RYTHM, Inc 10-Q for FY2023 Q1
RYTHM, Inc. (RYM)
About this 10-Q
RYTHM, Inc filed this 10-Q on November 28, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.8M
- down 77.7% from $26.02M a year earlier
- Net loss
- $10.33M
- compared with net income of $1.78M a year earlier
- Diluted EPS
- -$9.63
- compared with $13.79 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from _________ to _________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
(Registrant’s phone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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 ☐ ☒
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 ☐ ☒
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 | ☐ |
| ☒ | 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.
| Class | Outstanding as of October 19, 2023 | |
| Common Stock, $0.001 par value |
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AGRIFY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Marketable securities | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Inventory, net of reserves of $ | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Loan receivable net of allowance for doubtful accounts of $ | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets, net | ||||||||
| Other non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Operating lease liabilities, current | ||||||||
| Long-term debt, current | ||||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Warrant liabilities | ||||||||
| Operating lease liabilities, non-current | ||||||||
| Long-term debt | ||||||||
| Other non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 15) | ||||||||
| Stockholders’ equity: | ||||||||
| Common Stock, $ | ||||||||
| Preferred Stock, $ | ||||||||
| Preferred A Stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Non-controlling interests | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
| (1) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
AGRIFY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
| Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue (including $ | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| General and administrative | ||||||||
| Selling and marketing | ||||||||
| Research and development | ||||||||
| Change in contingent consideration | ( | ) | ||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Interest (expense) income, net | ( | ) | ||||||
| Change in fair value of warrant liabilities | ||||||||
| Other income (expense) | ||||||||
| Loss on extinguishment of notes payable | ( | ) | ||||||
| Other income (expense), net | ( | ) | ||||||
| Net (loss) income before income taxes | ( | ) | ||||||
| Income tax benefit | ||||||||
| Net (loss) income | ( | ) | ||||||
| Income attributable to non-controlling interest | ( | ) | ||||||
| Net (loss) income attributable to Agrify Corporation | $ | ( | ) | $ | ||||
| Net (loss) income per share attributable to Common Stockholders – basic | $ | ( | ) | $ | ||||
| Net (loss) income per share attributable to Common Stockholders – diluted | $ | ( | ) | $ | ||||
| Weighted average common shares outstanding - basic (1) | ||||||||
| Weighted average common shares outstanding - diluted (1) | ||||||||
| (1) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
AGRIFY CORPORATION
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 | Amount | Shares | Amount | Capital | Deficit | to Agrify | Interests | Equity | ||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of Common Stock and warrants in private placement | ||||||||||||||||||||||||||||||||||||
| Acquisition of Lab Society | ||||||||||||||||||||||||||||||||||||
| Exercise of options | ||||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | — | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||
| Common Stock | Preferred A Stock | Additional Paid-In | Accumulated | Total Stockholders’ Equity attributable | Non- Controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | to Agrify | Interests | Equity | ||||||||||||||||||||||||||||
| Balance at January 1, 2023 | — | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of Common Stock through an “at the market” offering, net of fees | ||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock to Pure Pressure | — | — | — | |||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||||||||||||||
| Proceeds from Employee Stock Purchase Plan Shares | — | — | — | — | — | |||||||||||||||||||||||||||||||
| Net (loss) | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||||||||
| Balance March 31, 2023 | $ | — | $ | — | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
AGRIFY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| For the three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income attributable to Agrify Corporation | $ | ( | ) | $ | ||||
| Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of premium on investment securities | ||||||||
| Amortization of debt discount | ||||||||
| Interest on investment securities | ( | ) | ||||||
| Amortization of issuance costs | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Stock based compensation expense | ||||||||
| Non-cash interest income | ( | ) | ||||||
| Change in fair value of warrant liabilities | ( | ) | ( | ) | ||||
| Loss on extinguishment of notes payable, net | ||||||||
| Early termination of lease | ||||||||
| Income attributable to non-controlling interests | ||||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Right of use assets, net | ( | ) | ( | ) | ||||
| Other non-current assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses and other current liabilities | ( | ) | ( | ) | ||||
| Operating lease liabilities | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Purchase of securities | ( | ) | ||||||
| Proceeds from sale of securities | ||||||||
| Issuance of loan | ( | ) | ( | ) | ||||
| Cash paid for business combination, net of cash acquired | ( | ) | ||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of debt and warrants in private placement | ||||||||
| Proceeds from issuance of Common Stock and warrants in private placement, net of fees | ||||||||
| Proceeds from “at the market” Program, net | ||||||||
| Proceeds from Employee Stock Option Plan shares | ||||||||
| Proceeds from exercise of options | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Repayment of notes payable, other | ( | ) | ||||||
| Repayment of debt in private placement | ( | ) | ||||||
| Payments on insurance financing loan | ( | ) | ( | ) | ||||
| Payments on other financing loans | ( | ) | ( | ) | ||||
| Payments of financing leases | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net (decreased) increase in cash, cash equivalents, and restricted cash | ( | ) | ||||||
| Cash, cash equivalents, and restricted cash at the beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash at the end of period | $ | $ | ||||||
| Cash, cash equivalents, and restricted cash at end of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents, and restricted cash at the end of period | $ | $ | ||||||
| Supplemental disclosures of non-cash flow information | ||||||||
| Initial fair value of warrants | ||||||||
| Financing of prepaid insurance | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Overview, Basis of Presentation and Significant Accounting Policies
Description of Business
Agrify Corporation (“Agrify” or the “Company”) is a leading 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 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-positioned to capture market share and create a dominant market position in the indoor cannabis 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” and the Company also has ownership interests in certain companies. (Please refer to Exhibit 23.1 for further details)
Reverse Stock 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.
Confidentially Marketed Public Offering
On December 16, 2022, the
Company 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
The aggregate gross proceeds
to the Company from the Offering were approximately $
5
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 days, the bid price for
the Company’s Common Stock had closed below $
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 $
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 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 and for the quarterly 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 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 failure to file its Annual Report on Form 10-K (the “Form 10-K”) with the SEC by the required due date.
On May 17, 2023, the Company received a second notice from Nasdaq (the “May Nasdaq Notice”) that it remained 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 quarter 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 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.
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.
6
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $
Basis of Presentation and Principles of Consolidation
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. 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
7
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, has negative cash flows from operations and a working capital deficiency. The Company also has an
accumulated deficit of $
As of March 31, 2023, the
Company had $
On October 18, 2022, the
Company entered into the ATM Program with Canaccord Genuity LLC (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 $
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.
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 months ended March 31, 2023 and 2022.
8
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company
effected a 1-for-10 reverse stock split of its Common 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. The shares of Common Stock retained a par value of $
Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents consist principally of cash and deposits with maturities of three months or less as of March 31, 2023 and December 31, 2022. All cash equivalents are carried at cost, which approximates fair value. Restricted cash 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 in the consolidated balance sheets. Additional information relating to the Company’s Exchange Note may be found in Note 8 – Debt, included elsewhere in the notes to the consolidated financial statements.
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, 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.
