UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(mark one)
☒ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ______
Commission file number. 001-39946
AGRIFY CORPORATION
(Exact Name of Registrant as Specified in Its
Charter)
| Nevada | | 30-0943453 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
76 Treble Cove Rd.
Building 3
Billerica, MA 01862
(Address of principal executive offices)
(617) 896-5243
(Registrant’s telephone number, including
area code)
Securities Registered Pursuant to Section 12(b)
of the Act:
| (Title of Class) | | Trading Symbol (s) | | (Name of exchange on which registered) |
| Common Stock, par value $0.001 per share | | AGFY | | NASDAQ Capital Market |
Securities Registered Pursuant to Section 12(g)
of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,”
“accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant, computed by reference to the price at which the common equity was last sold, or the average
bid and asked price of such common equity, as of June 30, 2021 was approximately $226,200,793. Shares of the registrant’s common
stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting power of
the registrant have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not a determination
for other purposes.
There were a total of 26,542,898 shares of the registrant’s
common stock, par value $0.001 per share, outstanding as of March 24, 2022.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s
definitive proxy statement for the 2022 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements
and information relating to Agrify Corporation. All statements other than statements of historical facts contained in this report, including
statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future
operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,”
“continue,” “anticipate,” “intend,” “expect” and similar expressions are intended to
identify forward-looking statements. These forward-looking statements include statements relating to:
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our market opportunity; |
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the effects of increased competition as well as innovations by new and existing competitors in
our market; |
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our ability to retain our existing customers and to increase our number of customers; |
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the future growth of the indoor agriculture industry and demands of our customers; |
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our ability to effectively manage or sustain our growth; |
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potential issuance of holdback shares from prior acquisitions and integration of complementary businesses and technologies; |
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our ability to maintain, or strengthen awareness of, our brand; |
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future revenue, hiring plans, expenses, capital expenditures, and capital requirements; |
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our ability to comply with new or modified laws and regulations that currently apply or become
applicable to our business; |
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the loss of key employees or management personnel; |
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our financial performance and capital requirements; and |
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our ability to maintain, protect, and enhance our intellectual property. |
We caution you that the foregoing list may not
contain all of the forward-looking statements made in this report. We have based these forward-looking statements largely on our current
expectations and projections about future events and financial trends that we believe may affect our financial condition, results of
operations, business strategy, short term and long-term business operations and objectives, and financial needs. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.”
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for
our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.
In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not
occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements
as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable,
we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking
statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after
the date of this report to conform these statements to actual results or to changes in our expectations.
SUMMARY OF RISK FACTORS
An investment in our securities involves a high
degree of risk. The occurrence of one or more of the events or circumstances described in “Item 1A. Risk Factors,” alone
or in combination with other events or circumstances, may materially adversely affect our business, financial condition and operating
results. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. Such risks
include, but are not limited to:
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our ability to continue as a “going concern”; |
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our short operating history; |
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risk of loss associated with our TTK Solution Offerings; |
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our ability to obtain additional financing; |
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risk associated with potential future impairment charges; |
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our concentration of customers; |
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our reliance on a limited base of suppliers; |
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operational difficulties of our suppliers as a result of COVID-19; |
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risks associated with having clients operating in the cannabis industry; |
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the inability of our customers to meet their financial or contractual
obligations; |
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conflicts of interest of our officers and directors relating to two
of our vendors; |
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potential data breach or cyber-attack; |
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dependence on key personnel; |
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reliance on our relationship with Inventronics without a definitive
agreement in place; |
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no assurance our backlog and qualified pipeline will translate into
bookings; |
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failure of our information technology systems to perform adequately; |
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intense competition for our products and services; |
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protecting and defending against intellectual property claims; |
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protecting our core technology and intellectual property; |
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data privacy and security concerns relating to our technology and practices; |
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ability to use our net operating losses; |
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our management and their affiliates control a substantial interest
in us; |
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our outstanding loans may not be forgivable; |
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potential for a large number
of shares eligible for public sale could depress the market price of our common stock; |
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exercise of all or any number of outstanding warrants or the issuance of stock-based awards may dilute your holding of shares of our common stock; |
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provisions in our charter documents and Nevada law may prevent a change
in control of our company; |
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reduced disclosure requirements applicable to emerging growth companies
and smaller reporting companies; |
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no intention to declare any dividends to our shareholders; |
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risks associated with a shortage of raw materials; |
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litigation that may adversely affect our business, financial condition,
and results of operations; |
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Nasdaq may delist our securities from trading on its exchange; |
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impact of COVID-19 and related risks; |
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increased costs and demands upon management as a result of being a
public company; and |
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inherent risks related to our financial and operational projections. |
MARKET, INDUSTRY AND OTHER DATA
Unless otherwise indicated, information contained
in this report concerning our industry and the markets in which we operate, including our general expectations and market position, market
opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data
and other similar sources and on our knowledge of the markets for our services. These data involve a number of assumptions and limitations,
and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information and
cannot assure you of its accuracy or completeness. While we believe the market position, market opportunity and market size information
included in this report is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates
of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty
and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this report. These and
other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
In addition, we own or have rights to trademarks
or trade names that we use in connection with the operation of our business, including our corporate names, logos, and website names.
In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products.
This report may also contain trademarks, service marks and trade names of other companies, which are the property of their respective
owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this report is not intended
to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, some of the copyrights,
trade names and trademarks referred to in this report are listed without their ©, ® and ™ symbols, but we will assert,
to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks. All other trademarks are the property
of their respective owners.
PART I
Item 1. Business.
Unless otherwise stated or the context otherwise
requires, references in this report to “Agrify”, the “Company,” “we,” “us,” “our,”
or similar references mean Agrify Corporation and its subsidiaries on a consolidated basis.
Overview
We are a rapidly growing developer of proprietary
hardware and software cultivation and extraction solutions for the cannabis and hemp industry. We believe we are passionately transforming
cannabis cultivation and extraction methods through innovation. Our mission is to become the world’s most vertically integrated
solution provider for the cannabis and hemp industry globally, while driving superior quality, consistency, and Return on Investment
(“ROI”) for our valued customers. We currently have three primary areas of business focus:
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Facility Design & Building Services |
Cultivation Solutions
While we do not cultivate, come in contact
with, distribute, process, or dispense cannabis or hemp or any cannabis or hemp derivatives that are currently prohibited under
United States federal law, our equipment and business solutions can be used within indoor grow and processing facilities by fully
licensed cannabis and hemp cultivators and processors or in some cases, by individual processors for individual use in compliance
with applicable law. We sell our proprietary cultivation solutions to independent licensed cultivators. The two primary products we
sell are the Agrify Vertical Farming Unit and Agrify Insights SaaS (“Software-as-a-Service”) software.
Agrify Vertical Farming Unit (“VFU”)
We believe our proprietary VFU technology is the
only product in the market that offers a modular, compartmentalized micro-climate growing system for indoor vertical farming. Our VFU
system is designed for large-state and multi-state operators who are looking to consistently produce higher-quality crops at scale. The
ideal facility size that we target in our sales process ranges from 20,000 square feet to 50,000 square feet. The VFU is an integrated
hardware and software growing system. These units are designed to line up horizontally in rows, and they can be stacked vertically up
to 3 units tall, taking advantage of unused indoor vertical space with the below advantages:
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Superior Floor Space Utilization. Each VFU provides two growing rows. Our design introduces
an open-room facility design approach to maximize available cultivation floor print while offering superior risk mitigation via individual
compartmentalized cultivation chambers. |
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Precise Environmental Controls. Each VFU has an environmental control unit that is
integrated with our proprietary cultivation software, Agrify Insights software. This integration allows for precise control
and automation over light photoperiod and intensity, temperature, humidity, vapor pressure deficit (“VPD”), carbon dioxide,
fertigation, and irrigation throughout the life cycle of the plants. |
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Modular Scalability. The VFU is designed with proper loading to stack up to 3 units
tall, sextupling production volume over the same footprint. Each unit is designed to easily integrate with a mezzanine catwalk system. |
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Biosecurity and Risk Mitigation. The VFU has a motorized curtain on both sides of
the unit that enclose the grow area to prevent light-leak and spread of disease that would typically lead to facility-wide crop failure.
Contamination can be controlled and limited to the affected units, which are designed with sanitation in mind. From the aluminum
frame to the selection of antimicrobial plastics and down to the IP65 electronics and polycarbonate-lensed LED lights, the entire
VFU can be easily sanitized. |
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Worker Safety. The VFU’s working area is 8 feet tall, allowing easy access
to both rows of plants within the unit. As the motorized curtains can be lifted on either side, this also allows efficient ergonomics
at arm’s length. Similarly, our Interlight LED technology is dimmed or turned-off when the curtains are raised for a more ambient
working environment. |
Examples
of VFU infrastructure verse traditional grows
To further illustrate the benefit of going with
the VFU infrastructure versus a more traditional indoor cultivation setup with conventional LED lights or conventional HPS lights, we
have conducted a comparative analysis internally on an approximately 45,000 square foot facility.
While the upfront cost is more for the facility
that is outfitted in VFUs, that is quickly offset by the fact that a VFU outfitted facility has the capacity to generate about 4x the
amount of estimated annual revenue and over 4x the annual estimated EBITDA. In looking at the numerical values in the model, it becomes
even more compelling when comparing the VFU facility to a facility with a traditional grow room. Assuming an initial investment of approximately
$27.7 million for the VFU facility build-out, our model indicates that the facility owner would recoup their initial investment and produce
significant free cash flow in the first year of operation assuming the facility should be able to achieve almost $88 million of estimated
annual revenue and roughly $78.4 million in annual estimated EBITDA. In contrast, the traditional indoor facilities would cost approximately
$8.8 million or a little less than $16.5 million to build out depending on which lights are used and would generate approximately $20.4
million or $22.5 million in estimated annual revenue and right around $16 million or just under $19 million in annual estimated EBITDA.
When comparing the different facility types on a side-by-side analysis, we believe the VFU facility is far more attractive than either
type of traditional facility given the financial upside is significantly higher and is a far more sophisticated way to grow crops.
We have also modelled out another scenario in
which a prospective customer has a license that stipulates that they are permitted to operate with at most 16,200 square feet of canopy
space in their facility (which is the exact same amount of canopy square footage displayed in the above model for the traditional setup
in the 45,000 square foot facility). However, given the modular and stackable nature of the VFUs, we are able to help the customer achieve
the same canopy square footage with 253 VFUs in a facility that is only 20,000 square feet, which is less than half the size of the traditional
facility. While canopy square footage is basically identical for all of the different cultivation approaches we looked at in this particular
simulation, the VFU setup requires a much smaller and theoretically much less expensive facility, and because the VFUs are more productive,
the estimated annual yield is about 31% higher than in the facility with the traditional grow room setup and conventional LED lights and
45% higher than in the facility with the traditional grow room setup and conventional HPS lights.
Agrify Insights SaaS Software Solution
Each individual VFU sold includes a license for
Agrify Insights SaaS Software (“Agrify Insights software”), and a monthly SaaS subscription fee is charged, per VFU. The VFU
cannot operate successfully without the use of Agrify Insights software, and we typically charge between $2,400 to $3,600 per VFU sold,
per year. On average Agrify Insights SaaS Software license agreement is for a multi-year term, with an annual auto renewal.
Agrify Insights software is cloud-based software
as a service that interfaces with a microservices middleware and relational database that integrates with our hardware and provides our
managers, facility owners, facility managers, and growers real-time control and monitoring of facilities, growing conditions, and insights
into both production and profit optimization. The combination of precise environmental control and automation with data collection and
actionable insights empowers our customers to be more efficient, more productive, and more intelligent about how they run their businesses.
We believe that the robust data analytics capabilities from our Agrify Insights software platform coupled with our VFU system is enabling
our customers to transform their businesses and quality of the product they are cultivating.
The Agrify Insights software is focused around
optimizing four key components:
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Optimization at the plant level; |
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Optimization at the VFU unit level; |
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Optimization at the facility level; and |
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Optimization at the business level. |
When these key components are combined, they encompass
the cultivation operations of an Agrify customer. By reducing human error and providing insights through data collection and analysis,
Agrify Insights software minimizes risk and increases operational efficiencies. Ultimately, our customers are seeking to produce the same
consistent end product no matter where they are located.
Plant-Level Optimization
Central to our solution is granular control of
the cultivation environment. The end-product of a crop is determined by both the plant’s genetics and the environment in which the
plants are grown. Control over the growing environment is accomplished through the Agrify Insights software. By recording over 1.5 million
data points per VFU per year and being able to reproduce specific environments based on the data, cultivators are effectively able to
minimize the variation in their crops and dial-in the maximum quality. Further individual plant varietals can be optimized by tailoring
the grow plan (recipe for cultivation) to enhance particular genetic traits; increasing the temperature can speed chemical processes and
growth rates and adjusting the length of different phases of a plant’s lifecycle can maximize the crop’s yield. Additionally,
when new varieties of plants are cultivated, having multiple controlled, compartmentalized, growth chambers allow for iterative experiments
which offer real insight into how new varieties are best cultivated. For example, you can grow a new variety in 5 different VFUs that
are set to mimic the climate of different geographies to see where the varieties are suited to grow.
Our “Grow Plans” are the templates
or recipes that define the parameters for each lifecycle. Grow Plans define the environmental settings (light - photoperiod and intensity/
temperature / humidity / VPD / CO2 / irrigation / fertilization) for each crop variety and cultivator as well as the schedule for completing,
as applicable, “plant-hands-on” tasks such as bottoming, pruning, and harvest. Agrify Insights software ships to the customer
with many pre-developed Grow Plans and customers can create their own Grow Plans, electing to share them with other customers or not.
Individual VFU Level Optimization
Our VFU hardware provides cultivation environmental
control within the growth chamber. This hardware and its component valves, motors and sensors are directed and controlled by Agrify
Insights software.
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Monitor and Control Agrify Hardware. Agrify Insights software can either automatically
or manually control our hardware. For example, the water-chilled fan coil can keep temperature in a range accurate to 1.5 degrees
Fahrenheit. |
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Cultivation Environmental Control. Using Agrify Insights software, users can
view environmental charts that plot temperature, humidity, carbon dioxide over time. It also shows when the plants were irrigated
and whether the unit is in cooling, circulating, or dehumidifying mode. We sample these values every minute and report them back
to the cloud every 15 minutes, or more often if there have been significant changes. Each growing chamber reports approximately 1.5
million data points annually, enabling our clients to perform in-depth analysis of grow performance. The manual control screen visualizes
the current state of the grow chamber and enables our technicians to take direct control for troubleshooting, if necessary. The device
log shows us what decisions were made by the onboard Agrify Insights software and why. |
Facility Level Optimization
Our modular VFUs are deployed in scale at a customer’s facility
with the smallest commercial operation deployment to date being 63 VFUs. Agrify Insights software is designed to operate these individual
VFUs as a combined facility. Agrify Insights software features at the facility level include:
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Production Planning. The production planning feature is designed to maximize a facility’s
utilization by executing a “best-fit” scheduling algorithm to selected Grow Plans across the growing units that have
been deployed at a customer facility. Since grow plans typically have a different number of growing days that start on staggered
schedules, this module is a critical component for optimizing the planting and moving schedules, significantly increasing plant production,
and reducing the cost per pound of harvest. |
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Workforce Management. Agrify Insights software includes a workforce planning
feature to assign tasks to staff. These tasks can be automatically assigned based on user role or their knowledge, skills, and abilities.
The calendar displays the estimated amount of time required to complete plant-touching tasks on any given day. |
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Automatic Notification System. Users can select to subscribe to anomalous events,
and users are notified in the order in which they are listed. If a user does not acknowledge the notification within the specified
time frame, the next user in the list is notified, providing the business with 24/7 monitoring and notifications. |
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Preventative Maintenance. Our equipment and facility preventative maintenance schedules
and related tasks are contained, tracked and monitored within Agrify Insights software. |
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Facility Infrastructure Controls. Agrify Insights software controls the irrigation
on a facility level as well as connects with the water chilled HVAC system and ambient lighting system, providing our customers a
central piece of software for facility management. |
Optimization at the Business Level
Agrify Insights software analysis features
enable customers to understand how cultivation decisions impact their overall business. Understanding the data from the cultivation facility
can help our customers better plan and make informed decisions that impact downstream parts of their business.
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Consumables Procurement Integration. Each task can also be assigned a set of consumables
whose inventory will be reduced when the task is started. This feature can help customers manage supply levels and can automatically
create purchase orders so that they never run out of required supplies. |
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Online Standard Operating Procedures (“SOPs’’) and Safety Datasheets. Agrify Insights software hosts digital copies of our included Standard Operating Procedures and datasheets, or users can upload their own via our content management system, ensuring that the most recent version of SOPs and forms are available to users. |
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Roles-Based Dashboards. Ability to obtain access to information specifically suited to your workforce’s various needs. Facility owners have access to high-level information about crop yields and equipment usage in an easy-to-understand scorecard. Farm managers receive a worksheet and calendar that lets them manage their workforce and automatically assign plant-touching tasks. This also provides facility managers with an ongoing window into consumables and lets them set inventory levels. |
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Data Collection. Agrify Insights software is a centralized repository for
all data relating to the cultivation aspects of our clients’ business, including research and development testing data, and
the ability to capture and compare test results. By doing so, Agrify Insights software becomes a customers’ cultivation
statement of record. |
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Financial Simulator / What If Scenarios. Our operating expenses (“OpEx”)
calculator enables users to evaluate impacts to profitability by changing hundreds of attributes including, but not limited to, changes
to costs in labor, electric, water, CO2, and growing media as well as potential volatility in yields and pricing. |
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Regulatory Reporting Integration. We have integrated our software with Metrc, a leading
seed-to-harvest compliance management and tracking solution, which will enable our customers to handle most regulatory reporting
directly through Agrify Insights software. |
Extraction Solutions
While we do not extract,
come in contact with, distribute, process, or dispense cannabis or hemp or any cannabis or hemp derivatives that are currently
prohibited under United States federal law, our extraction equipment and business solutions can be used within indoor processing
facilities by fully licensed cannabis and hemp cultivators and processors or in some cases, by individual processors for individual
use in compliance with applicable law. We sell our proprietary extraction solutions to independent, licensed cultivators and
processing labs.
Cannabis represents a potential cornucopia of
medicinal and pharmaceutical advancement. Cannabis produces over 550 different phytochemicals, over 120 of which are cannabinoids like
tetrahydrocannabinol (“THC”) and cannabidiol (“CBD”). Other cannabinoids like varins, cannabigerivarin (“CBGV”),
tetrahydrocannabivarin (“THCV”), and cannabidivarin (“CBDV”) are less well known and potentially offer significant
value. As we continue to learn more about the complex chemical composition of cannabis, the need for distillation solutions is clear. Distillation
enables the identification, isolation, and separation of valuable cannabis metabolites. The ability to take cannabis compounds distilled
into their pure forms, and then recombine them into specific, purposeful end-products could have significant potential for the pharmaceutical
industry in the future.
Since October 2021, we have been strategically
focused on establishing ourselves as a global leader in the cannabis and hemp extraction equipment industry, complementing our cutting-edge
cannabis and hemp cultivation solutions. Over a 5-month period, we acquired four of the top brand names in the industry:
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Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions (“Precision”)
- Market leader in developing and producing high-quality hydrocarbon extraction solutions was acquired by Agrify on October
1, 2021. |
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Cascade Sciences, LLC (“Cascade”)- Market leader in developing and producing high-quality vacuum
purge ovens and decarboxylation ovens was acquired by Agrify on October 1, 2021. |
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PurePressure, LLC (“PurePressure”) - Market leader in developing and producing high-quality solventless
extraction solutions was acquired by Agrify on December 31, 2021. |
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LS Holdings Corp. (“Lab Society”) - Market leader in developing and producing
high-quality distillation and solvent separation extraction solutions was acquired by Agrify on February 1, 2022. |
Combined, the four acquisitions listed above provide
what we believe to be the most comprehensive extraction solutions from a single provider, with over 7,000 customers, including over 30
Multi-State-Operators, and some of the best extraction labs in the industry. Our leading extraction brands provide equipment and solutions
for extraction, post-processing, and testing for the cannabis and hemp industry. The extraction, post-processing and testing services
are complementary and highly attractive areas of the supply chain.
Our extraction division now offers cutting-edge
technologies and end-to-end service solutions. Solutions from the extraction division include equipment, technology, facility and lab
design, and extensive research and development capabilities. By providing new hardware-as-a-service we intend to capture higher margin
recurring revenue and supply chain optimization through streamlined product sourcing, purchasing, manufacturing, and warehousing.
These acquisitions have greatly expanded our product
and service offerings in the post-harvest segment of the supply chain, and believe we are positioning the Company as the most vertically
integrated total solutions provider for our cannabis and hemp customers. The global cannabis extraction market is expected to potentially
grow to $24 billion by 2028, and as the cannabis industry continues to experience rapid growth globally, we expect the sales of our extraction
solutions to follow a similar growth trajectory.
Facility Design & Building Services
Agrify provides fully integrated architectural,
engineering, and project management oversight of qualified General Contractors for its customers commercial cannabis facilities buildouts.
Each custom commercial cannabis facility is specifically designed to maximize the production output of Agrify’s proprietary VFU’s
and cannabis extraction product solutions.
Cannabis Market Opportunity
While we do not cultivate, come in contact with,
distribute or dispense cannabis or any cannabis derivatives that are currently prohibited under U.S. federal law, our cultivation solutions
can be used within indoor grow facilities by cannabis cultivators if they choose to do so.
In the U.S., the development and growth of the
regulated medical and recreational (adult use) cannabis industry has generally been driven by state law and regulation, and accordingly,
the market varies on a state-by-state basis. State laws that legalize and regulate cannabis for medicinal reasons allow patients to consume
cannabis with a designated healthcare provider’s recommendation, subject to various requirements and limitations. As of December
31, 2021, 38 states have passed laws allowing their citizens to use medical cannabis. On top of this medical condition growth trend, there
has been a slower but steady increase in the number of states that have chosen to legalize cannabis for recreational use. As of December
31, 2021, 18 states have passed laws allowing their citizens to use recreational cannabis. Shifting public attitudes and state law and
legislative activity are driving this change as indicated by a 2019 poll by Quinnipiac University that found that 93% of Americans support
patient access to medical-use cannabis, if recommended by a doctor, which was the same level of support from a similar poll conducted
by Quinnipiac University in 2018. Similarly, the trend toward further legalization and regulation of cannabis sales is spreading globally.
As of the date of this report, over 28 countries outside the U.S. currently have medicinal cannabis regulation in force, and that number
is expected to significantly increase over time.
Given that the market size of legal cannabis in
the U.S. in 2020 was expected to be $17 billion according to New Frontier, and 53% of cannabis volume is currently grown indoors according
to New Leaf Data Services, we estimate that the indoor segment of the legal U.S. cannabis sector is a $9 billion market with the expectation
that there will be even more growth on the horizon. In fact, according to a report from April 2020, BDSA, the leading provider of cannabis
industry market research, in conjunction with Arcview Market Research, forecasted that U.S. legal cannabis sales will approach $34 billion
by 2025, which represents 72% of their projection for total global sales of $47 billion in 2025.
