| Overview, Basis of Presentation and Significant Accounting Policies | Note
1 — Overview, Basis of Presentation and Significant Accounting Policies Description
of Business Agrify
Corporation (“Agrify” or the “Company”) is a provider of innovative cultivation and extraction solutions
for the cannabis industry, bringing data, science, and technology to the forefront of the market. The Company’s proprietary micro-environment-controlled
Agrify Vertical Farming Units (or “VFUs”) enable cultivators to produce the highest quality products with what we believe
to be unmatched consistency, yield, and return investment at scale. The Company’s comprehensive extraction product line, which
includes hydrocarbon, alcohol, solventless, post-processing, and lab equipment, empowers producers to maximize the quantity and quality
of extract required for premium concentrates. The
Company was formed in the State of Nevada on June 6, 2016 as Agrinamics, Inc., and subsequently changed its name to Agrify Corporation.
The Company is sometimes referred to herein by the words “we,” “us,” “our,” and similar terminology. The
Company has nine wholly-owned subsidiaries, which are collectively referred to as the “Subsidiaries” and the Company also
has ownership interests in certain companies. Nasdaq
Deficiency Notice The Nasdaq Notice
had no immediate effect on the listing of the Company’s Common Stock on The Nasdaq Stock Market LLC. On
October 17, 2023, the Company received a Staff Delisting Determination (the “Staff Determination”) from the Listing Qualifications
Department of Nasdaq notifying the Company that it was not in compliance with Nasdaq’s continued listing requirements under the
Listing Rule as a result of its failure to file the First Quarter Form 10-Q, the Second Quarter Form 10-Q and the Form 10-K (collectively,
the “Delinquent Reports”) in a timely manner. On
November 16, 2023, the Company received a notice from Nasdaq that the Company remains noncompliant with the Listing Rule as a result
of its failure to file its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2023 with the SEC by the required
filing date. On
December 1, 2023, the Company received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) stating that because the Company
reported stockholders’ deficit of $(17.17) million in its Form 10-Q for the quarter ended March 31, 2023, the Company was no longer
in compliance with Nasdaq Listing Rule 5550(b)(1) (the “Primary Equity Listing Rule”), which requires that listed companies
maintain a minimum of $2.5 million in stockholders’ equity. In response, the Company timely requested a hearing before a Nasdaq
Hearings Panel (the “Panel”), which stayed any further action by the Listing Qualifications Staff. The hearing was held on
January 11, 2024. The Company arrived at the hearing having previously cured any additional grounds for delisting as a result of delinquent
periodic filings during 2023 that were filed prior to the hearing. On
January 30, 2024, the Company received formal notice that the Panel had granted the Company’s request for an exception through
April 15, 2024 to evidence compliance with the Listing Rule, which was subsequently extended to May 15, 2024. Accordingly, there can
be no assurance that the Company will be able to regain compliance with the Nasdaq listing rules or maintain its listing on the Nasdaq
Capital Market. If the Company’s common stock is delisted, it could be more difficult to buy or sell the Company’s common
stock or to obtain accurate quotations, and the price of the Company’s common stock could suffer a material decline. Delisting
could also impair the Company’s ability to raise capital. On
March 5, 2024, the Company received a deficiency letter from the Staff of Nasdaq notifying the Company that, for the last 30 consecutive
business days, the bid price for the Company’s common stock had closed below $1.00 per share, which is the minimum closing price
required to maintain continued listing on the Nasdaq Stock Market under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”).