The
tables below show customers who account for
9
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue
| Three months ended March 31, 2023 | Three months ended March 31, 2022 | |||||||||||||||
| (In thousands) | Amount | % of Total Revenue | Amount | % of Total Revenue | ||||||||||||
| Customer A | $ | % | ||||||||||||||
| Customer B | $ | % | ||||||||||||||
| Customer C | $ | % | ||||||||||||||
| * | Customer revenue, as a percentage of total revenue, was less than |
Accounts Receivable, Net
| As of March 31, 2023 | As of December 31, 2022 | |||||||||||||||
| (In thousands) | Amount | % of Total Accounts Receivable | Amount | % of Total Accounts Receivable | ||||||||||||
| Company Customer Number – 15095 | $ | % | $ | % | ||||||||||||
| Company Customer Number - 10888 | $ | % | $ | % | ||||||||||||
| Company Customer Number - 16491 | $ | % | ||||||||||||||
| * |
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.
Property and Equipment
| Estimated Useful Life (Years) | ||
| Computer and office equipment | ||
| Furniture and fixtures | ||
| Software | ||
| Vehicles | ||
| Research and development of laboratory equipment | ||
| Machinery and equipment | ||
| Leased equipment | ||
| Trade show assets | ||
| Leasehold improvements |
10
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 expense 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 quarter 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 property 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. Accordingly, the Company concluded that the entire carrying value of its goodwill was impaired, resulting in a second-quarter
impairment charge of $
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 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.
| Trade names | ||
| Acquired developed technology | ||
| Non-compete agreements | ||
| Customer relationships | ||
| Capitalized website costs |
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.
11
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the quarter 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 property 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 intangible assets. Accordingly, the Company concluded that the entire carrying value of its intangible assets should be impaired,
resulting in a second-quarter impairment charge of $
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 (“ASC 815”). The accounting treatment of derivative financial instruments requires that the Company identify and record certain 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 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.
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.
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 “August 2022 Exchange Agreement”). Pursuant to the August 2022 Exchange
Agreement, the Company issued a new warrant to purchase
12
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Debt Issuance Costs and Debt Discount
The Company may record debt issuance costs and/or debt discounts in connection with the 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
Certain convertible debt issued by the Company, 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 an 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 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 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.
Deferred Revenue
Deferred revenue includes amounts collected or billed in excess of revenue that the 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 values of accounts receivable and accounts payable approximate their carrying values due to the short-term nature of these instruments.
13
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
The Company measures all stock options and other stock-based awards granted to employees, directors and consultants 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.
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 4 – 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; |
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AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| ● | 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.
15
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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 ended March 31, 2023 and 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.
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 receivables 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.
16
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $
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™”).
Capitalization of Internal Software Development Costs
The Company capitalizes certain software engineering efforts related to the continued development of Agrify Insights™ under ASC Topic 350-40. The costs incurred in the preliminary stages of development are expensed as incurred as research costs. Once the application has reached the development stage, internal and external costs incurred to develop internal-use software are capitalized and amortized on a straight-line basis over the estimated 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 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. The estimated useful life of capitalized internal-use software ranges from two to five years.
Income Taxes
The Company accounts 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 tax asset will not be realized.
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
17
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizes the benefit of a tax position when it is effectively settled. ASC 740-10-25-10 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 with Conversion and Other Options (Subtopic 470-20), and Derivatives and 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 for fiscal years beginning after December 15, 2022. The Company does not expect that the application of ASU No. 2016-13 will have a material impact on the presentation of its results of operations, financial position, or disclosures.
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 Company does not expect that the application of ASU 2021-08 will have a material impact on the presentation of its results of operations, financial position, or disclosures.
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.
18
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Revenue and Deferred Revenue
Revenue
The Company sells its equipment and services to customers under a combination of a contract and purchase order. Equipment revenue includes sales from proprietary products designed and engineered by the Company such 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.
| Three months ended March 31, | ||||||||
| (In thousands) | 2023 | 2022 | ||||||
| Transferred at a point in time | $ | $ | ||||||
| Transferred over time | ||||||||
| Total revenue | $ | $ | ||||||
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.
Deferred Revenue
| (In thousands) | Three months ended March 31, 2023 | Year ended December 31, 2022 | ||||||
| Deferred revenue – beginning of period | $ | $ | ||||||
| Additions | ||||||||
| Interest income on deferred revenue | ||||||||
| Recognized | ( | ) | ( | ) | ||||
| Deferred revenue – end of period | $ | $ | ||||||
Deferred revenue balances primarily consist of customer deposits on the Company’s cultivation and extraction solutions equipment. As of March 31, 2023 and December 31, 2022, all of the Company’s deferred revenue balances were reported as current liabilities in the accompanying consolidated balance sheets.
19
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Supplemental Consolidated Balance Sheet Information
Accounts Receivable
| (In thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Accounts receivable, gross | $ | $ | ||||||
| Less allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
| (In thousands) | Three months ended March 31, 2022 | Year ended December 31, 2022 | ||||||
| Allowance for doubtful accounts - beginning of period | $ | $ | ||||||
| (Recovery of) Provision for doubtful accounts | ( | ) | ||||||
| Write-offs of uncollectible accounts | ( | ) | ||||||
| Other adjustments | ( | ) | ||||||
| Allowance for doubtful accounts - end of period | $ | $ | ||||||
Bad debt expense was $
Prepaid Expenses and Other Current Assets
| (In thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Other receivables, other | $ | $ | ||||||
| Prepaid expenses, other | ||||||||
| Prepaid insurance | ||||||||
| Deferred issuance costs, net | ||||||||
| Prepaid software | ||||||||
| Prepaid materials | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
Property and Equipment, Net
| (In thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Leasehold improvements | $ | $ | ||||||
| Machinery and equipment | ||||||||
| Software | ||||||||
| Computer and office equipment | ||||||||
| Leased equipment | ||||||||
| Furniture and fixtures | ||||||||
| Research and development laboratory equipment | ||||||||
| Vehicles | ||||||||
| Trade show assets | ||||||||
| Total property and equipment, gross | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Construction in progress | ||||||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation expense for the three months ended March 31, 2023 and
2022 was $
20
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other Non-Current Assets
| (In thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Security deposits | $ | $ | ||||||
| Long-term deferred commissions expense | ||||||||
| Total other non-current assets | $ | $ | ||||||
Accrued Expenses and Other Current Liabilities
| (In thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Accrued acquisition liabilities (1) | $ | $ | ||||||
| Sales tax payable (2) | ||||||||
| Accrued construction costs | ||||||||
| Compensation related fees | ||||||||
| Accrued professional fees | ||||||||
| Accrued warranty expenses | ||||||||
| Accrued consulting fees | ||||||||
| Accrued inventory purchases | ||||||||
| Accrued interest expense | ||||||||
| Financing lease liabilities | ||||||||
| Other current liabilities | ||||||||
| Total accrued expenses and other current liabilities | $ | $ | ||||||
| (1) |
| (2) |
21
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accrued Warranty Costs
| (In thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Warranty accrual - beginning of period | $ | $ | ||||||
| Liabilities accrued for warranties issued during the period | ||||||||
| Warranty accrual - end of period | $ | $ | ||||||
Note 4 — Fair Value Measures
Fair Values of Assets and Liabilities
In accordance with ASC Topic 820 “Fair Value Measurement”, the Company measures fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows:
| Level 1: | Observable inputs such as quoted prices for identical assets or liabilities in active markets. | |
| Level 2: | Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active. | |
| Level 3: | Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions about how market participants would price the asset or liability. |
Valuation techniques for assets and liabilities include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||
| Fair Value Measurements Using Input Types | Fair Value Measurements Using Input Types | |||||||||||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||
| Mutual funds (included in cash and cash equivalents) | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Money market funds | ||||||||||||||||||||||||||||||||
| Cash receivables | ||||||||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Warrant liabilities - January 2022 warrants | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Warrant liabilities - March 2022 warrants | ||||||||||||||||||||||||||||||||
| Warrant liabilities - August 2022 warrants | ||||||||||||||||||||||||||||||||
| Warrant liabilities - December 2022 warrants | ||||||||||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
22
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 as well as other balances of the Company are as follows:
| ● | Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and deferred revenue liabilities approximate their fair 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 March 31, 2023, approximated fair value. |
| ● | The Company’s deferred consideration was recorded in connection with acquisitions during the three months ended March 31, 2023 and fiscal 2022 using an estimated fair value discount at the time of the transactions. As of March 31, 2023 and December 31, 2022, the carrying value of the deferred consideration approximated fair value, respectively. |
| ● | The Company’s warrant liabilities are marked-to-market each reporting period with the changes in fair value of warrant liabilities recorded in other income (expense), net in the accompanying consolidated statements of operations until the warrants are exercised. The fair value of the warrant liabilities are estimated using a Black-Scholes option-pricing model. |
Marketable Securities
As of March 31, 2023, the Company held investments in, municipal bonds and corporate bonds. 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.