The different cultivation environments for cannabis
each have advantages and disadvantages, and this leads to a variance in price points based on quality, actual and perceived, and process.
According to New Leaf Data Services’ March 25, 2022 U.S. cannabis spot index, the average wholesale price per pound of outdoor grown
flower was $502 per pound, greenhouse flower averaged $840 per pound, while indoor grown flower averaged $1,651 per pound and the total
market on average was $1,242 per pound. Based on the breakdown of production by cultivation environment, indoor grown flower represents
53% of total volume by type while greenhouse and outdoor represent 23% and 24%, respectively. Additionally, based on the breakdown of
percentage of observed transactions, indoor grown flower represents 64% of total volume by type while greenhouse and outdoor represent
18% and 18%, respectively.
Outdoor cannabis has the lowest initial capital
expenditures required to start cultivation. According to Marijuana Business Daily (“MBD”), the average start-up cost per
square foot of outdoor cultivation is $10. The expansive size of outdoor grows and their reliance on natural soil, lighting and weather
conditions means cultivators have relatively few infrastructure needs. They can get their business off the ground quickly and with minimal
upfront expenditures trading quality for lower cost production.
Greenhouse grown cannabis commands a higher price
per pound than field grown cannabis as the more protected environment produces higher quality flower. According to MBD, the average start-up
cost per square foot for greenhouse cultivation is $50, but the true costs tend to be all over the map with an executive from Ohio-based
Rough Brothers, an 84-year-old greenhouse company that started taking on cannabis clients in 2013, opining that such costs can vary greatly,
going so far as to say “I could build you a cannabis greenhouse for $20 a square foot or $200 a square foot.”
Indoor grown cannabis commands the highest price
per pound as it produces the highest quality flower due to the fact that growers have the most control over the environment. Indoor cultivation
facilities vary significantly in sophistication and technology with the build-out costs reflecting that fact. While MBD states that the
average start-up cost per square foot for indoor cultivation is $75, anything close to that cost would inevitably yield a primitive and
arguably insufficient setup. In contrast, Jennifer Martin, a prominent cannabis cultivation consultant, indicated on MarijuanaPropagation.com
that a far more advanced and scalable configuration would likely cost between $400 to $500 per square foot. In general, the more a company
invests up front, the higher the upside will be in the future. However, beyond initial build-out costs, it has historically been very
expensive to grow cannabis in an indoor facility. The industry norm for direct production-related operating costs ranges from approximately
$436 per pound according to a competitive cost analysis conducted by MJardin to $516 per pound, which is based on another examination
of cultivation costs by the website CannaBusinessPlans.com.
Our premium indoor grow solutions, whether it’s
our VFUs or our LED lights, are designed, engineered, and calibrated to drive significant improvements for our customers, who trust us
to deliver the type of productivity and quality that was previously unattainable.
Competitive Landscape
We believe our full suite of product offerings
form an unmatched ecosystem for indoor growing and extraction. At this time, our Agrify Vertical Farming Unit, Agrify Insights
software, Extraction solutions, our facility design and build services, and our engineering/installation services are highly differentiated
from anything else on the market.
At the same time, our customers are actively being
approached by a variety of companies who do offer compelling standalone products and services, so we recognize that our customers do have
choices and alternatives, and they also need to factor in opportunity cost whenever they make purchasing decisions. Consequently, we more
broadly define our competition as any other company going after the same finite budget dollars as us in the indoor agriculture space.
We have highlighted below the most notable players that operate across some of the same functional, highly fragmented areas of agriculture
technology that we operate.
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Semi-Integrated Vertical Cultivation Systems — Sprout AI |
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Aeroponic Systems — AEssenceGrows and Thrive Growing |
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Horticultural Lighting — Gavita, Fluence, VividGro, Hydrofarm, GrowGeneration, Hawthorne and Heliospectra |
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Extraction Solutions — Extraction Tech Solutions, Galenja |
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Monitoring Software — Grownetics and Trym |
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Cultivation Software — Quantum Leaf, Flourish, and Grow Link |
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Vertical Cultivation Racking Systems — Pipp Horticulture and Montel |
Despite the presence of some well-funded and
well-established competitors who offer pieces of what we do, we are able to compete on the basis of several defensible factors including
our industry experience, our technical expertise, the differentiated value proposition of our individual offerings, and our positioning
as a single-source provider. However, we believe above all else, it is our ability to offer an unrivaled level of precision through a
total end-to-end turnkey solution that sets us apart from existing competitors and potential new market entrants.
Our Competitive Strengths
We believe our business has, and our future success
will be driven by, the following competitive strengths:
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Innovative Technology in an Attractive Growing Industry. Our innovative solutions
are aimed at large and growing U.S. domestic and global markets. We believe we are the only provider of a fully integrated end-to-end
hardware and software turnkey solution for indoor cultivation and extraction facilities that allows customers to produce at scale,
high-quality products with consistency that meet the growing demand and needs of end users at a relatively low cost. As such, we
believe we have a first mover advantage due to innovating this new type of smart cannabis and hemp cultivation and processing solution,
which is already designed, manufactured, and implemented in a number of commercial scale deployments across multiple states within
the U.S. |
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Integrated Proprietary Components. We design and create our own hardware, software and SOPs from the ground up, rather than buying piecemeal from third parties. We take a systems-engineered integrated approach that we believe has inherent advantages over other, ad-hoc systems. |
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Emphasis on Precision and Consistency Through Our Proprietary Grow Solutions. While
being able to help our customers increase capacity, yield and consequently revenues hold a tremendous amount of value, we believe
that our biggest differentiator is our ability to impact the actual quality and consistency of the output by controlling the environment
in which the crops are grown and all of the variables that influence harvests with an unparalleled level of precision. The by-product
of our Agrify total turn-key solution (“TTK Solution”) is that our customers are able to create consistent high-quality
products with repeatability from anywhere similar to any other consumer product company that provides a branded food or drink product. |
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Emphasis on Precision and Consistency Through Our Extraction Division. In addition
to our premium grow solutions, we have begun offering our customers industry leading cannabis and hemp extraction equipment, design
and training solutions. By acquiring leading brands earlier this year, we are immediately able to offer our customers premium solutions
to meet their processing needs in this rapidly expanding sector. |
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Market Knowledge and Understanding. We have extensive experience with controlled
agriculture environments, extraction, post-processing and scale-up manufacturing, as well as industry technical knowledge and relationships.
We are keenly aware of the struggles that indoor cultivators and extractors face, and we serve as a credible and collaborative partner
through the entire customer lifecycle. We believe that our fully integrated TTK Solution, extraction equipment and ancillary services
are the key to resolving many of the challenges our customers face. |
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Differentiated Business Model. Unlike many of our competitors, we offer a diversified
mix of hardware, software and services, which leads to multiple revenue streams. Given the nature of our deployments, we become deeply
embedded in our customers’ operations through our numerous product offerings, which include our TTK Solutions and the direct sale
of our VFUs, and various extraction and processing equipment and this puts us in a position where their success is directly tied to our
equipment. Our ability to differentiate our business model, through both our TTK Solutions, as well as through our direct VFU hardware
sales, provides us with multiple opportunities to expand our installed user base, which we believe will lead to future high-margin and
stable recurring SaaS revenues, via our Agrify Insights software, and production fee revenues. |
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Novel Equipment Financing Solution. Limited access to outside capital is a significant
issue for cultivators as it can inhibit growth and cultivation facility expansion. We help solve this problem by offering equipment
financing plans for select good credit customers, which we believe further enables us to become a vendor of choice. Qualified customers
pay approximately 30%-50% upfront and finance the balance through a two-year payment plan. |
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Experienced and Proven Management Team. Our leadership team has entrepreneurial experience,
technical expertise, and a track record of scaling up businesses and operating public companies. Additionally, our team is supported
by strong advisors and leading strategic and institutional investors. |
Our Customers
We primarily market and sell our products to
newly licensed, well-funded producers in a single market as well as multi-state operators. Our customers choose us for a number of reasons,
including the breadth and availability of the products we offer, our extensive expertise, and the quality of our customer service. For
large multi-state operators, our solutions allow operators to produce consistent high-quality products regardless of the geographic locations
where they are licensed to operate. Our system removes the variations of local grow environment, and also provides consistent standard
operating procedures across different facilities, helping every facility to achieve the highest Good Manufacturing Processes standards.
Our ability to provide a “one-stop shop” experience allows us to be the preferred vendor to many of these customers by streamlining
their entry into or expansion of their cultivation capabilities. In addition, we believe our customers find great value in the advice
and recommendations provided by our knowledgeable sales and service associates, which further increases demand for our products.
We believe the nature of our solutions and our
high-touch customer service model strengthens relationships, builds loyalty and drives repeat business as our customers’ businesses
expand. In addition, we feel as if our premium product lines and comprehensive product portfolio position us well to meet our customers’
needs. Furthermore, we fully anticipate that we will be able to leverage all of the data that we are collecting from our existing customer
base to make continuous improvements to our offerings and better serve our current and new customers in the future.
To date, we have customers across the U.S. and
internationally in the cannabis and hemp industry and are of all sizes, ranging from small, single location/ single vertical businesses
to multi-state enterprise operations who use Agrify family of solutions.
In 2021, we had two customers that represented
more than 10% of total revenues and accounts receivable. In 2020, we had three customers that represented more than 10% of total revenues
and accounts receivable.
Our Growth Strategy
We have developed a multi-pronged growth strategy
as described below to help us capitalize on the sizable opportunity at hand. Through methodical sales and marketing efforts, cultivation
and extraction solutions, facility design and building services, scale-up manufacturing, and equipment financing, we believe we have implemented
several key initiatives we can use to grow our business more effectively. We also intend to opportunistically pursue the strategies described
below to continue our upward trajectory and enhance shareholder value. In 2021 we believe we have significantly improved our new bookings
and qualified pipeline. With our expanded product line to included quality extraction solutions, we become more attractive to our prospects
and customers, enhancing our value-add and improved wallet share opportunities. We expect our qualified pipeline and new bookings of opportunities
to continue to grow.
Sales and Marketing
Rigorous Sales Process and Strong Infrastructure
in Place to Drive Revenue Growth
We embrace and utilize a rigorous Sandler sales
process to evaluate potential new opportunities and then advance vetted prospects through the different phases of our qualified pipeline.
The Sandler sales process is the leading enterprise sales process globally, which is based on the psychology of human behavior, is consistent
with the values and culture we have chosen to implement at Agrify, and consequently our salespeople spend most of their time building
relationships and qualifying opportunities in order to make closing new business more streamlined, collaborative and organic in nature.
There are specific requirements, milestones, and events that we have identified along the sales process that must be met to move prospects
through and convert them from vetted opportunities into committed sales orders within a 12-month period. At each phase of the pipeline,
a prospect opportunity is assigned a probability value for closing, providing management production forecast ability.
Our professional proactive sales team works to
convert our qualified pipeline of opportunities into confirmed contractual bookings. Given our emphasis on enterprise sales opportunities
we believe we are able to significantly scale our business in the coming year without significant increases our headcount. At the time
of this report, our sales team was made up of Sales Operations Specialist, Order Management Representatives, Solution Architects, Account
Managers, Director of Business Development, and Director of Channel Partners totaled 19 full-time employees.
We believe our business has, and our future success
will be driven by, the following sales and marketing strategy:
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Marketing Team Aligned
with Sales Force to Maximize Our Industry Visibility to Drive Revenue. Our marketing department works in tandem with our sales
and business development representatives to best represent and sell our cultivation and extraction solutions to the cannabis industry.
The sales and business development representatives advance prospects
through our sales funnel, also known as a “buyer’s journey”.
Our sales funnel duties are completed using a customer relationship management (“CRM”) system, which allows us to track,
qualify, and report on the pipeline velocity and ROI of our marketing
initiatives. Leads are added into our funnel predominantly through our digital marketing efforts, including direct marketing, organic
social media growth, thought leadership, events, and demand generation
via paid advertisements. |
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Direct Marketing. We capitalize on our direct marketing
efforts by utilizing our internal CRM database, as well as the external help of trusted industry databases to target the right audience.
Emails go out on a weekly basis and are subdivided by product focus and state, depending on the campaign. We use A/B testing in our email
campaign strategy to harness meaningful messages that result around 35%-40% engagement for open and click rates. The average open and
click rates for all industries is 21.33%.
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Social Media and Thought Leadership. Through the creation
and promotion of engaging content that positions us as a thought leader, we continue to organically grow our social media audience. We
share original video, photography, industry-related articles, and blog content on a consistent basis. By developing strategic partnerships
with well-known and respected brands, we are working to better position ourselves with marketing and branding efforts on social. Furthermore,
we promote our social media in our communication via email and on our website. We also keep our finger on the pulse of trends and competitors
in the market, remaining in-the-know.
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Trade Shows. Trade shows and events related to the cannabis
industry have proven to be highly effective. When attending trade shows and events, we typically position ourselves front and center,
with high-level sponsorships, outstanding booth placement, and speaking opportunities. Our product and subject matter experts take advantage
of speaking opportunities, positioning Agrify as industry thought leaders. We expect to continue to grow our industry presence by generating
leads using conferences as a platform. The trade show plan has been carefully vetted to ensure that these shows are reputable, have a
strong business to business focus, high foot-traffic rates, as well as hosted in a desirable market.
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Paid Advertising. We utilize paid
advertising such as banner ads on high-trafficked media sites that largely focus on cannabis and other relevant topics. We provide
content offers and other downloadable materials in order to capture these leads. As we gain experience through these different
marketing initiatives, we will make appropriate spending adjustments with our most effective outlets. We seek to expand our business
both nationally and internationally, and will do so when we have proven, viable marketing options available to us.
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Public Relations Campaigns. We have successfully gained the interest of press from networks such as CFN and a number of other cannabis media outlets. With our industry positioning using thought-leadership and on-going participation in industry conferences, we have been highlighted through the Newswire and featured in a variety of media outlets. We will continue to sponsor and keynote in industry-related events including technology and agriculture conferences, podcasts, radio shows and more to continue to gain press and ultimately more exposure. |
Agrify Total Turn-key Solutions
We also believe that our data-driven TTK Solution
for cultivation solutions is unlike any other customer solution being offered and enables our customers to get to market faster
by providing them with our seamlessly integrated hardware and software offerings as well as access to capital and a wide range of associated
services from experts including consulting, training, design, engineering, and construction to form what we believe is the most complete
solution available from a single provider.
Agrify’s TTK Solution provides our valued
customers with the benefit of working with a single, highly qualified provider in what has historically been a decentralized market full
of piecemeal solutions that were not necessarily designed and engineered to work harmoniously with one another. Given the significant
shortcomings associated with traditional indoor grow methods across all commercial agriculture segments, it was apparent that a new paradigm
in indoor cultivation was desperately needed, which is precisely why we are bringing a more modern, manufacturing style approach that
is process driven through technology and measured via data and analytics. Overall, our holistic approach to addressing our customers’
cultivation needs treats their production facilities as an end-to-end ecosystem whose success depends on all of its components working
together optimally. Despite the rapidly growing cannabis and hemp industry, many grower and processor customers face some significant
obstacles to their operations that pose a serious threat to their long-term viability.
We believe Agrify proprietary TTK Solution is
the key to resolving many of the challenges our customers encounter. Since launching our TTK Solution in June of 2021, we have generated
significant momentum in the United States market and over time, we expect to have significant future TTK Solution opportunities both
domestically and abroad. We have set ourselves apart by bringing to market a horticulturist expertise, bundled solution of state-of-the-art
equipment, software and services that is turn-key, end-to-end, fully integrated and optimized for precision growing and extraction. Agrify’s
TTK Solution provides customers with the following bundled equipment and services:
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Facility design, lab design, and engineering services |
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Facility and lab buildout project management |
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Agrify state of the art VFUs |
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Agrify data driven Insights SaaS software |
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Agrify state of the art extraction products |
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Expert horticulturist training and ongoing support |
Agrify’s TTK Solution agreement terms are typically for ten years.
If facility design and building services are provided, on average the customer pays Agrify an annual interest rate ranging from 12% to
18% per annum and the money owed for the design and build services are completely repaid withing 24 months of facility occupancy certification.
During the remaining term of the agreement the Agrify receives monthly recurring SaaS fees and for a production success fee based on the
amount of each harvest. For extraction equipment and products, Agrify TTK Solution agreements range from five years to ten years and the
Company receives a production success fee based on the amount produced.
Equipment Financing
We recognize that many new cultivators face particular
capital and time constraints, and we also recognize that the initial cost of our equipment can be a deterrent for some. We solve this
problem by offering equipment financing plans for select good credit customers, which we believe further enables us to become a vendor
of choice. While we proactively show our prospects that the strong and immediate return on investment derived from Agrify solutions will
more than make up for associated start-up costs, we wanted to do even more to support our prospective customers, which is why we unveiled
an equipment financing program to help remove this final barrier to entry for otherwise excited cultivators. This requires participating
credit-worthy customers to pay a substantial down payment, typically between 30% and 50% of the purchase price, with the balance financed
over two years, with interest, under commercially reasonable terms.
Our individual offerings, which are described
in more detail below, are compelling on their own. However, we believe what really sets us apart is our ability to bring to the market
a tech-forward, bundled solution of equipment, software and services that is turn-key, end-to-end, fully integrated and optimized for
precision growing.
Scale-Up Manufacturing Capabilities in Order to Meet the Increasing
Demand for Our Grow Solutions
We currently use contract manufacturers (“CMs”)
in the U.S. and in Asia for prototyping and volume manufacturing, and we plan to expand our capabilities in order to meet the increasing
demand for our grow solutions. We design the systems internally, and then work with our CMs and suppliers to refine, prototype, and test
the designs. The designs are documented at a level that allows us to have our products manufactured at multiple CMs, both in the U.S.
and abroad.
Additionally, we work with domestic suppliers
on a wide range of metal fabrication to allow for rapid prototyping and product development. One such CM and metal fabrication shop that
we have worked with extensively in the past is Harbor Mountain Holdings, LLC (“HMH”), which is based in the Atlanta, GA area.
HMH has been producing and assembling many of our products for over three years, and they have served our needs well as a versatile and
valued partner. On July 21, 2020, we acquired HMH, including the acquisition of HMH’s research and development, testing, and flexible
manufacturing plant located just outside Atlanta, GA, along with key personnel and equipment. We believe this acquisition fits in nicely
with our overall scale-up manufacturing strategy. We expect HMH to evolve into more of a service, engineering development and prototyping,
and test facility.
On December 7, 2020, we entered into a five-year
supply agreement with Mack Molding Co., a Vermont corporation (“Mack”), pursuant to which Mack will become a key supplier
of Company’s VFUs. Mack is a leading supplier of molded plastic parts, fabricated metal parts and high-level assemblies to the medical,
industrial, transportation, energy/environment, computer and business equipment, defense, aerospace and consumer markets. Founded in 1920,
Mack is a wholly owned subsidiary of the privately held Mack Group corporation, which also includes Mack Technologies and Mack Prototype.
The supply agreement contemplates that, following an introductory period, we will negotiate a minimum percentage of our VFU requirements
that we will purchase from Mack each year based on the agreed upon pricing formula. The introductory period is not time-based but rather
refers to the production of an initial number of units after which the parties have rights to adjust pricing and negotiate a certain minimum
requirements percentage. We believe this approach will result in both parties making a more informed decision with respect to the pricing
and other terms of the supply agreement with Mack. In the event we are unable to agree with Mack on pricing or a minimum requirements
percentage, either party may terminate the agreement upon notice without further consequence or obligation.
We believe the supply agreement with Mack provides
us with several key benefits, including:
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Rapid Scaling: We can scale to customer orders, as Mack has agreed to maintain a minimum
safety stock of VFUs in inventory and allow us to store additional inventory pending customer deliveries; and |
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Long-Term Efficiencies: Under a strategic partner governance structure, we intend to meet
with Mack at least quarterly in efforts to improve components acquisition and logistics, to lower production costs over time, provide
additional alternatives for third party component vendors and allow us to provide input as to Mack’s overall production process
and operational effectiveness. |
We anticipate that this key strategic relationship
with Mack will grow with our continued and expanding need for additional VFUs.
Overall, our approach to manufacturing is to
use CMs to prototype, iterate, and begin initial production, then transition to volume production including in lower cost geographies,
which results in both rapid time-to-market and low production costs. As we grow, we intend to continually analyze and evolve our manufacturing
capabilities to best meet our customer needs while always focusing on ways to maximize operating margins.
Intellectual Property
We rely on a combination of patent, trademark,
copyright, trade secret, including federal, state and common law rights in the United States and other countries, nondisclosure agreements,
and other measures to protect our intellectual property. We require our employees, consultants, and advisors to execute confidentiality
agreements and to agree to disclose and assign to us all inventions conceived under their respective employment, consultant, or advisor
agreement, using our property, or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized
parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Our business is affected
by our ability to protect against misappropriation and infringement of our intellectual property, including our trademarks, service marks,
patents, domain names, copyrights and other proprietary rights.
Patents
We hold 17 patents in the United States and 3
international patents. We also have nine pending patent applications. These patents and patents applications are directed to, among other
things, extraction and processing of botanicals and particular compounds.
Trademarks and Copyrights
We own or have applications for numerous national
and state trademarks which are essential to our businesses, including Agrify, Precision, PurePressure, PressWare, Lab Society and Elitelab,
among others. In addition, we recognize common-law trademark rights AGRIFY INSIGHTS and AGRINAMICS for different software as a service
products.
Our subsidiary, Agrify Brands, LLC is the owner
of certain common-law trademarks that it licenses to third parties. Marks covered by the license include, DAWG STAR (including multiple
logo designs), WESTERN CULTURED (including multiple logo designs), TWISTED LEGION (logo), WAXTRONAUT (including multiple logo designs)
and WAXTRONAUT COSMICALLY CURATED EXTRACTS.
Although we have not sought copyright registration
for our technology or works to date, we rely on common law copyright and trade secret protections in relation to our TechOps/ Agrify
Insights software computer program for indoor agriculture management. We have registered our Internet domain names related to our business.
We license software from third parties and utilize open-source software for integration into our applications.
In addition, while we know that our current product
and service capabilities are highly novel and compelling, we do not intend to be complacent. We will continue to learn from our customers
and from the market, and if there is an opportunity to deploy a new and improved version of one of our offerings or if we decide there
is room in the market for a new type of solution, we fully intend to diligently explore those possibilities to augment our existing business
and grow our reach.
Employees and Human Capital Resources
As of December 31, 2021, we had a total of 141
employees, of which 136 are full-time employees, with 36 located in the New England area, 35 in Georgia, 31 in Michigan, 17 in Oregon
and 22 in other states. None of our employees are subject to collective bargaining agreements. We consider our relationship with our
employees to be good.
Our human capital resources objectives include,
as applicable, identifying, recruiting, retaining, incentivizing, and integrating our existing and new employees, advisors, and consultants.
The principal purposes of our equity incentive plan are to attract, retain and reward personnel through the granting of stock-based compensation
awards, in order to increase stockholder value and the success of our company by motivating such individuals to perform to the best of
their abilities and achieve our objectives.
Legal Proceedings
From time to time, we may be subject to various
claims, legal actions and regulatory proceedings arising in the ordinary course of business.