The Notice has no immediate effect on the listing of the Company’s common stock on Nasdaq. In accordance with Nasdaq Listing Rule
5810(c)(3)(A), the Company has 180 calendar days to regain compliance with the Minimum Bid Requirement. The compliance period for the
Company will expire on September 3, 2024. Basis
of Presentation and Principles of Consolidation These
interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management,
all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed
consolidated financial statements have been included. The results reported in the condensed consolidated financial statements for any
interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying condensed consolidated
financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do
not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting
principles generally accepted in the United States (“U.S. GAAP”). Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction
with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission on April 15, 2024. Accounting
for Wholly-Owned Subsidiaries The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”) and include the accounts of Agrify Corporation and its wholly-owned subsidiaries, as described above,
in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”). The Company includes results of operations of acquired companies from the date
of acquisition. All significant intercompany transactions and balances are eliminated. Accounting
for Less Than Wholly-Owned Subsidiaries For
the Company’s less than wholly-owned subsidiaries, which include, Agrify-Valiant LLC (“Agrify-Valiant”), and Agrify
Brands, LLC (“Agrify Brands”), the Company first analyzes whether these entities are a variable interest entity (a “VIE”)
in accordance with ASC Topic 810, Consolidation (“ASC 810”), and if so, whether the Company is the primary beneficiary requiring
consolidation. The Company continuously re-assesses (i) whether the
joint-venture is a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If it is determined that the joint-venture qualifies
as a VIE and the Company is the primary beneficiary, the Company’s financial interest in the VIE is consolidated. Based
on the Company’s analysis of these entities, the Company has determined that Agrify-Valiant and Agrify Brands are each a VIE, and
that the Company is the primary beneficiary. While the Company owns 60% of Agrify-Valiant’s equity interests and 75% of Agrify
Brand’s equity interests, the remaining equity interests in Agrify-Valiant and Agrify Brands are owned by unrelated third parties,
and the agreement with these third parties provides the Company with greater voting rights. Accordingly, the Company consolidates its
interest in the financial statements of Agrify-Valiant and Agrify Brands under the VIE rules and reflects the third parties’ interests
in the consolidated financial statements as a non-controlling interest. The Company records this non-controlling interest at its initial
fair value, adjusting the basis prospectively for the third parties’ share of the respective consolidated investments’ net
income or loss or equity contributions and distributions. These non-controlling interests are not redeemable by the equity holders and
are presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holders based on its economic
ownership percentage. Going
Concern In
accordance with the FASB Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going
Concern”, the Company’s management evaluated whether there are conditions or events that raise substantial doubt about its
ability to continue as a going concern within one year after the financial statements’ issuance date. The following matters raise
substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements
are issued. The
Company has incurred operating losses since its inception and has negative cash flows from operations and a working capital deficit.
The Company also has an accumulated deficit of $265.8 million as of March 31, 2024. The Company’s primary sources of liquidity
are its cash and cash equivalents and marketable securities, with additional liquidity accessible, subject to market conditions and other
factors, including limitations that may apply to the Company under applicable SEC regulations, from the capital market. As of March 31,
2024, the Company had $0.1 million of cash, cash equivalents, and marketable securities. The Company had no restricted cash as of March
31, 2024. Current liabilities were $27.7 million as of March 31, 2024. These
consolidated financial statements have been prepared on a going concern basis, which implies the Company believes these conditions raise
substantial doubt about its ability to continue as a going concern within the next twelve-months from the date these consolidated financial
statements are available to be issued. The Company’s continuation as a going concern is dependent upon its ability to obtain the
necessary debt or equity financing to continue operations until the Company begins generating sufficient cash flows from operations to
meet its obligations. If the Company is unable raise additional funds, it may be forced to cease operations. As
of February 28, 2024, the company raised net proceeds of $2.2 million via the issuance of common stock and prefunded warrants in a public
offering through Alexander Capital and is recorded within common stock and additional paid-in capital on the Company’s condensed consolidated
balance sheet. The Company intends to raise additional capital later this year to support its 2024 and 2025 funding needs. The Company
also continues to make additional adjustments in headcount, salary, travel, sales and marketing spending, but there is no guarantee that
these ongoing cost-cutting efforts or capital raises will be sufficient to maintain operations. There
is no assurance that the Company will ever be profitable. The consolidated financial statements do not include any adjustments to reflect
the potential future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that
may result should the Company be unable to continue as a going concern. Use
of Estimates The
preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates include
assumptions about collection of accounts and notes receivable, the valuation and recognition of stock-based compensation expense, valuation
allowance for deferred tax assets, the valuation of inventory, and useful life of fixed assets and intangible assets. The Company bases
its estimates on historical experience, known trends and other market-specific information, other relevant factors that it believes to
be reasonable under the circumstances, and management’s judgement. On an ongoing basis, management evaluates its estimates when
there are changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known.
