convertible Note will be payable on the Maturity Date, provided that the Lender will be entitled to a cash sweep of 30% of the proceeds of any at-the-market equity offering and 20% of the proceeds received by the Company in connection with any other equity financing, which will reduce the outstanding principal amount under the August 2022 Note or the Convertible Note.

At any time, the Company may prepay all of the Convertible Note by redemption at a price equal to 102.5% of the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest. The Lender will also have the option of requiring the Company to redeem the Convertible Note (i) on August 19, 2023 or August 19, 2024 at a price equal to the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest, provided that the redemption right on August 19, 2023 will not be exercisable if the Company raises at least $8.0 million in gross proceeds from equity offerings prior to such date, or (ii) if the Company undergoes a fundamental change (as defined below) at a price equal to 102.5% of the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest.

The Convertible Note will impose certain customary affirmative and negative covenants upon the Company, as well as covenants that will (i) restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, (ii) restrict the ability of the Company and its subsidiaries from making certain investments, subject to specified exceptions, and (iii) restrict the declaration of any dividends or other distributions, subject to specified exceptions. If an event of default under the Convertible Note occurs, the Lender can elect to redeem the Convertible Note for cash equal to (A) 115% of the then-outstanding principal amount of the Convertible Note (or such lesser principal amount accelerated by the Investor), plus accrued and unpaid interest, including default interest, which accrues at a rate per annum equal to 15% from the date of a default or event of default, or, only in connection with certain events of default, (B) the greater of the amount under clause (A) or the sum of (i) 115% of the product of (a) the conversion rate in effect as of the trading day immediately preceding the date that the Lender delivers a notice of acceleration; (b) the total then outstanding principal amount under the Convertible Note (in thousands); and (c) the greater of (1) the highest daily volume weighted average price (“VWAP”) per share of Common Stock occurring during the fifteen consecutive trading days ending on, and including, the trading day immediately before the date the Lender delivers such notice and (2) the highest daily VWAP per share of Common Stock occurring during the fifteen consecutive trading days ending on, and including, the trading immediately before the date the applicable event of default occurred and (ii) the accrued and unpaid interest on the Convertible Note.

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

If the Lender elects to convert the Convertible Note, the conversion price per share will be $0.3820, subject to customary adjustments for certain corporate events. The conversion of the Convertible Note will be subject to certain customary conditions. The Convertible Note may not be converted into shares of Common Stock if such conversion would result in the Lender and its affiliates owning an aggregate of in excess of 4.99% of the then-outstanding shares of Common Stock, provided that upon 61 days’ notice, such ownership limitation may be adjusted by the Lender, but in any case, to no greater than 9.99%.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company evaluated the embedded features in accordance with ASC 815-15-25 and the determined embedded features are not required to be bifurcated and separately measured at fair value.

Interest expense related to the Convertible Notes described above was $609,001 for the six months ended June 30, 2023. Accrued interest totaled $136,913 as of June 30, 2023.

Notes Conversion

Pursuant to the Exchange Agreement the Company entered into with High Trail Special Situations LLC on March 8, 2023, the Lender elected on April 26, 2023, to convert $1.6 million of the remaining outstanding principal amount on the Convertible Note for 153,617 shares of Common Stock of the Company.

On May 1, 2023, the Company entered into a letter agreement with the above referenced accredited Lender (the “Letter Agreement”), pursuant to which the Company and the Lender agreed to exchange or redeem $2.0 million of the remaining outstanding principal amount under the Exchange Note for a total of 445,196 shares of Common Stock of the Company, subject to a Beneficial Ownership Limitation of 4.99% of the Company’s Common Stock. Due to the Beneficial Ownership Limitation of 4.99%, a total of 69,568 shares of Common Stock of the Company were issued to the Lender, with the remaining 375,629 shares held in abeyance until the balance (or portion thereof) may be issued in compliance with such limitations. As a result, the Company recognized a loss on the of $11,609.

The following table summarizes the short-term and long-term portions of the Exchange Note as of SeptemberJune 30, 2022:2023:

 

(In thousands) Short-Term  Long-Term  Notes
Payable,
Net		  Short-Term  Long-Term  Notes
payable, net		 
Direct issuance costs $498  $      -  $498 
            
Principal $35,000  $-  $35,000  $—   18,509   18,509 
Unamortized discount  (3,677)      (3,677)  310   380   690 
Net carrying amount $31,323  $-  $31,323  $310  $18,889  $19,199 

 

As of SeptemberJune 30, 2022,2023, future minimum principal payments were as follows:

 

Years ending December 31 (In thousands),      
   
Remaining 2022 $35,269 
2023  297 
Remaining 2023 $970 
2024  287   287 
2025  118   18,629 
2026 and thereafter  — 
Total future payments $35,971  $19,886 

 

Paycheck Protection Program Loan

 

Paycheck Protection Program Loans under the Coronavirus Aid, Relief, and Economic Security Act

 

In May 2020, the Company entered into a PPP Loan with Bank of America pursuant to the PPP under the CARES Act administered by the SBA.

 

The Company received total proceeds of approximately $779 thousand from the unsecured PPP Loan, which was originally scheduled to mature on May 7, 2022. The SBA deniedCompany applied for forgiveness on the Company’s submission to have the remaining $779 thousand of PPP Loan forgiven.loan, but forgiveness was denied by the SBA. On June 23, 2022, the Company received a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and the loan bears interest at a rate of 1.00% per year. The PPP loan is payable in 34 equal combined monthly principal and interest payments of approximately $24 thousand that commenced on August 7, 2022.

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The breakdown of PPP Loan balances by current and non-current as of SeptemberJune 30, 20222023 and December 31, 20212022 were as follows:

 

(In thousands) Balance Sheet
Location		 September 30,
2022		  December 31,
2021		 
PPP Loan, current Long-term debt,
current		 $256  $792 
PPP Loan, non-current Long-term debt  470   12 
Total PPP Loan outstanding   $726  $804 

PurePressure SBA Debt

As part of the acquisition of PurePressure, $159 thousand of debt remained outstanding from a standard SBA loan as of December 31, 2021. This debt has subsequently been paid as a part of the PurePressure acquisition.


(In thousands) Balance Sheet
Location		 June 30,
2023		  December 31,
2022		 
PPP Loan, current Long-term debt, current $281  $255 
PPP Loan, non-current Long-term debt  260   401 
Total PPP Loan outstanding   $541  $656 

 

Note 119 — Leases

Leases

 

The determination if any arrangement contained a lease at its inception was done based on whether or not the Company has the right to control the asset during the contract period. The lease term was determined assuming the exercise of options that were reasonably certain to occur. Leases with a lease term of 12 months or less at inception were not reflected in the Company’s balance sheet and those lease costs are expensed on a straight-line basis over the respective term. Leases with a term greater than 12 months were reflected as non-current right-of-use assets and current and non-current lease liabilities in the Company’s consolidated balance sheets.

 

As the implicit interest rate in its leases was generally not known, the Company’s used its incremental borrowing rate as the discount rate for purposes of determining the present value of its lease liabilities. At SeptemberJune 30, 2022 and December 31, 2021,2023, the Company’s weighted-average discount rate utilized for its leases was 7.27% and 7.16%, respectively.7.33%.

 

When a contract contained lease and non-lease elements, both were accounted for as a single lease component.

 

The Company had several non-cancelable finance leases for machinery and equipment. The Company’s finance leases have remaining lease terms of one year to five years.

 

The Company had several non-cancelable operating leases for corporate offices, warehouses, showrooms, research and development facilities and vehicles. The Company’s leases have remaining lease terms of one year to five years, some of which include options to extend. Some leases include payment for common area maintenance associated with the property.

The Company had several non-cancellable operating leases for corporate offices, warehouses, showrooms, research and development facilities and vehicles. The Company’s leases have remaining lease terms of one year to five years, some of which include options to extend. Some leases include payment for communal area maintenance associated with the property.

Additional information on the Company’s operating and financing lease activity is as follows:

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
(In thousands) 2022  2021  2022  2021 
Operating lease cost $293  $100  $828  $184 
Finance lease cost:                
Amortization of right-of-use assets  54   44   148   134 
Interest on lease liabilities  7   10   26   32 
Total lease cost $354  $154  $1,002  $350 

(In thousands) Balance Sheet
Location		 September 30,
2022		  December 31,
2021		 
Assets        
Right-of-use assets, net Right-of-use, net $2,470  $1,479 
Finance lease assets Property and equipment, net  304   380 
Total lease assets   $2,774  $1,859 
           
Liabilities          
Current:          
Operating Operating lease liabilities, current $822  $814 
Financing Accrued expenses and other current liabilities  153   156 
Non-current:          
Operating Operating lease liabilities, non-current  1,744   704 
Financing Other non-current liabilities  187   293 
Total lease liabilities   $2,906  $1,967 
Weighted-average remaining lease term – operating leases    3.68 years    3.11 years 
Weighted-average remaining lease term – finance leases    2.50 years    2.36 years 
Weighted-average discount rate – operating leases    6.70%  8.03%
Weighted-average discount rate – finance leases    7.84%  6.29%

 


 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Additional information on the Company’s operating and financing lease activity was as follows:

  Three months ended
June 30,		  Six months ended
June 30,		 
(In thousands) 2023  2022  2023  2022 
Operating lease cost $248  $291  $504  $536 
Finance lease cost:                
Amortization of right-of-use assets  46   46   91   94 
Interest on lease liabilities  5   9   11   18 
Total lease cost $299  $346  $606  $648 

  June 30,
2023		  December 31,
2022		 
Weighted-average remaining lease term – operating leases  3.29 years   3.59 years 
Weighted-average remaining lease term – finance leases  1.94 years   2.30 years 
Weighted-average discount rate – operating leases  7.40%  6.76%
Weighted-average discount rate – finance leases  7.81%  7.83%

(In thousands) Balance Sheet Location June 30,
2023		  December 31,
2022		 
Assets          
Right-of-use assets, net Right-of-use, net $2,359  $2,210 
Finance lease assets Property and equipment, net  602   261 
Liabilities          
Operating lease liabilities, current Operating lease liabilities, current  831   734 
Operating lease liabilities, non-current Operating lease liabilities, non-current  1,703   1,587 
Total operating lease liabilities   $2,533  $2,321 
           
Finance lease liabilities, current Accrued expenses and other current liabilities  142   152 
Finance lease liabilities, non-current Other non-current liabilities  86   147 
Total finance lease liabilities   $228  $299 

Maturities of operating and finance lease liabilities as of SeptemberJune 30, 20222023 are as follows:

 

Years ending December 31 (In thousands), Operating
Lease		  Finance
Lease		  Operating lease  Finance lease 
     
Remaining 2022 $227  $37 
2023  921   182 
Remaining 2023 $494  $89 
2024  614   91   861   91 
2025  493   51   748   50 
2026  461   15   560   16 
Thereafter  200   — 
2027  202   — 
Total minimum lease payments  2,916   376   2,865   246 
Less imputed interest  (350)  (36)  (331)  (18)
Total lease liabilities $2,566  $340  $2,534  $228 

 

Note 12 — Convertible Promissory Notes


 

On January 11, 2021, the Company’s Board of Directors and shareholders approved the amendment to the conversion formula of the Convertible Promissory Notes (the “Convertible Notes”) issued by the Company on dates between August 2020 and November 2020. Pursuant to the amendment, immediately prior to the consummation of a public transaction, the outstanding principal amount of the Convertible Notes, together with all accrued and unpaid interest, shall convert into a number of fully paid and non-assessable shares of Common Stock, at a conversion price of $1,544.00 per share.

 

While the original conversion feature was bifurcated from the host instrument, the Company determined that the amended conversion feature would not require bifurcation. Since the accounting for the conversion feature changed because of the amendment, the Company applied extinguishment accounting pursuant to its accounting policy.

AGRIFY CORPORATION

 

Accordingly, the Company recognized 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).

On February 1, 2021, in conjunction with the closing of the Company’s IPO, the Convertible Notes in the aggregate principal amount of $13.1 million were converted into 8,485 shares of Common Stock at the election of the Company at a conversion price of $77.20 per share.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1310 — Stockholders’ Equity

 

On July 11, 2022, the Company increased its authorized number of shares of Common Stock to 5,150,0008,000,000, consisting of: 5,000,000 shares of Common Stock, par value $0.001 per share and 3,000,000 shares of Preferred Stock.preferred stock, par value $0.001 per share. On January 9, 2020, the Company designated 100,000105,000 shares of the 3,000,000 authorized shares of Preferred Stock, as Series A Convertible Preferred Stock (“Series A Preferred Stock”).

 

Series A Convertible Preferred Stock

Beginning in the first quarter of 2020,On March 1, 2023, the Company issued an aggregatefurther increased its authorized number of 60,000 shares of Series A Preferred Stock, for an aggregate purchase price of $6.0 million. In May 2020, the Company completed an offering of Series A Preferred Stock with the issuance of an additional 40,000 shares of Series A Preferred Stock for an aggregate purchase price of $4.0 million.

Amendment of Conversion Formulas

On January 11, 2021, the Company’s Board of Directors approved the amendment to the conversion formula of the Series A Preferred Stock and Convertible Notes. After the amendment:

●the Series A Preferred Stock is convertible, at any time after the issuance or immediately prior to the closing of a public transaction, into Common Stock in an amount of shares equal to (i) the product of the Series A Preferred Stock original price plus accrued but unpaid dividends on the shares being converted, multiplied by the number of shares of Series A Preferred Stock being converted, divided by (ii) a conversion price of $1,544.00 per share (after the reverse split taking effect); and

●immediately prior to the consummation of a public transaction, the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest shall convert into a number of fully paid and non-assessable shares of Common Stock equal to the quotient of (i) the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest thereunder immediately prior to such public transaction divided by (ii) a conversion price of $1,544.00 per share (after the reverse split taking effect).

On January 11, 2021, the Company’s shareholders approved the amendment to the Series A Preferred Stock.


Initial Public Offering

On February 1, 2021, the Company completed an IPO for the sale of 27,00013,000,000, consisting of: 10,000,000 shares of Common Stock, at a price of $2,000.00 per share. The Company also granted the underwriters: (a) a 45-day option to purchase up to 4,050 additional shares of Common Stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the IPO, and (b) warrants to purchase 810 shares of Common Stock (equal to 3% of the aggregate number of shares of Common Stock issued in the IPO) at an exercise price of $2,500.00 per share (which is equal to 125% of the IPO price). Subsequently, the underwriters exercised the over-allotment option, and on February 4, 2021, the Company closed on the sale of an additional 4,050 shares of Common Stock for a price of $2,000.00par value $0.001 per share and granted to the underwriters warrants to purchase 121 additional3,000,000 shares of Common Stock (equal to 3% of the amount of shares issued as part of the exercised of the over-allotment option) at an exercise price of $2,500.00 per share. The exercise of the over-allotment option brought the total number of shares of Common Stock sold by the Company in connection with the IPO to 31,050 shares and the total net proceeds received in connection with the IPO to approximately $57.0 million, after deducting underwriting discounts and estimated offering expenses.

Immediately prior to the closing of the Company’s IPO, all outstanding shares of Series A Preferred Stock and Convertible Notes were converted into 6,865 shares of Common Stock and 8,485 shares of Common Stock, respectively, at a conversion price of $1,544.00preferred stock, par value $0.001 per share.

 

Subsequent Public Offering

On February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) for the sale of 27,778 shares of Common Stock for a price of $2,700.00 per share. The Company also granted the underwriters: (a) a 45-day option to purchase up to 4,167 additional shares of Common Stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the February Offering, and (b) warrants to purchase 833 shares of Common Stock (equal to 3% of the aggregate number of shares of Common Stock issued in the February Offering) at an exercise price of $3,375.00 per share (which is equal to 125% of the February Offering). Subsequently, the underwriters exercised the over-allotment option, and on March 22, 2021, the Company closed on the sale of an additional 4,167 shares of Common Stock for a price of $2,700.00 per share and granted to the underwriters warrants to purchase 125 additional shares of Common Stock (equal to 3% of the amount of shares issued as part of the exercised of the over-allotment option) at an exercise price of $3,375 per share. The exercise of the over-allotment option brought the total number of shares of Common Stock sold by the Company in connection with the February Offering to 31,944 shares and the total net proceeds received in connection with the February Offering to approximately $80.0 million, after deducting underwriting discounts and estimated offering expenses.

Underwriter Termination

On September 14, 2021, the Company entered into a letter agreement and waiver (the “Letter Agreement”), to amend the terms of its underwriting agreement with the representative of the underwriters in the IPO. Pursuant to the Letter Agreement, the representative agreed to waive the right of first refusal included in the underwriting agreement in consideration of a cash payment to the representative of $2.4 million and the right to participate as a co-manager with 10% of the economics with respect to the Company’s next public offering of securities, payable in cash upon the closing of such offering.

Private Placement

 

On January 25, 2022, the Company entered into a Securities Purchase Agreement (the “Securities Agreement”) with an institutional investor and other accredited investors for the sale by the Company of 12,25212,253 shares (the “SA Shares”) of Common Stock, pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to an aggregate of 7,853 shares of Common Stock and warrants to purchase up to an aggregate of 15,079 shares of Common Stock (the “Common Warrants” and, collectively with the Pre-Funded Warrants, the “SA Warrants”), in a private placement offering. The combined purchase price for one share of Common Stock (or one Pre-Funded Warrant) and the accompanying fraction of a Common Warrant was $1,360.00 per share.

 

Subject to certain ownership limitations, the SA Warrants are exercisable six months from issuance. Each Pre-Funded Warrant was exercisable into one share of Common Stock 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 $1,496.00 (as adjusted from time to time in accordance with the terms thereof) and will expire on the fifth anniversary of the initial exercise date. The institutional investor that received the Pre-Funded Warrants fully exercised such warrants in March 2022.

 

Raymond Chang, Chairman and Chief Executive Officer (“CEO”) of the Company, and Stuart Wilcox, who is currently theformerly served as our Chief Operating Officer, and at the time he was a member of the Company’s Board of Directors, participated in the private placement on essentially the same terms as other investors, except for having a combined purchase price of $1,380.00 per share.

 

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

 


Issuance of Common Stock in Connection with Acquisitions

 

On October 1, 2021, the Company issued an aggregate of 3,332 shares of its Common Stock to the Precision and Cascade shareholders in connection with the Company’s acquisition of Precision and Cascade. On August 17, 2022, the Company issued an additional 435 shares of its Common Stock to the Precision and Cascade shareholders in connection with the finalization of the net working capital settlement. Refer to Note 9 – Business Combinations, included elsewhere in the notes to the consolidated financial statements.for contingent liabilities.

 

On December 31, 2021, the Company issued an aggregate of 1,202 shares of its Common Stock to the PurePressure shareholders in connection with the Company’s acquisition of PurePressure. ReferOn January 31, 2023, the remaining 372 Holdback Buyer Shares were released, including 6 Holdback Buyer Shares that were withheld to cover a tax indemnification claim in accordance with the Purchase Agreement. Additional information regarding the PurePressure Holdback Buyer Shares may be found in Note 98 – Business Combinations, included elsewhere in the notes to the consolidated financial statements.

 

On February 1, 2022, the Company issued an aggregate of 1,491 shares of its Common Stock to the Lab Society shareholders in connection with the Company’s acquisition of Lab Society. ReferOn April 28, 2023, the Company issued the remaining 499 Holdback Buyer Shares to the Lab Society Owners in accordance with the Lab Society Merger Agreement.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At The Marketing Offering

On October 18, 2022, the Company entered into the ATM Program with the Agent pursuant to which it may issue and sell, from time to time, shares of its Common Stock having an aggregate offering price of up to $50 million, depending on market demand, with the Agent acting as an agent for sales. The ATM Program allowed the Company to sell shares of Common Stock pursuant to specific parameters defined by the Company as well as those defined by the SEC and the ATM Program agreement. As of December 31, 2022, the Company sold 306,628 shares of Common Stock, under the ATM at an average price of $50.85 per share, resulting in gross proceeds of $15.6 million, and net proceeds of $15.0 million after commissions and fees to the Agent totaling $468 thousand and legal fees totaling $75 thousand. $3.0 million of the proceeds under the ATM Program were used to repay amounts due to the Investor under the Exchange Note. The Company used net proceeds generated from the ATM Program for working capital and general corporate purposes, including repayment of indebtedness, funding its transformation initiatives and product category expansion efforts and capital expenditures. Due to the late filing of this Annual Report on Form 10-K, the Company is no longer eligible to utilize the registration statement on Form S-3 relating to the ATM Program, and does not anticipate any further sales under the ATM Program in the foreseeable future.