On January 5, 2021, we received a demand
letter from Nicholas Cooper and Richard Weinstein, two of our former employees (and one of Mr. Cooper’s affiliated entities), asserting
that such individuals were entitled to compensation arising out of their employment by us, as well as their partial ownership of TriGrow
Systems, Inc. The demand letter asserts that the former employees are due certain sales commissions under their applicable bonus plan,
equity earn-outs based on certain sales targets, and various equity purchases through our employee stock ownership plan. The demand letter
also asserts various employment claims, including, but not limited to, statutory wage withholding violations, wrongful termination, breach
of contract, breach of the duty of good faith and fair dealing, fraud in the inducement, promissory estoppel, minority shareholder oppression,
breach of fiduciary duty, unjust enrichment, and violations of state and federal securities laws.
On January 19, 2021, Messrs. Cooper and Weinstein
filed a lawsuit against Agrify Corporation in the United States District Court for the Western District of Washington, alleging the same
claims made in their demand letter based on the same facts disclosed above. The plaintiffs are seeking relief in the form of monetary
damages in an amount to be determined. Messrs. Cooper and Weinstein are also seeking relief in the form of reinstatement and Mr. Weinstein
is seeking rescission of Mr. Weinstein’s Release of Claims Agreement. On March 10, 2021, we moved to dismiss all of Cooper and Weinstein’s
claims, asserting that the claims failed to allege legal grounds for relief. A decision on our motion is expected in the summer of 2021.
On May 12, 2021, a Magistrate issued a preliminary Report and Recommendation, which recommended dismissal of certain of Cooper and Weinstein’s
claims, and recommended others for additional factual discovery. On July 27, 2021, a District Judge entered an order partially adopting
the Report and Recommendation, dismissing one claim with prejudice, dismissing a second claim with leave to amend, and permitting the
remaining claims to proceed.
Additionally, on July 29, 2021, the Company
filed a separate arbitration in Boston, Massachusetts against Cooper and Weinstein, in which the Company alleges that Cooper and
Weinstein were liable for certain conduct during the time they were TriGrow employees, including breach of fiduciary duty, unjust
enrichment, usurpation of corporate opportunity, conversion, fraudulent concealment, and false representation. Also on July
29, 2021, the Company submitted a claim for indemnification to certain legacy TriGrow Systems, LLC. shareholders. The claim
for indemnification relates to conduct by Cooper and Weinstein during the time they were TriGrow employees. We do not believe these
claims have any merit and intend to vigorously defend against them (see Note 21, Commitments and Contingencies, in the notes to our
audited consolidated financial statements as of December 31, 2021).
Corporate History
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.
On December 8, 2019, we formed Agrify-Valiant, LLC, a 60/40 joint-venture
limited liability company, in which we are the 60% majority owner with Valiant-America, LLC, one of the largest premium integrated consulting
and general contracting firms in North America with more than ten years of facility general contracting experience across many states.
On January 22, 2020, we and Agrify Merger
Sub, Inc., our newly formed wholly owned subsidiary (or “Merger Sub”), entered into an Agreement of Merger with TriGrow
Systems, Inc., a Nevada corporation (or “TriGrow”), pursuant to which TriGrow was merged with and into Merger Sub, with
Merger Sub as the surviving corporation, resulting in our indirect acquisition of TriGrow.
On July 21, 2020, we acquired HMH, who we have
had a close working relationship with for over three years, including the acquisition of HMH’s research and development, testing,
and flexible manufacturing plant located just outside Atlanta, GA, along with key personnel and equipment. We believe this acquisition
will give us increased, and in some respects, new in-house resources and capabilities around engineering, prototyping, manufacturing,
testing, warehousing, and installation services.
On October 1, 2021, we acquired Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a
Precision Extraction Solutions (“Precision”) and Cascade Sciences, LLC (“Cascade”). As part of the acquisition
of Precision, Precision merged with and into a wholly owned subsidiary of the Company, Precision Extraction NewCo, LLC.
On December 31, 2021, we acquired PurePressure,
LLC (“PurePressure”), a leader in solventless extraction and advanced ice water hash processing equipment in the cannabis
and hemp industry.
Subsequent to December 31, 2021, on February 1, 2022, we acquired
LS Holdings Corp. (“Lab Society”), a leader in distillation and solvent separation for the cannabis and hemp industry. As
part of the acquisition of Lab Society, Lab Society merged with and into a wholly owned subsidiary of the Company, Lab Society NewCo,
LLC.
Regulatory Implications of Providing Equipment and Services in
the Cannabis and Hemp Industry
We sell products and services that end users
may purchase for use in industries or segments, including the growing of cannabis and hemp, which are subject to varying, inconsistent,
and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions.
For example, certain countries and 36 U.S. states have adopted frameworks that authorize, regulate, and tax the cultivation, processing,
sale, and use of cannabis for medicinal and/or non-medicinal use, while the U.S. Controlled Substances Act and the laws of other U.S.
states prohibit growing cannabis. In addition, with the passage of the Farm Bill in December 2018, hemp cultivation is now broadly permitted.
The Farm Bill explicitly allows the transfer of hemp-derived products across state lines for commercial or other purposes. It also removes
restrictions on the sale, transport, or possession of hemp-derived products, so long as those items are produced in a manner consistent
with the law. Our products are multi-purpose products and may be used on a wide range of plants and are purchased by cultivators who
may grow any variety of plants, including cannabis and hemp.
Despite well over a majority of state laws decriminalizing
varying types of its use, marijuana remains a Schedule I drug under the Controlled Substances Act, making it illegal under federal law
in the United States to, among other things, cultivate, distribute or possess cannabis in the United States. In those states in which
the use of marijuana has been legalized, its use remains a violation of federal law pursuant to the Controlled Substances Act. The Controlled
Substances Act classifies marijuana as a Schedule I controlled substance, and as such, medical and adult cannabis use is illegal under
U.S. federal law. Unless and until the U.S. Congress amends the Controlled Substances Act with respect to marijuana (and the President
approves such amendment), there is a risk that federal authorities may enforce current federal law. Financial transactions involving
proceeds generated by, or intended to promote, cannabis-related business activities in the United States may form the basis for prosecution
under applicable U.S. federal money laundering legislation. The approach to enforcement of such laws by the federal government in the
United States has trended toward non-enforcement against individuals and businesses that comply with medical or adult-use cannabis regulatory
programs in states where such programs are legal, strict compliance with state laws with respect to cannabis.
In most states that have legalized medical- and
recreational-use cannabis in some form, the growing, processing and/or dispensing of cannabis generally requires that the operator obtain
one or more licenses in accordance with applicable state requirements. In addition, many states regulate various aspects of the growing,
processing and/or dispensing of cannabis and hemp. Local governments in some cases also impose rules and regulations on the manner of
operating cannabis and hemp businesses. As a result, applicable state and local laws and regulations vary widely, including, but not
limited to, regulations governing the medical cannabis program, product testing, the level of enforcement by state and local authorities
on non-licensed cannabis operators, state and local taxation of regulated cannabis products, local municipality bans on operations and
operator licensing processes and renewals.
As part of its rigorous due diligence policy
on all potential customers, the Company carefully reviews the appropriate licensure of each potential customers in the cannabis and hemp
industry for compliance with applicable local, state, and federal laws. The Company is not involved in the cultivation, processing or
retail of cannabis products and never takes a controlling interest in any of the operations of its cannabis customers as a matter of
state law.
Implications of Being an Emerging Growth Company and Smaller Reporting
Company
We qualify as an “emerging growth company” as
defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act. As a result, we are permitted to, and intend
to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies.
Accordingly, for so long as we are an “emerging growth company,” we will not be required to:
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engage an auditor to report on our internal controls over financial reporting pursuant to Section
404(b) of the Sarbanes–Oxley Act of 2002, or the Sarbanes–Oxley Act; |
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comply with any requirement that may be adopted by the Public Company Accounting Oversight Board,
or the PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information
about the audit and the financial statements (i.e., an auditor discussion and analysis); |
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submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay,”
“say-on-frequency,” and “say-on-golden parachutes;” or |
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disclose certain executive compensation related items such as the correlation between executive
compensation and performance and comparison of the chief executive officer’s compensation to median employee compensation. |
In addition, the JOBS Act provides that an “emerging
growth company” can use the extended transition period for complying with new or revised accounting standards.
We will remain an “emerging growth company”
until the earliest to occur of:
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our reporting $1 billion or more in annual gross revenues; |
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our issuance, in a three-year period, of more than $1 billion in non-convertible debt; |
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the end of the fiscal year in which the market value of our common stock held by non-affiliates
exceeds $700 million on the last business day of our second fiscal quarter; and |
We cannot predict if investors will find our
securities less attractive because we may rely on these exemptions, which could result in a less active trading market for our securities
and increased volatility in the price of our securities.
Finally, we are a “smaller reporting company”
(and may continue to qualify as such even after we no longer qualify as an emerging growth company) and accordingly may provide less
public disclosure than larger public companies, including the inclusion of only two years of audited financial statements and only two
years of management’s discussion and analysis of financial condition and results of operations disclosure. As a result, the information
that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity
interests.
Item 1A. Risk Factors.
Investing in our common stock involves a high
degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information
in this Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our
common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business,
financial condition, results of operations, and prospects could be materially and adversely affected. In that event, the market price
of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Industry
We have a history of losses, expect to continue to incur losses
in the near term and may not achieve or sustain profitability in the future, and as a result, our management has identified, and our
auditors agreed that there is a substantial doubt about our ability to continue as a going concern.
We have incurred significant losses in each fiscal
year since our inception in 2016. We have experienced net losses of approximately $32.5 million and $21.6 million for the years ended
December 31, 2021 and 2020, respectively. We expect our operating expenses (“OpEx”), to increase in the future due to expected
increased sales and marketing expenses, operational costs, product development costs, and general and administrative costs and, therefore,
our operating losses will continue or even increase at least through the near term. In addition, since the consummation of our initial
public offering (the “IPO”) on February 1, 2021, we have incurred and will continue to incur significant legal, accounting,
and other expenses as a public company that we did not incur as a private company. Furthermore, to the extent that we are successful in
increasing our customer base, we will also incur increased expenses because costs associated with generating and supporting customer agreements
are generally incurred up front, while revenue is generally recognized ratably over the term of the agreement. You should not rely upon
our recent revenue growth as indicative of future performance. We may not reach profitability in the near future or at any specific time
in the future. If and when our operations do become profitable, we may not sustain profitability.
We have a relatively short operating history, which makes it
difficult to evaluate our business and future prospects.
We have a relatively short operating history,
which makes it difficult to evaluate our business and future prospects. We have been in existence since June 2016 and much of our revenue
growth has occurred during 2020 and 2021. We have encountered, and will continue to encounter, risks and difficulties frequently experienced
by growing companies in rapidly changing industries, including those related to:
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market acceptance of our current and future products and services; |
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changing regulatory environments and costs associated with compliance, particularly as related
to our operations in the cannabis sector; |
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our ability to compete with other companies offering similar products and services; |
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our ability to effectively market our products and services and attract new clients; |
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the amount and timing of OpEx, particularly sales and marketing expenses, related to the maintenance
and expansion of our business, operations, and infrastructure; |
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our ability to control costs, including OpEx; |
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our ability to manage organic growth and growth fueled by acquisitions; |
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public perception and acceptance of cannabis-related products and services generally; and |
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general economic conditions and events. |
If we do not manage these risks successfully,
our business and financial performance will be adversely affected.
Potential risk of loss associated with our TTK Solution Offerings
During 2021, we introduced our TTK Solution, which
among other things, include financing arrangements related to both facility design and build services and equipment. These arrangements
require a significant upfront investment of working capital over a one- to two-year period, before we start to receive repayment on the
upfront construction advances and on our recurring monthly SaaS fees and production fees.
As of December 31, 2021, a significant amount
of our working capital has been invested in funding our TTK Solutions construction and equipment commitments. We expect to continue
to allocate a significant portion of our working capital towards existing and future TTK partnerships.
We believe that there is a potential risk of loss
associated with our ability to receive anticipated future payments that are in line with our projected financial unit metrics due to a
host of variables including, but not limited to the following:
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As we are in the early stages of our TTK Solution offerings, the TTK
Solution is currently an unproven business model;
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The TTK Solution offering requires a significant amount of capital and our collection of advanced amounts is subject to customer credit risk; |
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Our anticipated downstream production fee revenue assumes that our VFUs will successfully produce 35 pounds of product per VFU per year; and |
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Our anticipated returns are reliant upon our customer’s ability to market and sell the products. |
We may require additional financing to achieve our goals, and
a failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to delay, limit, reduce or terminate
our product manufacturing and development, and other operations.
At December 31, 2021, we had cash and cash equivalents
and current marketable securities of approximately $56.6 million, which we believe will be sufficient to fund our planned operations for
the next 12 months. Our operating plan may change because of factors currently unknown to us, and we may need to seek additional funds
sooner than planned. Even if we are able to substantially increase revenue and reduce OpEx, we may need to raise additional capital, either
through borrowings, private offerings, public offerings, or some type of business combination, such as a merger, or buyout, and there
can be no assurance that we will be successful in such pursuits. Accordingly, if we are unable to generate adequate cash from operations,
and if we are unable to find sources of funding, it may be necessary for us to sell one or more lines of business or all or a portion
of our assets, enter into a business combination, or reduce or eliminate operations. These possibilities, to the extent available, may
be on terms that result in significant dilution to our shareholders or that result in our investors losing all of their investment in
our company.
If we are able to raise additional capital, we
do not know what the terms of any such capital raising would be. In addition, any future sale of our equity securities would dilute the
ownership and control of your shares and could be at prices substantially below prices at which our shares currently trade. Our inability
to raise capital could require us to significantly curtail or terminate our operations. We may seek to increase our cash reserves through
the sale of additional equity or debt securities. The sale of convertible debt securities or additional equity securities could result
in additional and potentially substantial dilution to our shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that would restrict our operations and liquidity and ability
to pay dividends. In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties.
We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Any failure to raise additional
funds on favorable terms could have a material adverse effect on our liquidity and financial condition.
We face risks associated with strategic acquisitions.
Since our inception, we have strategically acquired
several businesses, and plan to continue to make strategic acquisitions, some of which may be material. These acquisitions may involve
a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following,
any of which could adversely affect our results of operations:
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Any acquired business could under-perform relative to our expectations and the price that we paid
for it, or not perform in accordance with its anticipated timetable; |
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We may incur or assume significant debt in connection with its acquisitions; |
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Acquisitions could cause our results of operations to differ from our own or the investment community’s
expectations in any given period, or over the long term; and |
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Acquisitions could create demands on our management that it may be unable to effectively address,
or for which it may incur additional costs. |
Additionally, following any business acquisition,
we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key employees and
customers.
We may record goodwill and other intangible assets
on our consolidated balance sheet in connection with its acquisitions. If we are not able to realize the value of these assets, we may
be required to incur charges relating to the impairment of these assets, which could materially impact our results of operations.
We have substantial
debt and other financial obligations, and we may incur even more debt. Any failure to meet our debt and other financial obligations or
maintain compliance with related covenants could harm our business, financial condition and results of operations.
On March 14, 2022, we entered into a Securities
Purchase Agreement (the “Purchase Agreement”) with an institutional investor (the “Investor”). The Purchase Agreement
provides for of the issuance of a senior secured note in the aggregate amount of $65 million (the “Note”) and a warrant exercisable
6,881,108 shares of the Company’s common stock, with the potential for two potential subsequent closings for notes with an original
principal amount of $35 million each. The Note will mature on March 1, 2026.
Pursuant to the terms of the Notes, we are subject
to various covenants, including negative covenants that restrict our ability to engage in certain transactions, which may limit our ability
to respond to changing business and economic conditions. Such negative covenants include, among other things, limitations on our ability
and the ability of our subsidiaries to:
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make investments (including acquisitions), |
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pay dividends on our capital stock. |
In addition, the Notes contains certain financial
covenants, including minimum liquidity, which will be tested monthly, and adjusted EBITDA and minimum revenue, each of which will be tested
at the end of each fiscal quarter.
If we are not in compliance with certain of these
covenants, in addition to other actions the Investors may require, the amounts outstanding under the Purchase Agreement may become immediately
due and payable. This immediate payment may negatively impact our financial condition. In addition, any failure to make scheduled payments
of interest and principal on our outstanding indebtedness would likely harm our ability to incur additional indebtedness on acceptable
terms. Our cash flow and capital resources may be insufficient to pay interest and principal on our debt in the future. If that should
occur, our capital raising or debt restructuring measures may be unsuccessful or inadequate to meet our scheduled debt service obligations,
which could cause us to default on our obligations and further impair our liquidity.
Further, based upon our actual performance levels,
our covenants relating to liquidity and adjusted EBITDA could limit our ability to incur additional debt, which could hinder our ability
to execute our current business strategy.
Our ability to make scheduled payments on our
debt and other financial obligations and comply with financial covenants depends on our financial and operating performance. Our financial
and operating performance will continue to be subject to prevailing economic conditions and to financial, business and other factors,
some of which are beyond our control. Failure within any applicable grace or cure periods to may such payments, comply with the financial
covenants, or any other non-financial or restrictive covenant, would create a default under the Note. Our cash flow and existing capital
resources may be insufficient to repay our debt at maturity, in which such case prior thereto we would have to extend such maturity date,
or otherwise repay, refinance and or restructure the obligations under the Note, including with proceeds from the sale of assets, and
additional equity or debt capital. If we are unsuccessful in obtaining such extension, or entering into such repayment, refinance or restructure
prior to maturity, or any other default existed under the Note, the Investor could accelerate the indebtedness under the Note, foreclose
against its collateral or seek other remedies, which would jeopardize our ability to continue our current operations.
We may be required to record impairment charges against the
carrying value of our goodwill and other intangible assets in the future.
As of December 31, 2021 and 2020, we had
recorded goodwill and intangible assets with a net book value of $64.2 million and $2.3 million, respectively. We are required to
test for impairment at least annually and whenever evidence of impairment exists. We have not recorded any impairment charges against
the carrying value of our goodwill and intangible assets in the past. The carrying value of our goodwill and intangible asset values are
measured using a variety of factors, including values of comparable companies, overall stock market and economic data and our own projections
of future financial performance. We may be required in the future to record impairment charges that could have a material adverse effect
on our reported results.
Two customers, each of which are related parties, accounted for
approximately 52.5% (or $31.4 million) of our total revenue during the year ended December 31, 2021. During the year ended December 31,
2020, two customers accounted for approximately 46.8% (or $5.7 million) of our total revenue and one related party customer accounted
for approximately 32.4% (or $3.9 million) of our total revenue. In the event of any material decrease in revenue from these customers,
or if we are unable to replace the revenue through the sale of our products to additional customers, our financial condition and results
from operations could be materially and adversely affected.
This concentration of customers leaves us exposed
to the risks associated with the loss of one or more of these significant customers, which would materially and adversely affect our revenues
and results of operations. In addition, some of these customers have experienced and may continue to experience construction delays in
building out their facilities and we have been assisting these customers in addressing these delays, including in certain cases extending
their payment terms. Any continued delays will likely result in a negative impact on our revenues. Further, if these customers were to
significantly reduce their relationship with us, or in the event that we are unable to replace the revenue through the sale of our products
to additional customers, our financial condition and results from operations could be negatively impacted, and such impact would likely
be significant.
Our reliance on a limited base of suppliers for our products
may result in disruptions to our supply chain and business and adversely affect our financial results.
We rely on a limited number of suppliers for
our products and other supplies. If we are unable to maintain supplier arrangements and relationships, if we are unable to contract with
suppliers at the quantity and quality levels needed for our business, if any of our key suppliers becomes insolvent or experience other
financial distress or if any of our key suppliers is negatively impacted by COVID-19, including with respect to staffing and shipping
of products, we could experience disruptions in our supply chain, which could have a material adverse effect on our financial condition,
results of operations and cash flows.
Many of our suppliers are experiencing operational difficulties
as a result of COVID-19, which in turn may have an adverse effect on our ability to provide products to our customers.
The measures being taken to combat the pandemic
are impacting our suppliers and may destabilize our supply chain. For example, manufacturing plants have closed and work at others curtailed
in many places where we source our products. Some of our suppliers have had to temporarily close a facility for disinfecting after employees
tested positive for COVID-19, and others have faced staffing shortages from employees who are sick or apprehensive about coming to work.
Further, the ability of our suppliers to ship their goods to us has become difficult as transportation networks and distribution facilities
have had reduced capacity and have been dealing with changes in the types of goods being shipped.
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 and we do not significantly depend on any one supplier; 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. If the difficulties experienced by our suppliers continue, we cannot
guarantee that we will be able to locate alternative sources of supply for our merchandise on acceptable terms, or at all. If we are
unable to adequately purchase appropriate amounts of supplies for our products, our business and results of operations may be materially
and adversely affected.
As a company with clients operating in the cannabis industry,
we face many particular and evolving risks associated with that industry.
We currently serve private clients as they operate
in a growing cannabis industry. Any risks related to the cannabis industry that may adversely affect our clients and potential clients
may, in turn, adversely affect demand for our products. Specific risks faced by companies operating in the cannabis industry include,
but are not limited to, the following:
Marijuana remains illegal under United
States federal law
Marijuana is a Schedule-I controlled substance
under the Controlled Substances Act and is illegal under federal law. It remains illegal under United States federal law to grow, cultivate,
sell or possess marijuana for any purpose or to assist or conspire with those who do so. Additionally, 21 U.S.C. 856 makes it illegal
to “knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing,
distributing, or using any controlled substance.” Even in those states in which the use of marijuana has been authorized, its use
remains a violation of federal law. Since federal law criminalizing the use of marijuana is not preempted by state laws that legalize
its use, strict enforcement of federal law regarding marijuana would likely result in our clients’ inability to proceed with their
operations, which would adversely affect demands for our products.
Uncertainty of federal enforcement and
the need to renew temporary safeguards
On January 4, 2018, former Attorney General Sessions
rescinded the previously issued memoranda (known as the Cole Memorandum) from the U.S. Department of Justice (“DOJ”) that
had de-prioritized the enforcement of federal law against marijuana users and businesses that comply with state marijuana laws, adding
uncertainty to the question of how the federal government will choose to enforce federal laws regarding marijuana. Attorney General Sessions
issued a memorandum to all United States Attorneys in which the DOJ affirmatively rescinded the previous guidance as to marijuana enforcement,
calling such guidance “unnecessary.” This one-page memorandum was vague in nature, stating that federal prosecutors should
use established principles in setting their law enforcement priorities. Under previous administrations, the DOJ indicated that those
users and suppliers of medical marijuana who complied with state laws, which required compliance with certain criteria, would not be
prosecuted. As a result, it is now unclear if the DOJ will seek to enforce the Controlled Substances Act against those users and suppliers
who comply with state marijuana laws.
Despite former Attorney General Sessions’
rescission of the Cole Memorandum, the Department of the Treasury, Financial Crimes Enforcement Network, has not rescinded the “FinCEN
Memo” dated February 14, 2014, which de-prioritizes enforcement of the Bank Secrecy Act against financial institutions and marijuana-related
businesses which utilize them. This memo appears to be a standalone document and is presumptively still in effect. At any time, however,
the Department of the Treasury, Financial Crimes Enforcement Network, could elect to rescind the FinCEN Memo. This would make it more
difficult for our clients and potential clients to access the U.S. banking systems and conduct financial transactions, which would adversely
affect our operations.