| (In thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Current marketable securities: | ||||||||
| Money market funds | $ | $ | ||||||
| Cash receivables | ||||||||
| Corporate bonds | ||||||||
| Mutual funds | ||||||||
| $ | $ | |||||||
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.
23
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| (In thousands) | Three months ended March 31, 2023 | Year ended December 31, 2022 | ||||||
| Contingent consideration – beginning of period | $ | $ | ||||||
| Accrued contingent consideration | ||||||||
| Accretion of contingent consideration | ||||||||
| Payments made on contingent liabilities | ( | ) | ||||||
| Change in estimated fair value | ( | ) | ||||||
| Contingent consideration – end of period | $ | $ | ||||||
The Company included contingent consideration within accrued expenses and other current liabilities on its consolidated balance sheets as of March 31, 2023 and December 31, 2022.
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 $
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 $
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 $
Warrant Liabilities
The estimated fair value of the warrant liabilities on March 31, 2023 is determined using Level 3 inputs. Inherent in a Black-Scholes option-pricing model are assumptions used in calculating the estimated fair values 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.
24
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
January 2022 Warrants
| As of March 31, 2023 | December 31, 2022 | |||||||
| Stock price | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Expected term (in years) | ||||||||
| Volatility | % | % | ||||||
| Discount rate - treasury yield | % | % | ||||||
| (In thousands) | Three months ended March 31, 2023 | |||
| Warrant liabilities – beginning of period | $ | | ||
| Change in estimated fair value | ||||
| Warrant liabilities – end of period | $ | |||
March 2022 Warrants
| As of March 31, 2023 | December 31, 2022 | |||||||
| Stock price | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Expected term (in years) | ||||||||
| Volatility | % | % | ||||||
| Discount rate - treasury yield | % | % | ||||||
| (In thousands) | Three months ended March 31, 2023 | |||
| Warrant liabilities – beginning of period | $ | |||
| Change in estimated fair value | ( | ) | ||
| Warrant liabilities – end of period | $ | |||
25
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 2022 Warrants
| As of March 31, 2023 | December 31, 2022 | |||||||
| Stock price | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Expected term (in years) | ||||||||
| Volatility | % | % | ||||||
| Discount rate - treasury yield | % | % | ||||||
| (In thousands) | Three months ended March 31, 2023 | |||
| Warrant liabilities – beginning of period | $ | | ||
| Change in estimated fair value | ( | ) | ||
| Warrant liabilities – end of period | $ | |||
December 2022 Warrants
| As of March 31, 2023 | December 31, 2022 | |||||||
| Stock price | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Expected term (in years) | ||||||||
| Volatility | % | % | ||||||
| Discount rate - treasury yield | % | % | ||||||
| (In thousands) | Three months ended March 31, 2023 | |||
| Warrant liabilities – beginning of period | $ | |||
| Change in estimated fair value | ( | ) | ||
| Warrant liabilities – end of period | $ | |||
Note 5 — Loans Receivable
A portion of the capital
raised from the Company’s IPO was allocated to launch the Company’s TTK Solution program. The TTK Solution is the industry’s
first-of-its-kind program in which the Company engages with qualified cannabis operators in the early phases of their business plans and
provides critical support, typically over a
26
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On September 15, 2022,
During the year ended December
31, 2022, the Company established a reserve of approximately $
| (In thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Bud & Mary’s – TTK Solution | $ | $ | ||||||
| Greenstone – TTK Solution – Related Party | ||||||||
| Company Customer Number 136 – TTK Solution | ||||||||
| Company Customer Number 125 – TTK Solution | ||||||||
| Company Customer Number 71 – Non-TTK Solution (1) | ||||||||
| Allowance for doubtful accounts (2) | ( | ) | ( | ) | ||||
| Total loan receivable | $ | $ | ||||||
| (1) |
| (2) |
| (3) | The Company established an
allowance for doubtful accounts of approximately $ |
At this time, the Company is not aware of, nor has it identified any risk or potential performance failure associated with any of its TTK Solution arrangements, other than the noted exceptions 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 ASC 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 March 31, 2023, two of the Company’s
employees own approximately
27
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Inventory
Inventories are stated at the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a first-in, first-out basis. Such costs include the acquisition cost for raw materials and operating supplies. The Company’s standard payment terms with suppliers may require making payments in advance of delivery of the Company’s products. The Company’s prepaid inventory is a short-term, non-interest-bearing asset that is applied to the purchase of products once they are delivered.
| (In thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Raw materials | $ | $ | ||||||
| Prepaid inventory | ||||||||
| Finished goods | ||||||||
| Inventory for resale | ||||||||
| Inventory, gross | ||||||||
| Inventory reserves | ( | ) | ( | ) | ||||
| Total inventory, net | $ | $ | ||||||
Inventory Reserves
The Company establishes an inventory reserve for obsolete, slow moving, and defective inventory. The Company calculates inventory reserves for obsolete, slow moving, or defective items as the difference between the cost of inventory and its estimated net realizable value. The reserves are based upon management’s expected method of disposition.
| (In thousands) | Three Months Ended March 31, 2023 | Year Ended December 31, 2022 | ||||||
| Inventory reserves – beginning of period | $ | $ | ||||||
| (Decrease) increase in inventory reserves | ( | ) | ||||||
| Inventory reserves – end of period | $ | $ | ||||||
Note 7 — 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 months 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 impairment testing purposes, the Company has one reporting unit.
During the three-month 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 was 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.