Confidentially Marketed Public Offering

On December 16, 2022, the Company issued 594,232 shares of its Common Stock, Pre-Funded 2022 Warrants to purchase 75,000 shares of its Common Stock and accompanying December 2022 Warrants to purchase 1,338,471 shares of the Company’s Common Stock. The Company received net proceeds from the Offering of approximately $8.2 million, after deducting underwriting discounts and commissions and estimated expenses. The Company intends to use the net proceeds from the Offering, together with its existing cash resources, for working capital and general corporate purposes, which may include capital expenditures and repayment of debt.

The Pre-Funded 2022 Warrants were exercisable immediately upon issuance at an exercise price of $0.001 per share and do not have an expiration date. The December 2022 Warrants were exercisable immediately and have a term of exercise equal to five years from the initial exercise date at an exercise price of $13.00 per share. The offering price for the securities was $13.00 per share (or $12.98 for each Pre-Funded 2022 Warrant).

The December 2022 Warrants may not be exercised by the holder to the extent that the holder, together with its affiliates, would beneficially own, after such exercise more than 4.99% of the shares of the Company’s Common Stock then outstanding (subject to the right of the holder to increase or decrease such beneficial ownership limitation upon notice to the Company, provided that such limitation cannot exceed 9.99%) and provided that any increase in the beneficial ownership limitation shall not be effective until the sixty-first day after such notice is delivered.

The Pre-Funded 2022 Warrants were classified as a component of permanent equity and the December 2022 Warrants were liability-classified and were recorded at the issuance date using a relative fair value allocation method. The Pre-Funded 2022 Warrants are equity-classified because they are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, are immediately exercisable, and permit the holders to receive a fixed number of shares of Common Stock upon exercise. In addition, such warrants do not provide any guarantee of value or return. The December 2022 Warrants are liability-classified as there is a volatility floor and these warrants are not indexed to the Company’s own stock.

As of December 31, 2022, the Company valued the December 2022 Warrants using the Black-Scholes option-pricing model and determined the fair value at $5.9 million. The key inputs to the valuation model included the annualized volatility of 98.0% and the expected term of about 5 years.

Raymond Chang, Chairman and CEO, participated in the Offering and purchased 115,385 shares of Common Stock and 230,769 December 2022 Warrants for an aggregate purchase price of approximately $1.5 million.

Additional information regarding the Company’s December 2022 Warrants may be found in Note 91 – Business Combinations,Overview, Basis of Presentation, and Significant Accounting Policies and Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements.

 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1411 — Stock-Based Compensation and Employee Benefit Plans

 

2022 Omnibus Equity Incentive Plan

 

On April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Omnibus Equity Incentive Plan (the “2022 Plan”), which replaced the 2020 Stock Option Plan (the “2020 Plan”). The 2022 Plan provides for the grant of stock options, stock appreciation right awards, performance share awards, restricted stock awards, restricted stock unit awards, other stock-based awards and cash-based awards. The aggregate number of shares of Common Stock that may be reserved and available for grant and issuance under the 2022 Plan is 26,483 shares, which includes the 10,000 shares authorized under the 2022 Plan, plus the rollover of 16,483 issued and outstanding awards under the 2020 Plan. Shares will be deemed to have been issued under the 2022 Plan solely to the extent actually issued and delivered pursuant to an award. If any award granted under the 2020 Plan or the 2022 Plan expires, is canceled, or terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2022 Plan. The 2022 Plan shall continue in effect, unless sooner terminated, until the tenth anniversary of the date on which it is adopted by the Board of Directors. As of June 30, 2023, there were 13,008 shares of Common Stock available to be granted under the Company’s 2022 Plan.

Stock-based Compensation

The Company’s stock optioncompensation expense was $0.8 million and $0.9 million for the three months ended June 30, 2023 and 2022, respectively. The Company’s stock compensation expense was $1.6 million and $941 thousand for the three months ended September 30, 2022 and 2021, respectively, and $3.5 million and $4.0$1.9 million for the ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively. There was $4.3 million of total unrecognized compensation cost related to unvested

Stock Options

Stock options granted under the Company’s options plans as2022 Plan are generally non-qualified and are granted with an exercise price equal to the market price of September 30, 2022. This stock option expense will be recognized through 2025.

the Company’s Common Stock on the date of grant. The fair value of each option isgrant was estimated on the date of the grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying Common Stock, expected option life, and expected volatility in the market value of the underlying Common Stock. No stock options were granted during the ninethree and six months ended SeptemberJune 30, 2023 and 2022.

 

The following table summarizes the Company’s assumptions used in the valuation of options granted during the year ended December 31, 2021:

Volatility40%
Risk-free interest rate1.10% – 1.63%
Dividend yield0.00%
0% Expected life (Years)10
Forfeiture rate0.00%


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 the Company’s stock options and warrants have characteristics different from those of its 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 the Company’s history of having never issued a dividend and management’s current expectation of future action surrounding dividends. The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a period consistent with the underlying instrument’s expected term. The expected lives for such grants were based on the simplified method for employees and directors.

 

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

 

As of September 30, 2022, there were 3,234 shares of Common Stock available to be granted under the Company’s 2022 Plan.


 

Stock Option Activity

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents option activity under the Company’s stock option plans for the ninethree and six months ended SeptemberJune 30, 2022 and the year ended December 31, 2021:2023:

 

(In thousands, except share and per share data) Number of
Options		  Weighted-
Average
Exercise
Price		  Aggregate
Intrinsic
Value		  Number of
Options		  Weighted-
Average
Exercise Price		  Aggregate
Intrinsic Value		 
Options outstanding at December 31, 2020  15,666  $702.00  $— 
Options outstanding at January 1, 2023  13,439  $1,518.05  $              — 
Granted  7,600   2,426.00       —   —     
Exercised  (3,288)  646.00       (104)  6.67     
Forfeited  (2,151)  796.00       (260)  —     
Canceled  (5)  886.00     
Options outstanding at December 31, 2021  17,822   1,436.00  $251,440 
Granted  —   —     
Exercised  (43)  458.40     
Forfeited  (2,351)  1,022.20     
Canceled  (1,145)  1,858.60     
Options outstanding at September 30, 2022  14,283  $1,473.20  $— 
Expired  (67)  699.97     
Options outstanding at June 30, 2023  13,008  $1,564.69  $— 
                        
Options vested and exercisable as of September 30, 2022  10,909  $1,257.40     
Options vested and expected to vest as of September 30, 2022  13,610  $1,438.60     
Options vested and exercisable as of June 30, 2023  10,969  $1,404.60     
Options vested and expected to vest as of June 30, 2023  12,124  $1,498.89     

As of June 30, 2023, total unrecognized compensation expense related to unvested options under the Company’s 2022 Plan was $1.9 million, which is expected to be recognized over a weighted average period of 0.71 years.

The following table summarizes information about options vested and exercisable at June 30, 2023:

   Options Vested and Exercisable 
Price ($)  Number of Options  Weighted-Average
Remaining Contractual Life
(Years)		  Weighted-Average
Exercise Price		 
$456.00   3,758   5.63  $456.00 
$972.00   3518   5.54  $972.00 
$1,536.00   21   6.63  $1,536.00 
$1,840.00   125   8.51  $1,840.00 
$2,768.00   3547   7.15  $2,768.00 

The following table summarizes information about options expected to vest after June 30, 2023:

   Options Vested and Expected to Vest 
Price ($)  Number of Options  Weighted-Average
Remaining Contractual Life
(Years)		  Weighted-Average
Exercise Price		 
 456.00   3,758   5.63  $456.00 
 972.00   3,565   5.54  $972.00 
 1,536.00   50   6.63  $1,536.00 
 1,840.00   250   8.51  $1,840.00 
 2,768.00   4,500   7.15  $2,768.00 

 


 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

 

The following table presents restricted stock unit activity underUnder the 2022 Plan, for the nine months ended September 30, 2022:Company may grant restricted stock units to employees, directors and officers. The restricted stock units granted generally vest equally over periods ranging from one to three years. The fair value of restricted stock units is determined based on the closing market price of the Company’s Common Stock on the date of grant. Compensation expense related to the restricted stock units is recognized using a straight-line attribution method over the vesting period.

 

 Number of
Shares		  Weighted-
Average
Grant Date
Fair Value		  Number of
Shares		  Weighted-
Average
Grant Date Fair
Value		 
Unvested at December 31, 2021  —  $— 
Unvested at December 31, 2022  7,691  $230.75 
Granted  9,440   252.40   —   — 
Vested  (1,000)  384.00   (17)  230.80 
Forfeited  (475)  314.00   (3,100)  230.80 
Unvested at September 30, 2022  7,965  $249.20 
Unvested at June 30, 2023  4,574  $230.80 

As of June 30, 2023, total unrecognized compensation expense related to unvested restricted stock units was $1.0 million, which is expected to be recognized over a weighted average period of 2.11 years.

 

2022 Employee Stock Purchase Plan

 

On April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 2,500 shares of Common Stock for issuance under the ESPP. On SeptemberJune 30, 2022,2023, 2,500 shares were available for future issuance.

 

Under the ESPP, eligible employees are granted options to purchase shares of Common Stock at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. Options to purchase shares are granted twice yearly on or about August 1 and February 1 and are exercisable on or about the succeeding January 31 and July 31, respectively, of each year. No participant may purchase more than $25 thousand worth of Common Stock annually. No Common Stock was granted under the 2022 ESPP during the ninethree and six months ended SeptemberJune 30, 2022. 2023.

 

Employee Benefit Plan

 

The Company maintains an employee’s savings and retirement plan under Section 401(k) of the Internal Revenue Code (the “401k“401(k) Plan”). All full-time U.S. employees become eligible to participate in the 401k401(k) Plan. The Company’s contribution to the 401k401(k) Plan is discretionary. During the three months and ninesix months ended SeptemberJune 30, 2022 and 2021,2023, the Company did not contribute to the 401k401(k) Plan.

Note 15 — Stock Warrants 

The following table presents all warrant activity of the Company for the nine months ended September 30, 2022 and the year ended December 31, 2021:

  Number of
Warrants		  Weighted-
Average
Exercise
Price		 
Warrants outstanding at December 31, 2020  4,139  $4.00 
Granted  1,890   294.40 
Exercised  (4,671)  121.40 
Warrants outstanding at December 31, 2021  1,358   4.00 
Granted  128,476   427.00 
Exercised  (8,295)  0.20 
Warrants outstanding at September 30, 2022  121,539  $451.40 

The Company received proceeds from the exercise of warrants of less than $1 thousand and $4 thousand for the three months ended September 30, 2022 and September 30, 2021, respectively, and $2 thousand and $9 thousand for the nine months ended September 30, 2022 and 2021, respectively. 

 


 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1612 — Stock Warrants

The following tables present all warrant activity of the Company for the six months ended June 30, 2023 and 2022:

  Number of
Warrants		  Weighted-
Average
Exercise Price		 
Warrants outstanding at December 31, 2022  1,530,001  $38.07 
Granted  —   — 
Exercised  (35,000)  — 
Warrants outstanding at June 30, 2023  1,495,001  $38.91 

  Number of
Warrants		  Weighted-
Average
Exercise Price		 
Warrants outstanding at December 31, 2021  1,358  $4.00 
Granted  57,339   1,204.00 
Exercised  (8,138)  — 
Warrants outstanding at June 30, 2022  50,559  $1,364.00 

The Company received proceeds from the exercise of warrants of $0 for the three and six months ended June 30, 2023, and $1 thousand and $2 thousand for the three and six months ended June 30, 2022, respectively.

Modification to December 2022 Warrants

On April 19, 2023, the Company entered into an agreement to reduce the exercise price for its December 2022 Warrants from approximately $13 to approximately $3.4 and had entered into agreements with certain holders of the December 2022 Warrants to exercise such warrants for gross proceeds of up to $1.84 million (the “Warrant Inducement”).

On April 24, 2023, the Company announced that it would not consummate the Warrant Inducement, however the reduction of the exercise price remained effective.

Note 13 — Income Taxes

 

The Company’s quarterly provision for income taxes is measured using an annual effective income tax rate, was 0.0%adjusted for discrete items within the period presented. To determine the annual effective tax rate, the Company estimates both the three months ended September 30, 2022total income (loss) before income taxes for the full year and 2021.the jurisdictions in which that income (loss) is subject to tax. The actual effective tax rate for the full year may differ from these estimates if income tax benefit(loss) before income taxes is greater than or less than what was $0 for bothestimated or if the three months ended September 30, 2022 and 2021.allocation of income (loss) to jurisdictions in which it is taxed is different from the estimated allocations.

 

The Company’sprovision for income taxes represents Federal and state and local income taxes. The effective incomerate differs from statutory rates due to the effect of certain nondeductible expenses. Our effective tax rate was 0.2%will change from quarter to quarter based on recurring and 0.0% fornon-recurring factors including, but not limited to, the nine months ended September 30, 2022geographical mix of earnings, enacted tax legislation, and 2021, respectively. Thestate and local income taxes. In addition, changes in judgment from the evaluation of new information resulting in the recognition de-recognition or re-measurement of a tax benefit was $262 thousandposition taken in a prior annual period is recognized separately in the quarter of the change.

Tax contingencies are recorded, if needed, to address potential exposure involving tax positions the Company has taken that could be challenged by tax authorities. These potential exposures could result from applications of various statutes, rules, regulations and $0 for the nine months ended September 30, 2022interpretations. Any estimates of tax contingencies contain assumptions and 2021, respectively. The difference between the Company’s effectivejudgments about potential actions by taxing jurisdictions. Any interest and penalties related to uncertain tax rates for the 2022 and 2021 periods and the U.S. statutory tax ratepositions would be included as part of 21% was primarily due to a valuation allowance recorded against the Company’s deferred tax assets. The change in the income tax benefit for the nine months ended September 30, 2022 comparedprovision. The Company’s conclusions regarding uncertain tax positions may be subject to the nine months ended September 30, 2021 was primarily due toreview and adjustment at a discrete incomelater date based upon ongoing analysis of or changes in tax benefit of $200 thousand recorded during the first quarter of 2022, which is attributable to a non-recurring partial release of the Company’s U.S. valuation allowancelaws, regulations and interpretations thereof as a result of the Lab Society acquisition. Additionally,well as a result of the goodwill impairment charge recorded during the second quarter of 2022, the Company recognized a small benefit of $62 thousand related to the reversal of its opening deferred tax liability on indefinite-lived assets.other factors.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1714 — Net Loss Per Share

 

Net loss per share calculations for all periods have been adjusted to reflect the Company’s reverse stock splits. Net loss per share was calculated based on the weighted-average number of itsthe Company’s Common Stock then outstanding.

 

Basic net loss per share is calculated using the weighted-average number of Common Stock outstanding during the periods. NetDiluted net loss per share assuming dilution, is calculated using the weighted-average numbercomputed by giving effect to all potential shares of common shares outstanding and the dilutive effect of all potentially dilutive securities, including Common Stock, equivalentsincluding outstanding stock options, stock related to unvested restricted stock units, and convertible securities.outstanding warrants to the extent dilutive. Net loss per share, assuming dilution, is equal to basic net loss per share because the effect of dilutive securities outstanding during the periods, including options and warrants computed using the treasury stock method, is anti-dilutive.

 

The components of basic and diluted net loss per share were as follows:

 

  Three Months ended
September 30,		  Nine Months ended
September 30,		 
(In thousands, except share and per share data) 2022  2021  2022  2021 
Numerator:            
Net income (loss) attributable to Agrify Corporation $(57,413) $(9,758) $(130,235) $(19,204)
Accrued dividend attributable to Preferred A Stockholders  -   -   -   (61)
Net income (loss) available for common shareholders $(57,413) $(9,758) $(130,235) $(19,265)
Denominator:                
Weighted-average common shares outstanding – basic and diluted  133,526   104,172   129,832   90,344 
Net income (loss per share attributable to Common Stockholders – basic and diluted $(429.98) $(93.67) $(1,003.10) $(212.57)

(1)Periods presented have been adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021, the 1-for-10 reverse stock split on October 18, 2022, and the 1-for-20 reverse stock split on July 5, 2023. Additional information regarding the reverse stock splits may be found in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to the condensed consolidated financial statements.
  Three months ended June 30,  Six months ended June 30, 
(In thousands, except share and per share data) 2023  2022  2023  2022 
Numerator:            
Net loss attributable to Agrify Corporation $(6,805) $(74,604) $(17,132) $(72,824)
Denominator:                
Weighted-average common shares outstanding – basic  1,549,669   132,911   1,312,299   127,956 
Net loss per share attributable to Common Stockholders – basic and diluted $(4.39) $(561.31) $(13.05) $(569.13)

 


 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s potential dilutive securities, which include stock options, restricted stock units, and warrants, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common sharesCommon Shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholdersCommon Stockholders is the same. The Company excluded the following potential common sharesCommon Stock equivalents presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholdersCommon Stockholders for the periods indicated because including them would have had an anti-dilutive effect:

 

 September 30,
2022		  September 30,
2021		  Six Months ended
June 30,
2023		  Six Months ended
June 30,
2022		 
Shares subject to outstanding Common Stock options  14,286   175,552 
Shares subject to outstanding stock options  10,969   16,455 
Shares subject to unvested restricted stock units  8,965   —   4,574   — 
Shares subject to outstanding warrants  121,539   13,592   1,495,001   50,559 
  144,790   189,144   1,510,544   67,014 

 

Note 1815 — Commitments and Contingencies

 

Legal MattersMatters

 

Cooper and Weinstein MatterBud & Mary’s Litigation

On January 5, 2021,September 15, 2022, the Company receivedprovided a demand letter from Nicholas Coopernotice of default to Bud & Mary’s and Richard Weinstein, (twocertain related parties notifying such parties that Bud & Mary’s was in default of its obligations under the Company’s former employees), and oneBud & Mary TTK Agreement. On October 5, 2022, Bud & Mary’s filed a complaint in the Superior Court of Mr. Cooper’s affiliated entities, asserting that Messrs. Cooper and Weinstein were entitled to compensation arising out of their employment byMassachusetts in Suffolk County, naming the Company and their partial ownership of TriGrow Systems, LLC which had been acquired byas the Company. The demand letter asserts that Messrs. Cooper and Weinstein are due certain sales commissions under their applicable bonus plan, equity earn-outs based on certain sales targets, and various equity purchases through the Company’s employee stock ownership plan. The demand letter also asserts various employment claims, including but not limited to, statutory wage withholding violations, wrongful termination,defendant. Bud & Mary’s is seeking, among other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract breach ofand conversion arising from the duty of good faithAgreement. While the Company believes the claim is without merit and fair dealing, fraudwill continue to vigorously defend itself against Bud & Mary’s allegations, litigation is inherently unpredictable and there can be no assurance that the Company will prevail in the inducement, promissory estoppel, minority shareholder oppression, breach of fiduciary duty, unjust enrichment, and violations of state and federal securities laws.this matter.

 

On January 19, 2021, Messrs. Cooper and Weinstein filed a lawsuit against the Company in the United States District Court for the Western District of Washington, alleging the same claims made in their demand letter based on the facts disclosed above. The plaintiffs are seeking relief in the form of monetary damages in an amount to be determined. Messrs. Cooper and Weinstein are also seeking relief in the form of reinstatement and Mr. Weinstein is seeking rescission of his previously executed Release of Claims Agreement. On March 10, 2021, the Company moved to dismiss all Messrs. Cooper and Weinstein’s claims, asserting that the claims failed to allege legal grounds for relief. On May 12, 2021, a Magistrate issued a preliminary Report and Recommendation, which recommended dismissal of certain of Messrs. Cooper and Weinstein’s claims, and recommended others for additional factual discovery. On July 27, 2021, a District Judge entered an order partially adopting the Report and Recommendation, dismissing one claim with prejudice, dismissing a second claim with leave to amend, and permitting the remaining claims to proceed.