In 2014, Congress passed a spending bill (“2015
Appropriations Bill”) containing a provision (“Appropriations Rider”) blocking federal funds and resources allocated
under the 2015 Appropriations Bill from being used to “prevent such States from implementing their own State medical marijuana
law.” The Appropriations Rider seemed to have prohibited the federal government from interfering with the ability of states to
administer their medical marijuana laws, although it did not codify federal protections for medical marijuana patients and producers.
Moreover, despite the Appropriations Rider, the Justice Department maintains that it can still prosecute violations of the federal marijuana
ban and continue cases already in the courts. Additionally, the Appropriations Rider must be re-enacted every year. While it was continued
in subsequent years and remains in effect, continued re-authorization of the Appropriations Rider cannot be guaranteed. If the Appropriation
Rider is no longer in effect, the risk of federal enforcement and override of state marijuana laws would increase.
Further legislative development beneficial
to our operations is not guaranteed
One aspect of our business involves selling goods
and services to state-licensed cannabis cultivators. The success of our business may partly depend on the continued development of the
cannabis industry and the activity of commercial business within the industry. The continued development of the cannabis industry is
dependent upon continued legislative and regulatory authorization of cannabis at the state level and a continued laissez-faire approach
by federal enforcement agencies. Any number of factors could slow or halt progress in this area. Further regulatory progress beneficial
to the industry cannot be assured. While there may be ample public support for legislative action, numerous factors impact the legislative
and regulatory process, including election results, scientific findings or general public events. Any one of these factors could slow
or halt progressive legislation relating to cannabis and the current tolerance for the use of cannabis by consumers, which could adversely
affect demand for our products and operations.
The cannabis industry could face strong
opposition from other industries
We believe that established businesses in other
industries may have a strong economic interest in opposing the development of the cannabis industry. Cannabis may be seen by companies
in other industries as an attractive alternative to their products, including recreational marijuana as an alternative to alcohol, and
medical marijuana as an alternative to various commercial pharmaceuticals. Many industries that could view the emerging cannabis industry
as an economic threat are well established, with vast economic and federal and state lobbying resources. It is possible that companies
within these industries could use their resources to attempt to slow or reverse legislation legalizing cannabis. Any inroads these companies
make in halting or impeding legislative initiatives that would be beneficial to the cannabis industry could have a detrimental impact
on some of our clients and, in turn on our operations.
The legality of marijuana could be reversed
in one or more states
The voters or legislatures of states in which
marijuana has already been legalized could potentially repeal applicable laws which permit the operation of both medical and retail marijuana
businesses. These actions might force businesses, including those that are our clients, to cease operations in one or more states entirely.
Changing legislation and evolving interpretations
of law
Laws and regulations affecting the medical and
adult-use marijuana industry are constantly changing, which could detrimentally affect some of our clients and, in turn, our operations.
Local, state and federal marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require
our clients and thus us to incur substantial costs associated with modification of operations to ensure such clients’ compliance.
In addition, violations of these laws, or allegations of such violations, could disrupt our clients’ business and result in a material
adverse effect on our operations. In addition, it is possible that regulations may be enacted in the future that will limit the amount
of cannabis growth or related products that our commercial clients are authorized to produce. We cannot predict the nature of any future
laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative
policies and procedures, when and if promulgated, could have on our operations.
Our business depends in part on client licensing
Our business is partly dependent on certain of
our customers obtaining various licenses from various municipalities and state licensing agencies. There can be no assurance that any
or all licenses necessary for our clients to operate their businesses will be obtained, retained or renewed. If a licensing body were
to determine that a client of ours had violated applicable rules and regulations, there is a risk the license granted to that client
could be revoked, which could adversely affect our operations. There can be no assurance that our existing clients will be able to retain
their licenses going forward, or that new licenses will be granted to existing and new market entrants.
Banking regulations could limit access
to banking services
Since the use of marijuana is illegal under federal
law, there is a compelling argument that banks cannot lawfully except for deposit funds from businesses involved with marijuana. Consequently,
businesses involved in the cannabis industry often have trouble finding a bank willing to accept their business. The inability to open
bank accounts may make it difficult for some of our clients to operate and their reliance on cash can result in a heightened risk of
theft, which could harm their businesses and, in turn, harm our business. Although the proposal of the Secure and Fair Enforcement Banking
Act, also referred to as the SAFE Banking Act, would allow banks to work with cannabis businesses and prevent federal banking regulators
from intervening or punishing those banks, the legislation still requires the approval of the United States Senate. There can be no assurance
that that the SAFE Banking Act will become law in the United States. Additionally, most courts have denied marijuana-related businesses
bankruptcy protection, thus, making it very difficult for lenders to recoup their investments, which may limit the willingness of banks
to lend to our clients and to us.
We may face insurance risks
In the United States, many marijuana-related
businesses are subject to a lack of adequate insurance coverage. In addition, many insurance companies may deny claims for any loss relating
to marijuana or marijuana-related operations based on their illegality under federal law, noting that a contract for an illegal transaction
is unenforceable.
We participate in an evolving industry
The cannabis industry is not yet well-developed,
and many aspects of this industry’s development and evolution cannot be accurately predicted. While we have attempted to identify
many risks specific to the cannabis industry, you should carefully consider that there are other risks that cannot be foreseen or are
not described in this report, which could materially and adversely affect our business and financial performance. We expect that the
cannabis market and our business will evolve in ways that are difficult to predict. Our long-term success may depend on our ability to
successfully adjust our strategy to meet the changing market dynamics. If we are unable to successfully adapt to changes in the cannabis
industry, our operations could be adversely affected.
The inability of our customers to meet their financial or contractual
obligations to us may result in disruption to our results of operations and could result in financial losses.
We have exposure to several customers and at
least some of these customers are experiencing financial difficulties. We have in the past, and may in the future, need to take allowances
against and need to write off receivables due to the creditworthiness of these customers. Further, the inability of these customers to
purchase our products could materially adversely affect our results of operations.
Our reliance on our relationship with our strategic investor,
Inventronics, without a definitive agreement in place may have an adverse effect on our ability to provide products and services to our
customers.
Inventronics Inc. (“Inventronics”),
based in Hangzhou, Zhejiang, China, is currently one of the largest companies in the world engaged in the design and manufacture of high
efficiency, high reliability and long-life LED drivers, and has worked with us to develop our LED lighting technology. Inventronics is
a shareholder of our company and the founder of Inventronics is a member of our board of directors. We intend to continue to rely on our
strategic relationship with Inventronics with respect to various aspects of our business, including access to the most advanced LED driver
technology, component suppliers and contract manufacturing located in Asia, as well as research and development support. Although we intend
in due course to memorialize our relationship with Inventronics in a formal written agreement, we are currently not a party to a definitive
agreement that governs our relationship with Inventronics. Accordingly, we do not have the benefit of certain rights and remedies that
would otherwise be included in a definitive agreement with another third party. If we are unable to maintain our strong relationship with
Inventronics, our lack of a definitive agreement with such company may have an adverse effect on our ability to provide products and services
to our customers.
Changes in our credit profile may affect our relationship with
our suppliers, which could have a material adverse effect on our liquidity.
Changes in our credit profile may affect the
way our suppliers view our ability to make payments and may induce them to shorten the payment terms of their invoices. Given the large
dollar amounts and volume of our purchases from suppliers, a change in payment terms may have a material adverse effect on our liquidity
and our ability to make payments to our suppliers and, consequently, may have a material adverse effect on our business and results of
operations.
Although we believe our current sales backlog, which consists
of purchase orders or purchase commitments, and our qualified pipeline of carefully vetted potential sales opportunities, will translate
into future revenue, there can be no assurance that we will be successful in such pursuit.
As of December 31, 2021, our backlog, which consists
of purchase orders or purchase commitments, was $837 million. We expect to recognize revenue of approximately $110 million from the backlog
as revenue in 2022 and the rest gradually thereafter. Although we conduct a detailed due diligence investigation on our current and potential
customers and place a heavy emphasis on the qualification process to ensure that all active customer purchase orders and commitments relating
to our backlog and all active opportunities in our qualified pipeline have been meticulously vetted, the criteria we rely on and the internal
analysis we undertake is subjective. Furthermore, we have a relatively short operating history and do not have significant data relating
to the conversion of our backlog into revenue and the conversion of our qualified pipeline into customer contracts. Accordingly, although
we are confident that our backlog and qualified pipeline will translate into bookings over the next 12 months, there can be no assurance
that we will be successful in such pursuit. In the event our backlog and qualified pipeline do not translate into bookings as projected,
it could materially and adversely affect our business and financial performance.
Certain of our officers and directors may become subject to conflicts
of interests arising out of our relationship with Bluezone Products, Inc. (“Bluezone”) and Enozo Technologies, Inc. (“Enozo”).
We are a party to two distribution agreements
with companies in which certain of our officers and directors have an interest. Specifically, Guichao Hua, a member of our board of directors,
has an ownership interest in Bluezone of approximately 3%. Raymond Chang, our Chairman of the Board and Chief Executive Officer, has a
minority ownership interest in and manages NXT Venture Fund II, a now inactive fund, of approximately 5% which has a minority interest
in Bluezone of approximately 8%. This results in Mr. Chang having approximately a 0.4% indirect ownership interest in Bluezone. Mr. Hua
is a board member of Enozo and has an ownership interest of approximately 12% in the company. Mr. Chang also is owed approximately $500
thousand of debt from Enozo in accordance with a certain promissory note. The overlapping nature of these relationships could cause conflicts
of interest for Messrs. Hua and Chang, which may not be easily resolved, or if they are resolved, they may not be resolved on terms advantageous
to our company.
We rely on third parties for certain services made available
to our customers, which could limit our control over the quality of the user experience and our cost of providing services.
Some of the applications and services available
through our proprietary Agrify “Precision Elevated™” cultivation solution, including our flagship hardware product,
the Agrify Vertical Farming Unit (“VFU”), and our proprietary SaaS product, Agrify Insights software, are provided through
relationships with third party service providers. We do not typically have any direct control over these third-party service providers.
These third-party service providers could experience service outages, data loss, privacy breaches, including cyber-attacks, and other
events relating to the applications and services they provide that could diminish the utility of these services and which could harm users
thereof. Our platform is currently hosted by a third-party service provider. There are readily available alternative hosting services
available should we desire or need to move to a different web host. Certain ancillary services provided by us also uses the services of
third-party providers, for which, we believe, there are readily available alternatives on comparable economic terms. Offering integrated
platforms which rely, in part, on the services of other providers lessens the control that we have over the total client experience. Should
the third-party service providers we rely upon not deliver at standards we expect and desire, acceptance of our platforms could suffer,
which would have an adverse effect on our business and financial performance. Further, we cannot be assured of entering into agreements
with such third-party service providers on economically favorable terms.
The growth and success of our business depends on the continued
contributions of Raymond Chang, as our key executive officer, as well as our ability to attract and retain qualified personnel.
Our growth and success are dependent upon the
continued contributions made by our Chairman of the Board and Chief Executive Officer, Raymond Chang. We rely on Mr. Chang’s expertise
in business operations when we are developing new products and services. If Mr. Chang cannot serve us or is no longer willing to do so,
we may not be able to find alternatives in a timely manner or at all. This may have a material adverse effect on our business. In addition,
our growth and success will depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional,
creative, technical and managerial personnel. Competition for experience and qualified talent in the indoor agriculture marketplace can
be intense. We may not be successful in identifying, attracting, hiring, training and retaining such personnel in the future. If we are
unable to hire, assimilate and retain qualified personnel in the future, such inability could adversely affect our operations.
We face intense competition that could prohibit us from developing
or increasing our customer base.
The indoor agriculture industry is highly competitive.
We may compete with companies that have greater capital resources and facilities. More established companies with much greater financial
resources which do not currently compete with us may be able to adapt their existing operations more easily to our line of business. In
addition, the continued growth of the cannabis industry will likely attract some of these existing companies and incentivize them to produce
solutions that are competitive with those offered by us. Our competitors may also introduce new and improved products, and manufacturers
may sell equipment direct to consumers. We may not be able to successfully compete with larger enterprises devoting significant resources
to compete in our target marketspace. Due to this competition, there is no assurance that we will not encounter difficulties in increasing
revenues and maintaining and/or increasing market share. In addition, increased competition may lead to reduced prices and/or margins
for products we sell.
Protecting and defending against intellectual property claims
may have a material adverse effect on our business.
Our ability to compete depends, in part, upon
successful protection of our intellectual property relating to our proprietary Agrify cultivation solution, including our flagship hardware
product, the VFU, and our proprietary SaaS product, Agrify Insights software. We seek to protect our proprietary and intellectual property
rights through patent applications, common law copyright and trademark laws, nondisclosure agreements, and non-disclosure provisions within
our licensing and distribution arrangements with reputable companies in our target markets. Enforcement of our intellectual property rights
would be costly, and there can be no assurance that we will have the resources to undertake all necessary action to protect our intellectual
property rights or that we will be successful. Any infringement of our material intellectual property rights could require us to redirect
resources to actions necessary to protect same and could distract management from our underlying business operations. An infringement
of our material intellectual property rights and resulting actions could adversely affect our operations.
We cannot assure investors that we will continue
to innovate and file new patent applications, or that any current or future patent applications will result in granted patents. Further,
we cannot predict how long it will take for such patents to issue, if at all. It is possible that, for any of our patents that may issue
in the future, our competitors may design their products around our patented technologies. Further, we cannot assure investors that other
parties will not challenge any patents granted to us, or that courts or regulatory agencies will hold our patents to be valid, enforceable,
and/or infringed. We cannot guarantee investors that we will be successful in defending challenges made against our patents and patent
applications. Any successful third-party challenge or challenges to our patents could result in the unenforceability or invalidity of
such patents, or such patents being interpreted narrowly and/or in a manner adverse to our interests. Our ability to establish or maintain
a technological or competitive advantage over our competitors and/or market entrants may be diminished because of these uncertainties.
For these and other reasons, our intellectual property may not provide us with any competitive advantage. For example:
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we may not have been the first to make the inventions claimed or disclosed
in our patent application; |
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we may not have been the first to file patent application. To determine the priority of these inventions,
we may have to participate in interference proceedings or derivation proceedings declared by the U.S. Patent and Trademark Office
(“USPTO”), which could result in substantial cost to us, and could possibly result in a loss or narrowing of patent rights.
No assurance can be given that our granted patents will have priority over any other patent or patent application involved in such
a proceeding, or will be held valid as an outcome of the proceeding; |
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other parties may independently develop similar or alternative products and technologies or duplicate
any of our products and technologies, which can potentially impact our market share, revenue, and goodwill, regardless of |
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it is possible that our issued patents may not provide intellectual property protection of commercially
viable products or product features, may not provide us with any competitive advantages, or may be challenged and invalidated by
third parties, patent offices, and/or the courts; |
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we may be unaware of or unfamiliar with prior art and/or interpretations of prior art that could
potentially impact the validity or scope of our patents or patent applications that we may file; |
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we take efforts and enter into agreements with employees, consultants, collaborators, and advisors
to confirm ownership and chain of title in intellectual property rights. However, an inventorship or ownership dispute could arise
that may permit one or more third parties to practice or enforce our intellectual property rights, including possible efforts to
enforce rights against us; |
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we may elect not to maintain or pursue intellectual property rights that, at some point in time,
may be considered relevant to or enforceable against a competitor; |
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we may not develop additional proprietary products and technologies that are patentable, or we
may develop additional proprietary products and technologies that are not patentable; |
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the patents or other intellectual property rights of others may have an adverse effect on our business;
and |
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we apply for patents relating to our products and technologies and uses thereof, as we deem appropriate.
However, we or our representatives or their agents may fail to apply for patents on important products and technologies in a timely
fashion or at all, or we or our representatives or their agents may fail to apply for patents in potentially relevant jurisdictions. |
To the extent our intellectual property offers
inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct or indirect competition.
If our intellectual property does not provide adequate coverage over our competitors’ products, our competitive position could
be adversely affected, as could our business.
Our success depends in part upon our ability to protect our
core technology and intellectual property.
Our success depends in part upon our ability
to protect our core technology and intellectual property. To establish and protect our proprietary rights, we rely on a combination of
trademark, copyright, patent, trade secret and unfair competition laws of the United States and other countries, as well as contract
provisions, license agreements, confidentiality procedures, non-disclosure agreements with third parties, employee disclosure and invention
assignment agreements, and other contractual rights, as well as procedures governing internet/domain name registrations. However, there
can be no assurance that these measures will be successful in any given case. We may be unable to prevent the misappropriation, infringement
or violation of our intellectual property rights, breach of any contractual obligations to us, or independent development of intellectual
property that is similar to ours, any of which could reduce or eliminate any competitive advantage we have developed, adversely affecting
our revenues or otherwise harming our business.
We generally control access to and use of our
proprietary technology and other confidential information through the use of internal and external controls, including contractual protections
with employees, contractors, customers, and partners, and our software is protected by U.S. copyright laws.
Despite efforts to protect our proprietary rights
through intellectual property laws, licenses, and confidentiality agreements, unauthorized parties may still copy or otherwise obtain
and use our software and technology. Companies in the Internet, technology, and software industries frequently enter into litigation
based on allegations of infringement, misappropriation, or violations of intellectual property rights or other laws. From time to time,
we may face allegations that we have infringed the trademarks, copyrights, patents, trade secrets and other intellectual property rights
of third parties, including competitors. If it became necessary for us to resort to litigation to protect these rights, any proceedings
could be burdensome, costly and divert the attention of our personnel, and we may not prevail. In addition, any repeal or weakening of
laws or enforcement in the United States or internationally intended to protect intellectual property rights could make it more difficult
for us to adequately protect our intellectual property rights, negatively impacting their value and increasing the cost of enforcing
our rights.
We have obtained and applied for U.S. trademark
and service mark registrations and will continue to evaluate the registration of additional trademarks and service marks or, as appropriate.
We cannot guarantee that any of our pending trademark applications will be approved by the applicable governmental authorities. Moreover,
even if the trademark applications are approved, third parties may seek to oppose or otherwise challenge these registrations. A failure
to obtain registrations for our trademarks could limit and impede our marketing efforts.
We may need to enter into intellectual property license agreements
in the future, and if we are unable to obtain these licenses, our business could be harmed.
We may need or may choose to obtain licenses
and/or acquire intellectual property rights from third parties to advance our research or commercialization of our current or future
products. We also cannot provide any assurances that third-party patents do not exist that might be enforced against our current or future
products in the absence of such a license or acquisition. We may fail to obtain any of these licenses or intellectual property rights
on commercially reasonable terms. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access
to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license
replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected products, which could materially
harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales,
or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation.
Others may assert intellectual property infringement claims
against us.
Companies in the software and technology industries
can own patents, copyrights, trademarks, and trade secrets, and frequently enter into litigation based on allegations of infringement,
misappropriation, or other violations of intellectual property or other rights. In addition, various “non-practicing entities”
that own patents (colloquially known as “patent trolls”) often attempt to aggressively assert their rights to extract value
from technology companies. It is possible that, from time to time, third parties may claim that our products misappropriate or infringe
their intellectual property rights. Irrespective of the validity or the successful assertion of any such claims, we could incur significant
costs and diversion of resources in defending against these claims, which could adversely affect our operations. We may receive unfavorable
preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained
in all cases. We may decide to settle such lawsuits and disputes on terms that are unfavorable to us. As a result, we may also be required
to develop alternative non-infringing technology or practices or discontinue the practices. The development of alternative non-infringing
technology or practices could require significant effort and expense or may not be feasible. In addition, to the extent claims against
us are successful, we may have to pay substantial money damages or discontinue, modify, or rename certain products or services that are
found to be in violation of another party’s rights. We may have to seek a license (if available on acceptable terms, or at all)
to continue offering products and services, which may significantly increase our operating expenses.
Our ability to use our net operating losses to offset future
taxable income may be subject to certain limitations.
As of December 31, 2021, we had net operating
loss (“NOL”) carryforwards for federal and state income tax purposes which may be available to offset taxable income in future
years. Approximately $675 thousand federal NOLs will expire if not utilized by 2037 and approximately $51.5 million of federal NOLs carryforward
indefinitely but are only available to offset 80% of taxable income per year. The state NOLs will expire depending upon the various rules
in the states in which we operate. A lack of future taxable income would adversely affect our ability to utilize these NOLs before they
expire. The utilization of our NOLs could be subject to annual limitations under Section 382 and 383 of the Internal Revenue Code (“IRC”
or the “Code”) of 1986, and similar state tax provisions due to ownership change limitations that may have occurred previously
or that could occur in the future. In general, under Section 382, a corporation that undergoes an “ownership change” (as defined
under Section 382 of the Code and applicable Treasury Regulations) is subject to limitations on its ability to utilize its pre-change
NOLs to offset its future taxable income. As of December 31, 2021, we have not conducted an analysis of an ownership change under Section
382. To the extent that a study is completed, and an ownership change is deemed to occur, in the past or future, our NOLs and any NOLs
of companies that we have acquired could be limited to offset any future taxable income.
There is also a risk that due to regulatory changes,
such as suspensions on the use of NOLs or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to reduce
future income tax liabilities for federal and state income tax purposes. For these reasons, we may not be able to utilize a material
portion of our NOLs, even if we attain profitability, which could result in increased future tax liability to us and could adversely
affect the results of our operations and overall financial condition.
There are no assurances that our outstanding loans will be forgivable
in whole or in part.
In May and July 2020, we entered into two separate
Loan Agreements and Promissory Notes (the “PPP Loans”) with Bank of America pursuant to the Paycheck Protection Program (the
“PPP”) under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered
by the U.S. Small Business Administration. We received total proceeds of $779 thousand and $44 thousand from the unsecured PPP Loans.
The PPP Loans are scheduled to mature on May 7, 2022 and July 27, 2025, respectively, and have an interest rate of 1.00% per annum and
is are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration (the “SBA”)
under the CARES Act. The PPP Loans may be prepaid at any time prior to its maturity with no prepayment penalties. In September 2021, the
loan for $44 thousand was 100% forgiven by the SBA. The Company’s application for forgiveness of the balance of the remaining $779
thousand PPP Loan is still under review by the SBA.
The PPP Loans contain customary events of default
relating to, among other things, payment defaults and breaches of representations and warranties. Subject to certain conditions, the
PPP Loans may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP. The amount of loan proceeds
eligible for forgiveness is based on a formula based on a number of factors, including the amount of loan proceeds used by us for certain
eligible expenses including payroll costs, rent payments on certain leases and certain qualified utility payments, provided that, among
other things, at least 60% of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and
maintaining salaries at a certain level. According to the PPP, the lender has 60 days from receipt of the completed application to issue
a decision to the SBA. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for
under the statute and applicable regulations, the lender must request payment from the SBA at the time the lender issues its decision
to the SBA. The SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the
lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA.