28
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $
| (In thousands) | Year ended December 31, 2022 | |||
| Goodwill - beginning of period | $ | |||
| Goodwill acquired during period | ||||
| Goodwill purchase accounting adjustment | ||||
| Goodwill impairment loss | ( | ) | ||
| Goodwill - end of period | $ | |||
| Intangible Assets, Gross | Accumulated
Amortization and Impairment | Intangible Assets, Net | ||||||||||||||||||||||||||||||
| (In thousands) | January 1, 2022 | Additions and Retirements, net | December 31, 2022 | January 1, 2022 | Expense and Retirements, net | December 31,
2022 | January 1,
2022 | December 31,
2022 | ||||||||||||||||||||||||
| Trade names | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Customer Relationships | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Acquired developed Technology | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Non-compete | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Capitalized website costs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
Note 8 — Debt
| (In thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Note payable – Exchange Note | $ | $ | ||||||
| PPP Loan | ||||||||
| Navitas loan | ||||||||
| Other notes payable (1) | ||||||||
| Total debt | ||||||||
| Less: unamortized debt premium (discount) | ( | ) | ||||||
| Total debt, net of debt discount | ||||||||
| Less: current portion, net of current unamortized debt discount | ( | ) | ( | ) | ||||
| Long-term debt | $ | $ | ||||||
| (1) |
29
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $
August 2022 Securities Exchange Agreement
On August 18, 2022, the Company
reached an agreement with the 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 $
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
At any time, the Company
may prepay all of the Exchange Note by redemption at a price equal to
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
Until the date the Exchange
Note is fully repaid, the Investor has, subject to certain exceptions, the right to participate for up to
The Modified Warrant has
an exercise price of $
30
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Note Exchange Warrant
has an exercise price of $
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 $
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 $
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 $
At any time, the Company
may prepay all of the Convertible Note by redemption at a price equal to
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)
31
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Until the date the Convertible
Note is fully repaid, the Lender will have, subject to certain exceptions, the right to participate for up to
If the Lender elects to convert
the Convertible Note, the conversion price per share will be $
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 $
| (In thousands) | Short-Term | Long-Term | Notes payable, net | |||||||||
| Principal | $ | |||||||||||
| Unamortized premium | ||||||||||||
| Net carrying amount | $ | $ | $ | |||||||||
32
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Years ending December 31 (In thousands), | ||||
| Remaining 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| Total future payments | $ | |||
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 $
| (In thousands) | Balance Sheet Location | March 31, 2023 | December 31, 2022 | |||||||
| PPP Loan, current | $ | $ | ||||||||
| PPP Loan, non-current | ||||||||||
| Total PPP Loan outstanding | $ | $ | ||||||||
Note 9 — 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
As the implicit interest
rate in its leases was generally not known, the Company’s used its incremental borrowing rate as the discount rate for purposes
of determining the present value of its lease liabilities. At March 31, 2023, the Company’s weighted-average discount rate utilized
for its leases was
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.
33
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
| Three months ended March 31, | ||||||||
| (In thousands) | 2023 | 2022 | ||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | ||||||||
| Interest on lease liabilities | ||||||||
| Short-term lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Weighted-average remaining lease term – operating leases | ||||||||
| Weighted-average remaining lease term – finance leases | ||||||||
| Weighted-average discount rate – operating leases | % | % | ||||||
| Weighted-average discount rate – finance leases | % | % | ||||||
| (In thousands) | Balance Sheet Location | March 31, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||||
| Right-of-use assets, net | $ | $ | ||||||||
| Finance lease assets | ||||||||||
| Liabilities | ||||||||||
| Operating lease liabilities, current | ||||||||||
| Operating lease liabilities, non-current | ||||||||||
| Total operating lease liabilities | $ | $ | ||||||||
| Finance lease liabilities, current | ||||||||||
| Finance lease liabilities, non-current | ||||||||||
| Total finance lease liabilities | $ | $ | ||||||||
| Years ending December 31 (In thousands), | Operating lease | Finance lease | ||||||
| Remaining 2023 | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Total minimum lease payments | ||||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Total lease liabilities | $ | $ | ||||||
34
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Stockholders’ Equity
On July 11, 2022, the Company
increased its authorized number of shares to
On March 1, 2023, the Company further increased its authorized number
of shares to
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
Subject to certain ownership
limitations, the SA Warrants are exercisable six months from issuance.
Raymond Chang, Chairman and
Chief Executive Officer (“CEO”) of the Company, and Stuart Wilcox, who formerly 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 $
The gross proceeds to the
Company from the private placement were approximately $
Issuance of Common Stock in Connection with Acquisitions
On October 1, 2021, the Company
issued an aggregate of
On December 31, 2021, the
Company issued an aggregate of
On February 1, 2022, the
Company issued an aggregate of
35
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 $
Confidentially Marketed Public Offering
On December 16, 2022, the
Company issued
The Pre-Funded 2022 Warrants
were exercisable immediately upon issuance at an exercise price of $
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
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 $
Raymond Chang, Chairman and
CEO, participated in the Offering and purchased
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.
36
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
The
Company’s stock compensation expense was $
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 months ended March 31, 2023.
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.
37
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| (In thousands, except share and per share data) | Number of Options | Weighted-Average Exercise Price | Aggregate Intrinsic Value | |||||||||
| Options outstanding at January 1, 2023 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Forfeited | ( | ) | ||||||||||
| Expired | ( | ) | ||||||||||
| Options outstanding at March 31, 2023 | $ | $ | ||||||||||
| Options vested and exercisable as of March 31, 2023 | $ | |||||||||||
| Options vested and expected to vest as of March 31, 2023 | $ | |||||||||||
As of March 31, 2023, total
unrecognized compensation expense related to unvested options under the Company’s 2022 Plan was $
| Options Vested and Exercisable | ||||||||||||||
| Price ($) | Number of Options | Weighted-Average Remaining Contractual Life (Years) | Weighted-Average Exercise Price | |||||||||||
| $ | 456.00 | $ | ||||||||||||
| $ | 972.00 | $ | ||||||||||||
| $ | 1,536.00 | $ | ||||||||||||
| $ | 1,840.00 | $ | ||||||||||||
| $ | 2,768.00 | $ | ||||||||||||
The following table summarizes information about options expected to vest after March 31, 2023:
| Options Vested and Expected to Vest | ||||||||||||||
| Price ($) | Number of Options | Weighted-Average Remaining Contractual Life (Years) | Weighted-Average Exercise Price | |||||||||||
| $ | 456.00 | $ | ||||||||||||
| $ | 972.00 | $ | ||||||||||||
| $ | 1,536.00 | $ | ||||||||||||
| $ | 1,840.00 | $ | ||||||||||||
| $ | 2,768.00 | $ | ||||||||||||
38
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.
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Unvested at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Unvested at March 31, 2023 | $ | |||||||
As of March 31, 2023, total
unrecognized compensation expense related to unvested restricted stock units was $
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
Under the ESPP, eligible
employees are granted options to purchase shares of Common Stock at the lower of
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 ended March 31, 2023, the Company did not contribute to the 401(k) Plan.
Note 12 — Stock Warrants
| Number of Warrants | Weighted-Average Exercise Price | |||||||
| Warrants outstanding at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Warrants outstanding at March 31, 2023 | ||||||||
39
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Number of Warrants | Weighted-Average Exercise Price | |||||||
| Warrants outstanding at December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Exercised | ( | ) | $ | |||||
| Warrants outstanding at March 31, 2022 | $ | |||||||
The Company received proceeds from the exercise
of warrants of $
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.
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.