Additionally, on July 29, 2021, the Company filed a separate arbitration in Boston, Massachusetts against Messrs. Cooper and Weinstein, in which the Company alleges that Messrs. Cooper and Weinstein were liable for certain conduct during the time they were TriGrow employees, including breach of fiduciary duty, unjust enrichment, usurpation of corporate opportunity, conversion, fraudulent concealment, and false representation. Also on July 29, 2021, the Company submitted a claim for indemnification to certain legacy TriGrow Systems, LLC. shareholders. The claim for indemnification relates to conduct by Messrs. Cooper and Weinstein during the time they were TriGrow employees. During the third quarter of 2022, the Company deemed it necessary to fully reserve for the outstanding $14.7 million note receivable balance due to the current litigation and Messrs. Cooper and Weinstein settled all claims and potential claims between themselves and any affiliated entities bythe uncertainty of the customer’s ability to repay the balance. The $14.7 million represents the amount of the contingent loss that the Company has determined to Messrs. Cooperbe reasonably possible and Weinstein,estimable. The actual cost of resolving this matter may be higher or lower than the amount the Company has reserved.

If the Company is unable to realize revenue from its TTK Solution offerings on a timely basis or at all, or if it incurs an additional loss as a result of the Bud & Mary’s claim, the Company’s business and a related entity for approximately $800 thousand.financial performance will be adversely affected. On November 14, 2022, the Company filed its answers and affirmative defenses to the Bud & Mary’s complaint and counterclaims. The Company is seeking, among other relief, monetary damages in connection with the breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and enforcement of the guarantees. Bud & Mary’s is permitted to file an amended complaint during October 2023, and Agrify will be permitted to make responsive filings, which may include an answer and counterclaim.

 

United States Customs Seizure MatterBowdoin Construction Corp. Litigation

 

On June 28, 2022,February 22, 2023, Bowdoin Construction Corp. (“Bowdoin”) filed a complaint (the “Bowdoin Complaint”) in the Superior Court of Massachusetts in Norfolk County naming the Company, was notifiedBud & Mary’s and certain related parties as defendants, captioned Bowdoin Construction Corp. v. Agrify Corporation, Bud & Mary’s Cultivation, Inc. and BMLC2, LLC, case no. 2382CV00173. The Bowdoin Complaint relates to a construction contract between Bowdoin and the Company relating to the property that is the subject of the Bud & Mary’s Complaint, and alleges breach of contract by Bud & Mary’s and by the United States CustomsCompany due to nonpayment of approximately $6.3 million due under the contract and Border Protection (“CBP”) that they seized 123 cartons of horticulture grow lights appraised at approximately $623 thousand at the Port of Savannah, Georgia based on CBP’s interpretation of certain importation laws which prohibit the importation of certain goods that are subject to healthrelated indemnification claims and safety legal restrictions, including a prohibition on the importation of drug paraphernalia, in accordance with 21 U.S.C. § 863(a).mechanics’ liens. The Company is currently disputing the seizure. The Company does not believe these claims have any meritentitled to indemnification by Bud & Mary’s and intends to vigorously defend its position.this claim.

 


 

Commitments

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Supply Agreement with Mack Molding Co.

 

In December 2020, the Company entered into a five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack will become a key supplier of VFUs. In February 2021, the Company placed a purchase order with Mack amounting to approximately $5.2 million towards the initial production of VFUs during 2021. In SeptemberSince February 2021, the Company increased the purchase order with Mack to approximately $11.5$26.5 million towards production of VFUs during 2021 and 2022. The Company believesbelieved the supply agreement with Mack willwould provide the Company with increased scaling capabilities and the ability to meet the potential future demand of its customers more efficiently. The supply agreement contemplates that, following an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack each year based on the agreed-upon pricing formula. The introductory period is not time-based but rather refers to the production of an initial number of units after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage. The Company believesbelieved this approach willwould result in both parties making a more informed decision with respect to the pricing and other terms of the supply agreement with Mack.

 

On October 11, 2022, the Company received a $9.4 million invoice from Mack for inventory purchased on the Company’s behalf to build VFUs. As part of the terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had aged greater than nine months. Due to the slowdown in the demand for the VFUs and the lack of a demand forecast that the Company could provide to the vendor, Mack exercised the right to invoice the Company for the slow-moving inventory. As of December 31, 2022, the Company owed Mack $8.4 million for purchased inventory on behalf of the Company to produce VFUs, which is included in accounts payable in the consolidated balance sheet.

On March 2, 2023, Mack filed an arbitration action seeking the amounts owed to Mack for purchased inventory. On October 27, 2023, and effective as of October 18, 2023, Mack and the Company entered into a Modification and Settlement Agreement with respect to the dispute. See Note 17 – Subsequent Events.

TRC Electronics Litigation

The Company was named as a defendant in a complaint filed by TRC Electronics, Inc. (“TRC”) on April 13, 2023 in the United States District Court for the Eastern District of Pennsylvania. In the Complaint, TRC asserts two causes of action against the Company: (1) breach of contract, and (2) promissory estoppel. TRC’s claims are based on allegations that the Company failed to make payments due under three purchase orders for commercial electronics parts. TRC seeks damages in the amount of $565,210, plus attorneys’ fees, costs, and post-judgment interest. The Company has filed an answer denying liability on TRC’s claims and is proceeding with discovery.

Sinclair Scientific Litigation

On June 15, 2023, the Company and its wholly-owned subsidiary Precision Extraction Newco, LLC (“Precision”), filed an Amended Verified Complaint in the Court of Chancery of the State of Delaware against Sinclair Scientific, LLC (“Sinclair”) and certain individual defendants (the “Delaware Action”). The claims filed in the Delaware Action concern various breaches of the Plan of Merger and Equity Purchase Agreement dated September 29, 2021, by and between the Company, Sinclair, Mass2Media, LLC, and certain of their members (the “Merger Agreement”). In response to the Delaware Action, certain of the defendants filed counterclaims for breach of contract and declaratory judgment against the Company and Precision alleging breach of the Merger Agreement. The Company and Precision filed an answer to the counterclaims denying all liability on the claims and discovery in the Delaware Action has recently commenced.

Commitments

Supply Agreement with Mack Molding Co.

In December 2020, the Company entered into a five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack would become a key supplier of VFUs. In February 2021, the Company placed a purchase order with Mack amounting to approximately $5.2 million towards the initial production of VFUs during 2021. Since February 2021, the Company increased the purchase order with Mack to approximately $26.5 million towards production of VFUs during 2021 and 2022. The Company believed the supply agreement with Mack would provide the Company with increased scaling capabilities and the ability to meet the potential future demand of its customers more efficiently. The supply agreement contemplates that, following an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack each year based on the agreed-upon pricing formula. The introductory period is not time-based but rather refers to the production of an initial number of units, after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage. The Company believed this approach would result in both parties making a more informed decision with respect to the pricing and other terms of the supply agreement with Mack.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On October 11, 2022, the Company received a $9.4 million invoice from Mack for inventory purchased on the Company’s behalf to build VFUs. As part of the terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had aged greater than nine months. Due to the slowdown in the demand for the VFUs and the lack of a demand forecast that the Company could provide to the vendor, Mack exercised the right to invoice the Company for the slow-moving inventory. As of June 30, 2023, the Company owed Mack $8.4 million for purchased inventory on behalf of the Company to produce VFUs, which is included in accounts payable in the consolidated balance sheet. On October 27, 2023, and effective as of October 18, 2023, Mack and the Company entered into a Modification and Settlement Agreement with respect to the dispute. See Note 17 – Subsequent Events.

Distribution Agreements with Related Party – Bluezone Products, Inc.

 

On September 7, 2019, the Company entered into a distribution agreement with Bluezone Products, Inc. (“Bluezone”) for distribution rights to the Bluezone products with certain exclusivity rights. The agreement requires minimum purchases amounting to $480 thousand and $600 thousand for the first and second contract anniversary years. The agreement auto-renews for successive one-year periods unless earlier terminated. In March 2021, the Company notified Bluezone of the non-renewal of the agreement which means it ended on May 31, 2021. The Company exceeded the minimum purchase amount for the first year and purchased approximately $309 thousand of the committed $660 thousand second-year purchases through December 31, 2021. Bluezone is a related party to the Company.

 

Committed Purchase Agreement with Related Party – Greenstone4D Bios, Inc.

 

On December 29,September 18, 2021, Greenstone purchased 239 VFUs from the Company of which 60 VFUs were already in Greenstone’s possession under a lease agreement. Under the lease agreement, Greenstone owed the Company a production service fee of $300 per pound of flower produced and containedentered into an option to purchase the equipment within the lease agreement. The term of this agreement was for ten years, but it was terminated upon signing theamended purchase agreement for the 239 VFUs. There is no remaining obligation under the lease agreement.with 4D Bios, Inc. (“4D”) to secure purchases of horticultural equipment. The remaining 179 VFUs were shipped to the Greenstone storage facility on December 30, 2021original agreement required minimum purchases of between $577 dollars and $607 dollars per unit of 4D products until December 31, 2021. Greenstone2020. The amended agreement requires minimum purchases of $582 dollars per unit with a final payment of approximately $864 thousand paid to 4D. 4D is a related party to the Company. Additional information regarding recent developments with Greenstone may be found in Note 6 – Loan Receivable, included elsewhere in the notes to the consolidated financial statements.The Company settled all outstanding commitments, leaving no open committed purchases as of December 31, 2021.

 

Committed Purchase Agreement with Related Party – Ora Pharm

In June 2022, the Company entered into an agreement with Ora Pharm (“Ora”) pursuant to which Ora will purchase approximately $1.6 million in equipment from the Company, and Ora may purchase software services from the Company in the future. Mr.Stuart Wilcox, the Company’s former Chief Operating Officer, is the Chairman of Ora. Mr. Wilcox has not had an interest in any transaction since the beginning of the Company’s last fiscal year, or any currently proposed transaction. There are no family relationships among any of the Company’s directors or executive officers and Mr. Wilcox.

 

Other CommitmentsAt The Marketing Offering

On October 18, 2022, the Company entered into the ATM Program with the Agent pursuant to which it may issue and Contingenciessell, from time to time, shares of its Common Stock having an aggregate offering price of up to $50 million, depending on market demand, with the Agent acting as an agent for sales. The ATM Program allowed the Company to sell shares of Common Stock pursuant to specific parameters defined by the Company as well as those defined by the SEC and the ATM Program agreement. As of December 31, 2022, the Company sold 306,628 shares of Common Stock, under the ATM at an average price of $50.85 per share, resulting in gross proceeds of $15.6 million, and net proceeds of $15.0 million after commissions and fees to the Agent totaling $468 thousand and legal fees totaling $75 thousand. $3.0 million of the proceeds under the ATM Program were used to repay amounts due to the Investor under the Exchange Note. The Company used net proceeds generated from the ATM Program for working capital and general corporate purposes, including repayment of indebtedness, funding its transformation initiatives and product category expansion efforts and capital expenditures. Due to the late filing of this Annual Report on Form 10-K, the Company is no longer eligible to utilize the registration statement on Form S-3 relating to the ATM Program, and does not anticipate any further sales under the ATM Program in the foreseeable future.

Confidentially Marketed Public Offering

On December 16, 2022, the Company issued 594,232 shares of its Common Stock, Pre-Funded 2022 Warrants to purchase 75,000 shares of its Common Stock and accompanying December 2022 Warrants to purchase 1,338,471 shares of the Company’s Common Stock. The Company received net proceeds from the Offering of approximately $8.2 million, after deducting underwriting discounts and commissions and estimated expenses. The Company intends to use the net proceeds from the Offering, together with its existing cash resources, for working capital and general corporate purposes, which may include capital expenditures and repayment of debt.

 

The Company is potentially subjectPre-Funded 2022 Warrants were exercisable immediately upon issuance at an exercise price of $0.001 per share and do not have an expiration date. The December 2022 Warrants were exercisable immediately and have a term of exercise equal to claims relatedfive years from the initial exercise date at an exercise price of $13.00 per share. The offering price for the securities was $13.00 per share (or $12.98 for each Pre-Funded 2022 Warrant).

The December 2022 Warrants may not be exercised by the holder to various non-income taxes (such as sales, value-added, consumption, and similar taxes) from various tax authorities, including in jurisdictions in whichthe extent that the holder, together with its affiliates, would beneficially own, after such exercise more than 4.99% of the shares of the Company’s Common Stock then outstanding (subject to the right of the holder to increase or decrease such beneficial ownership limitation upon notice to the Company, already collectsprovided that such limitation cannot exceed 9.99%) and remitsprovided that any increase in the beneficial ownership limitation shall not be effective until the sixty-first day after such taxes. Ifnotice is delivered.

The Pre-Funded 2022 Warrants were classified as a component of permanent equity and the relevant taxing authorities successfully pursueDecember 2022 Warrants were liability-classified and were recorded at the issuance date using a relative fair value allocation method. The Pre-Funded 2022 Warrants are equity-classified because they are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, are immediately exercisable, and permit the holders to receive a fixed number of shares of Common Stock upon exercise. In addition, such warrants do not provide any guarantee of value or return. The December 2022 Warrants are liability-classified as there is a volatility floor and these claims,warrants are not indexed to the Company’s own stock.

As of December 31, 2022, the Company could be subjectvalued the December 2022 Warrants using the Black-Scholes option-pricing model and determined the fair value at $5.9 million. The key inputs to additional tax liabilities.the valuation model included the annualized volatility of 98.0% and the expected term of about 5 years.

 

Refer toRaymond Chang, Chairman and CEO, participated in the Offering and purchased 115,385 shares of Common Stock and 230,769 December 2022 Warrants for an aggregate purchase price of approximately $1.5 million.

Additional information regarding the Company’s December 2022 Warrants may be found in Note 101 – Debt,Overview, Basis of Presentation, and Significant Accounting Policies and Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum debt payments. Refer to Note 11 – Leases, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum lease payments under operating and financing lease liabilities. Refer to Note 16 – Income Taxes, included elsewhere in the notes to the consolidated financial statements for information regarding income tax contingencies.statements.

 


 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1911 — Related PartiesStock-Based Compensation and Employee Benefit Plans

 

Some2022 Omnibus Equity Incentive Plan

On April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Omnibus Equity Incentive Plan (the “2022 Plan”), which replaced the 2020 Stock Option Plan (the “2020 Plan”). The 2022 Plan provides for the grant of stock options, stock appreciation right awards, performance share awards, restricted stock awards, restricted stock unit awards, other stock-based awards and cash-based awards. The aggregate number of shares of Common Stock that may be reserved and available for grant and issuance under the 2022 Plan is 26,483 shares, which includes the 10,000 shares authorized under the 2022 Plan, plus the rollover of 16,483 issued and outstanding awards under the 2020 Plan. Shares will be deemed to have been issued under the 2022 Plan solely to the extent actually issued and delivered pursuant to an award. If any award granted under the 2020 Plan or the 2022 Plan expires, is canceled, terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2022 Plan. The 2022 Plan shall continue in effect, unless sooner terminated, until the tenth anniversary of the officers and directorsdate on which it is adopted by the Board of Directors. As of June 30, 2023, there were 13,008 shares of Common Stock available to be granted under the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available.Company’s 2022 Plan.

 

The Company’s stock compensation expense was $0.8 million and $0.9 million for the three months ended June 30, 2023 and 2022, respectively. The Company’s stock compensation expense was $1.6 million and $1.9 million for the six months ended June 30, 2023 and 2022, respectively.

Stock Options

Stock options granted under the Company’s 2022 Plan are generally non-qualified and are granted with an exercise price equal to the market price of the Company’s Common Stock on the date of grant. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying Common Stock, expected option life, and expected volatility in the market value of the underlying Common Stock. No stock options were granted during the three and six months ended June 30, 2023 and 2022.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the expected term. The expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s current expectation of future action surrounding dividends. The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a period consistent with the underlying instrument’s expected term. The expected lives for such grants were based on the simplified method for employees and directors.

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


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table describespresents option activity under the net purchasing (sales) activity with entities identified as related parties toCompany’s stock option plans for the Company:three and six months ended June 30, 2023:

 

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
(In thousands) 2022  2021  2022  2021 
Bluezone $—  $217  $5  $310 
4D Bios (1)  —   864   —   1,311 
Enzo  —   40   —   40 
Cannae Policy Group  —   —   25   — 
Topline Performance Group  1   —   71   — 
NEIA  —   (3,217)  (1,763)  (19,572)
Greenstone  212   (1,998)  392   (1,998)
Valiant Americas, LLC  1,315   606   11,120   2,323 
Living Greens Farm  —   —   —   (58)
(In thousands, except share and per share data) Number of
Options		  Weighted-
Average
Exercise Price		  Aggregate
Intrinsic Value		 
Options outstanding at January 1, 2023  13,439  $1,518.05  $              — 
Granted  —   —     
Exercised  (104)  6.67     
Forfeited  (260)  —     
Expired  (67)  699.97     
Options outstanding at June 30, 2023  13,008  $1,564.69  $— 
             
Options vested and exercisable as of June 30, 2023  10,969  $1,404.60     
Options vested and expected to vest as of June 30, 2023  12,124  $1,498.89     

 

(1)Purchases from 4D for the nine months ended September 30, 2021 include $384 thousand for a down payment on inventory orders.

As of June 30, 2023, total unrecognized compensation expense related to unvested options under the Company’s 2022 Plan was $1.9 million, which is expected to be recognized over a weighted average period of 0.71 years.

 

The following table summarizes net related party receivable (payable) as of Septemberinformation about options vested and exercisable at June 30, 2022 and December 31, 2021:2023:

 

(In thousands) September 30,
2022		  December 31,
2021		 
Cannae Policy Group $—  $(8)
Cannaquip  —   (21)
Greenstone (net of allowance for doubtful accounts of $7,079 and $0 at September 30, 2022 and December 31, 2021, respectively) (1)  5,308   11,177 
Living Greens Farm (2)  —   34 
NEIA  —   3,500 
Valiant Americas, LLC  (599)  (922)
Topline Performance Group  (1)  — 
   Options Vested and Exercisable 
Price ($)  Number of Options  Weighted-Average
Remaining Contractual Life
(Years)		  Weighted-Average
Exercise Price		 
$456.00   3,758   5.63  $456.00 
$972.00   3518   5.54  $972.00 
$1,536.00   21   6.63  $1,536.00 
$1,840.00   125   8.51  $1,840.00 
$2,768.00   3547   7.15  $2,768.00 

 

(1)The Greenstone allowance for doubtful accounts balance consisted of capital advances, accrued interest and VFUs sales. Additional information regarding recent developments with Greenstone may be found in Note 6 – Loan Receivable, included elsewhere in the notes to the consolidated financial statements.

The following table summarizes information about options expected to vest after June 30, 2023:

 

(2)The balance was fully reserved at September 30, 2022 due to an ongoing dispute with the customer.
   Options Vested and Expected to Vest 
Price ($)  Number of Options  Weighted-Average
Remaining Contractual Life
(Years)		  Weighted-Average
Exercise Price		 
 456.00   3,758   5.63  $456.00 
 972.00   3,565   5.54  $972.00 
 1,536.00   50   6.63  $1,536.00 
 1,840.00   250   8.51  $1,840.00 
 2,768.00   4,500   7.15  $2,768.00 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

Under the 2022 Plan, the Company may grant restricted stock units to employees, directors and officers. The restricted stock units granted generally vest equally over periods ranging from one to three years. The fair value of restricted stock units is determined based on the closing market price of the Company’s Common Stock on the date of grant. Compensation expense related to the restricted stock units is recognized using a straight-line attribution method over the vesting period.