Actual financial results could differ from those estimates. Accounts
Receivable, Net and Loans Receivable, Net Accounts
receivable, net, primarily consists of amounts for goods and services that are billed and currently due from customers. The
composition of loan receivable, net is detailed in Note 5. In accordance with ASC 310-10, accounts receivable and loan
receivable balances are presented net of an allowance for credit losses, which are an estimate of billed or borrowed amounts that
may not be collectible. In determining the amount of the allowance at each reporting date, management makes judgments about general
economic conditions, historical write-off experience, and any specific risks identified in customer or borrower collection matters,
including the aging of unpaid accounts receivable and changes in customer or borrower financial conditions. Accounts and loans
receivable balances are written off after all means of collection are exhausted and the potential for non-recovery is determined to
be probable. Adjustments to the allowance for credit losses are recorded as general and administrative expenses in the consolidated
statements of operations. Concentration
of Credit Risk and Significant Customer Financial
instruments that potentially subject the Company to a concentration of credit risk primarily consist of cash, cash equivalents, restricted
cash, marketable securities, and accounts receivable. Cash equivalents primarily consist of money market funds with original maturities
of three months or less, which are invested primarily with U.S. financial institutions. Cash deposits with financial institutions, including
restricted cash, generally exceed federally insured limits. Management believes minimal credit risk exists with respect to these financial
institutions and the Company has not experienced any losses on such amounts. During the year
three -month period ended March 31, 2024, the Company has one customer that comprised approximately 1% of its revenue and two
customers that comprised approximately 47% of its accounts receivable balance. During the year
three -month period ended March 31, 2023, the Company has one customer that comprised approximately 11% of its revenue and two
customers that comprised approximately 84% of it accounts receivable balance. Inventories The
Company values all its inventories, which consist primarily of significant raw material hardware components, at the lower of cost or
net realizable value, with cost principally determined by the weighted-average cost method on a first-in, first-out basis. Write-offs
of potentially slow-moving or damaged inventory are recorded through specific identification of obsolete or damaged material. The Company
takes physical inventory at least once annually at all inventory locations. Warrant
Liabilities The
Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates
all its financial instruments, including issued private placement stock purchase warrants, to determine if such instruments are derivatives
or contain features that qualify as embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity (“ASC
480”) and ASC 815. The Company accounts for warrants as either equity-classified or liability-classified instruments based on an
assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480 and ASC 815. Management’s assessment
considers whether the warrants are freestanding financial instruments pursuant to ASC 480, whether they meet the definition of a liability
pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether
the warrants are indexed to the Company’s own Common Stock among other conditions for equity classification. For
issued or modified warrants that meet all of the criteria for equity classification, they are recorded as a component of additional paid-in
capital at the time of issuance. For issued or modified warrants that are precluded from equity classification, they are recorded as
a liability at their initial fair value on the date of issuance and subject to remeasurement on each balance sheet date with changes
in the estimated fair value of the warrants to be recognized as an unrealized gain or loss in the consolidated statements of operations. Fair
Value of Financial Instruments The
Company’s financial instruments consist of cash, marketable securities, accounts receivable, accounts payable, accrued expenses,
warrant liabilities, and loans receivable. Refer to Note 4 - Fair Value Measures, included elsewhere in the notes to the consolidated
financial statements for details of the Company’s financial instruments. Revenue
Recognition Overview The
Company generates revenue from the following sources: (1) equipment sales, (2) providing services and (3) construction contracts. In
accordance with ASC 606 “Revenue Recognition”, the Company recognizes revenue from contracts with customers using a five-step
model, which is described below:
● identify
the customer contract;
● identify
performance obligations that are distinct;
● determine
the transaction price;
● allocate
the transaction price to the distinct performance obligations; and
● recognize
revenue as the performance obligations are satisfied. Identify
the customer contract A
customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have
been identified, payment terms are identified, the contract has commercial substance and collectability is probable. Specifically, the
Company obtains written/electronic signatures on contracts and purchase orders, if said purchase orders are issued in the normal course
of business by the customer. Identify
performance obligations that are distinct A
performance obligation is a promise by the Company to provide a distinct good or service or a series of distinct goods or services. A
good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or
together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service
to the customer is separately identifiable from other promises in the contract. Determine
the transaction price The
transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services
to a customer, excluding sales taxes that are collected on behalf of government agencies. Allocate
the transaction price to distinct performance obligations The
transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of
the goods or services being provided to the customer. The Company’s contracts typically contain multiple performance obligations,
for which the Company accounts for individual performance obligations separately, if they are distinct. The standalone selling price
reflects the price the Company would charge for a specific piece of equipment or service if it was sold separately in similar circumstances
and to similar customers. Recognize
revenue as the performance obligations are satisfied Revenue
is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer. Significant
Judgments The
Company enters into contracts that may include various combinations of equipment, services and construction, which are generally capable
of being distinct and accounted for as separate performance obligations. Contracts with customers often include promises to transfer
multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations
that should be accounted for separately versus together may require significant judgment. Once the Company determines the performance
obligations, it determines the transaction price, which includes estimating the amount of variable consideration to be included in the
transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on the
SSP. The corresponding revenue is recognized as the related performance obligations are satisfied. Judgment
is required to determine the SSP for each distinct performance obligation. The Company determines SSP based on the price at which the
performance obligation is sold separately and the methods of estimating SSP under the guidance of ASC 606-10-32-33. If the SSP is not
observable through past transactions, the Company estimates the SSP, taking into account available information such as market conditions,