40
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Three months ended March 31, | ||||||||
| (In thousands, except share and per share data) | 2023 | 2022 | ||||||
| Numerator: | ||||||||
| Net income (loss) attributable to Agrify Corporation | ( | ) | ||||||
| Net income (loss) available for common shareholders | ( | ) | ||||||
| Denominator: | ||||||||
| Weighted-average common shares outstanding – basic | ||||||||
| Weighted-average common shares outstanding – diluted | ||||||||
| Net income (loss) per share attributable to Common Stockholders – basic | $ | ( | ) | $ | ||||
| Net income (loss) per share attributable to Common Stockholders – diluted | $ | ( | ) | $ | ||||
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.
| Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Shares subject to outstanding stock options | ||||||||
| Shares subject to unvested restricted stock units | ||||||||
| Shares subject to outstanding warrants | ||||||||
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 $
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.
41
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $
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 $
On October 11, 2022, the
Company received a $
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 $
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.
42
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $
On October 11, 2022, the
Company received a $
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 $
Committed Purchase Agreement with Related Party – 4D Bios, Inc.
On September 18, 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 $
43
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
Note 16 — Related Parties
Some of the officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available.
| Three months ended March 31, | ||||||||
| (In thousands) | 2023 | 2022 | ||||||
| Bluezone | $ | $ | ||||||
| Cannae Policy Group | ||||||||
| Topline Performance Group | ( | ) | ||||||
| NEIA | ( | ) | ( | ) | ||||
| Greenstone Holdings | ( | ) | ( | ) | ||||
| Valiant Americas, LLC | ||||||||
| (In thousands) | March 31, 2023 | December 31, 2022 | ||||||
| NEIA | $ | $ | ||||||
| Valiant Americas, LLC | ( | ) | ||||||
| Topline Performance Group | ||||||||
Note 17 — Subsequent Events
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued.
Nasdaq Deficiency Notices
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 failure to file its Annual Report on Form 10-K with the SEC by the required due date.
On May 17, 2023, the Company received a second notice from Nasdaq (the “May Nasdaq Notice”) that it remained 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 quarter 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 “Delayed Reports”). The Nasdaq Notice had no immediate effect on the listing of the Company’s common stock on The Nasdaq Stock Market LLC.
44
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On October 17, 2023, the Company received 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 Delinquent Reports in a timely manner. The Company timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”), and the Panel scheduled a hearing for January 11, 2024.
Securities Exchange Agreement
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 $
Discontinuance of the ATM Program
The ATM Program was discontinued after April 1, 2023.
Repricing of Common Stock Warrants
The Company issued
Leases
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.
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 $
Additionally, as part of
the Modification Agreement, the Company agreed to issue to Mack a warrant to purchase
45
AGRIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $
Each
warrant has an exercise price of $
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 $
The
Letter Agreement requires that the Company issue equity securities to Mr. Chang or his affiliates for aggregate gross proceeds of at least
$
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 $
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 $
46
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, 2022 filed with the Securities and Exchange Commission on November 27, 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 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 a developer of proprietary precision hardware and software grow solutions for the indoor commercial agriculture industry and provides equipment and solutions for cultivation, extraction, post-processing, and testing for the cannabis and hemp industries. We believe we are the only company with an automated and fully integrated grow solution in the industry. Our Agrify “Precision Elevated™” cultivation solution seamlessly combines our integrated hardware and software offerings with a broad range of associated services including consulting, engineering, and construction and is designed to deliver the most complete commercial indoor farming solution available from a single provider. The totality of our product offerings and service capabilities forms an unrivaled ecosystem in what has historically been a highly fragmented market. As a result, we believe we are well situated to create a dominant market position in the indoor agriculture sector.
Agrify Corporation was incorporated in the state of Nevada on June 6, 2016, originally incorporated as Agrinamics, Inc. (or “Agrinamics”). On September 16, 2019, Agrinamics amended its articles of incorporation to reflect a name change to Agrify Corporation.
Our corporate headquarters are located in Billerica, Massachusetts. We also lease properties located within various geographic regions in which we conduct business, including Colorado, Georgia, Massachusetts, Michigan, and Oregon.
Reverse Stock Split
On January 12, 2021, we effected a 1-for-1.581804 reverse stock split on our Common Stock. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented, unless otherwise indicated.
On October 18, 2022, 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.
47
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 of 12,253 shares (the “SA Shares”) of our 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 became exercisable six months from issuance. Each Pre-Funded Warrant is exercisable into one share of Common Stock (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 previously 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.
Acquisition of Lab Society
On February 1, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with LS Holdings Corp. (“Lab Society”), Lab Society NewCo, LLC, a newly-formed wholly-owned subsidiary of us (“Merger Sub”), Michael S. Maibach Jr. as the Owner Representative thereunder, and each of the shareholders of Lab Society (collectively, the “Owners”), pursuant to which we agreed to acquire Lab Society. Concurrently with the execution of the Merger Agreement, we consummated the merger of Lab Society with and into Merger Sub, with Merger Sub surviving such merger as a wholly-owned subsidiary of us (the “Lab Society Acquisition”).
The aggregate consideration for the Lab Society Acquisition consisted of $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness of Lab Society at closing; 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 were released following the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions of the Merger Agreement. Additional information regarding our contingent consideration arrangements may be found in Note 4 – Fair Value Measures, included in the notes to the consolidated financial statements.
48
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.
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.
We amortize our intangible assets assuming no residual value over periods in which the economic benefit of these assets 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 the Investor to amend its existing SPA Note and entered into a Securities Exchange Agreement (the “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 the Exchange Note with an aggregate original principal amount of $35.0 million and a new warrant to purchase 71,139 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 “August 2022 Warrants”). Additional information regarding our August 2022 Warrants may be found in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies and Note 4 – Fair Value Measures, included in the notes to the condensed consolidated financial statements.
The Exchange Note is a senior secured obligation of ours and ranks senior to all indebtedness of 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 holder 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 holder 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.
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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 holder 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 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.
Until the date the Exchange Note is fully repaid, the holder 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 holder’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 holder’s election. Until we completed a qualified equity financing of at least $15.0 million, which requirement was satisfied with sales under the 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 issued 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 August 2022 Warrants each provide that in no event will the number of shares of Common Stock issued upon exercise of such warrants result in the holder’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 holder, but to no greater than 9.99). Additionally, the August 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.
March 2023 Securities Exchange Agreement
On March 9, 2023 we entered into 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 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”).
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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%.
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The Company evaluated the embedded features in accordance with ASC 815-15-25 and determined the embedded features are not required to be bifurcated and separately measured at fair value.
Interest expense related to the Convertible Notes described above was $170,974 for the three months ended March 31, 2023. Accrued interest totaled $170,974 as of March 31, 2023.
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, we entered into an underwriting agreement (the “Underwriting Agreement”) with Canaccord Genuity LLC as the underwriter, pursuant to which we agreed to sell an aggregate of 594,232 shares of our Common Stock, and, in lieu of Common 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 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 4.99% 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%).
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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 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 legal expenses, for net proceeds of $8.2 million. We intend 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.
Impact of coronavirus pandemic (“COVID-19”)
The extensive impact of the pandemic caused by COVID-19 has resulted and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world. In an effort to halt the outbreak of COVID-19, a number of countries, states, counties, and other jurisdictions have imposed, and may impose in the future, various measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, limitations on gatherings of people, reduced operations, and extended closures of businesses.
To date, although all of our operations are functioning, COVID-19 has continued to cause some disruptions to our business, such as some temporary delays in the delivery of our inventory. Although the ability of our suppliers to timely ship their goods has affected some of our deliveries, currently the difficulties experienced by our suppliers have not yet materially impacted our ability to deliver products to our customers. However, if this continues, it may negatively affect any inventory we may have and more significantly delay the delivery of merchandise to our customers, which in turn will adversely affect our revenues and results of operations.