  Number of
Shares		  Weighted-
Average
Grant Date Fair
Value		 
Unvested at December 31, 2022  7,691  $230.75 
Granted  —   — 
Vested  (17)  230.80 
Forfeited  (3,100)  230.80 
Unvested at June 30, 2023  4,574  $230.80 

As of June 30, 2023, total unrecognized compensation expense related to unvested restricted stock units was $1.0 million, which is expected to be recognized over a weighted average period of 2.11 years.

2022 Employee Stock Purchase Plan

On April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 2,500 shares of Common Stock for issuance under the ESPP. On June 30, 2023, 2,500 shares were available for future issuance.

Under the ESPP, eligible employees are granted options to purchase shares of Common Stock at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. Options to purchase shares are granted twice yearly on or about August 1 and February 1 and are exercisable on or about the succeeding January 31 and July 31, respectively, of each year. No participant may purchase more than $25 thousand worth of Common Stock annually. No Common Stock was granted under the 2022 ESPP during the three and six months ended June 30, 2023.

Employee Benefit Plan

The Company maintains an employee’s savings and retirement plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). All full-time U.S. employees become eligible to participate in the 401(k) Plan. The Company’s contribution to the 401(k) Plan is discretionary. During the three months and six months ended June 30, 2023, the Company did not contribute to the 401(k) Plan.

 


 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 2012 — Subsequent EventsStock Warrants

 

The following tables present all warrant activity of the Company for the six months ended June 30, 2023 and 2022:

  Number of
Warrants		  Weighted-
Average
Exercise Price		 
Warrants outstanding at December 31, 2022  1,530,001  $38.07 
Granted  —   — 
Exercised  (35,000)  — 
Warrants outstanding at June 30, 2023  1,495,001  $38.91 

  Number of
Warrants		  Weighted-
Average
Exercise Price		 
Warrants outstanding at December 31, 2021  1,358  $4.00 
Granted  57,339   1,204.00 
Exercised  (8,138)  — 
Warrants outstanding at June 30, 2022  50,559  $1,364.00 

The Company received proceeds from the exercise of warrants of $0 for the three and six months ended June 30, 2023, and $1 thousand and $2 thousand for the three and six months ended June 30, 2022, respectively.

Modification to December 2022 Warrants

On April 19, 2023, the Company entered into an agreement to reduce the exercise price for its December 2022 Warrants from approximately $13 to approximately $3.4 and had entered into agreements with certain holders of the December 2022 Warrants to exercise such warrants for gross proceeds of up to $1.84 million (the “Warrant Inducement”).

On April 24, 2023, the Company announced that it would not consummate the Warrant Inducement, however the reduction of the exercise price remained effective.

Note 13 — Income Taxes

The Company’s quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items within the period presented. To determine the annual effective tax rate, the Company estimates both the total income (loss) before income taxes for the full year and the jurisdictions in which that income (loss) is subject to tax. The actual effective tax rate for the full year may differ from these estimates if income (loss) before income taxes is greater than or less than what was estimated or if the allocation of income (loss) to jurisdictions in which it is taxed is different from the estimated allocations.

The provision for income taxes represents Federal and state and local income taxes. The effective rate differs from statutory rates due to the effect of certain nondeductible expenses. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, and state and local income taxes. In addition, changes in judgment from the evaluation of new information resulting in the recognition de-recognition or re-measurement of a tax position taken in a prior annual period is recognized separately in the quarter of the change.

Tax contingencies are recorded, if needed, to address potential exposure involving tax positions the Company has taken that could be challenged by tax authorities. These potential exposures could result from applications of various statutes, rules, regulations and interpretations. Any estimates of tax contingencies contain assumptions and judgments about potential actions by taxing jurisdictions. Any interest and penalties related to uncertain tax positions would be included as part of the income tax provision. The Company’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analysis of or changes in tax laws, regulations and interpretations thereof as well as other factors.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 14 — Net Loss Per Share

Net loss per share calculations for all periods have been adjusted to reflect the Company’s reverse stock splits. Net loss per share was calculated based on the weighted-average number of the Company’s Common Stock outstanding.

Basic net loss per share is calculated using the weighted-average number of Common Stock outstanding during the periods. Diluted net loss per share is computed by giving effect to all potential shares of Common Stock, including outstanding stock options, stock related to unvested restricted stock units, and outstanding warrants to the extent dilutive. Net loss per share, assuming dilution, is equal to basic net loss per share because the effect of dilutive securities outstanding during the periods, including options and warrants computed using the treasury stock method, is anti-dilutive.

The components of basic and diluted net loss per share were as follows:

  Three months ended June 30,  Six months ended June 30, 
(In thousands, except share and per share data) 2023  2022  2023  2022 
Numerator:            
Net loss attributable to Agrify Corporation $(6,805) $(74,604) $(17,132) $(72,824)
Denominator:                
Weighted-average common shares outstanding – basic  1,549,669   132,911   1,312,299   127,956 
Net loss per share attributable to Common Stockholders – basic and diluted $(4.39) $(561.31) $(13.05) $(569.13)


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s potential dilutive securities, which include stock options, restricted stock units, and warrants, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of Common Shares outstanding used to calculate both basic and diluted net loss per share attributable to Common Stockholders is the same. The Company excluded the following potential Common Stock equivalents presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to Common Stockholders for the periods indicated because including them would have had an anti-dilutive effect:

  Six Months ended
June 30,
2023		  Six Months ended
June 30,
2022		 
Shares subject to outstanding stock options  10,969   16,455 
Shares subject to unvested restricted stock units  4,574   — 
Shares subject to outstanding warrants  1,495,001   50,559 
   1,510,544   67,014 

Note 15 — Commitments and Contingencies

Legal Matters

Bud & Mary’s Litigation

 

On September 15, 2022, the Company provided a notice of default to Bud & Mary’s and certain related parties notifying such parties that Bud & Mary’s was in default of its obligations under the Bud & Mary TTK Agreement. On October 5, 2022, Bud & Mary’s filed a complaint in the Superior Court of Massachusetts in Suffolk County, naming the Company as the defendant. Bud & Mary’s is seeking, among other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion arising from the Agreement. While the Company believes the claim is without merit and will continue to vigorously defend itself against Bud & Mary’s allegations, litigation is inherently unpredictable and there can be no assurance that the Company will prevail in this matter.

 

During the third quarter of 2022, the Company deemed it necessary to fully reserve for the outstanding $14.7 million note receivable balance outstanding due to the current litigation and the uncertainty of the customer’s ability to repay the outstanding balance. The $14.7 million represents the amount of the contingent loss that the Company has determined to be reasonably possible and estimable. The actual cost of resolving this matter may be higher or lower than the amount the Company has reserved. In addition, $5.3 million

If the Company is unable to realize revenue from its TTK Solution offerings on a timely basis or at all, or if it incurs an additional loss as a result of the notes receivable balance for work performedBud & Mary’s claim, the Company’s business and financial performance will be adversely affected. On November 14, 2022, the Company filed its answers and affirmative defenses to the Bud & Mary’s complaint and counterclaims. The Company is seeking, among other relief, monetary damages in connection with the breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and enforcement of the guarantees. Bud & Mary’s is permitted to file an amended complaint during October 2023, and Agrify will be permitted to make responsive filings, which may include an answer and counterclaim.

Bowdoin Construction Corp. Litigation

On February 22, 2023, Bowdoin Construction Corp. (“Bowdoin”) filed a complaint (the “Bowdoin Complaint”) in the third quarterSuperior Court of 2022 has been recordedMassachusetts in Norfolk County naming the Company, Bud & Mary’s and certain related parties as an unbilled note receivabledefendants, captioned Bowdoin Construction Corp. v. Agrify Corporation, Bud & Mary’s Cultivation, Inc. and deferred the revenueBMLC2, LLC, case no. 2382CV00173. The Bowdoin Complaint relates to a future period.construction contract between Bowdoin and the Company relating to the property that is the subject of the Bud & Mary’s Complaint, and alleges breach of contract by Bud & Mary’s and by the Company due to nonpayment of approximately $6.3 million due under the contract and related indemnification claims and mechanics’ liens. The Company has recognizedis entitled to indemnification by Bud & Mary’s and intends to vigorously defend this claim.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Mack Molding Co.

In December 2020, the expenses associatedCompany entered into a five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack will become a key supplier of VFUs. In February 2021, the work completed inCompany placed a purchase order with Mack amounting to approximately $5.2 million towards the currentinitial production of VFUs during 2021. Since February 2021, the Company increased the purchase order with Mack to approximately $26.5 million towards production of VFUs during 2021 and 2022. The Company believed the supply agreement with Mack would provide the Company with increased scaling capabilities and the ability to meet the potential future demand of its customers more efficiently. The supply agreement contemplates that, following an introductory period, duethe Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack each year based on the agreed-upon pricing formula. The introductory period is not time-based but rather refers to the uncertaintyproduction of an initial number of units after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage. The Company believed this approach would result in both parties making a more informed decision with respect to the pricing and other terms of the Company’s ability to recover the funds owed by the customer and its obligations to the vendors that have performed this work. The Company determined that it will only recognize unbilled notes receivable revenue if cash is collected from the customer in a future period.

Approval of Issuance of Shares Upon Exercise of Warrantssupply agreement with Mack.

 

On October 14,11, 2022, the Company received approvala $9.4 million invoice from Mack for inventory purchased on the Company’s behalf to build VFUs. As part of the terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had aged greater than nine months. Due to the slowdown in the demand for the issuanceVFUs and the lack of upa demand forecast that the Company could provide to 105,544 sharesthe vendor, Mack exercised the right to invoice the Company for the slow-moving inventory. As of Common Stock uponDecember 31, 2022, the exerciseCompany owed Mack $8.4 million for purchased inventory on behalf of the SPA WarrantCompany to produce VFUs, which is included in accounts payable in the consolidated balance sheet.

On March 2, 2023, Mack filed an arbitration action seeking the amounts owed to Mack for purchased inventory. On October 27, 2023, and effective as of October 18, 2023, Mack and the Company entered into a Modification and Settlement Agreement with respect to the dispute. See Note Exchange Warrant17 – Subsequent Events.

TRC Electronics Litigation

The Company was named as a defendant in connectiona complaint filed by TRC Electronics, Inc. (“TRC”) on April 13, 2023 in the United States District Court for the Eastern District of Pennsylvania. In the Complaint, TRC asserts two causes of action against the Company: (1) breach of contract, and (2) promissory estoppel. TRC’s claims are based on allegations that the Company failed to make payments due under three purchase orders for commercial electronics parts. TRC seeks damages in the amount of $565,210, plus attorneys’ fees, costs, and post-judgment interest. The Company has filed an answer denying liability on TRC’s claims and is proceeding with discovery.

Sinclair Scientific Litigation

On June 15, 2023, the issuanceCompany and its wholly-owned subsidiary Precision Extraction Newco, LLC (“Precision”), filed an Amended Verified Complaint in the Court of Chancery of the State of Delaware against Sinclair Scientific, LLC (“Sinclair”) and certain individual defendants (the “Delaware Action”). The claims filed in the Delaware Action concern various breaches of the Plan of Merger and Equity Purchase Agreement dated September 29, 2021, by and between the Company, Sinclair, Mass2Media, LLC, and certain of their members (the “Merger Agreement”). In response to the Delaware Action, certain of the defendants filed counterclaims for breach of contract and declaratory judgment against the Company and Precision alleging breach of the Merger Agreement. The Company and Precision filed an answer to the counterclaims denying all liability on the claims and discovery in the Delaware Action has recently commenced.

Commitments

Supply Agreement with Mack Molding Co.

In December 2020, the Company entered into a five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack would become a key supplier of VFUs. In February 2021, the Company placed a purchase order with Mack amounting to approximately $5.2 million towards the initial production of VFUs during 2021. Since February 2021, the Company increased the purchase order with Mack to approximately $26.5 million towards production of VFUs during 2021 and 2022. The Company believed the supply agreement with Mack would provide the Company with increased scaling capabilities and the ability to meet the potential future demand of its customers more efficiently. The supply agreement contemplates that, following an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack each year based on the agreed-upon pricing formula. The introductory period is not time-based but rather refers to the production of an initial number of units, after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage. The Company believed this approach would result in both parties making a more informed decision with respect to the pricing and other terms of the supply agreement with Mack.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On October 11, 2022, the Company received a $9.4 million invoice from Mack for inventory purchased on the Company’s behalf to build VFUs. As part of the terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had aged greater than nine months. Due to the slowdown in the demand for the VFUs and the lack of a senior secured notedemand forecast that the Company could provide to the vendor, Mack exercised the right to invoice the Company for the slow-moving inventory. As of June 30, 2023, the Company owed Mack $8.4 million for purchased inventory on behalf of the Company to produce VFUs, which is included in accounts payable in the consolidated balance sheet. On October 27, 2023, and effective as of October 18, 2023, Mack and the exchange of previously issued warrants in August 2022,Company entered into a Modification and Settlement Agreement with respect to the reductiondispute. See Note 17 – Subsequent Events.

Distribution Agreements with Related Party – Bluezone Products, Inc.

On September 7, 2019, the Company entered into a distribution agreement with Bluezone Products, Inc. (“Bluezone”) for distribution rights to the Bluezone products with certain exclusivity rights. The agreement requires minimum purchases amounting to $480 thousand and $600 thousand for the first and second contract anniversary years. The agreement auto-renews for successive one-year periods unless earlier terminated. In March 2021, the Company notified Bluezone of the exercise pricenon-renewal of certainthe agreement which means it ended on May 31, 2021. The Company exceeded the minimum purchase amount for the first year and purchased approximately $309 thousand of those warrants under certain circumstances, was approved. Additional information regarding the Warrant Liabilitiescommitted $660 thousand second-year purchases through December 31, 2021. Bluezone is a related party to the Company.

Committed Purchase Agreement with Related Party – 4D Bios, Inc.

On September 18, 2021, the Company entered into an amended purchase agreement with 4D Bios, Inc. (“4D”) to secure purchases of horticultural equipment. The original agreement required minimum purchases of between $577 dollars and $607 dollars per unit of 4D products until December 31, 2020. The amended agreement requires minimum purchases of $582 dollars per unit with a final payment of approximately $864 thousand paid to 4D. 4D is a related party to the Company. The Company settled all outstanding commitments, leaving no open committed purchases as of December 31, 2021.

Committed Purchase Agreement with Related Party – Ora Pharm

In June 2022, the Company entered into an agreement with Ora Pharm (“Ora”) pursuant to which Ora will purchase approximately $1.6 million in equipment from the Company, and Ora may be found in Note 10 – Debt, included elsewherepurchase software services from the Company in the notes tofuture. Stuart Wilcox, the consolidated financial statements.Company’s former Chief Operating Officer, is the Chairman of Ora.

 

At The Marketing Offering

 

InOn October 18, 2022, the Company entered into the ATM Program with the Agent.Agent pursuant to which it may issue and sell, from time to time, shares of its Common Stock having an aggregate offering price of up to $50 million, depending on market demand, with the Agent acting as an agent for sales. The ATM Program allowsallowed the Company to sell shares of Common Stock pursuant to specific parameters defined by the Company as well as those defined by the SEC and the ATM Program agreement. Subsequent to the quarter ended September 30, 2022, asAs of November 7,December 31, 2022, the Company sold 306,628 shares of Common Stock, under the ATM at an average price of $50.80$50.85 per share, resulting in gross proceeds to the Company of $15.6 million, and net proceeds of $15.1$15.0 million after commissions and fees to the Agent totaling $468 thousand and legal fees totaling $75 thousand. $3.1$3.0 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. The Company has used and intends 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. Due to the late filing of this Annual Report on Form 10-K, the Company is no longer eligible to utilize the registration statement on Form S-3 relating to the ATM Program, and does not anticipate any further sales under the ATM Program in the foreseeable future.

 

Nasdaq Deficiency NoticesConfidentially Marketed Public Offering

 

On October 4,December 16, 2022, the Company issued 594,232 shares of its Common Stock, Pre-Funded 2022 Warrants to purchase 75,000 shares of its Common Stock and accompanying December 2022 Warrants to purchase 1,338,471 shares of the Company’s Common Stock. The Company received a deficiency letter (the “Notice”)net proceeds from the Listing Qualifications Department (the “Staff”)Offering of approximately $8.2 million, after deducting underwriting discounts and commissions and estimated expenses. The Nasdaq Stock Market, LLC (“Nasdaq”) notifyingCompany intends to use the Company that,net proceeds from the Offering, together with its existing cash resources, for working capital and general corporate purposes, which may include capital expenditures and repayment of debt.

The Pre-Funded 2022 Warrants were exercisable immediately upon issuance at an exercise price of $0.001 per share and do not have an expiration date. The December 2022 Warrants were exercisable immediately and have a term of exercise equal to five years from the initial exercise date at an exercise price of $13.00 per share. The offering price for the last 30 consecutive business days,securities was $13.00 per share (or $12.98 for each Pre-Funded 2022 Warrant).

The December 2022 Warrants may not be exercised by the bid price forholder to the extent that the holder, together with its affiliates, would beneficially own, after such exercise more than 4.99% of the shares of the Company’s Common Stock had closed below $1.00 per share, which isthen outstanding (subject to the minimum closing price requiredright of the holder to maintain a continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A),increase or decrease such beneficial ownership limitation upon notice to the Company, had 180 calendar daysprovided that such limitation cannot exceed 9.99%) and provided that any increase in the beneficial ownership limitation shall not be effective until the sixty-first day after such notice is delivered.

The Pre-Funded 2022 Warrants were classified as a component of permanent equity and the December 2022 Warrants were liability-classified and were recorded at the issuance date using a relative fair value allocation method. The Pre-Funded 2022 Warrants are equity-classified because they are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, are immediately exercisable, and permit the holders to regain compliancereceive a fixed number of shares of Common Stock upon exercise. In addition, such warrants do not provide any guarantee of value or return. The December 2022 Warrants are liability-classified as there is a volatility floor and these warrants are not indexed to the Company’s own stock.

As of December 31, 2022, the Company valued the December 2022 Warrants using the Black-Scholes option-pricing model and determined the fair value at $5.9 million. The key inputs to the valuation model included the annualized volatility of 98.0% and the expected term of about 5 years.

Raymond Chang, Chairman and CEO, participated in the Offering and purchased 115,385 shares of Common Stock and 230,769 December 2022 Warrants for an aggregate purchase price of approximately $1.5 million.

Additional information regarding the Company’s December 2022 Warrants may be found in Note 1 – Overview, Basis of Presentation, and Significant Accounting Policies and Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 11 — Stock-Based Compensation and Employee Benefit Plans

2022 Omnibus Equity Incentive Plan

On April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Omnibus Equity Incentive Plan (the “2022 Plan”), which replaced the 2020 Stock Option Plan (the “2020 Plan”). The 2022 Plan provides for the grant of stock options, stock appreciation right awards, performance share awards, restricted stock awards, restricted stock unit awards, other stock-based awards and cash-based awards. The aggregate number of shares of Common Stock that may be reserved and available for grant and issuance under the 2022 Plan is 26,483 shares, which includes the 10,000 shares authorized under the 2022 Plan, plus the rollover of 16,483 issued and outstanding awards under the 2020 Plan. Shares will be deemed to have been issued under the 2022 Plan solely to the extent actually issued and delivered pursuant to an award. If any award granted under the 2020 Plan or the 2022 Plan expires, is canceled, terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2022 Plan. The 2022 Plan shall continue in effect, unless sooner terminated, until the tenth anniversary of the date on which it is adopted by the Board of Directors. As of June 30, 2023, there were 13,008 shares of Common Stock available to be granted under the Company’s 2022 Plan.

The Company’s stock compensation expense was $0.8 million and $0.9 million for the three months ended June 30, 2023 and 2022, respectively. The Company’s stock compensation expense was $1.6 million and $1.9 million for the six months ended June 30, 2023 and 2022, respectively.