In accordance with the requirements of the CARES
Act and the PPP, we have used all of the proceeds from the PPP Loan primarily for payroll costs. We believe that we will be eligible for
the remaining loan forgiveness under the program, but there is no assurance that the full loan amount will be forgiven, and we cannot
anticipate the timing of any such forgiveness. Although we believe that we satisfied all eligibility criteria for the PPP Loan and that
our receipt of the PPP Loan is consistent with the objectives of the PPP Loan of the CARES Act, if it is later determined that we were
ineligible to receive the PPP Loan, we may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties
and adverse publicity, which could have a material adverse effect on our business, results of operations, and financial condition.
Risks Related to Ownership of our Common Stock
Concentration of ownership among our existing executive officers,
directors and their affiliates may prevent new investors from influencing significant corporate decisions.
Our executive officers, directors and their affiliates
beneficially own, in the aggregate, approximately 6.7% of our outstanding shares of common stock. In particular, Raymond Chang, our Chairman
of the Board and Chief Executive Officer, beneficially owns approximately 3.3% of our outstanding shares of common stock. As a result,
these stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including
the election of directors, amendment of our articles of incorporation and approval of significant corporate transactions. This control
could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval
of certain transactions difficult or impossible without the support of these stockholders.
The large number of shares eligible for public sale could depress
the market price of our common stock.
We have filed a registration statement to register
the shares of common stock underlying outstanding options and shares reserved for future issuance under our equity compensation plans.
Upon effectiveness of that registration statement, subject to the satisfaction of applicable exercise periods and subject to our insider
trading policy, the shares of common stock issued upon exercise of outstanding options will be available for immediate resale in the
United States in the open market.
Sales of our common stock as restrictions end
or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price
that we deem appropriate. These sales also could cause our stock price to fall and make it more difficult for you to sell shares of our
common stock.
The exercise of all or any number of outstanding
warrants or the issuance of stock-based awards may dilute your holding of shares of our common stock.
We have issued several securities providing for
the right to purchase our common stock. Investors could be subject to increased dilution upon the exercise of our Convertible Notes issued
in Fiscal 2020, which have a $0.02 exercise price. A total of 271,844 warrants issued on connection with the 2020 convertible notes are
outstanding as of December 31, 2021. Subsequent to December 31, 2021, the Company completed a private placement of our common stock and
entered into a securities purchase agreement. Both of these arrangements include warrant issuance provisions. On January 25, 2022, the
Company issued a total of 4,586,389 warrants in connection with the private placement entered into with an institutional investor and
other accredited investors. The warrant issuance included 1,570,644 pre-funded warrants, with an exercise price of $0.001, and 3,015,745
warrants with exercise prices ranging between $6.80 and $6.90. On March 23, 2022, the Company issued a total of 6,881,108 warrants in
connection with its entrance into a securities purchase agreement with an accredited investor. The warrants issued have an exercise price
of $6.75.
Additionally, shares of common stock were reserved
for issuance of equity-based awards to employees, directors and certain other individuals under the Company’s 2020 Omnibus Equity
Incentive Plan. The exercise of equity awards, including any restricted stock units that we may grant in the future, and the exercise
of warrants and the subsequent sale of shares of common stock issued thereby, could have an adverse effect on the market for our common
stock, including the price that an investor could obtain for their shares.
Investors may experience dilution in the value of their investment upon the exercise of the warrants and any
equity awards that may be granted or issued pursuant to the 2020 Omnibus Equity Incentive Plan.
Provisions in our articles of incorporation, our by-laws and
Nevada law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress
the trading price of our common stock.
Provisions of our articles of incorporation,
our by-laws and Nevada law may have the effect of deterring unsolicited takeovers or delaying or preventing a change in control of our
company or changes in our management, including transactions in which our stockholders might otherwise receive a premium for their shares
over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they
may deem to be in their best interests. These provisions include:
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the inability of stockholders to call special meetings; and |
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the ability of our board of directors to designate the terms of and issue new series of preferred
stock without stockholder approval, which could include the right to approve an acquisition or other change in our control or could
be used to institute a rights plan, also known as a poison pill, that would work to dilute the stock ownership of a potential hostile
acquirer, likely preventing acquisitions that have not been approved by our board of directors. |
The existence of the forgoing provisions and
anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They
could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common
stock in an acquisition.
We are an “emerging growth company,” as defined
in the JOBS Act, and a “smaller reporting company” within the meaning of the Securities Act, and we cannot be certain if
the reduced disclosure requirements applicable to emerging growth companies or smaller reporting companies will make our common stock
less attractive to investors.
We are an “emerging growth company,”
as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various
reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (2) reduced disclosure obligations
regarding executive compensation in this report and our periodic reports and proxy statements and (3) exemptions from the requirements
of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously
approved. In addition, as an emerging growth company, we are only required to provide two years of audited financial statements and two
years of selected financial data in this report. We could be an emerging growth company for up to five years, although circumstances
could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700 million
as of any March 31 before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that
time, after which, in each case, we would no longer be an emerging growth company as of the following December 31 or, if we issue more
than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth company
immediately.
Additionally, we are a “smaller reporting
company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure
obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting
company until the last day of the fiscal year in which (1) the market value of our shares of common stock held by non-affiliates exceeds
$250 million as of the prior June 30, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market
value of our ordinary shares held by non-affiliates exceeds $700 million as of the prior June 30. To the extent we take advantage of
such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or
impossible.
After we are no longer an “emerging growth
company,” we expect to incur additional management time and cost to comply with the more stringent reporting requirements applicable
to companies that are deemed accelerated filers or large accelerated filers, including complying with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act. We cannot predict or estimate the amount of additional costs we may incur or the timing of
such costs.
We have not and do not expect to declare any dividends to our
shareholders in the foreseeable future.
We have not and do not anticipate declaring any
cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to rely on sales of their common
stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking
cash dividends should not purchase our common stock.
General Risk Factors
The COVID-19 pandemic and the efforts to mitigate its impact
may have an adverse effect on our business, liquidity, results of operations, financial condition and price of our securities.
The pandemic involving the novel strain of coronavirus
and related respiratory disease (which we refer to as COVID-19) and the measures taken to combat it, have had an adverse effect on our
business. Public health authorities and governments at local, national and international levels have announced various measures to respond
to this pandemic. Some measures that directly or indirectly impact our business include:
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voluntary or mandatory quarantines; |
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restrictions on travel; and |
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limiting gatherings of people in public places. |
We have undertaken measures in an effort to mitigate
the spread of COVID-19 including limiting company travel and in-person meetings. We also have enacted our business continuity plans,
including implementing procedures requiring employees working remotely where possible which may make maintaining our normal level of
corporate operations, quality controls and internal controls difficult. Notwithstanding these efforts, our results of operations have
been adversely impacted by COVID-19 and this may continue.
Moreover, the COVID-19 pandemic has previously
caused some temporary delays in the delivery of our inventory, although recently we are no longer experiencing such delays. In addition,
the travel restrictions imposed as a result of COVID-19 have impacted our ability to visit customer sites to perform services related
to our products. Further, the COVID-19 pandemic and mitigation efforts have also adversely affected our customers’ financial condition,
resulting in reduced spending for the products we sell.
As events are rapidly changing, we do not know
how long the COVID-19 pandemic, or localized outbreaks or recurrences of COVID-19, and the measures that have been introduced to respond
to COVID-19 will disrupt our operations or the full extent of that disruption. Further, once we are able to restart normal operations
doing so may take time and will involve costs and uncertainty. We also cannot predict how long the effects of COVID-19 and the efforts
to contain it will continue to impact our business after the pandemic is under control. Governments could take additional restrictive
measures to combat the pandemic that could further impact our business or the economy in the geographies in which we operate. It is also
possible that the impact of the pandemic and response on our suppliers, customers and markets will persist for some time after governments
ease their restrictions. These measures have negatively impacted, and may continue to impact, our business and financial condition as
the responses to control COVID-19 continue.
A prolonged economic downturn, particularly in light of the
COVID-19 pandemic, could adversely affect our business.
Uncertain global economic conditions, in particular
in light of the COVID-19 pandemic, could adversely affect our business. Negative global and national economic trends, such as decreased
consumer and business spending, high unemployment levels and declining consumer and business confidence, pose challenges to our business
and could result in declining revenues, profitability and cash flow. Although we continue to devote significant resources to support
our brands, unfavorable economic conditions may negatively affect demand for our products.
Increases in costs, disruption of supply or shortage of raw
materials could harm our business.
We may experience increases in the cost or a
sustained interruption in the supply or shortage of raw materials. For example, the tariffs currently imposed for importing goods from
China has significantly increased. Any such an increase or supply interruption could materially negatively impact our business, prospects,
financial condition and operating results. We use various raw materials in our business including aluminum. The prices for these raw
materials fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and
operating results. Substantial increases in the prices for our raw materials increase our operating costs and could reduce our margins
if we cannot recoup the increased costs through increased prices for our products and services.
Matters relating to the employment market and prevailing wage
standards may adversely affect our business.
Our ability to meet our labor needs on a cost-effective
basis is subject to numerous external factors, including the availability of qualified personnel in the workforce in the markets in which
we operate, unemployment levels within those markets, prevailing wage rates, which have increased significantly, health and other insurance
costs and changes in employment and labor laws. In the event prevailing wage rates continue to increase in the markets in which we operate,
we may be required to concurrently increase the wages paid to our employees to maintain the quality of our workforce. To the extent such
increases are not offset by price increases, our business and operating results could be adversely affected. If we are unable to hire
and retain employees capable of meeting our business needs and expectations, our business and reputation may be impaired. Any failure
to meet our staffing needs or any material increase in turnover rates of our employees may adversely affect our business, results of
operations and financial condition.
Further, we rely on the ability to attract and
retain employees on a cost-effective basis. The availability of employees in the markets in which we operate has declined in recent years
and competition for such personnel has increased, especially under the economic crises experienced throughout the COVID-19 pandemic.
Our ability to attract and retain a sufficient workforce on a cost-effective basis depends on several factors, including the ability
to protect staff during the COVID-19 pandemic. We may not be able to attract and retain a sufficient workforce on a cost-effective basis
in the future. In the event of increased costs of attracting and retaining a workforce, our business and operating results could be adversely
affected.
Litigation may adversely affect our business, financial condition
and results of operations.
From time to time in the normal course of our
business operations, we may become subject to litigation involving intellectual property, data privacy and security, consumer protection,
commercial disputes and other matters that may negatively affect our operating results if changes to our business operation are required.
Due to our manufacturing and sale of our products, including hardware and software, we may also be subject to a variety of claims including
product warranty, product liability, and consumer protection claims related to product defects, among other litigation. We may also be
subject to claims involving health and safety, hazardous materials usage, other environmental impacts, or service disruptions or failures.
The cost to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity
associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are
valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results
of operations. In addition, insurance may not cover existing or future claims, be sufficient to fully compensate us for one or more of
such claims or continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could
result in unanticipated costs, thereby adversely affecting our results of operations and resulting in a reduction in the trading price
of our stock.
An active, liquid, and orderly trading market for our common
stock may not develop, the price of our stock may be volatile, and you could lose all or part of your investment.
The trading price of our common stock may be
highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Our stock
price could be subject to wide fluctuations in response to a variety of factors, which include:
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whether we achieve our anticipated corporate objectives; |
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actual or anticipated fluctuations in our quarterly or annual operating results; |
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changes in our financial or operational estimates or projections; |
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our ability to implement our operational plans; |
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termination of the lock-up agreement or other restrictions on the ability of our stockholders to
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changes in the economic performance or market valuations of companies similar to ours; and |
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general economic or political conditions in the United States or elsewhere. |
In addition, the stock market in general, and
the market for technology companies, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of companies’
stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall
market and the market price of a particular company’s securities, securities class action litigation has often been instituted against
these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s
attention and resources.
Our failure to meet the continuing listing requirements of the
NASDAQ Capital Market could result in a de-listing of our securities.
If we fail to satisfy the continuing listing
requirements of NASDAQ, such as the corporate governance, stockholders’ equity or minimum closing bid price requirements, NASDAQ
may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our common stock and
would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would likely take
actions to restore our compliance with NASDAQ’s listing requirements, but we can provide no assurance that any such action taken
by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our securities, prevent
our common stock from dropping below the NASDAQ minimum bid price requirement or prevent future non-compliance with NASDAQ’s listing
requirements.
We incur increased costs and demands upon management as a result
of complying with the laws and regulations affecting public companies, which could adversely affect our operating results.
As a public company, we incur significant legal,
accounting, and other expenses that we did not incur as a private company, including costs associated with public company reporting and
corporate governance requirements. These requirements include compliance with Section 404 and other provisions of the Sarbanes-Oxley Act,
as well as rules implemented by the Securities and Exchange Commission, or (“SEC”), and the NASDAQ. In addition, our management
team also has to adapt to the requirements of being a public company. We expect complying with these rules and regulations will substantially
increase our legal and financial compliance costs and to make some activities more time-consuming and costly.
The increased costs associated with operating
as a public company will decrease our net income or increase our net loss and may require us to reduce costs in other areas of our business
or increase the prices of our products or services. Additionally, if these requirements divert our management’s attention from other
business concerns, they could have a material adverse effect on our business, financial condition, and operating results.
As a public company, we also expect that it may
be more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced
policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult
for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.
As a public company, we are obligated to develop and maintain
proper and effective internal control over financial reporting. These internal controls may not be determined to be effective, which
may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We are required, pursuant to Section 404 of the
Sarbanes-Oxley Act, to annually furnish a report by management on, among other things, the effectiveness of our internal control over
financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control
over financial reporting, as well as a statement that our auditors have issued an attestation report on effectiveness of our internal
controls.
We are in the very early stages of the costly
and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with
Section 404. We may not be able to remediate future material weaknesses, or to complete our evaluation, testing and any required remediation
in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control
over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal
control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal
controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse
effect on the price of our common stock.
Data privacy and security concerns relating to our technology
and our practices could damage our reputation, cause us to incur significant liability, and deter current and potential users or customers
from using our products and services. Software bugs or defects, security breaches, and attacks on our systems could result in the improper
disclosure and use of user data and interference with our users and customers’ ability to use our products and services, harming
our business operations and reputation.
Concerns about our practices with regard to the
collection, use, disclosure, or security of personal information or other data-privacy-related matters, even if unfounded, could harm
our reputation, financial condition, and operating results. Our policies and practices may change over time as expectations regarding
privacy and data change. Our products and services involve the storage and transmission of proprietary information, and bugs, theft,
misuse, defects, vulnerabilities in our products and services, and security breaches expose us to a risk of loss of this information,
improper use and disclosure of such information, litigation, and other potential liability. Systems and control failures, security breaches
and/or inadvertent disclosure of user data could result in government and legal exposure, seriously harm our reputation and brand and,
therefore, our business, and impair our ability to attract and retain customers.
We may experience cyber-attacks and other attempts
to gain unauthorized access to our systems. We may experience future security issues, whether due to employee error or malfeasance or
system errors or vulnerabilities in our or other parties’ systems, which could result in significant legal and financial exposure.
We may be unable to anticipate or detect attacks or vulnerabilities or implement adequate preventative measures. Attacks and security
issues could also compromise trade secrets and other sensitive information, harming our business. As a result, we may suffer significant
legal, reputational, or financial exposure, which could harm our business, financial condition, and operating results.
Our operations may be impaired if our information technology
systems fail to perform adequately or if we are the subject of a data breach or cyber-attack.
We rely on information technology systems to conduct
business, including communicating with employees and our key commercial customers, ordering and managing materials from suppliers, shipping
products and providing SaaS services to our customers and analyzing and reporting results of operations. While we have taken steps to
ensure the security of our information technology systems, our systems may nevertheless be vulnerable to computer viruses, security breaches
and other disruptions from unauthorized users. If our information technology systems are damaged or cease to function properly for an
extended period of time, whether as a result of a significant cyber incident or otherwise, our ability to communicate internally as well
as with our customers could be significantly impaired, which may adversely impact our business.
Additionally, in the normal course of our business,
we collect, store and transmit proprietary and confidential information regarding our customers, employees, suppliers and others, including
personally identifiable information. An operational failure or breach of security from increasingly sophisticated cyber threats could
lead to loss, misuse or unauthorized disclosure of this information about our employees or customers, which may result in regulatory or
other legal proceedings, and have a material adverse effect on our business and reputation. We also may not have the resources or technical
sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Any such attacks or precautionary measures taken to prevent
anticipated attacks may result in increasing costs, including costs for additional technologies, training, and third-party consultants.
The losses incurred from a breach of data security and operational failures as well as the precautionary measures required to address
this evolving risk may adversely impact our financial condition, results of operations and cash flows.
Privacy regulation is an evolving area and compliance with applicable
privacy regulations may increase our operating costs or adversely impact our ability to service our clients and market our products and
services.
Because we store, process, and use data, some
of which contains personal information, we are subject to complex and evolving federal, state, and foreign laws and regulations regarding
privacy, data protection, and other matters. While we believe we are currently in compliance with applicable laws and regulations, many
of these laws and regulations are subject to change and uncertain interpretation, and could result in investigations, claims, changes
to our business practices, increased cost of operations, and declines in user growth, retention, or engagement, any of which could seriously
harm our business.
If our shares of common stock become subject to the penny stock
rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer
practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00,
other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation
systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange
or system. If we do not retain a listing on NASDAQ and if the price of our common stock is less than $5.00, our common stock will be
deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from
those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules
require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special
written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment
of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and
dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in
the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.
The financial and operational projections that we may make from
time to time are subject to inherent risks.
The projections that our management may provide
from time to time (including, but not limited to, those relating to potential peak sales amounts, production, and supply dates, and other
financial or operational matters) reflect numerous assumptions made by management, including assumptions with respect to our specific
as well as general business, economic, market and financial conditions and other matters, all of which are difficult to predict and many
of which are beyond our control. Accordingly, there is a risk that the assumptions made in preparing the projections, or the projections
themselves, will prove inaccurate. There will be differences between actual and projected results, and actual results may be materially
different from those contained in the projections. The inclusion of the projections in this report should not be regarded as an indication
that we or our management or representatives considered or consider the projections to be a reliable prediction of future events, and
the projections should not be relied upon as such.
If we were to dissolve, the holders of our securities may lose
all or substantial amounts of their investments.
If we were to dissolve as a corporation, as part
of ceasing to do business or otherwise, we may be required to pay all amounts owed to any creditors before distributing any assets to
the investors. There is a risk that in the event of such a dissolution, there will be insufficient funds to repay amounts owed to holders
of any of our indebtedness and insufficient assets to distribute to our other investors, in which case investors could lose their entire
investment.
If securities or industry analysts do not publish or cease publishing
research or reports about us, our business, or our market, or if they change their recommendations regarding our stock adversely, our
stock price and trading volume could decline.
The trading market for our common stock will
be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our
competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable
relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage
of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause
our stock price or trading volume to decline.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters is in Billerica, Massachusetts
where we occupy approximately 7,500 square feet of office and showroom space under lease that expires in 2027. We lease properties located
within various geographic regions in which we conduct business, including Colorado, Georgia, Massachusetts, Michigan, and Oregon. Our
properties include office spaces, showrooms and warehouses used for research and development, operational, sales, management, and administrative
purposes. All of our facilities are leased.
For leases that are scheduled to expire during
the next 12 months, we may negotiate new lease agreements, renew existing lease agreements, exercise any respective options to extend
the existing lease agreements, or use alternate facilities. We believe our facilities are adequate for our needs and believe that we
should be able to renew any of our existing leases or secure similar property without an adverse impact on our operations.
Item 3. Legal Proceedings.
Please see “Item 1 – Business –
Legal Proceedings” for a discussion of the significant legal proceedings in which we are involved.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock has traded on the NASDAQ Capital
Market under the symbol “AGFY.”
Holders of Record
As of March 24, 2022, there were 62 holders of
record of our common stock. Such numbers do not include beneficial owners holding shares of our common stock in nominee or “street”
name through various brokerage firms.
Dividends
We have never paid cash dividends on any of our
capital stock and currently intend to retain our future earnings, if any, to fund the development and growth of our business.
Securities Authorized for Issuance under Equity Compensation Plans
The information concerning our equity compensation
plan is incorporated by reference from the information in our Proxy Statement for our 2022 Annual Meeting of Stockholders, which we will
file with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
Equity Repurchases
None.
Recent Sales of Unregistered Securities
The following summarizes all issuances of our
unregistered securities during the year ended December 31, 2021.The securities in the below-referenced transactions were (i) issued without
registration and (ii) were subject to restrictions under the Securities Act and the securities laws of certain states, in reliance on
the private offering exemptions contained in Sections 4(2), 4(6) and/or 3(b) of the Securities Act and on Regulation D promulgated there
under, and in reliance on similar exemptions under applicable state laws as transactions not involving a public offering. Unless
stated otherwise, no placement or underwriting fees were paid in connection with these transactions.
In September 2021, the Company issued stock options
to purchase an aggregate of 8,000 shares of its common stock to an employee in consideration of achieving certain milestones from the
acquisition of Harbor Mountain Holdings, LLC.
In October 2021, the Company issued an aggregate
of 666,403 shares of its common stock to the Precision and Cascade shareholders in connection with the merger with Precision and
Cascade. In addition to the shares issued at the closing of the acquisition, the Company has also held back an additional 117,600 shares
of the Company’s common stock due to the former stockholders of Precision and Cascade, which are scheduled to be issued six (6)
months after the close, subject to the satisfaction of certain covenants.
In December 2021, the Company issued an aggregate
of 240,301 shares of its common stock to the PurePressure shareholders in connection with the merger PurePressure. Additionally,
as per the purchase agreement, the Company held back 88,878 shares of the Company’s common stock, representing 15% of the value
of the closing consideration amount. The shares will be held back by the Company for a period of twelve (12) months for purposes of satisfying
any post-closing adjustments.
Use of Proceeds from Initial Public Offering of Common Stock and
Secondary Public Offering
On February 1, 2021, we closed our initial public
offering, or (“IPO”), of 6,210,000 shares of common stock (inclusive of 810,000 shares of common stock from the full exercise
of the over-allotment option of shares granted to the underwriters). The offer and sale of all of the shares in the IPO were registered
under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File Nos. 333- 251616 and 333-252490),
which was declared effective by the SEC on January 27, 2021. Maxim Group LLC and Roth Capital Partners acted as the underwriters. The
public offering price of the shares sold in the offering was $10.00 per share. The total gross proceeds from the offering were $62.1 million.
After deducting underwriting discounts and commissions
of $4 million and offering expenses paid or payable by us of approximately $1 million, the net proceeds from the offering were approximately
$57 million. During the fiscal year ended December 31, 2021, we used the net proceeds from the IPO for our current working capital needs
to support accounts receivable growth, manage inventory to meet demand forecasts, and support operational growth.
On February 19, 2021, we consummated a secondary
public offering (the “February Offering”) of 5,555,555 shares of common stock for a price of $13.50 per share, less certain
underwriting discounts and commissions. On March 22, 2021, we closed on the sale of an additional 833,333 shares of common stock on the
same terms and conditions pursuant to the exercise of the underwriters’ over-allotment option. The exercise of the over-allotment
option brought the total number of shares of common stock sold by us in connection with the February Offering to 6,388,888 shares and
the total net proceeds received in connection with the February Offering to approximately $80 million, after deducting underwriting discounts
and estimated offering expenses. During the fiscal year ended December 31, 2021, we used the net proceeds from the IPO for our current
working capital needs to support accounts receivable growth, manage inventory to meet demand forecasts, and support operational growth.