The extent to which COVID-19 and the related global economic crisis, affect our business, results of operations and financial condition, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any recovery period, future actions taken by governmental authorities, central banks and other third parties (including new financial regulation and other regulatory reform) in response to the pandemic, and the effects on our produce, clients, vendors and employees. We continue to service our customers amid uncertainty and disruption linked to COVID-19 and we are actively managing our business to respond to its impact.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include assumptions about collection of accounts and notes receivable, the valuation and recognition of stock-based compensation expense, valuation allowance for deferred tax assets and useful life of fixed assets and intangible assets.
Financial Overview
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial position and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or 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 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.
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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 use and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability, and consideration is probable. Specifically, we obtain written/electronic signatures on contracts and a purchase order, if said purchase orders are issued in the normal course of business by the customer.
Identify performance obligations that are distinct
A performance obligation is a promise by us to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and our promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
Determine the transaction price
The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies.
Allocate the transaction price to distinct performance obligations
The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer. Our contracts typically contain multiple performance obligations, for which we account for individual performance obligations separately, if they are distinct. The standalone selling price reflects the price we would charge for a specific piece of equipment or service if it was sold separately in similar circumstances and to similar customers.
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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, taking into account available information such as market conditions, expected margins, and internally approved pricing guidelines related to the performance obligations. We license our software as a SaaS type subscription license, whereby the customer only has a right to access the software over a specified time period. The full value of the contract is recognized ratably over the contractual term of the SaaS subscription, adjusted monthly if tiered pricing is relevant. We typically satisfy our performance obligations for equipment sales when equipment is made available for shipment to the customer; for services sales as services are rendered to the customer and for construction contracts both as services are rendered and when contract is completed.
We utilize the cost-plus margin method to determine the SSP for equipment and build-out services. This method is based on the cost of the services from third parties, plus a reasonable markup that we believe is reflective of a market-based reseller margin.
We determine the SSP for services in time and materials contracts by observable prices in standalone services arrangements.
We estimate variable consideration in the form of royalties, revenue share, monthly fees, and service credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Variable consideration is typically not subject to constraint. Changes to variable consideration were not material for the periods presented.
If a contract has payment terms that differ from the timing of revenue recognition, we will assess whether the transaction price for those contracts include a significant financing component. We have elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if we expect that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service, will be one year or less. For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative estimate of the financing component and its relative significance, requires judgment. Accordingly, we impute interest on such contracts at an agreed upon interest rate and will present the financing components separately as financial income. For the three months ended March 31, 2023 and 2022, we did not have any such financial income.
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Payment terms with customers typically require payment 30 days from invoice date. Our agreements with customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise a concern over delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented.
We have elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service. Accordingly, we will accrue all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. We have payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
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 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.
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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, which occurred in 2020, the acquisition of Sinclair which occurred in 2021, the acquisition of 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. The 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 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 a decline in the Company’s market value as a result of a significant decline in the Company’s stock price. There have been no impairment charges recorded for three months ended March 31, 2023 and 2022, respectively.
Capitalization of Internal Software Development Costs
We capitalize certain software engineering efforts related to the continued development of Agrify Insights 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.
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We follow the provisions of ASC 740-10-25-5, “Basic Recognition Threshold.” When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10-25-6, the benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. We believe our tax positions are all highly certain of being upheld upon examination. As such, we have not recorded a liability for unrecognized tax benefits.
We recognize the benefit of a tax position when it is effectively settled. ASC 740-10-25-10, “Basic Recognition Threshold” provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. ASC 740-10-25-10 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority. For tax positions considered effectively settled, we recognize the full amount of the tax benefit.
Accounting for Stock-Based Compensation
We follow the provisions of ASC Topic 718, “Compensation — Stock Compensation.” ASC Topic 718 establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC Topic 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as options issued under our Stock Option Plans.
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying Common Stock, expected option life, and expected volatility in the market value of the underlying Common Stock.
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.
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Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022:
| Three months ended March 31, | ||||||||
| (In thousands, except share and per share data) | 2023 | 2022 | ||||||
| Revenue (including $46 and $863 from related parties, respectively) | $ | 5,804 | $ | 26,021 | ||||
| Cost of goods sold | 4,816 | 21,851 | ||||||
| Gross profit | 988 | 4,170 | ||||||
| General and administrative | 6,931 | 9,759 | ||||||
| Selling and marketing | 1,590 | 2,090 | ||||||
| Research and development | 735 | 2,084 | ||||||
| Change in contingent consideration | (684 | ) | — | |||||
| Total operating expenses | 8,572 | 13,933 | ||||||
| Loss from operations | (7,584 | ) | (9,763 | ) | ||||
| Interest (expense) income, net | (799 | ) | 559 | |||||
| Change in fair value of warrant liabilities | 2,672 | 10,785 | ||||||
| Other income (expense) | 4 | — | ||||||
| Loss on extinguishment of notes payable | (4,620 | ) | — | |||||
| Other income (expense), net | (2,743 | ) | 11,344 | |||||
| Net (loss) income before income taxes | (10,327 | ) | 1,581 | |||||
| Income tax benefit | — | 200 | ||||||
| Net (loss) income | (10,327 | ) | 1,781 | |||||
| Income attributable to non-controlling interest | — | (1 | ) | |||||
| Net (loss) income attributable to Agrify Corporation | $ | (10,327 | ) | $ | 1,780 | |||
| Net (loss) income per share attributable to Common Stockholders – basic | $ | (9.63 | ) | $ | 14.48 | |||
| Net (loss) income per share attributable to Common Stockholders – diluted | $ | (9.63 | ) | $ | 13.79 | |||
| Weighted average common shares outstanding - basic (1) | 1,072,292 | 122,946 | ||||||
| Weighted average common shares outstanding - diluted (1) | 1,072,292 | 129,045 | ||||||
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 Agrify Vertical Farming Units (or “VFUs”) and Agrify Integrated Grow Racks with our Agrify Insights software, which are supplemented with environmental control products, grow lights, facility build-out services and extraction equipment.
We continue to monitor and address 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 software, facility build-outs and extraction equipment and solutions. We believe that our product mix form an integrated ecosystem which allows us to be engaged with our potential customers from early stages of the grow cycle — first during the facility build-out, to the choice of cultivation solutions, running the grow business with our Agrify Insights software and finally, our extraction, post-processing and testing services to transform harvest into a sellable product. We believe that delivery of each solution in the various stages in the process will generate sales of additional solutions and services.
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The following table provides a breakdown of our revenue for the three months ended March 31, 2023 and 2022:
| Three
months ended March 31, | ||||||||||||||||
| (In thousands) | 2023 | 2022 | Change | % Change | ||||||||||||
| Cultivation solutions, including ancillary products and services | $ | 169 | $ | 382 | $ | (213 | ) | (56 | )% | |||||||
| Agrify Insights software | 30 | 1 | 29 | 2900 | % | |||||||||||
| Facility build-outs | 627 | 13,211 | (12,584 | ) | (95 | )% | ||||||||||
| Extraction solutions | 4,978 | 12,427 | (7,449 | ) | 100 | % | ||||||||||
| Total revenue | $ | 5,804 | $ | 26,021 | $ | (20,217 | ) | (78 | )% | |||||||
Revenues decreased by $20.2 million, or 78% for the three months ended March 31, 2023 compared to the same period in 2022. The comparative decrease in revenue was generated primarily from decreases in revenue from factory build-outs and extraction solutions. Extraction division revenues totaled $5.0 million in the first quarter of 2023. Additionally, design and build revenues decreased by $12.6 million due to the continued build-out of facilities under our TTK Solutions.