Stock Options

Stock options granted under the Company’s 2022 Plan are generally non-qualified and are granted with an exercise price equal to the Minimum Bid Requirement. To regain compliance with the Minimum Bid Requirement, the closing bidmarket price of the Company’s Common Stock must be at least $1.00 per shareon the date of grant. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying Common Stock, expected option life, and expected volatility in the market value of the underlying Common Stock. No stock options were granted during the three and six months ended June 30, 2023 and 2022.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the expected term. The expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s current expectation of future action surrounding dividends. The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a minimum of 10 consecutive trading days during this 180-day compliance period unlessconsistent with the Staff exercises its discretion to extendunderlying instrument’s expected term. The expected lives for such grants were based on the minimum trading day period pursuant to Nasdaq Listing Rule 5810(c)(3)(G). On October 28, 2022, the Staff notifiedsimplified method for employees and directors.

In arriving at stock-based compensation expense, the Company estimates the number of stock-based awards that will be forfeited due to employee turnover. The Company’s forfeiture assumption is based primarily on its employee turnover historical experience. If the closing bid price for its Common Stock was moreactual forfeiture rate is higher than $1.00 for 10 consecutive trading days, and thatthe estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the Company’s consolidated financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized in the Company’s consolidated financial statements. The expense the Company therefore regained compliance withrecognizes in future periods will be affected by changes in the Minimum Bid Requirement.estimated forfeiture rate and may differ significantly from amounts recognized in the current period.

 


 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents option activity under the Company’s stock option plans for the three and six months ended June 30, 2023:

(In thousands, except share and per share data) Number of
Options		  Weighted-
Average
Exercise Price		  Aggregate
Intrinsic Value		 
Options outstanding at January 1, 2023  13,439  $1,518.05  $              — 
Granted  —   —     
Exercised  (104)  6.67     
Forfeited  (260)  —     
Expired  (67)  699.97     
Options outstanding at June 30, 2023  13,008  $1,564.69  $— 
             
Options vested and exercisable as of June 30, 2023  10,969  $1,404.60     
Options vested and expected to vest as of June 30, 2023  12,124  $1,498.89     

As of June 30, 2023, total unrecognized compensation expense related to unvested options under the Company’s 2022 Plan was $1.9 million, which is expected to be recognized over a weighted average period of 0.71 years.

The following table summarizes information about options vested and exercisable at June 30, 2023:

   Options Vested and Exercisable 
Price ($)  Number of Options  Weighted-Average
Remaining Contractual Life
(Years)		  Weighted-Average
Exercise Price		 
$456.00   3,758   5.63  $456.00 
$972.00   3518   5.54  $972.00 
$1,536.00   21   6.63  $1,536.00 
$1,840.00   125   8.51  $1,840.00 
$2,768.00   3547   7.15  $2,768.00 

The following table summarizes information about options expected to vest after June 30, 2023:

   Options Vested and Expected to Vest 
Price ($)  Number of Options  Weighted-Average
Remaining Contractual Life
(Years)		  Weighted-Average
Exercise Price		 
 456.00   3,758   5.63  $456.00 
 972.00   3,565   5.54  $972.00 
 1,536.00   50   6.63  $1,536.00 
 1,840.00   250   8.51  $1,840.00 
 2,768.00   4,500   7.15  $2,768.00 


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

Under the 2022 Plan, the Company may grant restricted stock units to employees, directors and officers. The restricted stock units granted generally vest equally over periods ranging from one to three years. The fair value of restricted stock units is determined based on the closing market price of the Company’s Common Stock on the date of grant. Compensation expense related to the restricted stock units is recognized using a straight-line attribution method over the vesting period.

  Number of
Shares		  Weighted-
Average
Grant Date Fair
Value		 
Unvested at December 31, 2022  7,691  $230.75 
Granted  —   — 
Vested  (17)  230.80 
Forfeited  (3,100)  230.80 
Unvested at June 30, 2023  4,574  $230.80 

As of June 30, 2023, total unrecognized compensation expense related to unvested restricted stock units was $1.0 million, which is expected to be recognized over a weighted average period of 2.11 years.

2022 Employee Stock Purchase Plan

On April 18,29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 2,500 shares of Common Stock for issuance under the ESPP. On June 30, 2023, 2,500 shares were available for future issuance.

Under the ESPP, eligible employees are granted options to purchase shares of Common Stock at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. Options to purchase shares are granted twice yearly on or about August 1 and February 1 and are exercisable on or about the succeeding January 31 and July 31, respectively, of each year. No participant may purchase more than $25 thousand worth of Common Stock annually. No Common Stock was granted under the 2022 ESPP during the three and six months ended June 30, 2023.

Employee Benefit Plan

The Company maintains an employee’s savings and retirement plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). All full-time U.S. employees become eligible to participate in the 401(k) Plan. The Company’s contribution to the 401(k) Plan is discretionary. During the three months and six months ended June 30, 2023, the Company did not contribute to the 401(k) Plan.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 12 — Stock Warrants

The following tables present all warrant activity of the Company for the six months ended June 30, 2023 and 2022:

  Number of
Warrants		  Weighted-
Average
Exercise Price		 
Warrants outstanding at December 31, 2022  1,530,001  $38.07 
Granted  —   — 
Exercised  (35,000)  — 
Warrants outstanding at June 30, 2023  1,495,001  $38.91 

  Number of
Warrants		  Weighted-
Average
Exercise Price		 
Warrants outstanding at December 31, 2021  1,358  $4.00 
Granted  57,339   1,204.00 
Exercised  (8,138)  — 
Warrants outstanding at June 30, 2022  50,559  $1,364.00 

The Company received proceeds from the exercise of warrants of $0 for the three and six months ended June 30, 2023, and $1 thousand and $2 thousand for the three and six months ended June 30, 2022, respectively.

Modification to December 2022 Warrants

On April 19, 2023, the Company entered into an agreement to reduce the exercise price for its December 2022 Warrants from approximately $13 to approximately $3.4 and had entered into agreements with certain holders of the December 2022 Warrants to exercise such warrants for gross proceeds of up to $1.84 million (the “Warrant Inducement”).

On April 24, 2023, the Company announced that it would not consummate the Warrant Inducement, however the reduction of the exercise price remained effective.

Note 13 — Income Taxes

The Company’s quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items within the period presented. To determine the annual effective tax rate, the Company estimates both the total income (loss) before income taxes for the full year and the jurisdictions in which that income (loss) is subject to tax. The actual effective tax rate for the full year may differ from these estimates if income (loss) before income taxes is greater than or less than what was estimated or if the allocation of income (loss) to jurisdictions in which it is taxed is different from the estimated allocations.

The provision for income taxes represents Federal and state and local income taxes. The effective rate differs from statutory rates due to the effect of certain nondeductible expenses. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, and state and local income taxes. In addition, changes in judgment from the evaluation of new information resulting in the recognition de-recognition or re-measurement of a tax position taken in a prior annual period is recognized separately in the quarter of the change.

Tax contingencies are recorded, if needed, to address potential exposure involving tax positions the Company has taken that could be challenged by tax authorities. These potential exposures could result from applications of various statutes, rules, regulations and interpretations. Any estimates of tax contingencies contain assumptions and judgments about potential actions by taxing jurisdictions. Any interest and penalties related to uncertain tax positions would be included as part of the income tax provision. The Company’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analysis of or changes in tax laws, regulations and interpretations thereof as well as other factors.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 14 — Net Loss Per Share

Net loss per share calculations for all periods have been adjusted to reflect the Company’s reverse stock splits. Net loss per share was calculated based on the weighted-average number of the Company’s Common Stock outstanding.

Basic net loss per share is calculated using the weighted-average number of Common Stock outstanding during the periods. Diluted net loss per share is computed by giving effect to all potential shares of Common Stock, including outstanding stock options, stock related to unvested restricted stock units, and outstanding warrants to the extent dilutive. Net loss per share, assuming dilution, is equal to basic net loss per share because the effect of dilutive securities outstanding during the periods, including options and warrants computed using the treasury stock method, is anti-dilutive.

The components of basic and diluted net loss per share were as follows:

  Three months ended June 30,  Six months ended June 30, 
(In thousands, except share and per share data) 2023  2022  2023  2022 
Numerator:            
Net loss attributable to Agrify Corporation $(6,805) $(74,604) $(17,132) $(72,824)
Denominator:                
Weighted-average common shares outstanding – basic  1,549,669   132,911   1,312,299   127,956 
Net loss per share attributable to Common Stockholders – basic and diluted $(4.39) $(561.31) $(13.05) $(569.13)


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s potential dilutive securities, which include stock options, restricted stock units, and warrants, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of Common Shares outstanding used to calculate both basic and diluted net loss per share attributable to Common Stockholders is the same. The Company excluded the following potential Common Stock equivalents presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to Common Stockholders for the periods indicated because including them would have had an anti-dilutive effect:

  Six Months ended
June 30,
2023		  Six Months ended
June 30,
2022		 
Shares subject to outstanding stock options  10,969   16,455 
Shares subject to unvested restricted stock units  4,574   — 
Shares subject to outstanding warrants  1,495,001   50,559 
   1,510,544   67,014 

Note 15 — Commitments and Contingencies

Legal Matters

Bud & Mary’s Litigation

On September 15, 2022, the Company provided a notice of default to Bud & Mary’s and certain related parties notifying such parties that Bud & Mary’s was in default of its obligations under the Bud & Mary TTK Agreement. On October 5, 2022, Bud & Mary’s filed a complaint in the Superior Court of Massachusetts in Suffolk County, naming the Company as the defendant. Bud & Mary’s is seeking, among other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion arising from the Agreement. While the Company believes the claim is without merit and will continue to vigorously defend itself against Bud & Mary’s allegations, litigation is inherently unpredictable and there can be no assurance that the Company will prevail in this matter.

During the third quarter of 2022, the Company deemed it necessary to fully reserve for the outstanding $14.7 million note receivable balance due to the current litigation and the uncertainty of the customer’s ability to repay the balance. The $14.7 million represents the amount of the contingent loss that the Company has determined to be reasonably possible and estimable. The actual cost of resolving this matter may be higher or lower than the amount the Company has reserved.

If the Company is unable to realize revenue from its TTK Solution offerings on a timely basis or at all, or if it incurs an additional loss as a result of the Bud & Mary’s claim, the Company’s business and financial performance will be adversely affected. On November 14, 2022, the Company filed its answers and affirmative defenses to the Bud & Mary’s complaint and counterclaims. The Company is seeking, among other relief, monetary damages in connection with the breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and enforcement of the guarantees. Bud & Mary’s is permitted to file an amended complaint during October 2023, and Agrify will be permitted to make responsive filings, which may include an answer and counterclaim.

Bowdoin Construction Corp. Litigation

On February 22, 2023, Bowdoin Construction Corp. (“Bowdoin”) filed a complaint (the “Bowdoin Complaint”) in the Superior Court of Massachusetts in Norfolk County naming the Company, Bud & Mary’s and certain related parties as defendants, captioned Bowdoin Construction Corp. v. Agrify Corporation, Bud & Mary’s Cultivation, Inc. and BMLC2, LLC, case no. 2382CV00173. The Bowdoin Complaint relates to a construction contract between Bowdoin and the Company relating to the property that is the subject of the Bud & Mary’s Complaint, and alleges breach of contract by Bud & Mary’s and by the Company due to nonpayment of approximately $6.3 million due under the contract and related indemnification claims and mechanics’ liens. The Company is entitled to indemnification by Bud & Mary’s and intends to vigorously defend this claim.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Mack Molding Co.

In December 2020, the Company entered into a five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack will become a key supplier of VFUs. In February 2021, the Company placed a purchase order with Mack amounting to approximately $5.2 million towards the initial production of VFUs during 2021. Since February 2021, the Company increased the purchase order with Mack to approximately $26.5 million towards production of VFUs during 2021 and 2022. The Company believed the supply agreement with Mack would provide the Company with increased scaling capabilities and the ability to meet the potential future demand of its customers more efficiently. The supply agreement contemplates that, following an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack each year based on the agreed-upon pricing formula. The introductory period is not time-based but rather refers to the production of an initial number of units after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage. The Company believed this approach would result in both parties making a more informed decision with respect to the pricing and other terms of the supply agreement with Mack.

On October 11, 2022, the Company received a notice$9.4 million invoice from Nasdaq stating that becauseMack for inventory purchased on the Company’s behalf to build VFUs. As part of the terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had not yet filed its Annual Report on Form 10-Kaged greater than nine months. Due to the slowdown in the demand for the fiscal year endedVFUs and the lack of a demand forecast that the Company could provide to the vendor, Mack exercised the right to invoice the Company for the slow-moving inventory. As of December 31, 2022, the Company owed Mack $8.4 million for purchased inventory on behalf of the Company to produce VFUs, which is no longerincluded in compliance with Nasdaq Listing Rule 5250(c)(1). Nasdaq Listing Rule 5250(c)(1) requires listed companies to timely file all required periodic financial reports withaccounts payable in the Securities and Exchange Commission.consolidated balance sheet.

 

As disclosed byOn March 2, 2023, Mack filed an arbitration action seeking the amounts owed to Mack for purchased inventory. On October 27, 2023, and effective as of October 18, 2023, Mack and the Company on Form 8-Kentered into a Modification and Settlement Agreement with respect to the dispute. See Note 17 – Subsequent Events.

TRC Electronics Litigation

The Company was named as a defendant in a complaint filed by TRC Electronics, Inc. (“TRC”) on April 17,13, 2023 the Company’s audit committee concluded that, as a result of inadvertent errors in the accounting for warrants previously issued by the Company, it was appropriate to restate the Company’s previously issued unaudited condensed consolidated interim financial statements as of andUnited States District Court for the quarterly periods ended March 31, 2022, June 30, 2022Eastern District of Pennsylvania. In the Complaint, TRC asserts two causes of action against the Company: (1) breach of contract, and September 30, 2022. Given the scope of the process for preparing the Amended 10-Qs, the Company was unable to complete and file the Form 10-K by the required due date of March 31, 2023. The Notice states(2) promissory estoppel. TRC’s claims are based on allegations that the Company failed to make payments due under three purchase orders for commercial electronics parts. TRC seeks damages in the amount of $565,210, plus attorneys’ fees, costs, and post-judgment interest. The Company has 60 calendar days from April 18, 2023, or until June 20, 2023, to regain compliance by filing the Form 10-K or to submit to Nasdaq a plan to regain compliancefiled an answer denying liability on TRC’s claims and is proceeding with the Nasdaq Listing Rules.discovery.

Sinclair Scientific Litigation

 

On May 17,June 15, 2023, the Company and its wholly-owned subsidiary Precision Extraction Newco, LLC (“Precision”), filed an Amended Verified Complaint in the Court of Chancery of the State of Delaware against Sinclair Scientific, LLC (“Sinclair”) and certain individual defendants (the “Delaware Action”). The claims filed in the Delaware Action concern various breaches of the Plan of Merger and Equity Purchase Agreement dated September 29, 2021, by and between the Company, Sinclair, Mass2Media, LLC, and certain of their members (the “Merger Agreement”). In response to the Delaware Action, certain of the defendants filed counterclaims for breach of contract and declaratory judgment against the Company and Precision alleging breach of the Merger Agreement. The Company and Precision filed an answer to the counterclaims denying all liability on the claims and discovery in the Delaware Action has recently commenced.

Commitments

Supply Agreement with Mack Molding Co.

In December 2020, the Company entered into a five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack would become a key supplier of VFUs. In February 2021, the Company placed a purchase order with Mack amounting to approximately $5.2 million towards the initial production of VFUs during 2021. Since February 2021, the Company increased the purchase order with Mack to approximately $26.5 million towards production of VFUs during 2021 and 2022. The Company believed the supply agreement with Mack would provide the Company with increased scaling capabilities and the ability to meet the potential future demand of its customers more efficiently. The supply agreement contemplates that, following an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack each year based on the agreed-upon pricing formula. The introductory period is not time-based but rather refers to the production of an initial number of units, after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage. The Company believed this approach would result in both parties making a more informed decision with respect to the pricing and other terms of the supply agreement with Mack.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On October 11, 2022, the Company received a second notice$9.4 million invoice from NasdaqMack for inventory purchased on the Company’s behalf to build VFUs. As part of the terms of the contract manufacturing agreement, Mack had the contractual right to bill the Company for any inventory that had aged greater than nine months. Due to the slowdown in the demand for the VFUs and the lack of a demand forecast that the Company remains noncompliant withcould provide to the Nasdaq Listing Rule 5250(c)(1) as a result of its failurevendor, Mack exercised the right to file its Quarterly Report on Form 10-Qinvoice the Company for the quarter ended March 31,slow-moving inventory. As of June 30, 2023, with the SEC by the required due date. This notice requiresCompany owed Mack $8.4 million for purchased inventory on behalf of the Company to submitproduce VFUs, which is included in accounts payable in the consolidated balance sheet. On October 27, 2023, and effective as of October 18, 2023, Mack and the Company entered into a planModification and Settlement Agreement with respect to regain compliancethe dispute. See Note 17 – Subsequent Events.

Distribution Agreements with Related Party – Bluezone Products, Inc.

On September 7, 2019, the continued listing requirements byCompany entered into a distribution agreement with Bluezone Products, Inc. (“Bluezone”) for distribution rights to the Bluezone products with certain exclusivity rights. The agreement requires minimum purchases amounting to $480 thousand and $600 thousand for the first and second contract anniversary years. The agreement auto-renews for successive one-year periods unless earlier terminated. In March 2021, the Company notified Bluezone of the non-renewal of the agreement which means it ended on May 31, 2021. The Company exceeded the minimum purchase amount for the first year and purchased approximately $309 thousand of the committed $660 thousand second-year purchases through December 31, 2021. Bluezone is a related party to the Company.

Committed Purchase Agreement with Related Party – 4D Bios, Inc.

On September 18, 2021, the Company entered into an amended purchase agreement with 4D Bios, Inc. (“4D”) to secure purchases of horticultural equipment. The original agreement required minimum purchases of between $577 dollars and $607 dollars per unit of 4D products until December 31, 2020. The amended agreement requires minimum purchases of $582 dollars per unit with a final payment of approximately $864 thousand paid to 4D. 4D is a related party to the Company. The Company settled all outstanding commitments, leaving no open committed purchases as of December 31, 2021.

Committed Purchase Agreement with Related Party – Ora Pharm

In June 20, 2023. If Nasdaq accepts2022, the Company entered into an agreement with Ora Pharm (“Ora”) pursuant to which Ora will purchase approximately $1.6 million in equipment from the Company, and Ora may purchase software services from the Company in the future. Stuart Wilcox, the Company’s plan, then Nasdaqformer Chief Operating Officer, is the Chairman of Ora.

Other Commitments and Contingencies

The Company is potentially subject to claims related to various non-income taxes (such as sales, value-added, consumption, and similar taxes) from various tax authorities, including in jurisdictions in which the Company already collects and remits such taxes. If the relevant taxing authorities successfully pursue these claims, the Company could be subject to additional tax liabilities.

Refer to Note 8 – Debt, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum debt payments. Refer to Note 9 – Leases, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future minimum lease payments under operating and financing lease liabilities. Refer to Note 13 – Income Taxes, included elsewhere in the notes to the consolidated financial statements for information regarding income tax contingencies


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 16 — Related Parties

Some of the officers and directors of the Company are involved in other business activities and may, in its discretion, grant the future, become involved in other business opportunities that become available.

The following table describes the net purchasing (sales) activity with entities identified as related parties to the Company:

  Three months ended
June 30,		  Six months ended
June 30,		 
(In thousands) 2023  2022  2023  2022 
Bluezone $—  $—  $4  $5 
Cannae Policy Group  —   —   —   25 
Topline Performance Group  —   38   (1)  70 
NEIA  —   (1,129)  (43)  (1,763)
Greenstone Holdings  —   409   (2)  180 
Valiant Americas, LLC  —   4,855   —   9,805 

The following table summarizes net related party (payable) receivable as of June 30, 2023 and December 31, 2022:

(In thousands) June 30,
2023		  December 31,
2022		 
Bluezone $(4) $— 
Valiant Americas, LLC  1   (1)
Living Greens Farm  34   — 
Topline Performance Group  —   1 

Note 17 — Subsequent Events

The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to 180 days from the prescribed due date for filingthat the Form 10-K, or until October 16, 2023, to regain compliance.financial statements were issued.