Item 6. [Reserved].
Not applicable.
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
You should read the following discussion and
analysis of our financial condition and results of our operations together with our consolidated financial statements and the notes thereto
appearing elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations, whose actual
outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied
by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors,”
“Cautionary Statement regarding Forward-Looking Statements” and elsewhere in this report.
Overview
We are a developer of highly advanced and proprietary
precision hardware and software grow solutions for the indoor agriculture marketplace and provide equipment and solutions for extraction,
post-processing, and testing for the cannabis and hemp industry. We believe we are the only company with an automated and fully integrated
grow solution in the industry. We believe our Agrify “Precision Elevated™” cultivation solution is vastly differentiated
from anything else on the market in that it combines our seamlessly integrated hardware and software offerings with a wide range of associated
services such as consulting, engineering, and construction to form what we believe is the most complete solution available from a single
provider. The totality of our product mix and service capabilities forms an unrivaled ecosystem in what has historically been an extremely
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.
The Company’s corporate office is 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, the Company effected a 1-for-1.581804
reverse stock split. 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.
Fiscal 2021 Highlights
Acquisition of Precision and Cascade
On September 29, 2021 (the “Execution Date”),
we entered into a Plan of Merger and Equity Purchase Agreement, as amended by an amendment dated as of October 1, 2021 (as amended, the
“Purchase Agreement”), with Sinclair Scientific, LLC, a Delaware limited liability company (“Sinclair”), Mass2Media,
LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions, a Michigan limited liability company; and each of the equity holders
of Sinclair named therein (collectively, the “Sinclair Members”). On October 1, 2021, we consummated the transactions contemplated
by the Purchase Agreement.
Subject to the terms and conditions set forth
in the Purchase Agreement, (1) Sinclair transferred, to us, and we purchased (the “Interest Purchase”) from Sinclair, 100%
of the equity interests of Cascade Sciences, LLC, a Delaware limited liability company, such that immediately after the consummation of
such Interest Purchase, Cascade became a wholly owned subsidiary of us, and (2) Precision merged (the “Merger”) with and into
a newly-formed wholly owned subsidiary of us, Precision Extraction NewCo, LLC.
The aggregate consideration for the Interest
Purchase and the Merger consisted of: (a) the sum of $30 million, plus consideration payable to holders of outstanding Sinclair
equity awards, subject to certain adjustments for working capital, cash and indebtedness, payable in connection with the Interest Purchase;
(b) the number of shares of our common stock, subject to adjustment, equal to the quotient of (i) $20 million divided by (ii) the
volume-weighted average price per share of our common stock on The Nasdaq Capital Market for the 30 consecutive trading days ending on
the Execution Date (the “VWAP Price”), issuable in connection with the Merger; and (c) the True-Up Buyer Shares, if any (as
defined below), issuable in connection with the Merger.
The Purchase Agreement includes customary post-closing
adjustments, representations and warranties and covenants of the parties. The Sinclair Members may become entitled to additional shares
of our common stock (the “True-Up Buyer Shares”) and cash (together with the True-Up Buyer Shares, the “Aggregate True-Up
Payment”) based on the eligible net revenues (as defined in the Purchase Agreement) achieved by the Cascade and Precision businesses
during the fiscal year ending December 31, 2021. However, in no event shall the aggregate purchase price paid by us pursuant to the terms
of the Purchase Agreement, taking into account any Aggregate True-Up Payment in favor of the Sinclair Members, exceed $65 million.
In connection with the Aggregate True Up Payment, Precision and Cascade earned additional purchase consideration of $5.4 million during
fiscal year ending December 31, 2021. Of the $5.4 million of additional consideration, $1.4 million was recognized as change in contingent
consideration in our consolidated statements of operations during the fourth quarter of 2021 due to the fact that the final revenue achievement
exceeded our original fair value estimate at the time of the acquisition.
Transaction and related costs, consisting primarily
of professional fees, directly related to the acquisition, totaled $4.0 million for the year ended December 31, 2021. All transaction
and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocation for the business
combination has been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available
during the respective measurement period (up to one year from the acquisition date). The estimated fair value at acquisition is $49.9
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.
The amount of revenue of Precision and Cascade
included in our consolidated statement of operations from the acquisition date of October 1, 2021 to December 31, 2021 was approximately
$12.3 million.
Acquisition of PurePressure
On December 31, 2021, we entered into a Membership Interest
Purchase Agreement (the “Pure Purchase Agreement”) with PurePressure, LLC, a Colorado Limited liability company and the members
of PurePressure (collectively, the “Members”), Benjamin Britton as the Member Representative thereunder, and each of the Members.
Concurrently with the execution of the Pure Purchase Agreement, we consummated the acquisition of all the outstanding equity interests
of PurePressure, such that immediately after the consummation of such purchase, PurePressure became a wholly owned subsidiary of us (the
“Acquisition”).
The aggregate consideration for the Acquisition
consisted of: (a) $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness of PurePressure at
closing; (b) 329,179 shares of our common stock (the “Buyer Shares”); and (c) the Earn-out Consideration (as defined below),
to the extent earned.
We withheld 88,878 of the Buyer Shares issuable
to certain Members (the “Holdback 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 Pure Purchase Agreement. The Holdback Buyer Shares
shall be released following the twelve (12) month anniversary of the Closing Date in accordance with and subject to the conditions of
the Pure Purchase Agreement.
The Pure Purchase Agreement includes customary
post-closing adjustments, representations and warranties and covenants of the parties. The Members may become entitled to additional
consideration with a value of up to $3.0 million based on the eligible net revenues achieved by the PurePressure business during the
fiscal years ending December 31, 2022 and December 31, 2023, of which 40% will be payable in cash and the remaining 60% will be payable
by issuing shares of our common stock (collectively, the “Earn-out Consideration”).
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.
No revenue from PurePressure was included in
our consolidated statement of operations as the transaction occurred on December 31, 2021.
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.
Convertible Promissory Notes
On January 11, 2021, our Board of Directors and
shareholders approved the amendment to the conversion formula of the Convertible Promissory Notes (the “Notes”) issued by
us on dates between August 2020 and November 2020. Pursuant to the amendment, immediately prior to the consummation of a public transaction,
the outstanding principal amount of the Notes, together with all accrued and unpaid interest, shall convert into a number of fully paid
and non-assessable shares of common stock, at a conversion price of $7.72.
While the original conversion feature was bifurcated from
the host instrument, we determined that the amended conversion feature would not require bifurcation. Since the accounting for the conversion
feature changed because of the amendment, we applied extinguishment accounting pursuant to its accounting policy. Accordingly, we recognized
a gain on extinguishment of $2.7 million in connection with the derecognition of the net carrying amount of the extinguished debt
of $19.7 million (inclusive of $13.1 million of principal, $7.1 million of derivative liabilities, less $587 thousand of
debt discount) and the recognition of the $17.0 million fair value of the new convertible notes (including the same principal amount
of $13.1 million, plus the $3.9 million fair value of the beneficial conversion feature).
On February 1, 2021, in conjunction with the closing of our
IPO, the Notes in the aggregate principal amount of $13.1 million were converted into 1,697,075 shares of common stock
at the election of us at a conversion price of $7.72 per share.
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 estimate, which include estimates related to accruals, stock-based compensation expense, and
reported amounts of revenues and expenses during the reported period. We base our estimates on historical experience and other market-specific
or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from those
estimates or assumptions.
Revenue Recognition
Overview
We generate revenue from the following sources: (1) equipment
sales, (2) services sales and (3) construction contracts.
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 to provide
a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if
the customer can benefit from the good or service either on its own or together with other resources that are readily available to the
customer, and our promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
Determine the transaction price
The transaction price is the amount of consideration
to which we expect to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected
on behalf of government agencies.
Allocate the transaction price to distinct
performance obligations
The transaction price is allocated to each performance
obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer.
Our contracts typically contain multiple performance obligations, for which we account for individual performance obligations separately,
if they are distinct. The standalone selling price reflects the price we would charge for a specific piece of equipment or service if
it was sold separately in similar circumstances and to similar customers.
Recognize revenue as the performance obligations
are satisfied
Revenue is recognized when, or as, performance
obligations are satisfied by transferring control of a promised product or service to a customer.
Significant Judgments
We enter into contracts that can 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 buildout services. It 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.
The SSP for services in time and materials contracts
is determined by observable prices in standalone services arrangements.
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 contracts have 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 years ended December 31, 2021 and 2020, we did not have any such financial income.
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 fulfil 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.
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, and the acquisition
of PurePressure, which also occurred in 2021. As a result of these transactions, customer relationships, acquired technology, non-compete
agreements and trade name 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 fiscal 2020 and fiscal
2021.
Income Taxes
We account for income taxes pursuant to the provisions
of ASC Topic 740, “Income Taxes,” which requires, among other things, an asset and liability approach to calculating deferred
income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance
is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset
will not be realized.
We follow the provisions of ASC 740-10-25-5,
“Basic Recognition Threshold.” When tax returns are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount
of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10-25-6, the benefit of a tax position
is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes
it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes,
if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with
the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as
described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated
interest and penalties that would be payable to the taxing authorities upon examination. We believe our tax positions are all highly
certain of being upheld upon examination. As such, we have not recorded a liability for unrecognized tax benefits.
We recognize the benefit of a tax position when
it is effectively settled. ASC 740-10-25-10, “Basic Recognition Threshold” provides guidance on how an entity should determine
whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. ASC 740-10-25-10 clarifies
that a tax position can be effectively settled upon the completion of an examination by a taxing authority. For tax positions considered
effectively settled, we recognize the full amount of the tax benefit.
Accounting
for Stock-Based Compensation
We
follow the provisions of ASC Topic 718, “Compensation — Stock Compensation.” ASC Topic 718 establishes standards surrounding
the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC Topic 718 focuses primarily
on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as options issued
under our Stock Option Plans.
The
fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain
assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option
life and expected volatility in the market value of the underlying common stock.
The
Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected
stock price volatility. Because our stock options and warrants have characteristics different from those of our traded stock, and because
changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of such stock options. The risk-free interest rate is based
upon quoted market yields for United States Treasury debt securities with a term similar to the expected term. The expected dividend
yield is based upon our history of having never issued a dividend and management’s current expectation of future action surrounding
dividends. We calculate the expected volatility of the stock price based on the corresponding volatility of our peer group stock price
for a period consistent with the underlying instrument’s expected term. The expected lives for such grants were based on the simplified
method for employees and directors.
In
arriving at stock-based compensation expense, we estimate the number of stock-based awards that will be forfeited due to employee turnover.
Our forfeiture assumption is based primarily on its turn-over historical experience. If the actual forfeiture rate is higher than the
estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease
to the expense recognized in our financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then
an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized in our financial
statements. The expense we recognize in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly
from amounts recognized in the current period.
It
is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed
above.
Results
of Operations
Comparison
of Years Ended December 31, 2021 and 2020
The
following table summarizes our results of operations for the years ended December 31, 2021 and 2020:
| | |
Years ended
December 31, | |
| (Dollar amounts, excluding share and per share amounts, in thousands) | |
2021 | | |
2020 | |
| Revenue, net | |
$ | 59,859 | | |
$ | 12,087 | |
| Cost of goods sold | |
| 54,625 | | |
| 11,517 | |
| Gross profit | |
| 5,234 | | |
| 570 | |
| |
| | | |
| | |
| Selling, general and administrative | |
| 34,970 | | |
| 9,832 | |
| Research and development | |
| 3,925 | | |
| 3,354 | |
| Change in contingent consideration | |
| 1,412 | | |
| — | |
| Total operating expenses | |
| 40,307 | | |
| 13,186 | |
| Loss from operations | |
| (35,073 | ) | |
| (12,616 | ) |
| |
| | | |
| | |
| Interest income (expense), net | |
| 74 | | |
| (481 | ) |
| Other expenses | |
| (31 | ) | |
| — | |
| Gain (loss) on extinguishment of notes payable | |
| 2,685 | | |
| (5,618 | ) |
| Gain on forgiveness of PPP loan | |
| 45 | | |
| — | |
| Change in fair value of derivative liabilities | |
| — | | |
| (2,924 | ) |
| Other income (expense), net | |
| 2,773 | | |
| (9,023 | ) |
| Net loss before income taxes | |
| (32,300 | ) | |
| (21,639 | ) |
| Income tax provision | |
| 25 | | |
| — | |
| Net loss | |
| (32,325 | ) | |
| (21,639 | ) |
| Income (loss) attributable to non-controlling interest | |
| 140 | | |
| (22 | ) |
| Net loss attributable to Agrify Corporation | |
$ | (32,465 | ) | |
$ | (21,617 | ) |
| Net loss per share attributable to common stockholders – basic and diluted | |
$ | (1.69 | ) | |
$ | (5.32 | ) |
| Weighted average common shares outstanding – basic and diluted | |
| 19,090,932 | | |
| 4,175,867 | |
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 in 2020 and 2021 are supplemented with environmental control products, grow lights, facility build-out services and extraction
equipment.
We
continue to monitor and address the COVID-19 pandemic impacts on our supply chain. Although the availability of various products is dependent
on our suppliers, their locations, and the extent to which they are impacted by the COVID-19 pandemic, we are proactively working with
manufacturers to meet the needs of our customers during the pandemic. Product shortages have generally led to fluctuations in prices
globally, with corresponding 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.
The
following table provides a breakdown of our revenue for the years ended December 31, 2021 and 2020:
| | |
Year ended
December 31, | | |
| | |
| |
| (Dollar amounts in thousands) | |
2021 | | |
2020 | | |
Change | | |
% Change | |
| Cultivation solutions, including ancillary products and services | |
$ | 11,354 | | |
$ | 4,883 | | |
$ | 6,471 | | |
| 133 | % |
| Agrify Insights software | |
| 8 | | |
| 24 | | |
| (16 | ) | |
| (67 | )% |
| Facility build-outs | |
| 36,193 | | |
| 7,180 | | |
| 29,013 | | |
| 404 | % |
| Extraction solutions | |
| 12,304 | | |
| — | | |
| 12,304 | | |
| 100 | % |
| | |
$ | 59,859 | | |
$ | 12,087 | | |
$ | 47,772 | | |
| 395 | % |
Revenues for the year ended December 31, 2021 and 2020 were
$59.9 million and $12.1 million, respectively, representing a year over year increase of $47.8 million. The comparative increase in revenue
was generated primarily from facility build-outs, driven in large part by the current year introduction of our TTK Solution, an increase
in stand-alone VFU equipment sales and incremental revenue contribution associated with extraction-based equipment sales, resulting from
our October 1, 2021 acquisition of Precision and Cascade. The Precision-Cascade Acquisition accounted for $12.3 million of our revenue
increase in 2021.
Cost of Goods Sold
Cost of goods sold represents a combination of the following:
construction-related costs associated with our facility buildouts, 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 years ended December 31, 2021 and 2020:
| | |
Year ended
December 31, | | |
| | |
| |
| (Dollar amounts in thousands) | |
2021 | | |
2020 | | |
Change | | |
% Change | |
| Cultivation solutions, including ancillary products and services | |
$ | 10,855 | | |
$ | 4,562 | | |
$ | 6,293 | | |
| 138 | % |
| Agrify Insights software | |
| — | | |
| — | | |
| — | | |
| — | % |
| Facility build-outs | |
| 35,012 | | |
| 6,955 | | |
| 28,057 | | |
| 403 | % |
| Extraction solutions | |
| 8,758 | | |
| — | | |
| 8,758 | | |
| 100 | % |
| | |
$ | 54,625 | | |
$ | 11,517 | | |
$ | 43,108 | | |
| 374 | % |
The year over year increase in cost of goods sold
is primarily associated with an increase in subcontractor construction costs related to our facility buildouts in 2021, including construction
costs associated with design and build projects under our TTK Solutions. Additionally, an increase in equipment revenue in 2021, largely
attributable to the fourth quarter of 2021 addition of extraction equipment (which was associated with the Precision and Cascade acquisition)
served to increase the amount of internal and outsourced labor and materials costs recognized by the Company in 2021.
Gross
Profit
| | |
Year
ended
December 31, | | |
| | |
| |
(Dollar
amounts in thousands) | |
2021 | | |
2020 | | |
Change | | |
%
Change | |
| Gross profit | |
$ | 5,234 | | |
$ | 570 | | |
$ | 4,664 | | |
| 818 | % |
Gross profit totaled $5.2 million, or 8.7% of total revenue
during the year ended December 31, 2021 compared to gross profit of $570 thousand, or 4.7% of total revenue during the year ended December
31, 2020. The comparative $4.7 million year over year improvement in gross profit, as well as the comparative improvement in gross profit
margin, are primarily attributable to two specific fourth quarter of 2021 items. First, the Company completed a sale of older VFU equipment
models to a customer, which resulted in a gross margin well above the Company's historical gross margin performance range as it relates
to stand-alone VFU equipment sales. Second, was the positive lift in gross profit (and gross profit margin) associated with our extraction
equipment revenue, which is expected to generate gross margin of approximately 30%, which is also well above the company's historical
gross margin performance.
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 2022.
Selling, General and Administrative
| | |
Year
ended
December 31, | | |
| | |
| |
| (Dollar amounts in thousands) | |
2021 | | |
2020 | | |
Change | | |
%
Change | |
| Selling,
general and administrative | |
$ | 34,970 | | |
$ | 9,832 | | |
$ | 25,138 | | |
| 256 | % |
Selling, general and administrative expenses (“SG&A
Expenses”) consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses,
associated with selling, marketing, executive and other administrative functions. Other general and administrative expenses include, but
are not limited to, professional fees for legal, consulting, depreciation and amortization and accounting services, as well as facility
related costs.
SG&A Expenses increased by $25.1 million, or 256%, for the year
ended December 31, 2021, compared to the same period in 2020. The increase is attributable mainly to payroll and related expenses
increases of $4.1 million, an increase in stock-based compensation of $3.6 million, an increase in investor relations and directors’
and officers’ insurance of $3.1 million, an increase in legal, accounting and other operating expenses of $2.3 million, an increase
in account receivable reserve for bad debt of $1.2 million, an increase in depreciation and amortization of $903 thousand, which primarily
reflects an increase in amortization associated with the identified intangible assets in the acquisition of Precision and Cascade. Additionally,
the increase in SG&A Expense also includes a one-time investment banker termination fee of $2.4 million, direct acquisition costs
of $4.6 million and approximately $2.8 million related to incremental SG&A Expense associated with our fourth quarter 2021 acquisition
of Precision and Cascade, which amount excludes one-time expenses related to direct acquisition costs, depreciation and amortization.
Research
and Development
| | |
Year
ended
December 31, | | |
| | |
| |
(Dollar amounts in thousands) | |
2021 | | |
2020 | | |
Change | | |
%
Change | |
| Research
and development | |
$ | 3,925 | | |
$ | 3,354 | | |
$ | 571 | | |
| 17 | % |
Research
and development 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 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. |
Research and development expense increased by $571 thousand,
or 17%, for the year ended December 31, 2021 compared to the same period in 2020. The increase was due primarily attributable to
payroll and other employee-related expenses of approximately $1.6 million and an increase in materials and other items of $74 thousand.
These increases are partially offset by a decrease in consulting services of $1.1 million.
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, research and development expenses were 6.6% of total revenue for the year ended December 31, 2021, compared to 27.7%
for the year ended December 31, 2020. Although we continue to increase our investment in research and development activities, we expect
the expense to decrease as a percentage of revenue due to our revenue growth.
Change in contingent consideration
| | |
Year
ended
December 31, | | |
| | |
| |
(Dollar
amounts in thousands) | |
2021 | | |
2020 | | |
Change | | |
%
Change | |
| Change
in contingent consideration | |
$ | 1,412 | | |
$ | — | | |
$ | 1,412 | | |
| 100 | % |
Change in contingent consideration increased by $1.4 million,
or 100%, for the year ended December 31, 2021 compared to the same period in 2020. The change in contingent consideration expense,
which was recognized by the Company during the fourth quarter of 2021, relates to a change in our originally estimated fair value of contingent
consideration to be earned by the former members of Precision and Cascade.
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 805 (ASC 805), “Business Combinations” requires the Company to
determine an initial estimate as to the amount of potential contingent consideration to be earned as part of an acquisition as of the
date of the acquisition. In connection with our Acquisition of Precision and Cascade, the former members could have earned up to a capped
amount of $15.0 million in additional consideration, based upon the achievement of certain revenue-based thresholds, ending December 31,
2021.
Based on fourth quarter of 2021 revenue performance,
the former members of Precision and Cascade earned additional contingent consideration of approximately $5.4 million. This amount exceeded
the Company's initial fair value estimates by approximately $1.4 million. As per the guidelines of ASC 805, the Company is required to
record this increase as an operating expense in the period of change and not as an increase to goodwill. As of December 31, 2021, there
is no additional contingent consideration that can be earned by the former members of Precision and Cascade.
Similarly, the Company's December 31, 2021, acquisition
of PurePressure contains two consecutive twelve-month earnouts. The potential additional contingent consideration that can be earned under
each of the two earnout periods is capped at $1.5 million per period. The Company has made an initial estimate with respect to the probability
of achievement of the additional contingent consideration and recorded it as part of our initial purchase price accounting. We will continue
to evaluate PurePressure's future performance against our initial assumptions and projections on a quarterly basis. Any identified changes
to our original assumptions that result in a change in our overall expected earnout achievements will result in either an increase or
reduction in our future periodic operating expenses.
Other
Income (Expense), Net
| | |
Year ended December 31, | | |
| | |
| |
| (Dollar amounts in thousands) | |
2021 | | |
2020 | | |
Change | | |
% Change | |
| Interest income (expense), net | |
$ | 74 | | |
$ | (481 | ) | |
$ | 555 | | |
| 115 | % |
| Other expenses | |
| (31 | ) | |
| — | | |
| (31 | ) | |
| (100 | )% |
| Gain (loss) on extinguishment of notes payable | |
| 2,685 | | |
| (5,618 | ) | |
| 8,303 | | |
| 148 | % |
| Gain on forgiveness of PPP loan | |
| 45 | | |
| — | | |
| 45 | | |
| 100 | % |
| Change in fair value of derivative liabilities | |
| — | | |
| (2,924 | ) | |
| 2,924 | | |
| 100 | % |
| | |
$ | 2,773 | | |
$ | (9,023 | ) | |
$ | 11,796 | | |
| 131 | % |
Interest income (expense), net increased by $555
thousand, or 115%, for the year ended December 31, 2021 compared to the same period in 2020. The increase was due to the amortization
of debt discount related to the issuance of convertible promissory notes of $419 thousand for the year ended December 31, 2020, while
no amortization of debt discount occurred for the year ended December 31, 2021.
Other expenses decreased by $31 thousand, or 100%,
for the year ended December 31, 2021 compared to the same period in 2020.
Gain (loss) on extinguishment of notes payable
increased by $8.3 million, or 148%, for the year ended December 31, 2021 compared to the same period in 2020. See Note 15 -
Convertible Promissory Notes included elsewhere in the notes to the consolidated financial statements.