Cost of Goods Sold
Cost of goods sold represents a combination of the following: construction-related costs associated with our facility build-outs, internal and outsourced labor and material costs associated with the assembly of both cultivation equipment (primarily VFUs) and extraction equipment, as well as labor and parts costs associated with the sale or provision of other products and services.
The following table provides a breakdown of our cost of goods sold for the three months ended March 31, 2023 and 2022:
| Three months ended March 31, | ||||||||||||||||
| (In thousands) | 2023 | 2022 | Change | % Change | ||||||||||||
| Cultivation solutions, including ancillary products and services | $ | 533 | $ | 405 | $ | 128 | 32 | % | ||||||||
| Agrify Insights software | — | — | — | — | % | |||||||||||
| Facility build-outs | 720 | 13,076 | (12,356 | ) | (94 | )% | ||||||||||
| Extraction solutions | 3,563 | 8,370 | (4,807 | ) | 100 | % | ||||||||||
| Total cost of goods sold | $ | 4,816 | $ | 21,851 | $ | (17,035 | ) | (78 | )% | |||||||
Cost of goods sold decreased by $17.0 million, or 78%, for the three months ended March 31, 2023 compared to the same period in 2022. The comparative quarterly decrease in cost of goods sold is associated with decreases in cost of goods sold related to factory build-outs and extraction solutions.
Gross Profit (Loss)
| Three months ended March 31, | ||||||||||||||||
| (In thousands) | 2023 | 2022 | Change | % Change | ||||||||||||
| Gross profit | $ | 988 | $ | 4,170 | $ | (3,182 | ) | (76 | )% | |||||||
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Gross profit totaled $1.0 million, or 17.0% of total revenue during the three months ended March 31, 2023 compared to a gross loss of $4.2 million, or 16.0% of total revenue during the three months ended March 31, 2022. The comparative $3.2 million first-quarter year over year decrease in gross profit, as well as the comparative decrease in gross profit margin, is primarily attributable to a smaller decrease in costs of goods sold relative to the decrease in revenue for the period. During the first quarter of 2023, we realized a gross profit margin of 28% associated with our extraction solutions revenue, while we realized a gross profit margin of approximately (215)% on our cultivation-related revenues.
On a forward-looking basis, with the full year benefit of anticipated margin contribution associated with the extraction-related revenue contributions, the Company anticipates that gross margin performance, aided by our extraction-related equipment sales, will be in a mid-teens range. We anticipate that we will be able to improve upon that expected gross profit margin performance once we are able to generate meaningful software and production fee revenues from our TTK Solutions, which we currently expect to begin in the late third or early fourth quarter of 2023.
General and Administrative
| Three months ended March 31, | ||||||||||||||||
| (In thousands) | 2023 | 2022 | Change | % Change | ||||||||||||
| General and administrative | $ | 6,931 | $ | 9,759 | $ | (2,828 | ) | (29 | )% | |||||||
General and administrative (“G&A”) expenses consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses, associated with executive and other administrative functions. Other G&A expenses include, but are not limited to, professional fees for legal, consulting, depreciation and amortization and accounting services, as well as facility-related costs.
G&A expense decreased by $2.8 million, or 29%, for the three months ended March 31, 2023, compared to the same period in 2022. The decrease is attributable to payroll, benefits and related expenses decrease of $1.3 million, a decrease in acquisition-related expenses of $1.3 million, an increase in consulting and other related expenses of $652 thousand, a decrease in insurance expenses of $207 thousand, a decrease in depreciation and amortization of $639 thousand.
Selling and Marketing
| Three months ended March 31, | ||||||||||||||||
| (In thousands) | 2023 | 2022 | Change | % Change | ||||||||||||
| Selling and marketing | $ | 1,590 | $ | 2,090 | $ | (500 | ) | (24 | )% | |||||||
Selling and marketing expenses consist primarily of salaries and related costs of personnel, travel expenses, trade shows and advertising expenses.
Selling and marketing expenses decreased by $0.5 million, or 24%, for the three months ended March 31, 2023, compared to the same period in 2022. The decrease is attributable to a decrease in payroll, advertising and trade show expenses, along with an increase in travel and other expenses.
Research and Development
| Three months ended March 31, | ||||||||||||||||
| (In thousands) | 2023 | 2022 | Change | % Change | ||||||||||||
| Research and development | $ | 735 | $ | 2,084 | $ | (1,349 | ) | (65 | )% | |||||||
Research and development (“R&D”) expenses consisted primarily of costs incurred for the development of our Agrify Insights software and next generation VFUs, which includes:
| ● | employee-related expenses, including salaries, benefits, and travel; | |
| ● | expenses incurred by the subcontractor under agreements to provide engineering work related to the development of our next generation VFUs; | |
| ● | expenses related to our facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies. |
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R&D expense decreased by $$1.3 million, or 65%, for the three months ended March 31, 2023, compared to the same period in 2022. The decrease is attributable to the personnel and facility costs associated with the continued development of our VFUs, specifically related to improving the individual unit cooling and humidity environments.
We expect to continue to invest in future developments of our VFUs, Agrify Insights software and our extraction products. As a percentage of net revenue, R&D expenses were 12.7% of total revenue for the three months ended March 31, 2023, compared to 8.0% for the three months ended March 31, 2022.
Other Income (Expense), Net
| Three months ended March 31, | ||||||||||||||||
| (In thousands) | 2023 | 2022 | Change | % Change | ||||||||||||
| Interest income (expense), net | $ | (799 | ) | $ | 559 | $ | (1,358 | ) | (243 | )% | ||||||
| Loss on extinguishment of notes payable | (4,620 | ) | — | $ | (4,620 | ) | N/A | |||||||||
| Change in fair value of warrant liabilities | 2,672 | 10,785 | (8,113 | ) | (75 | )% | ||||||||||
| Other income (expense) | 4 | — | 4 | N/A | ||||||||||||
| Total other income (expense), net | $ | (2,743 | ) | $ | 11,344 | $ | (14,087 | ) | (124 | )% | ||||||
Interest income (expense), net decreased by $1.4 million, or 243%, for the three months ended March 31, 2023, compared to the same period in 2022. The decrease in interest income is attributable mainly to decreases in interest from marketable securities and interest income from TTK Solutions.
The change in fair value of warrant liabilities during the three months ended March 31, 2023 is related to the fair value remeasurement of warrants issued during March, August, and December, 2022.
Income (Loss) Attributable to Non-Controlling Interest
We consolidate the results of operations of two less than wholly-owned entities into our consolidated results of operations. On December 8, 2019, we formed Agrify Valiant LLC, a joint-venture limited liability company in which we are 60% majority owner and Valiant-America, LLC owns 40%. Agrify Valiant LLC started its operations during the second quarter of 2020. On January 22, 2020, as part of the acquisition of TriGrow, we received TriGrow’s 75% interest in Agrify Brands, LLC (formerly TriGrow Brands, LLC), a licensor of an established portfolio of consumer brands that utilize our grow technology. The license of these brands is ancillary to the sale of our VFUs and provides a means to differentiate customers’ products in the marketplace. It is not a material aspect of our business and we have not realized any royalty income. Accordingly, we are currently evaluating whether to continue this legacy business from an operational standpoint, as well as from a legal and regulatory perspective.