Nasdaq Deficiency Notices

 

On August 16, 2023, the Company received a third notice from Nasdaq that the Company remainsit remain noncompliant with the Nasdaq Listing Rule 5250(c)(1) as a result of its failure to file its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 (the “Second Quarter Form 10-Q”) with the SEC by the required filing date. This notice noted thatdate (the “August Nasdaq has previouslyNotice” and, together with the April Nasdaq Notice and the May Nasdaq Notice, the “Nasdaq Notices”).

The Nasdaq granted the Company an exception until September 30,October 16, 2023, to file its 2022 Form 10-K and First Quarter Form 10-Q. This notice also requires the Company to update its original plan to regain compliance with the filing requirement, including the Company’s plans to file theand Second Quarter Form2023 Forms 10-Q and indicate(the “Delayed Reports”). The Nasdaq Notice had no immediate effect on the progress the Company has made towards implementing the plan submitted in connection with the Initial Delinquent Filing.

Agrify-Valiant

On October 27, 2022, the Company provided notice to Valiant-America, LLC that the Company intended to begin the winding up of Agrify-Valiant.

Appointment of Raymond Chang as principal financial and accounting officer and Resignation of Timothy Oakes and Chief Financial Officer

On January 6, 2023, Timothy Oakes, the Chief Financial Officer of Agrify Corporation (the “Company”), resigned effective February 28, 2023. In connection with Mr. Oakes’ resignation, the Company has engaged WilliamsMarston LLC to assist with accounting and internal control matters and is continuing its process to identify a replacement Chief Financial Officer. Further, Raymond Chang, the Company’s Chief Executive Officer, will serve as the Company’s principal financial and accounting officer.


Bowdoin Litigation

On February 22, 2023, Bowdoin Construction Corp. (“Bowdoin”) filed a complaint in the Superior Court of Massachusetts in Norfolk County naming the Company, Bud & Mary’s and certain related parties as defendants. The Bowdoin Complaint relates to a construction contract between Bowdoin and Agrify relating to the property that is the subject of the Bud & Mary’s Complaint and alleges breach of contract by Bud & Mary’s and by Agrify due to nonpayment of approximately $7.0 million due under the contract and related indemnification claims and mechanics’ liens. While the Company believes the claim is without merit and will continue to vigorously defend itself against Bowdoin’s allegations, litigation is inherently unpredictable and there can be no assurance that the Company will prevail in this matter.

Amendments to Articles of Incorporation

On March 1, 2023, the Company filed Articles of Amendment (the “Charter Amendment”) to its Articles of Incorporation with the Secretary of State for the State of Nevada. The Charter Amendment increased the number of authorized shareslisting of the Company’s Common Stock from 100,000,000 to 200,000,000, and correspondingly increased the total authorized shares of stock from 103,000,000 to 203,000,000.on The Charter Amendment was approved by the Company’s stockholders at the Special Meeting on February 28, 2023 and became effective upon filing.

Securities Exchange AgreementNasdaq Stock Market LLC.

 

On March 8,October 17, 2023, the Company entered into a new Securities Exchange Agreement (the “Exchange Agreement”) with an accredited lender. Pursuant toreceived the Exchange Agreement, at closingStaff Determination from the Listing Qualifications Department of Nasdaq notifying the Company will prepay approximately $10.3 millionthat it was not in principal amountcompliance with Nasdaq’s continued listing requirements under the Exchange NoteListing Rule as a result of its failure to file the Delinquent Reports in a timely manner. The Company timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”), and exchange $10.0 in principal amount of the remaining balance of the Exchange NotePanel scheduled a hearing for a new senior secured convertible note (the “Convertible Note”) with an original principal amount of $10.0 million. The Convertible Note will be a senior secured obligation of the Company and will rank senior to all indebtedness of the Company. The Convertible Note will mature on August 19, 2025 and will contain a 9.0% annualized interest rate, with interest to be paid monthly, in cash, beginning April 1, 2023.January 11, 2024.

 

Concurrently with the closing under the Exchange Agreement, the Company and the Lender will enter into an Amendment to the Exchange Note (the “Note Amendment”). Pursuant to the Note Amendment, the Exchange Note will be amended to, among other changes, remove covenants that require the Company not to exceed maximum levels of allowable cash spend while the Exchange Note is outstanding and require the Company to maintain minimum amounts of cash on hand.

On April 26, 2023, the Company entered into a letter agreement with the above referenced accredited lender (the “Letter Agreement”), pursuant to which the Company and the lender agreed to exchange $2.0 million of the remaining outstanding principal amount under the Exchange Note for 8,903,927 shares of common stock of the Company, subject to a Beneficial Ownership Limitation of 4.99% of the Company’s Common Stock.

Issuance of Unsecured Promissory Note

 

On July 12, 2023, the Board of Directors of the Company approved the issuance of an unsecureda secured promissory note (the “GIC Note”) in favor of GIC Acquisition, LLC (the “Investor”“GIC Investor”), an entity that is owned and managed by Raymond Chang, the Company’s Chairman and Chief Executive Officer.Officer, and on October 3, 2023, the Board of Directors of the Company approved the amendment and restatement of the GIC Note as well as the issuance of a new secured promissory note (the “CP Note” and together with the GIC Note, the “Promissory Notes”) in favor of CP Acquisitions, LLC (the “CP Investor”), an entity that is partially managed by Mr. Chang. Pursuant to the GIC Note, the GIC Investor has lent $500,000 to the Company. Pursuant to the CP Note, the CP Investor may lend up to $3,000,000 to the Company. The Promissory Notes bear interest at a rate of 10% per annum, will mature in full on December 31, 2023, and may be prepaid without any fee or penalty. The Promissory Notes rank junior to all existing secured indebtedness of the Company.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Mack Molding Modification Agreement

On October 27, 2023, and with an effective date as of October 18, 2023, the Company entered into a Modification and Settlement Agreement (the “Modification Agreement”) with Mack Molding Company (“Mack”). Pursuant to the Modification Agreement, the Company and Mack agreed to settle an outstanding dispute under the Supply Agreement between the parties dated December 7, 2020 (the “Supply Agreement”). The Modification Agreement requires the Company to make payments of $500,000 and $250,000 to Mack on or before November 1, 2023 and February 15, 2024, respectively. The Company has made the first of these two payments in the amount of $500,000. Following the November 1, 2023 payment, the Company is entitled to take possession of certain Vertical Farming Units (“VFUs”) that were assembled under the Supply Agreement. The Modification Agreement also requires the Company to purchase from Mack a minimum of 25 VFUs per quarter for each quarter during 2024 and a minimum of 50 VFUs per quarter for the six quarters beginning with the first quarter of 2025. The Company is required to pay a storage fee of $25,000 per month for VFUs subject to the Modification Agreement.

Additionally, as part of the Modification Agreement, the Company agreed to issue to Mack a warrant to purchase 750,000 shares of Common Stock. The warrant has an exercise price of $4.00 per share, was exercisable upon issuance, has a term of three years from the date of issuance, and is exercisable on a cash basis unless at the time of exercise there is no effective registration statement for the resale of the underlying shares, in which case the warrant may be exercised on a cashless exercise basis at Mack’s election.

Warrant Issuance

On October 27, 2023, the Company entered into a letter agreement with the holder of the Exchange Note and the Convertible Note. Pursuant to the agreement, the Company agreed to exchange $3.0 million in principal and approximately $1.1 million in accrued but unpaid interest outstanding under the Exchange Note to purchase 2,809,669 shares of Common Stock (the “Exchange Warrant”). Additionally, the Company agreed to exchange the 375,629 shares of Common Stock held in abeyance for the lender under the terms of the Letter Agreement for a warrant to purchase 375,629 shares of Common Stock (the “Abeyance Warrant”).

Each warrant has an exercise price of $0.001 per share, was exercisable upon issuance, has a term of five years from the date of issuance and is exercisable on a cash basis or on a cashless exercise basis at the holder’s election.

The Exchange Warrant provides that in the event that Raymond Chang or his affiliates acquire securities from the Company, exercise convertible securities or amend the terms of convertible securities at a purchase or conversion price lower than $1.46, then the number of shares of Common Stock underlying Exchange Warrant will be increased to an amount equal to $3.0 million divided by such purchase or conversion price, subject to proportional adjustment in the event the Exchange Warrant has been partially exercised. Additionally, in the event that the Company has not issued equity securities in exchange for gross proceeds of at least $3.0 million to Mr. Chang or his affiliates (subject to certain offsets) by the third calendar day after the date when the Company receives stockholder approval, then on December 26, 2023, the number of shares of Common Stock underlying Exchange Warrant will be increased to an amount equal to $3.0 million divided by the Minimum Price as defined under Nasdaq listing rules, subject to proportional adjustment in the event the Exchange Warrant has been partially exercised.


AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Letter Agreement requires that the Company issue equity securities to Mr. Chang or his affiliates for aggregate gross proceeds of at least $3.0 million, minus any funds advanced by Mr. Chang to the Company since July 1, 2023.

Note Purchase

On October 27, 2023, CP Acquisitions LLC (the “New Lender”), an entity affiliated with and controlled by Raymond Chang, the Company’s Chief Executive Officer, purchased the Exchange Note and the Convertible Note from their holder. In connection with the Note Purchase, the New Lender has agreed to waive any events of default under the acquired notes through December 31, 2023 and to enter into an agreement with the Company to extend the maturity date thereon to December 31, 2025.

Note Amendment and Secured Promissory Note

On July 12, 2023, the Company issued an unsecured promissory note (the “Note”) in favor of GIC Acquisition, LLC (“GIC”), an entity that is managed by Raymond Chang, the Company’s Chairman and Chief Executive Officer, with an original principal amount of up to $500,000. On October 27, 2023, GIC and the Company amended and restated the Note (the “Restated Note”). Pursuant to the terms of the Restated Note, the Maturity Date was extended until December 31, 2023 and the Company granted a security interest in the Company’s assets that ranks junior to the Exchange Note and the Convertible Note.

Concurrently with the Restated Note, the Company issued a junior secured promissory note (the “Junior Secured Note”) to the New Lender. Pursuant to the Junior Secured Note, the New Lender will lend up to $500,000$3,000,000 to the Company. The Junior Secured Note bears interest at a rate of 10% per annum, will mature in full on August 6,December 31, 2023, and may be prepaid without any fee or penalty. The Junior Secured Note is a secured obligation of the Company that ranks junior to all existing secured indebtedness of the Company.

Leases

As of March 31, 2023,Exchange Note and the Company extended its lease by three years until March 31, 2026, for the premises located at 2468 Industrial Row Dr., Troy, Michigan 48084.

As of May 23, 2023, the Company extended its lease by three years until July 31, 2026, for the premises located at 2625 S. Santa Fe Dr., Bldg. 1, Units 1H and 1IJ.Convertible Note.

 


 

 

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, 20212022 filed with the Securities and Exchange Commission on March 31, 2022November 28, 2023 (the “Form 10-K”) and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. 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” 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 onea developer of the most innovative providers of advanced cultivationproprietary precision hardware and extractionsoftware grow solutions for the cannabisindoor commercial agriculture 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,provide equipment and Return on Investment at scale. Our comprehensivesolutions for cultivation, extraction, product line, which includes hydrocarbon, ethanol, solventless, post-processing, and lab equipment, empowers producers to maximizetesting for the quantitycannabis and quality of extract required for premium concentrates. 

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 and extraction solutionssolution seamlessly combinecombines our integrated hardware and software offerings with a broad range of associated services including consulting, engineering, and construction and areis 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 Troy, Michigan. We also lease properties located within various geographic regions in which we conduct business, including Colorado, Georgia, Massachusetts, Michigan, and Michigan.Oregon.

 

Reverse Stock SplitSplits

 

On January 12, 2021, weOctober 18, 2022, the Company effected a 1-for-1.5818041-for-10 reverse stock split on ourof its Common Stock. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented unless otherwise indicated.

 


 

On 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.

 

On July 5, 2023, the Company effected a 1-for-20 reverse stock split of its Common Stock. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented unless otherwise indicated.

 

No fractional shares of Common Stock were issued as a result of these reverse stock splits. Any fractional shares in connection with these reverse stock splits were rounded up to the nearest whole share and no stockholders received cash in lieu of fractional shares. The reverse stock splits had no impact on the number of shares of Common Stock that the Company is authorized to issue pursuant to its articles of incorporation or on the par value per share of the Common Stock. Proportional adjustments were made to the number of shares of Common Stock issuable upon exercise or conversion of the Company’s outstanding stock options and warrants, the exercise price or conversion price (as applicable) of the Company’s outstanding stock options and warrants, and the number of shares reserved for issuance under the Company’s equity incentive plan. All share and per share information included in this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the impact of these reverse stock splits.

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) 12,25212,253 shares (the “SA Shares”) of the our Common Stock, (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to an aggregate of 7,853 shares of Common Stock and (iii) warrants to purchase up to an aggregate of 15,06915,079 shares of Common Stock (the “Common Warrants” and, collectively with the Pre-Funded Warrants, the “SA Warrants”), in a private placement offering. The combined purchase price for one share of Common Stock (or one Pre-Funded Warrant) and the accompanying fraction of a Common Warrant was $1,360.00 per share.

 

Subject to certain ownership limitations, the SA Warrants arebecame exercisable six months from issuance. Each Pre-Funded Warrant is exercisable into one share of Common Stock at a price per share of $0.20 (as adjusted from time to time in accordance with the terms thereof). Each Common Warrant is exercisable into one share of Common Stock at a price per share of $1,496.00 (as adjusted from time to time in accordance with the terms thereof) and will expire on the fifth anniversary of the initial exercise date. The institutional investor that received the Pre-Funded Warrants fully exercised such warrants in March 2022.

 

Raymond Chang, our Chairman and Chief Executive Officer (“CEO”), and Stuart Wilcox, who is currentlypreviously served as our Chief Operating Officer, and at the time was a member of our Board of Directors, participated in the private placement on essentially the same terms as other investors, except for having a combined purchase price of $1,380.00 per share.

 

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

 

Acquisition of Lab Society

On February 1, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with LS Holdings Corp. (“Lab Society”), Lab Society NewCo, LLC, a newly-formed wholly-owned subsidiary of us (“Merger Sub”), Michael S. 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:of $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness of Lab Society at closing; 2,128 shares of Common Stock (the “Buyer Shares”); and the Earn-out Consideration (as defined below), to the extent earned.

 


 

 

We withheld 638 of the Buyer Shares issuable to the Owners (the “Holdback Lab Buyer Shares”) for the purpose of securing any post-closing adjustment owed to us and any claim for indemnification or payment of damages to which we may be entitled under the Merger Agreement. During the third quarter of 2022, 139 of the Holdback Lab Buyer Shares were forfeited after the finalization of the net working capital settlement. The remaining 499 Holdback Lab Buyer Shares will bewere 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 54 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements.

 

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

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 inWe amortize 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 intangibleassuming no residual value over periods in which the economic benefit of these assets may be found in Note 8 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.is consumed.

 

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 34,406 shares of Common Stock.

 

August 2022 Securities Exchange Agreement

 

On August 18, 2022, we reached an agreement with itsthe Investor to amend its existing SPA Note and entered into a Securities Exchange Agreement (the “Exchange“August 2022 Exchange Agreement”). Pursuant to the August 2022 Exchange Agreement, we partially paid $35.2 million along with approximately $300 thousand in repayments for other fees under the SPA Note and exchanged the remaining balance of the SPA Note for a new senior secured note (the “Exchange Note”)the Exchange Note with an aggregate original principal amount of $35.0 million and a new warrant to purchase 71,13871,139 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”“August 2022 Warrants”). Additional information regarding our Warrant LiabilitiesAugust 2022 Warrants may be found in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies and Note 54 – Fair Value Measures, included elsewhere in the notes to the condensed consolidated financial statements.

 


The Exchange Note is a senior secured obligation of usours and ranks senior to all indebtedness of us.ours. The Exchange Note will mature on the three-year anniversary of its issuance (the “Maturity Date”) and contains a 9.0% annualized interest rate, with interest to be paid monthly, in cash, beginning September 1, 2022. The principal amount of the Exchange Note will be payable on the Maturity Date, provided that the Investorholder 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 Investorholder 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 Investorholder 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)holder), plus accrued and unpaid interest, including default interest, which accrues at a rate per year equal to 15% from the date of a default or event of default. 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 Investorholder has, subject to certain exceptions, the right to participate for up to 30% of any offering of debt, equity (other than an offering of solely Common Stock), or equity-linked securities, including without limitation any debt, preferred stock or other instrument or security, of us or our subsidiaries.

 

The Modified Warrant has an exercise price of $430.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be exercisable on and after the six-month anniversary of issuance, has a term of five and one-half years from the date of issuance and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Modified Warrant (the “Modified Warrant Shares”), in which case the Modified Warrant will also be exercisable on a cashless exercise basis at the Investor’sholder’s election.

 

The Note Exchange Warrant has an exercise price of $246.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, was exercisable upon issuance, and has a term of five and one-half years from the date of issuance and is exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Warrant (the “Note Exchange Warrant Shares” and, together with the Modified Warrant Shares, the “Exchange Warrant Shares”), in which case the Note Exchange Warrant will also be exercisable on a cashless exercise basis at the Investor’sholder’s election. Until we completecompleted a qualified equity financing of at least $15.0 million, which requirement was satisfied with sales under the ATM Program,at-the-market continuous equity offering (“ATM” or “ATM Program”), the Note Exchange Warrant’s exercise price would have been reduced to the extent we issueissued 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 willAugust 2022 Warrants each provide that in no event will the number of shares of Common Stock issued upon exercise of such warrantwarrants result in the Investor’sholder’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,holder, 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)9.99). Additionally, the Warrant LiabilitiesAugust 2022 Warrants could not be exercised for more than an aggregate of 26,542 shares of Common Stock unless and until shareholder approval is obtained, which approval was obtained on October 14, 2022.

 


 

 

Impact of coronavirus pandemic (“COVID-19”)March 2023 Securities Exchange Agreement

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, althoughOn March 9, 2023 we entered into a senior note with High Trail Special Situations LLC (“Holder”) for value received, promises to pay to High Trail Special Situations LLC (the “Initial Holder”), or its registered assigns, the principal sum of ten million dollars ($10,000,000) (such principal sum, the “Principal Amount”) on August 19, 2025, and to pay any outstanding interest thereon, as provided in this note, in each case as provided in and subject to the other provisions of this Note, including the earlier redemption, repurchase or conversion of this Note.

Modification of Notes Payable

On March 8, 2023, the Company entered into a Securities Exchange Agreement (the “Exchange Agreement” or “Second Amendment”) with High Trail Special Situations LLC. Pursuant to the Exchange Agreement, at closing the Company will prepay approximately $10.3 million in principal amount under the August 2022 Note and exchange $10.0 million in principal amount of the remaining balance of the August 2022 Note for a new senior secured convertible note (the “Convertible Note”) with an original principal amount of $10.0 million. After the closing of the Exchange Agreement, the August 2022 Note will remain outstanding with a remaining balance of $11.7 million (the “Modified August 2022 Note” and, collectively with the Convertible Note, the “Notes”)

This exchange was deemed to be an extinguishment under ASC 470, as the modified debt added a substantive conversion option that was not inherent in the August 2022 Note. As a result, the Company recognized a loss on the extinguishment of debt of $4.6 million.

Convertible Notes

On March 8, 2023, as a result of the Exchange Agreement, the Company issued a Convertible Note to High Trail Special Situations LLC (the “Lender”) with a principal balance of $10 million. The Convertible Note bears a 9.0% annualized interest rate, with interest to be paid monthly, in cash, beginning April 1, 2023. The principal amount of the Convertible Note will be payable on the Maturity Date, provided that the Lender will be entitled to a cash sweep of 30% of the proceeds of any at-the-market equity offering and 20% of the proceeds received by the Company in connection with any other equity financing, which will reduce the outstanding principal amount under the August 2022 Note or the Convertible Note.