Gain on forgiveness of PPP loan increased by $45
thousand, or 100%, for the year ended December 31, 2021 compared to the same period in 2020. In September 2021, the loan for $44
thousand was 100% forgiven by the SBA. As a result, we recorded a gain of $45 thousand on the forgiveness on the loan and the associated
accrued interest.
Change in fair value of derivative liabilities
increased by $2.9 million, or 100%, for the year ended December 31, 2021 compared to the same period in 2020. The fair value of
the variable-share settlement features was computed to be $7.1 million, which resulted with a loss of $2.9 million for the year ended
December 31, 2020. For the year ended December 31, 2021, no derivatives were outstanding.
Income Tax Provision
| |
|
Year ended
December 31, |
|
|
|
|
|
|
|
| (Dollar amounts in thousands) |
|
2021 |
|
|
2020 |
|
|
Change |
|
|
% Change |
|
| Income tax provision |
|
$ |
25 |
|
|
$ |
— |
|
|
$ |
25 |
|
|
|
100 |
% |
We recorded an income tax provision
of $25 thousand in the year ended December 31, 2021 compared to no provision or benefit for income taxes in the year ago period. The Company
has historically generated losses from operations and is currently in a cumulative loss position. Accordingly, the Company has established
a full valuation allowance against the carrying value of its deferred tax assets.
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.
Liquidity
and Capital Resources
As of December 31, 2021, our principal sources
of liquidity were cash and cash equivalents and marketable securities totaling $56.5 million. We believe such amount, together with the
proceeds from the Private Placement that closed on January 28, 2022 and the senior secured debt facility that closed on March 14, 2022,
will be sufficient to support our planned operations for at least the next 12 months. Our current working capital needs are to support
accounts receivable 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 two Loan Agreements and Promissory
Notes (collectively the “PPP Loan”) 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 $823 thousand from the unsecured PPP Loans which are scheduled to mature during 2022 and 2025.
Subject to certain conditions, the PPP Loan may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act
and the PPP. In September 2021, the loan for $44 thousand was 100% forgiven by the SBA. As a result, we recorded a gain of $45 thousand
on the forgiveness on the loan and the associated accrued interest. If the remaining principal amount is not forgiven in full, we would
be obligated to repay any principal amount not forgiven and interest accrued thereon.
On March 14, 2022, we
entered into a Securities Purchase Agreement with an institutional investor. The Purchase Agreement provides for of the issuance of a
senior secured note (the “Note”) in the aggregate amount of $65 million and a warrant exercisable 6,881,108 shares of the
Company’s common stock, with the potential for two potential subsequent closings for notes with an original principal amount of
$35 million each. The initial closing pursuant to this debt facility occurred on March 14, 2022. The Note is a senior secured obligation
and ranks senior to all other indebtedness. We will be required to make amortization payments equal to 4.0% of the original principal
amount of the Note on the first day of each calendar month starting on February 1, 2023 and extending through the maturity date of March
1, 2026 (the “Maturity Date”), at which time all remaining outstanding principal and accrued but unpaid interest will be due.
The Note will have a stated interest rate of 6.75% per annum, and we will be required to pay interest on March 1, June 1, September 1
and December 1 of each calendar year through and including the Maturity Date. Following the one-year anniversary of the Note’s issuance,
we may, in lieu of paying interest in cash, pay such interest in kind, in which case interest on the Note will be calculated at the rate
of 8.75% per annum and will be added to the principal amount of the Note.
At any time following
the one-year anniversary of the Note’s issuance, we may prepay all (but not less than all) of the Note by redemption at a price
equal to 106.75% of the then-outstanding principal amount under the Note plus accrued but unpaid interest. The noteholder will also have
the option of requiring us to redeem the Note if we undergo a fundamental change at a price equal to 107% of the then-outstanding principal
amount under the Note plus any accrued interest thereon.
Cash
Flows
The
following table presents the major components of net cash flows from and used in operating, investing and financing activities for the
years ended December 31, 2021, and 2020:
| (Dollar amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Net cash (used in) provided by: | |
| | |
| |
| Operating activities | |
$ | (30,149 | ) | |
$ | (14,782 | ) |
| Investing activities | |
| (104,740 | ) | |
| (1,228 | ) |
| Financing activities | |
| 138,792 | | |
| 23,915 | |
Net increase in cash and cash
equivalents
| |
$ | 3,903 | | |
$ | 7,905 | |
Cash
Flow from Operating Activities
For the year ended December 31, 2021, we incurred
a net loss of $32.5 million, which included non-cash expenses of $1.3 million related to depreciation and amortization, $5.6 million
in connection with the issuance and acceleration of stock options, stock-based payment of $176 thousand related to the HMH acquisition,
provision of $1.2 million for doubtful accounts, provision of inventory obsolescence of $942 thousand and $1.4 million resulting from
the change in fair value of contingent consideration associated with the acquisition of Precision and Cascade.
These items were partially offset by a gain attributed to non-controlling
interest in the amount of $140 thousand, a gain on forgiveness of PPP loan of $45 thousand and a gain of $2.7 million related to extinguishment
of notes payable. Net cash was reduced by a $3.4 million increase in accounts receivable, a $6.6 million increase in prepaid inventory
due to demand forecast, a $3.3 million increase in deferred revenue, a $1.7 million increase in prepaid expenses and other receivables,
partially offset by an $8.3 million increase in accrued expenses and a $1.1 million increase in accounts payable.
For the year ended December 31, 2020, we incurred
a net loss of $21.6 million, which includes non-cash expenses of $5.6 million related to extinguishment of notes payable, $2.9 million
due to change in fair value of derivative liabilities, $407 thousand related to depreciation and amortization, $1.9 million in connection
with the issuance of stock options, non-cash interest expenses of $447 thousand related to the issuance of notes payable, a provision
of $54 thousand for doubtful accounts and $120 thousand from the disposal of fixed assets, partially offset by loss attributed to non-controlling
interest in the amount of $22 thousand. Net cash was reduced by a $3.7 million increase in accounts receivable, a $2.9 million increase
in prepaid inventory due to demand forecast, a $2.2 million decrease in deferred revenue, partially offset by a $4.8 million increase
in accrued expenses, a $12 thousand decrease in prepaid expenses, and a $527 thousand decrease in accounts payable.
Cash
Flow from Investing Activities
Net cash used in investing activities primarily
relates net purchases of held to maturity marketable securities, cash paid associated with the Company’s 2021 acquisitions, the
issuance of loans receivable in connection with the Company’s financing of construction and equipment under its TTK Solutions offering,
and for purchases of property and equipment, expenditures and purchase of held to maturity marketable securities. The capital expenditures
support growth and investment in property and equipment, to expand research, development, and testing capabilities and, to a lesser extent,
the replacement of existing equipment.
For the year ended December 31, 2021, net cash
used in investing activities was $104.7 million, which included cash outflows of $44.5 million in net purchases of held to maturity marketable
securities, $35.9 million paid in connection with our 2021 acquisitions of Precision and Cascade and PurePressure, $22.1 million related
to the issuance of TTK-related loans receivable, and $2.2 million of expenditures of property and equipment.
For the year ended December 31, 2020, net cash
used in investing activities was $1.2 million, which includes $1.1 million paid in connection with the acquisition of TriGrow and $136
thousand of purchases of property and equipment.
Cash
Flow from Financing Activities
For the year ended December 31, 2021, net cash
provided by financing activities was $138.8 million. Net cash provided by financing activities was primarily driven by the Company’s
February 2021 public offering and a follow-on secondary public offering. The Company received $57.0 million in net proceeds from our initial
public offering and $79.8 million in net proceeds from our secondary public offering. Additionally, the Company received $2.1 million
in proceeds from the exercise of stock options and warrants. Each of the above inflows of cash were offset by $148 thousand in payments
of financing leases.
For the year ended December 31, 2020, net cash
provided by financing activities was $23.9 million. Sources of cash provided by financing activities were attributable to $13.1 million
in proceeds from the issuance of notes payable, $10.0 million in proceeds from the issuance of Series A Preferred Stock, and the receipt
of $823 thousand in PPP Loans under the CARES Act.
Item
7A. 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
8. Financial Statements and Supplementary Data.
The financial statements required to be filed
pursuant to this Item 8 are appended to this Annual Report on Form 10-K, which financial statements are incorporated by reference
in response to this Item 8. An index of those financial statements is found in “Item 15. Exhibits and Financial Statement
Schedules” of this Annual Report on Form 10-K.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
None.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
Management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31,
2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports
that it files or submits 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 by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective at the reasonable assurance level as of December 31, 2021.
Management’s
Report on Internal Control over Financial Reporting
Management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under
the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the framework in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on the results of this evaluation, management has concluded that the Company’s internal control over financial reporting was not
effective at the reasonable assurance level as of December 31, 2021.
During the year ended December 31, 2021, management
identified material weaknesses related to inadequate design of the controls over the preparation of the consolidated financial statements
due to the lack of a timeline and process in place to timely close the Company’s annual books and records.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This Annual Report on Form 10-K does not include
an attestation report of our independent registered public accounting firm because we are an “emerging growth company,” and
may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging
growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section
404 of the Sarbanes-Oxley Act.
Remediation
of Material Weakness in Internal Control over Financial Reporting
In the course of preparing the financial statements
that were included in certain filings with the SEC during the years ended December 31, 2021 and 2020, we identified material weaknesses
in internal control over financial reporting. These material weaknesses related to inadequate design of the controls over the preparation
of the consolidated financial statements due to the lack of a timeline and process in place to timely close the Company’s annual
books and records, which was identified during the fiscal year ended December 31, 2021, and insufficient technical accounting resources
and lack of segregation of duties, which were identified during the fiscal year ended December 31, 2020. A material weakness is a deficiency
or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material
misstatement of its financial statements would not be prevented or detected on a timely basis. These deficiencies could result in misstatements
to our financial statements that could be material and may not be prevented or detected on a timely basis.
As of December 31, 2021, we were in varying stages
of remediating the current and previously reported material weaknesses in our internal control over financial reporting. During the
fiscal year ended December 31, 2021, we have increased the number of accounting resources employed by the Company. We have added
technically qualified personnel and are in the process of improving the Company’s technical accounting resources and capabilities.
Additionally, the expansion in accounting department resources has enabled the Company to create necessary and proper segregation of duties
between transactional, reconciliation and review and approval functions.
During the fourth quarter of 2021, we took steps
to address our material weakness related to control over the timeliness of our financial statement close process. While these actions,
which include adding public company-experienced resources to our accounting department staff, have already served to introduce improved
financial statement close-related policies and procedures, we will need to continue to devote specific attention to this aspect of our
internal control environment to ensure that this material weakness is fully remediated in the fiscal year ending December 31, 2022.
The material weakness related to the timeliness
of our financial control process will not be considered fully remediated until these additional controls and procedures have operated
effectively for a sufficient period of time and management has concluded, through testing, that these controls are effective. Our management
will monitor the effectiveness of our remediation plans and will make changes management determines to be appropriate. If not remediated,
this material weakness could result in material misstatements to our annual or interim financial statements that may not be prevented
or detected on a timely basis or result in a delayed filing of required periodic reports. If we are unable to assert that our internal
control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is
unable to express an unqualified opinion as to the effectiveness of the internal control over financial reporting, investors may lose
confidence in the accuracy and completeness of our financial reports, the market price of our Common Stock could be adversely affected
and we could become subject to litigation or investigations by the Nasdaq Capital Market, the SEC or other regulatory authorities, which
could require additional financial and management resources.
Changes
in Internal Control Over Financial Reporting
Other
than the changes to remediate the material weakness noted above, there was no change in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2021 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item
9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent
Inspections.
Not applicable.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
The information required by this Item 10
will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders
and is incorporated herein by reference.
Item
11. Executive Compensation.
The
information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our
2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters.
The
information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our
2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item
13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 10 will
be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item
14. Principal Accountant Fees and Services.
The information required
by this Item 10 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of
Stockholders and is incorporated herein by reference.
PART
IV
Item
15. Exhibits, Financial Statements and Schedules.
| |
(a) |
Financial Statements: |
(1)
The financial statements required to be included in this report appear after the signature page to this report as a separate section
beginning on page F-1.
(2)
All supplemental schedules have been omitted since the information is either included in the financial statements or the notes thereto
or they are not required or are not applicable.
(3)
The Exhibit Index of this report appears below.
| Exhibit No. |
|
Description |
| |
|
|
| 2.1± |
|
Agreement and Plan of Merger dated January 22, 2020 between the Registrant and TriGrow Systems, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) |
| 2.2± |
|
Plan of Merger and Equity Purchase Agreement, dated as of September 29, 2021, among the Registrant, Sinclair Scientific, LLC, Mass2Media, LLC dba PX2 Holdings, LLC, and each of the equity holders of Sinclair Scientific, LLC named therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2021 |
| 2.3 |
|
Amendment to Plan of Merger and Equity Purchase Agreement, dated as of October 1, 2021, between the Registrant and Sinclair Scientific, LLC (incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2021) |
| 2.4± |
|
Membership Interest Purchase Agreement, dated as of December 31, 2021, among the Registrant, PurePressure, LLC, Benjamin Britton as Member Representative, and each of the equity holders of PurePressure, LLC named therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2022) |
| 2.5± |
|
Merger Agreement, dated as of February 1, 2022, among the Registrant, LS Holdings Corp., Lab Society NewCo, LLC, Michael S. Maibach Jr. as Owner Representative, and each of the Owners named therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 2, 2022). |
| 3.1 |
|
Articles
of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Amendment No. 1
to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 13, 2021) |
| 3.2 |
|
Third
Amended and Restated Certificate of Designations of the Series A Convertible Preferred Stock of the Registrant (incorporated by reference
to Exhibit 3.2 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities
and Exchange Commission on January 13, 2021) |
| 3.3 |
|
Amended
and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrant’s Amendment No. 2 to
Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 26, 2021) |
| 4.1 |
|
Form
of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Amendment No. 2 to Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on January 26, 2021) |
| 4.2 |
|
Form
of Representative’s Warrant dated February 19, 2021 (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on February 11, 2021) |
| 4.3 |
|
Form
of Representative’s Warrant dated January 27, 2021 (incorporated by reference to Exhibit 4.2 to the Registrant’s Amendment
No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 26, 2021) |
| 4.4 |
|
Form
of Warrant issued to Noteholders (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-1
filed with the Securities and Exchange Commission on December 22, 2020) |
| 4.5 |
|
Description
of Registrant’s Securities (incorporated by reference to Exhibit 4.5 to the Registrant’s Annual Report on Form 10-K filed
with the Securities and Exchange Commission on April 2, 2021). |
| 4.6 |
|
Form
of Pre-Funded Warrant dated January 28, 2022 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on January 26, 2022). |
| 4.7 |
|
Form
of Common Stock Purchase Warrant dated January 28, 2022 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2022). |
| 4.8 |
|
Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 18, 2022) |
| 4.9 |
|
Form of Senior Secured Note (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 18, 2022) |
| 10.1 |
|
Operating
Agreement of Agrify-Valiant, LLC dated December 8, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) |
| 10.2 |
|
Distribution
Agreement dated June 7, 2019 between the Registrant and Bluezone Products, Inc.± (incorporated by reference to Exhibit 10.2 to
the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22,
2020) |
| 10.3 |
|
Distribution
Agreement dated March 9, 2020 between the Registrant and Enozo Technologies Inc.± (incorporated by reference to Exhibit 10.3
to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22,
2020) |
| 10.4 |
|
Purchase Agreement dated as of July 10, 2020 between the Registrant and 4D Bios Inc.± (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) |
| 10.5 |
|
Employment Agreement dated as of January 4, 2021 between the Registrant and Raymond Chang † (incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2021) |
| 10.9 |
|
2020 Omnibus Equity Incentive Plan † (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) |
| 10.10 |
|
Form of Note and Warrant Purchase Agreement (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) |
| 10.11 |
|
Form of Convertible Promissory Note (incorporated by reference to Exhibit 10.13 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 13, 2021) |
| 10.12 |
|
Intellectual Property Assignment and Transfer Agreement by and among the Registrant, Agrify Brands, LLC and The Holden Company effective as of January 1, 2020 (incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) |
| 10.13 |
|
Supply Agreement by and among the Registrant and Mack Molding Co. dated December 7, 2020 ± (incorporated by reference to Exhibit 10.15 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 13, 2021) |
| 10.14 |
|
Amended and Restated Operating Agreement of Agrify Brands, LLC effective as of August 12, 2020 (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) |
| 10.15* |
|
Separation Agreement of Niv Krikov, dated November 3, 2021 |
| 10.16 |
|
Form of Indemnification Agreement with directors and executive officers (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 11, 2021) |
| 10.17 |
|
Employment Agreement, dated as of November 10, 2021, between the Registrant and Thomas Massie † (incorporated by reference to Exhibit 10.19 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2021) |
| 10.18 |
|
Employment Agreement, dated as of November 10, 2021, between the Registrant and Timothy Oakes † (incorporated by reference to Exhibit 10.20 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2021) |
| 10.19± |
|
Form of Securities Purchase Agreement, dated as of January 25, 2022, between the Registrant and the Purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2022. |
| 10.20 |
|
Form of Registration Rights Agreement, dated as of January 25, 2022, between the Registrant and the Purchasers party thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2022. |
| 10.21± |
|
Form of Securities Purchase Agreement, dated as of March 14, 2022, between the Registrant and High Trail Special Situations LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 18, 2022) |
| 14.1 |
|
Code of Ethics of Agrify Corporation Applicable To Directors, Officers And Employees (incorporated by reference to Exhibit 14.1 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2020) |
| 21.1* |
|
Subsidiaries of the Registrant |
| 23.1* |
|
Consent of Independent Registered Public Accounting Firm
|
| 31.1* |
|
Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2* |
|
Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1** |
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2** |
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS |
|
Inline XBRL Instance Document |
| 101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| |
± |
Certain information has been omitted from this exhibit in reliance upon Item 601(a)(5) of Regulation S-K. |
| † | Indicates
a management contract or compensatory plan, contract or arrangement. |
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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 |
| |
|
| Date: March 31, 2022 |
By: |
/s/
Raymond Chang |
| |
|
By: Raymond Chang |
| |
|
Title: Chief Executive Officer
(principal executive officer) |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated.
| Signature |
|
Title |
|
Date |
| /s/
Raymond Chang |
|
Chief Executive Officer and
Director |
|
March
31, 2022 |
| Raymond Chang |
|
(Principal Executive Officer) |
|
|
| /s/
Timothy Oakes |
|
Chief Financial Officer |
|
March
31, 2022 |
| Timothy Oakes |
|
(Principal Financial and Accounting Officer) |
|
|
| /s/
Thomas Massie |
|
Chief Operating Officer and
Director |
|
March
31, 2022 |
| Thomas Massie |
|
|
|
|
| /s/
Guichao Hua |
|
Director |
|
March
31, 2022 |
| Guichao Hua |
|
|
|
|
| /s/
Krishnan Varier |
|
Director |
|
March
31, 2022 |
| Krishnan Varier |
|
|
|
|
| /s/
Timothy Mahoney |
|
Director |
|
March
31, 2022 |
| Timothy Mahoney |
|
|
|
|
| /s/
Stuart Wilcox |
|
Director |
|
March
31, 2022 |
| Stuart Wilcox |
|
|
|
|
| |
|
|
|
|
| /s/ Leonard
Sokolow |
|
Director |
|
March 31, 2022 |
| Leonard Sokolow |
|
|
|
|
Agrify
Corporation
Index to Consolidated Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders and Board of Directors of
Agrify
Corporation and Subsidiaries
Opinion
on the Financial Statements
We have audited the accompanying consolidated balance sheets of Agrify
Corporation and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations,
stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2021, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted
in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/
Marcum llp
Marcum
llp
We
have served as the Company’s auditor since 2019.
Melville,
NY
March 31, 2022
AGRIFY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | |
As of December 31, | |
| | |
2021 | | |
2020 | |
| Assets: | |
| | |
| |
| Cash and cash equivalents | |
$ | 12,014 | | |
$ | 8,111 | |
| Marketable securities | |
| 44,550 | | |
| — | |
| Accounts receivable, net of allowance for doubtful accounts of $1,415
and $54, as of December 31, 2021 and December 31, 2020, respectively | |
| 7,222 | | |
| 4,014 | |
| Inventory, net of reserves of $942 and $0, as of December 31, 2021 and December 31, 2020, respectively | |
| 20,498 | | |
| 5,170 | |
| Deferred IPO costs | |
| — | | |
| 981 | |
| Prepaid expenses and other current assets | |
| 2,452 | | |
| 364 | |
| Total current assets | |
| 86,736 | | |
| 18,640 | |
| | |
| | | |
| | |
| Loan receivable | |
| 22,255 | | |
| — | |
| Property and equipment, net | |
| 6,232 | | |
| 873 | |
| Right-of-use assets, net | |
| 1,479 | | |
| — | |
| Goodwill | |
| 50,090 | | |
| 632 | |
| Intangible assets, net | |
| 14,072 | | |
| 1,694 | |
| Other non-current assets | |
| 1,184 | | |
| — | |
| Total Assets | |
$ | 182,048 | | |
$ | 21,839 | |
| | |
| | | |
| | |
| Liabilities and Stockholders’ Equity | |
| | | |
| | |
| Current Liabilities: | |
| | | |
| | |
| Accounts payable | |
$ | 9,151 | | |
$ | 693 | |
| Accrued expenses and other current liabilities | |
| 28,764 | | |
| 6,550 | |
| Notes payable, net of debt discount of $0 and $4,777 as of December 31, 2021 and December 31, 2020, respectively | |
| — | | |
| 12,493 | |
| Derivative liabilities | |
| — | | |
| 7,141 | |
| Operating lease liabilities, current | |
| 814 | | |
| — | |
| Long-term debt, current | |
| 1,089 | | |
| — | |
| Deferred revenue | |
| 3,772 | | |
| 152 | |
| Total current liabilities | |
| 43,590 | | |
| 27,029 | |
| | |
| | | |
| | |
| Other non-current liabilities | |
| 318 | | |
| 435 | |
| Operating lease liabilities, non-current | |
| 704 | | |
| — | |
| Long-term debt | |
| 12 | | |
| 829 | |
| Total Liabilities | |
| 44,624 | | |
| 28,293 | |
| | |
| | | |
| | |
| Commitments and contingencies (Note 21) | |
| | | |
| | |
| | |
| | | |
| | |
| Stockholders’ Equity (Deficit) | |
| | | |
| | |
| Common stock, 50,000,000 shares, $0.001 par value authorized as of December 31, 2021 and December 31, 2020, respectively; 22,207,103 and 4,211,677 shares issued and outstanding at December 31, 2021 and 2020, respectively | |
| 21 | | |
| 4 | |
| Preferred stock 2,895,000 shares, $0.001 par value authorized as of December 31, 2021 and 2020, respectively; 0 shares issued and outstanding as of December 31, 2021 and 2020, respectively | |
| — | | |
| — | |
| Preferred A stock 105,000, $0.001 par value authorized as of December 31, 2021 and 2020, respectively; 0 and 100,000 shares issued and outstanding at December 31, 2021 and 2020, respectively | |
| — | | |
| — | |
| Additional paid-in capital | |
| 196,013 | | |
| 19,827 | |
| Accumulated deficit | |
| (58,975 | ) | |
| (26,510 | ) |
| Total Stockholders’ Equity (Deficit) | |
| 137,059 | | |
| (6,679 | ) |
| Non-controlling Interests | |
| 365 | | |
| 225 | |
| Total Liabilities and Stockholders’ Equity | |
$ | 182,048 | | |
$ | 21,839 | |
The
accompanying notes are an integral part of these consolidated financial statements.