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.
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Liquidity and Capital Resources
As of March 31, 2023, our principal sources of liquidity were cash and cash equivalents and marketable securities totaling $1.5 million and $— million in restricted cash. Our current working capital needs are to support revenue growth, to fund construction and equipment financing commitments associated with our TTK Solutions, manage inventory to meet demand forecasts and support operational growth. Our long-term financial needs primarily include working capital requirements and capital expenditures. We anticipate that we will allocate a significant portion of our current balance of working capital to satisfy the financing requirements of our current and future TTK arrangements. These arrangements require a significant amount of upfront capital necessary to fund construction, associated with facility build-outs, and equipment. There are many factors that may negatively impact our available sources of funds in the future, including the ability to generate cash from operations, raise debt capital and raise cash from the issuance of our securities. The amount of cash generated from operations is dependent upon factors such as the successful execution of our business strategy and general economic conditions.
We may opportunistically raise debt capital, subject to market and other conditions. Additionally, as part of our growth strategies, we may also raise debt capital for strategic alternatives and general corporate purposes. If additional financing is required from outside sources, we may not be able to raise such capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected.
Indebtedness
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 the SPA Note in the aggregate amount of $65.0 million and a 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 $35.0 million each.
On August 18, 2022, we entered into a Securities 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 an Exchange Note with an aggregate original principal amount of $35.0 million and a Note Exchange Warrant to purchase 71,139 shares of Common Stock. Additionally, we exchanged the SPA Warrant for a Modified Warrant for the same number of underlying shares but with a reduced exercise price.
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 “Convertible Note”).
The Convertible Note is a senior secured obligation and will rank senior to all of our indebtedness. The Convertible Note will mature on August 19, 2025 (the “Maturity Date”) and has a 9.0% annualized interest rate, with interest to be paid monthly, in cash. 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 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.
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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 holder 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.
Cash Flows
The following table presents the major components of net cash flows from and used in operating, investing, and financing activities for the three months ended March 31, 2023, and 2022:
| (In thousands) | March 31, 2023 | March 31, 2022 | ||||||
| Net cash (used in) provided by: | ||||||||
| Operating activities | $ | (9,469 | ) | $ | (30,875 | ) | ||
| Investing activities | 9,795 | (13,365 | ) | |||||
| Financing activities | (9,307 | ) | 87,431 | |||||
| Net increase in cash, cash equivalents, and restricted cash | $ | (8,981 | ) | $ | 43,191 | |||
Cash Flow from Operating Activities
For the three months ended March 31, 2023, we incurred a net loss of $10.3 million, which included $0.4 million related to depreciation and amortization, $— related to amortization of debt issuance costs, $0.9 of stock based compensation expense, and $2.7 related to the change in fair value of warrant liabilities. Net cash was reduced by changes in operating assets and liabilities of $2.6 million.
For the three months ended March 31, 2022, we recorded net income of $1.8 million, which included a non-cash gain related to the remeasurement of warrant liabilities of $10.8 million, non-cash expenses of $1.1 million related to depreciation and amortization, $1.0 million in connection with the issuance and acceleration of stock options, debt issuance costs of $2.7 million, non-cash interest income of $0.4 million related to TTK Solutions, and gain attributed to non-controlling interest in the amount of $1 thousand. Net cash was reduced by a $0.8 million increase in accounts receivable, a $2.4 million decrease in deferred revenue, a $16.4 million increase in inventory due to demand forecast, and a $3.0 million increase in prepaid expenses, a $2.1 million increase in accrued expenses and other current liabilities and $2.8 million decrease in accounts payable.
Cash Flow from Investing Activities
For the three months ended March 31, 2023, net cash provided by investing activities was $9.8 million, which included cash outflows of $0.1 million in net purchases of property, plant and equipment and $0.6 in issuances of notes receivable and cash inflows of $10.4 million related to proceeds from sales of securities.
For the three months ended March 31, 2022, net cash used in investing activities was $13.4 million, which included cash outflows of $6.4 million in net purchases of marketable securities, $3.5 million paid in connection with our 2022 acquisitions of Lab Society, $12.5 million related to the issuance of TTK-related loans receivable, and $3.7 million of expenditures for property and equipment.
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Cash Flow from Financing Activities
For the three months ended March 31, 2023, net cash used in financing activities was $9.3 million. Net cash used in financing activities was primarily driven by repayments of notes payable of $10.7 million, proceeds from at-the-market offerings of $1.5 million, and proceeds from ESPP shares of $0.03 million.
For the three months ended March 31, 2022, net cash provided by financing activities was $87.4 million. Net cash provided by financing activities was primarily driven by the Company’s two private placements during 2022. The Company received $65.0 million in net proceeds from our issuance of debt and warrants in a private placement, and $25.8 million in net proceeds from our issuance of Common Stock and warrants in a private placement. Additionally, the Company received $11 thousand in proceeds from the exercise of stock options and warrants. Each of the above inflows of cash was offset by $81 thousand in payments relating to financing leases.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market, or credit risk that could arise if we had engaged in those types of relationships.
Critical Accounting Policies and Estimates
Part I, Item, 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our 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 1 - Overview, Basis of Presentation and Significant Accounting Policies included in our 2022 Annual Report and Note 1 - Overview, Basis of Presentation and Significant Accounting Policies to our 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 information on recently issued accounting pronouncements are included within Note 1 - Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to consolidated financial statements covered under Part I, Item 1 of this Quarterly Report on Form 10-Q.
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New Accounting Pronouncements Not Yet Adopted
For more information on new accounting pronouncements not yet adopted are included within Note 1 - Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to consolidated financial statements covered under Part I, Item 1 in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by 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 as of March 31, 2023. Based on this evaluation, our Chief Executive Officer concluded that, due to the material weaknesses in our internal control over financial reporting previously 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 27, 2023, our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2023.
Changes in Internal Control Over Financial Reporting
We are implementing certain measures to remediate the material weaknesses identified in the design and operation of our internal control over financial reporting, including hiring additional qualified personnel, further documentation and implementation of control procedures and the implementation of control monitoring. Other than those measures, there have been no changes 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 March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 Proceedings in Note 15 - Commitments and Contingencies to our 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, 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, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| * | Filed herewith. |
| ** | Furnished herewith in accordance with Item 601 (b)(32) of Regulation S-K. |
| † | Indicates a management contract, compensatory plan, 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. |
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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: November 27, 2023
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT
TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Raymond Chang, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Agrify Corporation (the “Company”) for the quarterly period ended March 31, 2023; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting or caused such internal control to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 27, 2023 |
By: | /s/ Raymond Chang |
| Name: | Raymond Chang | |
| Title: | Chief Executive Officer (Principal Executive Officer and | |
| Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 1 to the Quarterly Report on Form 10-Q of Agrify Corporation (the “Company”) for the quarterly period ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
| Date: November 27, 2023 | By: | /s/ Raymond Chang |
| Name: | Raymond Chang | |
| Title: | Chief Executive Officer (Principal Executive Officer and Principal Financial and Accounting Officer) |