At any time, the Company may prepay all of our operations are functioning, COVID-19 has continuedthe Convertible Note by redemption at a price equal to cause some disruptions102.5% of the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest. The Lender will also have the option of requiring the Company to our business,redeem the Convertible Note (i) on August 19, 2023 or August 19, 2024 at a price equal to the then-outstanding principal amount under the Convertible Note plus accrued but unpaid interest, provided that the redemption right on August 19, 2023 will not be exercisable if the Company raises at least $8.0 million in gross proceeds from equity offerings prior to such as some temporary delays indate, or (ii) if the deliveryCompany undergoes a fundamental change (as defined below) at a price equal to 102.5% of our inventory. Although the ability of our suppliers to timely ship their goods has affected some of our deliveries, currentlythen-outstanding principal amount under 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.Convertible Note plus accrued but unpaid interest.

 

The extentConvertible Note will impose certain customary affirmative and negative covenants upon the Company, as well as covenants that will (i) restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, (ii) restrict the ability of the Company and its subsidiaries from making certain investments, subject to specified exceptions, and (iii) restrict the declaration of any dividends or other distributions, subject to specified exceptions. If an event of default under the Convertible Note occurs, the Lender can elect to redeem the Convertible Note for cash equal to (A) 115% of the then-outstanding principal amount of the Convertible Note (or such lesser principal amount accelerated by the Investor), plus accrued and unpaid interest, including default interest, which COVID-19accrues at a rate per annum equal to 15% from the date of a default or event of default, or, only in connection with certain events of default, (B) the greater of the amount under clause (A) or the sum of (i) 115% of the product of (a) the conversion rate in effect as of the trading day immediately preceding the date that the Lender delivers a notice of acceleration; (b) the total then outstanding principal amount under the Convertible Note (in thousands); and (c) the greater of (1) the highest daily volume weighted average price (“VWAP”) per share of Common Stock occurring during the fifteen consecutive trading days ending on, and including, the trading day immediately before the date the Lender delivers such notice and (2) the highest daily VWAP per share of Common Stock occurring during the fifteen consecutive trading days ending on, and including, the trading immediately before the date the applicable event of default occurred and (ii) the accrued and unpaid interest on the Convertible Note.


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

If the Lender elects to convert the Convertible Note, the conversion price per share will be $0.3820, subject to customary adjustments for certain corporate events. The conversion of the Convertible Note will be subject to certain customary conditions. The Convertible Note may not be converted into shares of Common Stock if such conversion would result in the Lender and its affiliates owning an aggregate of in excess of 4.99% of the then-outstanding shares of Common Stock, provided that upon 61 days’ notice, such ownership limitation may be adjusted by the Lender, but in any case, to no greater than 9.99%.

The Company evaluated the embedded features in accordance with ASC 815-15-25 and the related global economic crisis, affect our business, results of operationsdetermined embedded features are not required to be bifurcated 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 responseseparately measured at fair value.

Interest expense related to the pandemic, andConvertible Notes described above was $609,001 for 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.six months ended June 30, 2023. Accrued interest totaled $136,913 as of June 30, 2023.

 

Nasdaq Deficiency NoticeAt The Marketing Offering

 

On October 4,18, 2022, the Company entered into the ATM Program with the Agent pursuant to which it may issue and sell, from time to time, shares of its Common Stock having an aggregate offering price of up to $50 million, depending on market demand, with the Agent acting as an agent for sales. The ATM Program allowed the Company to sell shares of Common Stock pursuant to specific parameters defined by the Company as well as those defined by the SEC and the ATM Program agreement. As of December 31, 2022, the Company sold 306,628 shares of Common Stock, under the ATM at an average price of $50.85 per share, resulting in gross proceeds of $15.6 million, and net proceeds of $15.0 million after commissions and fees to the Agent totaling $468 thousand and legal fees totaling $75 thousand. $3.0 million of the proceeds under the ATM Program were used to repay amounts due to the Investor under the Exchange Note. The Company used net proceeds generated from the ATM Program for working capital and general corporate purposes, including repayment of indebtedness, funding its transformation initiatives and product category expansion efforts and capital expenditures. Due to the late filing of the Company’s Annual Report on Form 10-K, the Company is no longer eligible to utilize the registration statement on Form S-3 relating to the ATM Program, and does not anticipate any further sales under the ATM Program in the foreseeable future.

Confidentially Marketed Public Offering

On December 16, 2022, we received a deficiency letterentered into an underwriting agreement (the “Notice”“Underwriting Agreement”) fromwith Canaccord Genuity LLC as the Listing Qualifications Department (the “Staff”)underwriter, pursuant to which we agreed to sell an aggregate 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 price594,232 shares of our Common Stock, must be at least $1.00 per share for a minimumand, in lieu of 10 consecutive trading days during this 180-day compliance period, unless the Staff exercises its discretionCommon Stock to extend the minimum trading day period pursuantcertain investors that so chose, pre-funded warrants (the “Pre-Funded 2022 Warrants”) to Nasdaq Listing Rule 5810(c)(3)(G). On October 28, 2022, the Staff notified us that the closing bid pricepurchase 75,000 shares of our Common Stock, and accompanying warrants (the “December 2022 Warrants”) to purchase 1,338,462 shares of our Common Stock (the “Offering”). The combined public offering price for each share of Common Stock and accompanying two warrants was $13.00 per share, and the combined offering price for each Pre-Funded Warrant and accompanying two warrants was $12.98 per share.


The December 2022 Warrants may not be exercised by the holder to the extent that the holder, together with its affiliates, would beneficially own, after such exercise more than $1.004.99% of the shares of our Common Stock then outstanding (subject to the right of the holder to increase or decrease such beneficial ownership limitation upon notice to us, provided that such limitation cannot exceed 9.99%).

The Pre-Funded 2022 Warrants were classified as a component of permanent equity and the December 2022 Warrants were liability-classified and were recorded at the issuance date using a relative fair value allocation method. The Pre-Funded 2022 Warrants are equity-classified because they are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, are immediately exercisable, and permit the holders to receive a fixed number of shares of Common Stock upon exercise. In addition, such warrants do not provide any guarantee of value or return. The December 2022 Warrants are liability-classified as there is a volatility floor and these warrants are not indexed to our Common Stock.

Raymond Chang, our Chairman and CEO, participated in the Offering and purchased 115,385 shares of Common Stock and 230,769 warrants for 10 consecutive trading days,an aggregate purchase price of approximately $1.5 million.

We received aggregate gross proceeds to us from the Offering of approximately $8.7 million including offering costs of approximately $0.5 million for broker fees and that we therefore regained compliancelegal expenses, for net proceeds of $8.2 million. We intend to use the net proceeds from the Offering, together with the Minimum Bid Requirement.our existing cash resources, for working capital and general corporate purposes, which may include capital expenditures and repayment of debt.

 

Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include assumptions about collection of accounts and notes receivable, the valuation and recognition of stock-based compensation expense, valuation allowance for deferred tax assets and 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”).or GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate estimate,estimates, which include estimates related to accruals, stock-based compensation expense, and reported amounts of revenues and expenses during the reported period. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions.

 


 

Revenue Recognition

Overview

 

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

 

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

 

 ●identify the customer contract;
   
 ●identify performance obligations that are distinct;

 

 ●determine the transaction price;
   
 ●allocate the transaction price to the distinct performance obligations; 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 ususe 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.

 

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, consideringtaking 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 includesinclude 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-uponagreed upon interest rate and will present the financing components separately as financial income. For the three and nine months ended SeptemberJune 30, 20222023 and 2021,2022, 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.

 


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-yearmultiple 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”)Sinclair 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.

 

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 haveThe Company has determined it is a single reporting unit for the purpose of conducting the goodwill impairment assessment. A goodwill impairment charge is recorded if the amount by which ourthe Company’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Factors that could lead to a future impairment include material uncertainties such as a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in ourthe Company’s market value as a result of a significant decline in ourthe Company’s stock price.

 

During the three-month period ended June 30, 2022, wethe Company identified an impairment-triggeringa potential impairment triggering event associated with both a sustained decline in ourthe Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, wethe Company deemed that there wasmay be an impairment to the carrying value of its long-lived assets and accordingly performed interim testing to determine the proper fair value of its long-lived assets as of June 30, 2022. Based on its interim testing, wethe Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding ourthe Company’s interim testing on goodwill and intangible assets may be found in Note 8 – Goodwill and Intangible Assets, Net and Goodwill, included elsewhere in the notes to the condensed consolidated financial statements. During the three and six months ended June 30, 2023, no impairment charges were recorded.


 

Capitalization of Internal Software Development Costs

 

We capitalize on certain software engineering efforts related to the continued development of Agrify Insights™ cultivationInsights 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 — Stock Compensation.” ASC Topic 718 establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC Topic 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as options issued under our Stock Option Plans.


 

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

 

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

 

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

 

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

Results of Operations

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.

 


 

 

Results of Operations

Comparison of the Three and NineSix Months Ended SeptemberJune 30, 20222023 and 20212022

 

The following table summarizes our results of operations for the three and ninesix months ended SeptemberJune 30, 20222023 and September 30, 2021:2022:

 

  Three Months ended
September 30,		  Nine Months ended
September 30,		 
  2022    2022   
  (As Restated)  2021  (As Restated)  2021 
Revenue $7,019  $15,751  $52,369  $34,584 
Cost of goods sold  11,135   16,131   50,703   34,977 
Gross profit (loss)  (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 income (expense), net  (4,654)  45   (7,404)  68 
Other expenses  1,506   (15)  1,506   (78)
Change in fair value of warrant liabilities  16,268   -   47,234   - 
Gain on extinguishment of notes payable  (38,985)  —   (38,985)  2,685 
Other income, net  (25,865)  30   2,351   2,675 
Net income (loss) before income taxes  (57,412)  (9,772)  (130,492)  (19,051)
Income tax benefit  —   —   (262)  — 
Net income (loss)  (57,412)  (9,772)  (130,230)  (19,051)
Income (loss) attributable to non-controlling interest  1   (14)  5   153 
Net income (loss) attributable to Agrify Corporation $(57,413) $(9,758) $(130,235) $(19,204)
Net income (loss) per share attributable to Common Stockholders – basic and diluted $(429.98) $(93.67) $(1,003.10) $(213.24)
Weighted-average common shares outstanding – basic and diluted  133,526   104,172   129,832   90,344 
  Three months ended
June 30,		  Six Months Ended
June 30,		 
  2023  2022  2023  2022 
Revenue (including $0, $1,129, $46, and $1,763 from related parties, respectively) $5,066  $19,329  $10,870  $45,350 
Cost of goods sold  4,466   17,717   9,282   39,568 
Gross profit  600   1,612   1,588   5,782 
                 
General and administrative  4,819   19,378   11,750   29,137 
Selling and marketing  1,120   2,332   2,710   4,422 
Research and development  643   2,438   1,378   4,522 
Change in contingent consideration  (638)  (907)  (1,322)  (907)
Impairment of goodwill and intangible assets  —   69,904   —   69,904 
Total operating expenses  5,944   93,145   14,516   107,078 
Loss from operations  (5,344)  (91,533)  (12,928)  (101,296)
Interest expense, net  (400)  (3,311)  (1,199)  (2,752)
Change in fair value of warrant liabilities  (1,048)  20,181   1,624   30,966 
Gain (loss) on extinguishment of notes payable  (11)  —   (4,631)  — 
Other expense, net  (4)  —   —   — 
Other (expense) income, net  (1,463)  16,870   (4,206)  28,214 
Net loss before income taxes  (6,807)  (74,663)  (17,134)  (73,082)
Income tax benefit  —   62   —   262 
Net loss  (6,807)  (74,601)  (17,134)  (72,820)
Income (loss) attributable to non-controlling interests  2   (3)  2   (4)
Net loss attributable to Agrify Corporation $(6,805) $(74,604) $(17,132) $(72,824)
Net loss per share attributable to Common Stockholders – basic and diluted $(4.39) $(561.31) $(13.05) $(569.13)
Weighted average common shares outstanding - basic and diluted (1)  1,549,669   132,911   1,312,299   127,956 

(1)Periods presented have been adjusted to reflect the 1-for-20 reverse stock split on July 5, 2023. Additional information regarding reverse stock splits may be found in Note 1 – Overview, Basis of Presentation, and Significant Accounting Policies, included in the notes to the consolidated financial statements

 


 

Revenue

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 VFUsAgrify Vertical Farming Units (or “VFUs”) and Agrify Integrated Grow Racks with our Agrify Insights™ cultivationInsights 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™ cultivationInsights software, facility build-outs and extraction equipment and solutions. We believe that our product mix forms an integrated ecosystem thatwhich 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™ cultivationInsights 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 ofin the process will generate sales of additional solutions and services.

 

The following table provides a breakdown of our revenue for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021:2022:

 

 Three Months Ended September 30,       Nine Months Ended September 30,       Three months ended
June 30,		    %  Six months ended
June 30,		    %  
(In thousands) 2022  2021  Change  % Change  2022  2021  Change  % Change  2023 2022 Change Change 2023 2022 Change Change 
Cultivation solutions, including ancillary products and services $4  $2,756  $(2,752)  (100)% $707  $4,110  $(3,403)  (83)% $326  $321  $5   2% $495  $703  $(208)  (30)%
Agrify Insights™ cultivation software  1   —   1   100%  46   8   38   475%
Agrify Insights software  35   44   (9)  (20)%  65   45   20   44%
Facility build-outs  1,334   12,995   (11,661)  (90)%  23,551   30,466   (6,915)  (23)%  255   9,006   (8,751)  (97)%  882   22,217   (21,335)  (96)%
Extraction solutions  5,680   —   5,680   100%  28,065   —   28,065   100%  4,450   9,958   (5,508)  (55)%  9,428   22,385   (12,957)  (58)%
Total revenue $7,019  $15,751  $(8,732)  (55)% $52,369  $34,584  $17,785   51% $5,066  $19,329  $(14,263)  (74)% $10,870  $45,350  $(34,480)  (76)%

 

Revenues decreased by $8.7$14.3 million, or 55.4%74% for the three months ended SeptemberJune 30, 2022, as2023 compared to the same period in 2021. The comparative decrease in revenue was primarily related to a reduction in facility build-outs of $11.72022. Revenues decreased by $34.5 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 revenueor 76%, for the threesix months ended SeptemberJune 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 6 – Loan Receivable and Note 20 – 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, as2023 compared to the same period in 2021.2022. The comparative increasedecreases in revenue waswere 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 milliondecreases in revenue from facility build-outs and extraction solutions. Design and build revenues decreased by $8.8 million and $21.3 million for the ninethree and six months ended SeptemberJune 30, 2022. This was partially offset by a reduction of $6.9 million in facility build-out revenue resulting from the completed2023, respectively, due to reduced build-out of two facilities under our TTK Solutions which includesSolutions. Additionally, extraction division revenues decreased by $5.5 million and $13.0 million for the deferral of $5.3 million of revenue resulting from Bud & Mary’s pending litigationthree and a decrease in cultivation products and service sales of $3.4 million primarily due to migrating to a VFU leasing model.six months ended June 30, 2023, respectively.

 


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 ninesix months ended SeptemberJune 30, 20222023 and 2021:2022:

 

 Three Months Ended
September 30,		       Nine Months Ended
September 30,		       Three months ended
June 30,		     %  Six months ended
June 30,		     % 
(In thousands) 2022  2021  Change  % Change  2022  2021  Change  % Change  2023  2022  Change  Change  2023  2022  Change  Change 
Cultivation solutions, including ancillary products and services $572  $3,570  $(2,998)  (84)% $2,312  $5,456  $(3,144)  (58)% $490  $1,335  $(845)  (63)% $1,023  $1,740  $(717)  (41)%
Agrify Insights™ cultivation software  —   —   —   —%  —   —   —   —%
Facility build-outs  6,429   12,561   (6,132)  (49)%  28,217   29,521   (1,304)  (4)%  248   8,712   (8,464)  (97)%  968   21,788   (20,820)  (96)%
Extraction solutions  4,134   —   4,134   100%  20,174   —   20,174   100%  3,728   7,670   (3,942)  (51)%  7,291   16,040   (8,749)  (55)%
Total cost of goods sold $11,135  $16,131  $(4,996)  (31)% $50,703  $34,977  $15,726   45% $4,466  $17,717  $(13,251)  (75)% $9,282  $39,568  $(30,286)  (77)%

 

Cost of goods sold decreased by $5.0$13.3 million, or 31%75%, for the three months ended SeptemberJune 30, 2022 as2023 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.

2022. Cost of goods sold increaseddecreased by $15.7$30.3 million, or 45%77%, for the ninesix months ended SeptemberJune 30, 20222023 compared to the same period in 2021.2022. The comparative quarterly increasedecreases in the cost of goods sold is associated with the introductiondecreased amount 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 soldsubcontractor construction costs related to facility build-outs, decreased disproportionately as compared to revenue ininternal and outsourced labor and materials costs for 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.extraction solutions sales and cultivation solutions, including ancillary products and services.

 

Gross Profit (Loss)


 

  Three months ended
June 30,		     %  Six months ended
June 30,		     % 
(In thousands) 2023  2022  Change  Change  2023  2022  Change  Change 
Gross profit $600  $1,612  $(1,012)  (63)% $1,588  $5,782  $(4,194)  (73)%

 

Gross (Loss) Profit

  Three Months Ended
September 30,		        Nine Months Ended
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 lossprofit totaled $(4.1) million,$600 thousand, or (58.6)%11.8% of total revenue during the three months ended SeptemberJune 30, 20222023 compared to a gross loss of $(380) thousand,$1.6 million, or (2.4)%8.3% of total revenue during the three months ended SeptemberJune 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.

2022. Gross profit totaled $1.7$1.6 million, or 3.2%14.6%, of total revenue during the ninesix months ended SeptemberJune 30, 20222023 compared to a gross lossprofit of $(393) thousand,$5.8 million, or (1.1)%12.7%, of total revenue during the ninesix months ended SeptemberJune 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 ExpensesGeneral and Administrative

 

  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

  Three months ended
June 30,		     %  Six months ended
June 30,		     % 
(In thousands) 2023  2022  Change  Change  2023  2022  Change  Change 
General and administrative $4,819  $19,378  $(14,559)  (75)% $11,750  $29,137  $(17,387)  (60)%

 

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 increaseddecreased by $16.4$14.6 million, or 213%75%, for the three months ended SeptemberJune 30, 2022,2023, compared to the same period in 2021. The primary drivers of the increase in comparative2022. 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 offsetdecreased 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$17.4 million, or 222%60%, for the ninesix months ended SeptemberJune 30, 2022,2023, compared to the same period in 2021.2022. The primary drivers of the year-over-year increase in the comparative nine-month period of G&A expenses aredecrease is largely attributable to an increasepayroll, benefits and related expenses decreases of $2.1 million, a decrease in tradeacquisition-related expenses of $1.3 million, a decrease in bad debt expense of $9.0 million, a decrease in consulting and loan receivable allowancesother related expenses of $23.7$0.7 million, a decrease in stock based compensation of $0.9 million, a decrease in insurance expenses of $0.2 million, and $8.8 milliona decrease in depreciation and amortization 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.$0.7 million.

 

During the second


Selling 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 6 – 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.Marketing

 

Selling and marketing

  Three months ended
June 30,		     %  Six months ended
June 30,		     % 
(In thousands) 2023  2022  Change  Change  2023  2022  Change  Change 
Selling and marketing $1,120  $2,438  $(1,318)  (54)% $2,710  $4,422  $(1,712)  (39)%

 

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

 

Selling and marketing expenses increaseddecreased by $1.3 million, or 143%54%, for the three months ended SeptemberJune 30, 2022,2023, 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.

2022. Selling and marketing expenses increaseddecreased by $4.3$1.7 million, or 188%39%, for the ninesix months ended SeptemberJune 30, 2022,2023, compared to the same period in 2021. The increase is primarily related2022.The decreases are largely attributable to our acquisition of Lab Society in 2022reduced payroll, advertising 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.show expenses.