expected margins, and internally approved pricing guidelines related to the performance obligations. The Company licenses its SaaS type
subscription license, whereby the customer only has a right to access the software over a specified time period. The full value of the
contract is recognized ratably over the contractual term of the SaaS subscription, adjusted monthly if tiered pricing is relevant. The
Company typically satisfies its performance obligations for equipment sales when equipment is made available for shipment to the customer;
for services sales as services are rendered to the customer and for construction contracts both as services are rendered and when the
contract is completed. The
Company utilizes the cost-plus margin method to determine the SSP for equipment and build-out services. This method is based on the cost
of the services from third parties, plus a reasonable markup that the Company believes is reflective of a market-based reseller margin. The
Company determines the SSP for services in time and materials contracts by observable prices in standalone services arrangements. The
Company estimates variable consideration in the form of royalties, revenue share, monthly fees, and service credits at contract inception
and updated at the end of each reporting period if additional information becomes available. Variable consideration is typically not
subject to constraint. Changes to variable consideration were not material for the periods presented. If
a contract has payment terms that differ from the timing of revenue recognition, the Company will assess whether the transaction price
for those contracts include a significant financing component. The Company has elected the practical expedient that permits an entity
to not adjust for the effects of a significant financing component if the Company expects that at the contract inception, the period
between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service, will
be one year or less. For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative
estimate of the financing component and its relative significance, requires judgment. Accordingly, the Company imputes interest on such
contracts at an agreed-upon interest rate and will present the financing components separately as financial income. As of March 31, 2024
and March 31, 2023, the Company did not have any such financial income. Payment
terms with customers typically require payment 30 days from the invoice date. The Company’s agreements with its customers do not
provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances
where customers raise concern over delivered products or services, the Company has endeavored to remedy the concern and all costs related
to such matters have been insignificant in all periods presented. The
Company has elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and
not as a promised good or service. Accordingly, the Company will accrue all fulfillment costs related to the shipping and handling of
consumer goods at the time of shipment. The Company has payment terms with its customers of one year or less and has elected the practical
expedient applicable to such contracts not to consider the time value of money. Sales, value add, and other taxes the Company collects
concurrent with revenue-producing activities are excluded from revenue. The
Company receives payment from customers based on specified terms that are generally less than 30 days from the satisfaction of performance
obligations. There are no contract assets related to performance under the contract. The difference in the opening and closing balances
of the Company’s deferred revenue primarily results from the timing difference between the Company’s performance and the
customer’s payment. The Company fulfills obligations under a contract with a customer by transferring products and services in
exchange for consideration from the customer. Accounts receivable are recorded when the customer has been billed or the right to consideration
is unconditional. The Company recognizes deferred revenue when consideration has been received or an amount of consideration is due from
the customer, and the Company has a future obligation to transfer certain proprietary products. In
accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end
of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable.
The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A,
including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the right
to invoice practical expedient. The
Company generally provides a one-year warranty on its products for materials and workmanship but may provide multiple year warranties
as negotiated, and generally transfers to its customers the warranties it receives from its vendors, if any, which generally cover this
one-year period. In accordance with ASC 450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably
estimated. The Company maintained a reserve for warranty returns of $0.4 million and $0.4 million as of March 31, 2024 and December 31,
2023, respectively. The Company’s reserve for warranty returns is included in accrued expenses and other current liabilities in
its consolidated balance sheets. Additional information regarding the Company’s warranty reserve may be found in Note 3 –
Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements. Research
and Development Costs The
Company expenses research and development costs as incurred. Research and development expenses include payroll, employee benefits and
other expenses associated with product development. The Company incurs research and development costs associated with the development
and enhancement of both hardware and software products associated with its cultivation and extraction equipment, as well as its SaaS-based
software offering, Agrify Insights™ cultivation software (“Agrify Insights™”). Net
Loss Per Share The
Company presents basic and diluted net loss per share attributable to Common Stockholders in conformity with the two-class method required
for participating securities. The Company computes basic loss per share by dividing net loss available to Common Stockholders by the
weighted-average number of common shares outstanding. Net loss available to Common Stockholders represents net loss attributable to Common
Stockholders reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities
as the holders of the participating securities do not have a contractual obligation to share in any losses. Diluted loss per share adjusts
basic loss per share for the potentially dilutive impact of stock options and warrants. As the Company has reported losses for all periods
presented, all potentially dilutive securities including stock options and warrants, are anti-dilutive, and accordingly, basic net loss
per share equals diluted net loss per share. Net
loss per share calculations for all periods have been adjusted to reflect the reverse stock split effected on July 5, 2023. Net loss
per share was calculated based on the weighted-average number of Common Stock outstanding. Recently
Announced Accounting Pronouncements AS U
2023-09, Improvements to Income Tax Disclosures ∙ On December 14, 2023, the FASB issued, ASU 2023-09, Improvements to Income Tax
Disclosures, a final standard on improvements to income tax disclosures. The standard requires disaggregated information about a reporting
entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard applies to all entities subject
to income taxes and is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making
capital allocation decisions. For public business entities (PBEs), the new requirements will be effective for annual periods beginning
after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. The
Company is currently in the process of evaluating the effect of this guidance on its financial statements. Other
recent accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or
future consolidated financial statements. |