 


Research and developmentDevelopment

  Three months ended
June 30,		     %  Six months ended
June 30,		     % 
(In thousands) 2023  2022  Change  Change  2023  2022  Change  Change 
Research and development $643  $2,332  $(1,689)  (72)% $1,378  $4,522  $(3,144)  (70)%

 

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

 

 ●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;next generation VFUs: and
   
 ●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 increaseddecreased by $920 thousand,$1.7 million, or 111%72%, for the three months ended SeptemberJune 30, 2022,2023, 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.

2022. R&D expense increaseddecreased by $3.8$3.1 million, or 152%70%, for the ninesix months ended SeptemberJune 30, 2022,2023, compared to the same period in 2021.2022. The comparative periodic increase in R&D expense isdecreases are largely attributable to third-party consulting servicesthe personnel and facility costs associated with the continued development of $1.4 million, $1.2 million of incremental R&D expenseour VFUs, specifically related to improving the acquisition of Lab Society in 2022individual unit cooling 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.humidity environments.

 

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 8 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements. 

Other Income (Expense), Net

  Three Months Ended
September 30,		        Nine Months Ended
September 30,		       
(In thousands) 2022
(As Restated)		  2021  Change  % Change  2022
(As Restated)		  2021  Change  % Change 
Interest (expense) income, net $(4,654) $45  $(4,699)  (10,442)% $(7,404) $68  $(7,472)  (10,988)%
Other income (expense)  1,506   (15)  1,521   (10,140)%  1,506   (78)  1,584   (2,031)%
Change in fair value of warrant liability  16,268   —   16,268   100%  47,234   —   47,234   100%
(Loss) gain on extinguishment of notes payable  (38,985)  —   (38,985)  100%  (38,985)  2,685   (41,670)  (1,552)%
Total other (expense) income, net $(25,865) $30  $(25,895)  (86,317)% $2,351  $2,675  $(324)  (12)%

Interest (expense) income, net

Interest expense increased by $4.7 million, or 10,442%, 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 $4.7 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 $7.5 million, or 10,988%, 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 $8.8 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 $16.3 million, or 100% for the three ended September 30, 2022, compared to $0 for the three months ended September 30, 2021. During the three months period ended September 30, 2022, we recorded a non-cash gain of $16.3 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 5 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements. 

Change in fair value of warrant liability increased by $47.2 million, or 100% for the nine ended September 30, 2022, compared to $0 for the nine months ended September 30, 2021. During the nine months period ended September 30, 2022, we recorded a non-cash gain of $47.2 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 5 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements. 

(Loss) gain on extinguishment of notes payable

Loss on extinguishment of notes payable increased by $38.9 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 $38.9 million (inclusive of $13.1 million of unamortized warrants, $5.0 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 10 – Debt, included elsewhere in the notes to the consolidated financial statements.

Loss on extinguishment of notes payable increased by $41.7 million, or 1,552%, 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 $42.3 million (inclusive of $13.1 million of unamortized warrants, $5.0 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 12 – Convertible Promissory Notes, included elsewhere in the notes to the consolidated financial statements. 


 

 

Other (Expense) Income, Tax BenefitNet

 

  Three Months Ended
September 30,		        Nine Months Ended
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%        
  Three months ended
June 30,		     %  Six months ended
June 30,		     % 
(In thousands) 2023  2022  Change  Change  2023  2022  Change  Change 
Interest expense, net $(400) $(3,311) $2,911   (88)% $(1,199) $(2,752) $1,553   (56)%
Change in fair value of warrant liabilities  (1,048)  20,181   (21,229)  (105)%  1,624   30,966   (29,342)  (95)%
Loss on extinguishment of notes payable  (11)  —   (11)  N/A   (4,631)  —   (4,631)  N/A 
Other expense, net  (4)  —   (4)  N/A   —   —   —   —%
Total other income, net $(1,463) $16,870  $(18,333)  (109)% $(4,206) $28,214  $(32,420)  (115)%

 

The effectiveInterest income tax rate was 0.0%(expense), net decreased by $2.9 million, or 88%, for both the three months ended SeptemberJune 30, 2022 and 2021. The2023, compared to the same period in 2022. Interest income tax benefit was $0(expense), net decreased by $1.6 million, or 56%, for both the threesix months ended SeptemberJune 30, 2022 and 2021.2023, compared to the same period in 2022.The decrease in interest expense is attributable mainly to the decrease in principal balance of the debt payable to High Trail Special Situations LLC on which interest in accrued.

 

The change in fair value of warrant liabilities decreased by $21.2 million, or 105% during the income tax benefit for the ninethree months ended SeptemberJune 30, 20222023, compared to the ninesame period in 2022. The change in fair value of warrant liabilities decreased by $29.3 million, or 95% during the six months ended SeptemberJune 30, 2021 was primarily due2023, compared to the same period in 2022.The decrease is related to a discrete income tax benefitsignificant decline in the fair value of approximately $200 thousand recordedwarrant liabilities during the first quarterthree and six months ended June 30, 2022 between the initial grant date fair value and the fair value as of 2022,June 30, 2022. This decline in fair value was driven by a significant decrease in stock price during that time, which is attributablean input to the valuation calculation. Such a non-recurring partial releasefluctuation in stock price did not exist in the same period in 2023 and therefore there was not a significant change in the fair value of our U.S. valuation allowance as a resultwarrant liabilities in the current period.

The loss on extinguishment of notes payable of $4.6 million incurred during the six months ended June 30, 2023 is driven by the modification of the Lab Society acquisition. Additionally, as a resultnotes payable to High Trail Special Situations LLC through the Securities Exchange Agreement that was entered into on March 8, 2023 which was deemed to be an extinguishment 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.debt under ASC 470.

 

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 sinceAs of June 30, 2023, our inception and have negative cash flows from operations. We have an accumulated deficit of $189.2 million as of September 30, 2022. Our primaryprincipal sources of liquidity arewere 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 and restricted marketable securities 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 306,633 shares of Common Stock, under the ATM at an average price of $50.80 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$308 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, 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 anticipateThere are many factors that we will allocate a significant portionmay 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 current balancesecurities. The amount of working capital to satisfycash generated from operations is dependent upon factors such as the financing requirementssuccessful execution of our currentbusiness strategy and future TTK arrangements. These arrangements require a significant amount of upfront capital necessary to fund construction, associated with facility build-outs, and equipment.general economic conditions.

 

We may opportunistically raise debt capital, subject to market and other conditions. Additionally, as part of our growth strategies, we may also raise debt capital for strategic alternatives and general corporate purposes. If additional financing is required from outside sources, we may not be able to raise such capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial conditionwe may be adversely affected.forced to cease operations.

 

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”)the SPA Note in the aggregate amount of $65$65.0 million and a warrant (the “SPA Warrant”)SPA Warrant to purchase up to an aggregate of 34,406 shares of Common Stock, with the potential for two potential subsequent closings for notes with an original principal amount of $35$35.0 million each.


 

On August 18, 2022, we entered into a Securities Exchange Agreement. Pursuant to the August 2022 Exchange Agreement, we havepartially paid $35.2 million along with approximately $300 thousand in repayments for other fees under the SPA Note and exchanged the remaining balance of the SPA Note for a new senior secured note (the “Exchange Note”)an Exchange Note with an aggregate original principal amount of $35$35.0 million and a new warrantNote Exchange Warrant to purchase 71,14271,139 shares of Common Stock (the “Note Exchange Warrant”).Stock. Additionally, we exchanged the SPA Warrant for a new warrantModified Warrant for the same number of underlying shares but with a reduced exercise priceprice.

On March 8, 2023, the Company entered into a new Securities Exchange Agreement. Pursuant to the March 2023 Exchange Agreement, we prepaid approximately $10.3 million in principal amount under the Exchange Note and exchanged $10.0 million in principal amount of the remaining balance of the Exchange Note for a new senior secured convertible note (the “Modified Warrant”“Convertible Note”).

 

The ExchangeConvertible Note is a senior secured obligation of us and rankswill rank senior to all indebtedness of us.our indebtedness. The ExchangeConvertible Note will mature on the three-year anniversary of its issuanceAugust 19, 2025 (the “Maturity Date”) and containshas a 9.0% annualized interest rate, with interest to be paid monthly, in cash, beginning September 1, 2022.cash. The principal amount of the ExchangeConvertible Note will be payable on the Maturity Date,maturity date, provided that the Investorlender will be entitled to a cash sweep of 30% of the proceeds of any at-the-market equity offering and 20% of the proceeds received by us in connection with any other equity financing, which will reduce the outstanding principal amount under the Exchange Note. On October 27, 2023, CP Acquisitions LLC, and entity affiliated with and controlled by Raymond Chang, acquired the Exchange Note and the Convertible Note. As of October 30, 2023, there was approximately $6.7 million outstanding under the Exchange Note and $8.8 million outstanding under the Convertible Note.

 

At any time, we may prepay all of the Exchange Note by redemption at a price equal to 102.5% of the then-outstanding principal amount under the Note plus accrued but unpaid interest. The Investorholder 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.

 

Summary Statement of


Cash Flows

 

The following table presents the major components of net cash flows from and used in operating, investing, and financing activities for the ninesix months ended SeptemberJune 30, 2022,2023, and 2021:2022:

 

(In thousands) September 30,
2022		  September 30,
2021		  June 30,
2023		  June 30,
2022		 
Net cash (used in) provided by:     
Net cash and cash equivalents (used in) provided by:     
Operating activities $(58,020) $(17,557) $(11,634) $(50,491)
Investing activities  (4,135)  (84,683)  11,358   (29,637)
Financing activities  52,292   138,875   (9,873)  86,722 
Net increase in cash and cash equivalents $(9,863) $36,635 
Net (decrease) increase in cash and cash equivalents $(10,149) $6,594 

 

Cash FlowFlows from Operating Activities

 

Cash used in operating activities consistsFor the six months ended June 30, 2023, we incurred a net loss of $17.1 million, which included a $12.9 million loss from operations, a $4.6 million loss on extinguishment of notes payable, and $1.2 million of interest expense, net, income adjusted for non-cash benefits and expenses, and changes in operating assets and liabilities. Our primary source of cash providedpartially offset by operating activities is cash collections from our customersa $1.6 million credit related to the salechange in fair value of cultivation and extraction solutions. Our primary uses of cash from our operating activities include payments for employee-related expenditures, payments for inventory due to increased demand forecasts, construction costs related to TTK Solutions, acquisition-related costs and the payment of other operating expenses incurred in the ordinary course of business.

warrant liabilities. Net cash used in operating activities increasedfor the six months ended June 30, 2023 was $11.6 million.

For the six months ended June 30, 2022, we incurred a net loss of $72.8 million, which included a $101.3 million loss from operations and $2.8 million of interest expense, net, partially offset by a $31.0 million credit related to the change in fair value of warrant liabilities. Net cash used in operating activities for the six months ended June 30, 2022 was $50.5 million.

Cash Flows from Investing Activities

For the six months ended June 30, 2023, net cash provided by investing activities was $11.4 million, which included cash inflows of $10.5 million in proceeds from the nine months ended September 30, 2022 tosale of securities and $1.5 million in proceeds from the nine months ended September 30, 2021 primarily due to higher inventory purchases to meet demand, increased constructionrepayment of a loan receivable, partially offset by cash outflows of $591 thousand in costs related to TTK Solutions,the issuance of loans.

For the six months ended June 30, 2022, net cash used in investing activities was $29.6 million, which included cash outflows of $20.4 million related to the issuance of TTK-related loans receivable, $9.1 million of expenditures for property and equipment, $3.5 million paid in connection with our 2022 acquisition of Lab Society and partially offset by $3.4 million in net sales of marketable securities.

Cash Flows from Financing Activities

For the six months ended June 30, 2023, net cash used in financing activities was $9.9 million, which was primarily driven by repayment of debt in a private placement of $10.3 million and payments for employee-related expenditureson insurance financing loans of $999 thousand, partially offset by proceeds from the ATM Program of $1.5 million.

For the six months ended June 30, 2022, net cash provided by financing activities was $86.7 million, which consisted largely of $62.4 million in proceeds from our issuance of debt and other working capital needs.warrants in a private placement, and $25.8 million from the issuance of Common Stock and warrants in a private placement, net of fees.

 


 

 

Cash Flow from Investing Activities

Cash provided by investing activities consists primarily of maturities and sales of investments in marketable securities. Cash used in investing activities consists primarily of purchases of marketable securities, cash paid associated with our 2022 acquisition of Lab Society, the issuance of loans receivable in connection with our financing of construction and equipment under its TTK Solutions offering and purchases of property and equipment expenditures. The capital expenditures support growth and investment in property and equipment, to expand research, development, and testing capabilities and, to a lesser extent, the replacement of existing equipment.

Net cash used in investing activities decreased from the nine months ended September 30, 2022 to the nine months ended September 30, 2021 primarily due to a net decrease in cash used for purchases, sales and maturities of marketable securities, partially offset by an increase in purchases of property and equipment, issuance of TTK-related loans and cash paid in connection with our 2022 acquisitions of Lab Society.

Cash Flow from Financing Activities

Cash provided by financing activities consists primarily of proceeds from the issuance of Common Stock, debt, and warrants in private placements and proceeds from the initial and secondary public offerings. Cash used in financing activities consists primarily of repayment of debt.

Net cash provided by financing activities decreased from the nine months ended September 30, 2022 to the nine months ended September 30, 2021 primarily due to an increase in repayment of debt.

Off-Balance Sheet Arrangements

 

During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market, or credit risk that could arise if we had engaged in those types of relationships.

 

Critical Accounting Policies and Estimates

 

Part I, Item, 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses ourOur consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions.

 

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 consolidated financial statements are detailed in Note 31 - SummaryOverview, Basis of Presentation and Significant Accounting Policies included in our 20212022 Annual Report on Form 10-K and in Note 1 - Overview, Basis of Presentation and Significant Accounting Policies to our 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.

 

Recently Issued Accounting Pronouncements Adopted

 

For more informationInformation on recently issued accounting pronouncements areis included withinin Note 1 - Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to 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 moreMore information on new accounting pronouncements not yet adopted areby the Company is included within Note 1 - Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to consolidated financial statements covered under Part I, Item 1 ofin this Quarterly Report on Form 10-Q.


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.


 

Item 4. Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.

 

Evaluation of Disclosure Controls and Procedures

 

As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures.

The Company identified errors in the accounting for previously issued warrants, debt issuance costs and the classification of debt. Therefore, the Company restated it’s unaudited condensed financial statementsprocedures as of and for the periods ended March 31, 2022, June 30, 2022 and September 30, 2022. In connection with2023. Based on this evaluation, our Chief Executive Officer concluded that, due to the restatements, the Company identified a material weaknessweaknesses in its internal controls related to accounting for complex financial instruments. A material weakness is a deficiency, or combination of deficiencies, inour internal control over financial reporting such that there is apreviously identified in Item 9A, “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and filed with the SEC on November 28, 2023, our disclosure controls and procedures were not effective at the reasonable possibility that a material misstatementassurance level as of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.June 30, 2023.

Changes in Internal Control Over Financial Reporting

 

DuringWe are implementing certain measures to remediate the most recently completed fiscal quarter,material weaknesses identified in the design and operation of our internal control over financial reporting, including hiring technically qualified personnel and improving our technical accounting resources and capabilities. Other than those measures, there hashave been no changechanges in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2023 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. In light of the restatement of our financial statements as described above, we plan to enhance our processes to identify and appropriately apply applicable accounting requirements to better evaluate and understand the nuances of the complex accounting standards that apply to our condensed consolidated financial statements. Our plans at this time include providing enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.

 


 

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we are a party to various legal proceedings or claims arising in the ordinary course of business. For information related to legal proceedings, see the discussion under the caption Legal Matters in Note 1815 - Commitments and Contingencies to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, which information is incorporated by reference into this Part II, Item 1.

 

Item 1A. Risk Factors

 

As of the date of this report, except for the risk factor set forth below, there are no material changes to our risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.2022.

Our recently completed reverse stock split is subject to several risks, and we cannot predict whether it will increase the market price for our common stock.Common Stock.

 

We cannot predict whether the 1-for-101-for-20 reverse stock split completed on October 18, 2022July 5, 2023 will increase the market price for our common stock.Common Stock. The history of similar stock split combinations for companies in like circumstances is varied, and the market price of our Common Stock will also be based on our performance and other factors, some of which are unrelated to the number of shares outstanding. Further, there are a number of risks associated with the reverse stock split, including:

 

 ●The market price per share of our shares of Common Stock post-split may not remain in excess of the Minimum Bid Requirement, or we may fail to meet the other requirements for continued listing on Nasdaq, resulting in the delisting of our common stock.Common Stock.

 

 ●Although the Board of Directors believes that a higher stock price may help generate the interest of new investors, the reverse stock split may not result in a per-share price that will successfully attract certain types of investors and such resulting share price may not satisfy the investing guidelines of institutional investors or investment funds. Further, other factors, such as our financial results, market conditions and the market perception of our business, may adversely affect the interest of new investors in the shares of our Common Stock. As a result, the trading liquidity of the shares of our common stockCommon Stock may not improve as a result of the reverse stock split and there can be no assurance that the reverse stock split will result in the intended benefits.

 

 ●The reverse stock split could be viewed negatively by the market and other factors may adversely affect the market price of the shares of our common stock.Common Stock. Consequently, the market price per post-split share may not increase in proportion to the reduction of the number of shares of our Common Stock outstanding before the implementation of the reverse stock split. Accordingly, the total market capitalization of our shares of Common Stock after the reverse stock split may be lower than the total market capitalization before the reverse stock split. Any reduction in total market capitalization as the result of the reverse stock split may make it more difficult for us to meet the Nasdaq Listing Rule regarding minimum value of listed securities, which could result in our shares of Common Stock being delisted from The Nasdaq Capital Market.

 

 ●The reverse stock split may result in some stockholders owning “odd lots” of less than 100 shares of common stock.Common Stock. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in “round lots” of even multiples of 100 shares.

 


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On August 17, 2022, we issued 435 shares of Common Stock to the former holders of Precision and Cascade in connection with the finalization of the net working capital settlement from the acquisition of Precision and Cascade. The issuance of the shares of Common Stock was exempt from registration pursuant to Section 4(2) of, and Rule 506 under Regulation D promulgated under, the Securities Act of 1933, as amended.None.


 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 


Item 6. Exhibits

 

Exhibit No. Description
3.1 Certificate of Amendment to the Articles of Incorporation of the Registrant, filed July 11, 2022 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2022).
3.2 Certified of Amendment to the Articles of Incorporation of the Registrant, filed October 17, 2022 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 2022).
4.1 Form of Senior Secured Note (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2022).
4.2 Form of Warrant Exchange Note (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2022).
4.3 Form of Note Exchange Note (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2022).
10.1† Separation Agreement of Thomas Massie, dated as of July 8, 2022 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2022).
10.2† Employment Agreement, dated as of July 14, 2022, between the Registrant and Stuart Wilcox (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2022).
10.3†† Exchange Agreement, dated as of August 18, 2022, between Agrify Corporation and the investor listed therein (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2022).
10.4†† Equity Distribution Agreement, dated as of October 18, 2022, between the Registrant and Canaccord Genuity LLC (incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 18, 2022).
31.1* Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer and principal financial and accounting officer
32.1** Section 1350 Certification of principal executive officer and principal financial and acccountingaccounting officer
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document.
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*Filed herewith.

 

**Furnished herewith in accordance with Item 601 (b)(32) of Regulation S-K.

 

†Indicates a management contract, or compensatory plan, contract or arrangement.

 

††Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish copies of any of the omitted schedules and exhibits upon request by the U.S. Securities and Exchange Commission.

 


 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

AGRIFY CORPORATION
   
By:/s/ Raymond Chang
 
 Raymond Chang
 
 Chief Executive Officer
 
 (Principal Executive Officer and Principal Financial and Accounting Officer)

 

Date: October 2,December 11, 2023

 

 

8776

 

 

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