AGRIFY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for number of shares and per share amounts)
| | |
Year ended December 31, | |
| | |
2021 | | |
2020 | |
| Revenue, net | |
$ | 59,859 | | |
$ | 12,087 | |
| Cost of goods sold | |
| 54,625 | | |
| 11,517 | |
| Gross profit | |
| 5,234 | | |
| 570 | |
| | |
| | | |
| | |
| Selling, general and administrative | |
| 34,970 | | |
| 9,832 | |
| Research and development | |
| 3,925 | | |
| 3,354 | |
| Change in contingent consideration | |
| 1,412 | | |
| — | |
| Total operating expenses | |
| 40,307 | | |
| 13,186 | |
| Loss from operations | |
| (35,073 | ) | |
| (12,616 | ) |
| Interest income (expense), net | |
| 74 | | |
| (481 | ) |
| Other expenses | |
| (31 | ) | |
| — | |
| Gain (loss) on extinguishment of notes payable | |
| 2,685 | | |
| (5,618 | ) |
| Gain on forgiveness of PPP loan | |
| 45 | | |
| — | |
| Change in fair value of derivative liabilities | |
| — | | |
| (2,924 | ) |
| Other income (expense), net | |
| 2,773 | | |
| (9,023 | ) |
| Net loss before income taxes | |
| (32,300 | ) | |
| (21,639 | ) |
| Income tax provision | |
| 25 | | |
| — | |
| Net loss | |
| (32,325 | ) | |
| (21,639 | ) |
| Income (loss) attributable to non-controlling interest | |
| 140 | | |
| (22 | ) |
| Net loss attributable to Agrify Corporation | |
$ | (32,465 | ) | |
$ | (21,617 | ) |
| Net loss per share attributable to common stockholders – basic and diluted | |
$ | (1.69 | ) | |
$ | (5.32 | ) |
| Weighted average common shares outstanding – basic and diluted | |
| 19,090,932 | | |
| 4,175,176 | |
The
accompanying notes are an integral part of these consolidated financial statements.
AGRIFY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
| | |
Common
Stock | | |
Preferred
A
Stock | | |
Additional
Paid-In | | |
Subscription | | |
Accumulated | | |
Total
Stockholders’
Equity (Deficit)
attributable | | |
Non-
controlling | | |
Total
Stockholders’ Equity | |
| | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Receivable | | |
Deficit | | |
to
Agrify | | |
Interests | | |
(Deficit) | |
| Balance,
January 1, 2020 | |
| 3,616,125 | | |
$ | 4 | | |
| — | | |
$ | — | | |
$ | 4,124 | | |
$ | (40 | ) | |
$ | (4,893 | ) | |
$ | (805 | ) | |
$ | — | | |
$ | (805 | ) |
| Stock
based compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,921 | | |
| — | | |
| — | | |
| 1,921 | | |
| — | | |
| 1,921 | |
| Stock
subscription | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 40 | | |
| — | | |
| 40 | | |
| — | | |
| 40 | |
| Issuance
of Preferred A Stock | |
| — | | |
| — | | |
| 100,000 | | |
| — | | |
| 10,000 | | |
| — | | |
| — | | |
| 10,000 | | |
| — | | |
| 10,000 | |
| Investment
in Agrify Valiant | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| | | |
| 40 | | |
| 40 | |
| Acquisition
of TriGrow Systems | |
| 595,552 | | |
| — | | |
| — | | |
| — | | |
| 1,356 | | |
| — | | |
| — | | |
| 1,356 | | |
| 207 | | |
| 1,563 | |
| Warrants
issued and recorded as debt discount in connection with notes payable issuances | |
| — | | |
| — | | |
| — | | |
| — | | |
| 2,426 | | |
| — | | |
| — | | |
| 2,426 | | |
| — | | |
| 2,426 | |
| Net
loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (21,617 | ) | |
| (21,617 | ) | |
| (22 | ) | |
| (21,639 | ) |
| Balance,
December 31, 2020 | |
| 4,211,677 | | |
$ | 4 | | |
| 100,000 | | |
$ | — | | |
$ | 19,827 | | |
$ | — | | |
$ | (26,510 | ) | |
$ | (6,679 | ) | |
$ | 225 | | |
$ | (6,454 | ) |
| Balance,
January 1, 2021 | |
| 4,211,677 | | |
$ | 4 | | |
| 100,000 | | |
$ | — | | |
$ | 19,827 | | |
$ | — | | |
$ | (26,510 | ) | |
$ | (6,679 | ) | |
$ | 225 | | |
$ | (6,454 | ) |
| Stock-based
compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 5,552 | | |
| — | | |
| — | | |
| 5,552 | | |
| — | | |
| 5,552 | |
| Beneficial
conversion feature associated with amended Convertible Promissory Notes | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,869 | | |
| — | | |
| — | | |
| 3,869 | | |
| — | | |
| 3,869 | |
| Conversion
of Convertible Notes | |
| 1,697,075 | | |
| 2 | | |
| — | | |
| — | | |
| 13,098 | | |
| — | | |
| — | | |
| 13,100 | | |
| — | | |
| 13,100 | |
| Issuance
of common shares in connection with acquisition | |
| 8,000 | | |
| — | | |
| — | | |
| — | | |
| 176 | | |
| — | | |
| — | | |
| 176 | | |
| — | | |
| 176 | |
| Issuance
of common stock – Initial Public Offering (“IPO”), net of fees | |
| 6,210,000 | | |
| 6 | | |
| — | | |
| — | | |
| 56,955 | | |
| — | | |
| — | | |
| 56,961 | | |
| — | | |
| 56,961 | |
| Issuance
of common stock – Secondary public offering, net of fees | |
| 6,388,888 | | |
| 6 | | |
| — | | |
| — | | |
| 79,833 | | |
| — | | |
| — | | |
| 79,839 | | |
| | | |
| 79,839 | |
| Conversion
of Preferred A Stock | |
| 1,373,038 | | |
| 1 | | |
| (100,000 | ) | |
| — | | |
| (1 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Acquisition
of Precision and Cascade | |
| 666,403 | | |
| 1 | | |
| — | | |
| — | | |
| 12,354 | | |
| — | | |
| — | | |
| 12,355 | | |
| — | | |
| 12,355 | |
| Acquisition
of PurePressure | |
| 240,301 | | |
| — | | |
| — | | |
| — | | |
| 2,211 | | |
| — | | |
| — | | |
| 2,211 | | |
| — | | |
| 2,211 | |
| Exercise
of options | |
| 657,620 | | |
| — | | |
| — | | |
| — | | |
| 2,132 | | |
| — | | |
| — | | |
| 2,132 | | |
| — | | |
| 2,132 | |
| Exercise
of warrants | |
| 754,101 | | |
| 1 | | |
| — | | |
| — | | |
| 7 | | |
| — | | |
| — | | |
| 8 | | |
| — | | |
| 8 | |
| Net
loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (32,465 | ) | |
| (32,465 | ) | |
| 140 | | |
| (32,325 | ) |
| Balance
December 31, 2021 | |
| 22,207,103 | | |
$ | 21 | | |
| — | | |
$ | — | | |
$ | 196,013 | | |
$ | — | | |
$ | (58,975 | ) | |
$ | 137,059 | | |
$ | 365 | | |
$ | 137,424 | |
The
accompanying notes are an integral part of these consolidated financial statements.
AGRIFY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
| | |
For the Year ended
December
31, | |
| | |
2021 | | |
2020 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
| Net loss attributable to Agrify Corporation | |
$ | (32,465 | ) | |
$ | (21,617 | ) |
| Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities: | |
| | | |
| | |
| Depreciation and amortization | |
| 1,310 | | |
| 407 | |
| Amortization of premium on investment securities | |
| 951 | | |
| — | |
| Interest on investment securities | |
| (1,035 | ) | |
| — | |
| Change in fair value of contingent consideration | |
| 1,412 | | |
| — | |
| Provision for doubtful accounts | |
| 1,187 | | |
| 54 | |
| Provision for inventory obsolescence | |
| 942 | | |
| — | |
| Compensation in connection with the issuance of stock options | |
| 5,552 | | |
| 1,921 | |
| Issuance of common shares in connection with acquisition | |
| 176 | | |
| — | |
| Non-cash interest (income) expense | |
| (42 | ) | |
| 447 | |
| (Gain) loss on extinguishment of notes payable, net | |
| (2,685 | ) | |
| 5,618 | |
| Gain on forgiveness of PPP loan | |
| (45 | ) | |
| — | |
| Change in fair value of derivative liabilities | |
| — | | |
| 2,924 | |
| Deferred income taxes | |
| 25 | | |
| — | |
| (Gain) loss from disposal of fixed assets | |
| (5 | ) | |
| 120 | |
| (Gain) loss attributable to non-controlling interests | |
| 140 | | |
| (22 | ) |
| Changes in operating assets and liabilities, net of acquisition: | |
| | | |
| | |
| Accounts receivable | |
| (3,391 | ) | |
| (3,709 | ) |
| Inventory | |
| (6,568 | ) | |
| (2,941 | ) |
| Prepaid expenses and other current assets | |
| (1,745 | ) | |
| 12 | |
| Right of use assets, net | |
| 29 | | |
| — | |
| Accounts payable | |
| 1,127 | | |
| (527 | ) |
| Accrued expenses and other current liabilities | |
| 8,284 | | |
| 4,780 | |
| Deferred revenue | |
| (3,303 | ) | |
| (2,249 | ) |
| Net cash used in operating activities | |
| (30,149 | ) | |
| (14,782 | ) |
| | |
| | | |
| | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
| Purchases of property and equipment | |
| (2,220 | ) | |
| (136 | ) |
| Purchases of intangibles assets | |
| (104 | ) | |
| — | |
| Purchase of securities | |
| (62,209 | ) | |
| — | |
| Proceeds from the sale of securities | |
| 17,743 | | |
| — | |
| Proceeds from the sale of fixed assets | |
| 101 | | |
| — | |
| Issuance of loan receivable | |
| (22,143 | ) | |
| — | |
| Cash paid for business combination, net of cash acquired | |
| (35,908 | ) | |
| (1,092 | ) |
| Net cash used in investing activities | |
| (104,740 | ) | |
| (1,228 | ) |
| | |
| | | |
| | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
| Proceeds from issuance of Preferred A Stock | |
| — | | |
| 10,000 | |
| Proceeds from IPO, net of fees | |
| 56,961 | | |
| — | |
| Proceeds from Secondary public offering, net of fees | |
| 79,839 | | |
| — | |
| Proceeds from exercise of options | |
| 2,132 | | |
| — | |
| Proceeds from exercise of warrants | |
| 8 | | |
| — | |
| Payments of financing leases | |
| (148 | ) | |
| — | |
| Minority interest in Valiant | |
| — | | |
| 40 | |
| Proceeds from PPP Loans | |
| — | | |
| 823 | |
| Payments of financing leases | |
| — | | |
| (88 | ) |
| Proceeds from notes payable | |
| — | | |
| 13,100 | |
| Proceeds from issuance of common stock | |
| — | | |
| 40 | |
| Net cash provided by financing activities | |
| 138,792 | | |
| 23,915 | |
| Net increase in cash | |
| 3,903 | | |
| 7,905 | |
| Cash and cash equivalents – Beginning of period | |
| 8,111 | | |
| 206 | |
| Cash and cash equivalents – End of
period | |
$ | 12,014 | | |
$ | 8,111 | |
| Supplemental disclosure of non-cash investing and financing activities: | |
| | | |
| | |
| Equipment sold for loan receivable to customer | |
$ | 289 | | |
$ | — | |
| Warrants issued and recorded as debt discount in connection with notes payable issuances | |
$ | — | | |
$ | 2,426 | |
| Bifurcated embedded conversion options recorded as derivative liabilities and debt discount | |
$ | — | | |
$ | 2,769 | |
The
accompanying notes are an integral part of these consolidated financial statements.
AGRIFY
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands unless otherwise specified, except share and per share data)
Note
1 — Nature of Business and Basis of Presentation
Description
of Business
Agrify
Corporation (“Agrify” or the “Company”) is a developer of highly advanced and proprietary precision hardware
and software grow solutions for the indoor agriculture marketplace and provides equipment and solutions for cultivation, extraction,
post-processing, and testing for the cannabis and hemp industry. 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 eight wholly owned subsidiaries, which are collectively referred to as the “Subsidiaries”:
| ● | AGM
Service Corp LLC (formerly AGM Service Corp Inc.); |
| ● | TriGrow
Systems, LLC (“TriGrow”, which acted as the Company’s exclusive distributor
and which was acquired in January 2020 as TriGrow Systems, Inc. and converted to TriGrow
Systems, LLC in May 2020); |
| ● | Harbor
Mountain Holdings, LLC (“HMH”)(acquired in July 2020); |
| ● | Cascade
Sciences, LLC (“Cascade”)(which was acquired by the Company on October 1, 2021); |
| ● | Precision
Extraction NewCo, LLC (“Precision”)(which was a newly formed subsidiary in connection
with October 1, 2021 acquisition of Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision
Extraction Solutions and Cascade); and |
| ● | PurePressure,
LLC (“PurePressure”)(which was acquired by the Company on December 31, 2021). |
The
Company also has ownership interests in the following companies:
| ● | Teejan
Podoponics International LLC (“TPI”)(the Company has owned 50% of TPI”
since December 2018); |
| ● | Agrify-Valiant,
LLC (“Agrify-Valiant”)(the Company owns 60% of Agrify-Valient, which was formed
in December 2019); and |
| ● | Agrify Brands, LLC (“Agrify Brands”)(formerly TriGrow Brands, LLC)(the Company owns 75% of Agrify Brands, which ownership position was created as part of the January 2020 acquisition of TriGrow). |
On
February 1, 2022, the Company 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 the Company (“Merger
Sub”), Michael S. Maibach Jr. as the Owner Representative thereunder, and each of the shareholders of Lab Society
(collectively, the “Owners”), pursuant to which the Company agreed to acquire Lab Society. Concurrently with the
execution of the Merger Agreement, the Company consummated the merger of Lab Society with and into Merger Sub, with Merger Sub
surviving such merger as a wholly owned subsidiary of the Company (the “Lab Society Acquisition”). See Note 23,
Subsequent Events included elsewhere in the notes to the consolidated financial statements.
Reverse
Stock Split
On
January 12, 2021, the Company effected a 1-for-1.581804 reverse stock split. 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.
Initial
Public Offering and Secondary Public Offering
On
February 1, 2021, we closed our initial public offering, or (“IPO”), of 6,210,000 shares of common stock (inclusive of 810,000
shares of common stock from the full exercise of the over-allotment option of shares granted to the underwriters). The offer and sale
of all of the shares in the IPO were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on
Form S-1 (File Nos. 333- 251616 and 333-252490), which was declared effective by the SEC on January 27, 2021. Maxim Group LLC and Roth
Capital Partners acted as the underwriters. The public offering price of the shares sold in the offering was $10.00 per share. The total
gross proceeds from the offering were $62.1 million.
After
deducting underwriting discounts and commissions of $4 million and offering expenses paid or payable by us of approximately $1 million,
the net proceeds from the offering were approximately $57 million. During the fiscal year ended December 31, 2021, we used the net proceeds
from the IPO for our current working capital needs to support accounts receivable growth, manage inventory to meet demand forecasts,
and support operational growth.
On
February 19, 2021, we consummated a secondary public offering (the “February Offering”) of 5,555,555 shares of common stock
for a price of $13.50 per share, less certain underwriting discounts and commissions. On March 22, 2021, we closed on the sale of an
additional 833,333 shares of common stock on the same terms and conditions pursuant to the exercise of the underwriters’ over-allotment
option. The exercise of the over-allotment option brought the total number of shares of common stock sold by us in connection with the
February Offering to 6,388,888 shares and the total net proceeds received in connection with the February Offering to approximately $80
million, after deducting underwriting discounts and estimated offering expenses. During the fiscal year ended December 31, 2021, we used
the net proceeds from the IPO for our current working capital needs to support accounts receivable growth, manage inventory to meet demand
forecasts, and support operational growth.
On
September 14, 2021, the Company entered into a letter agreement and waiver (the “Letter Agreement”), to amend the terms of
its underwriting agreement with the representative of the underwriters in the IPO. Pursuant to the letter agreement, the representative
agreed to waive the right of first refusal included in the underwriting agreement in consideration of (i) a cash payment of $2.4 million
and (ii) the right to participate as a co-manager with ten percent (10%) of the economics with respect to the Company’s next public
offering of securities, payable in cash upon the closing of such offering.
Coronavirus
(“COVID-19”) Pandemic
The
spike of COVID-19 in the first quarter of 2020 has caused significant volatility in the U.S. markets. There is significant uncertainty
around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. economy. To date,
there has not been a material impact on the Company’s business operations and financial performance. The extent of the impact of COVID-19 on
the Company’s operational and financial performance will depend in part, on the length and severity of these restrictions and on
the Company’s ability to conduct business in the ordinary course.
The
Paycheck Protection Program
In
May and July 2020, the Company entered into two separate PPP Loans 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 (the “SBA”)(the “PPP Loans”). The Company received total proceeds of
approximately $823 thousand from the unsecured PPP Loans, of which $44 thousand was forgiven in September 2021. The Company’s
application related to the forgiveness of the remaining outstanding balance of PPP Loans is currently under review by the
SBA.
Note
2 — Summary of Significant Accounting Policies
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 U.S. (“GAAP”) and include the accounts
of Agrify Corporation and its wholly owned subsidiaries, as described above in Note 1 – Nature of Business and Basis of Presentation,
in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”). The Company includes results of operations of acquired companies from the date
of acquisition. All significant intercompany transactions and balances are eliminated.
Accounting
for Less Than Wholly Owned Subsidiaries
For
the Company’s less than wholly owned subsidiaries, which include TPI, Agrify-Valiant, and 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. VIEs 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, it is consolidated.
Based
on the Company’s analysis for these entities, the Company has determined that Agrify-Valiant, LLC and Agrify Brands, LLC are each
a VIE and that the Company is the primary beneficiary. While the Company owns 60% of Agrify-Valiant, LLC’s equity interests and
75% of Agrify Brands, LLC’s equity interests, the remaining equity interests in Agrify-Valiant, LLC and Agrify Brands, LLC are
owned by unrelated third parties, and the agreement with these third parties provides the Company with greater voting rights. Accordingly,
the Company consolidates the financial statements of Agrify-Valiant, LLC and Agrify Brands, LLC under the VIE rules and reflects the
third parties’ interests in the consolidated financial statements as a non-controlling interest. The Company records this non-controlling
interest at its initial fair value, adjusting the basis prospectively for the third parties’ share of the respective consolidated
investments’ net income or loss or equity contributions and distributions. These non-controlling interests are not redeemable by
the equity holders and are presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holders
based on its economic ownership percentage. The investment in 50% of the shares of TPI is treated as an equity investment as the Company
cannot exercise significant influence.
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 and
assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual of expenses. The Company
bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be
reasonable under the circumstances. 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 results could differ from those
estimates.
Fiscal
Year
The
Company, and its Subsidiaries, Fiscal Year ends on December 31, each year.
Emerging
Growth Company
We
qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to
as the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable
to other companies that are not emerging growth companies.
In
addition, the JOBS Act provides that an “emerging growth company” can use the extended transition period for complying
with new or revised accounting standards.
We
will remain an “emerging growth company” until the earliest to occur of:
| |
● |
our reporting $1.0 billion or more in annual gross
revenues; |
| |
|
|
| |
● |
our issuance, in a three-year period, of more than
$1.0 billion in non-convertible debt; |
| |
|
|
| |
● |
the end of the fiscal year in which the market value
of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter; and |
| |
|
|
| |
● |
December 31, 2026. |
Reclassifications
Certain amounts in the prior period financial
statements have been reclassified to conform to the presentation of the current period financial statements. In this Annual Report on
Form 10-K, we have reclassified our capitalized website costs so that they are included as part of our aggregate intangible assets, net
in our consolidated balance sheets as of December 31, 2021 and 2020.
Cash
and Cash Equivalents
Cash
and cash equivalents consist principally of cash and deposits with maturities of three months or less as of December 31, 2021 and December
31, 2020. All cash equivalents are carried at cost, which approximates fair value.
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
held to maturity 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 those investments
which will mature within the next 12 months including interest receivable on the long-term bonds.
Accounts
Receivable, Net
Accounts receivable, net primarily consists of
amounts billed and currently due from customers. Accounts receivable balances are presented net of an allowance for credit losses, which
is an estimate of amounts that may not be collectible. In determining the amount of the allowance at each reporting date, the Company
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. Account 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 concentration of credit risk primarily consist of cash and accounts receivable. The
Company places its cash with financial institutions in the United States. The cash balances are insured by the FDIC up to $250 thousand
per depositor with unlimited insurance for funds in noninterest-bearing transaction accounts through December 31, 2021. At times, the
amounts in these accounts may exceed the federally insured limits.
The Company has certain customers whose revenue
individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represent
10% or more of the Company’s total accounts receivable. Refer to the following table.
The Company has certain customers whose revenue
individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represent
10% or more of the Company’s total accounts receivable. Refer to the following table.
Revenue
For
the years ended December 31, 2021 and 2020, the Company’s customers that accounted for 10% or more of the total revenue were as
follows:
| | |
2021 | | |
2020 | |
| (Dollar Amounts in Thousands) | |
Amount | | |
% of Total
Revenue | | |
Amount | | |
% of Total
Revenue | |
| New England Innovation Academy (“NEIA”) – Related Party | |
$ | 22,010 | | |
| 36.8 | % | |
$ | 3,916 | | |
| 32.4 | % |
| Customer B | |
| * | | |
| * | | |
$ | 1,660 | | |
| 13.7 | % |
| Greenstone Holdings - Related Party | |
$ | 9,429 | | |
| 15.8 | % | |
| * | | |
| * | |
| Customer D | |
| * | | |
| * | | |
$ | 4,000 | | |
| 33.1 | % |
Accounts Receivable, Net
As
of December 31, 2021 and 2020, the Company’s customers that accounted for 10% or more of the total accounts receivable, net, were
as follows:
| | |
2021 | | |
2020 | |
| (Dollar Amounts in Thousands) | |
Amount | | |
% of Total Accounts Receivable | | |
Amount | | |
% of Total Accounts Receivable | |
| | |
| | |
| | |
| | |
| |
| NEIA – Related Party | |
$ | 3,498 | | |
| 48.4 | % | |
$ | 1,655 | | |
| 41.2 | % |
| Customer B | |
$ | 1,541 | | |
| 21.3 | % | |
$ | 1,510 | | |
| 37.6 | % |
| Customer F | |
| * | | |
| * | | |
$ | 400 | | |
| 10 | % |
Inventories
The
Company values all of its inventories, which consist primarily of 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. Physical inventories are taken
at least once annually for all inventory locations.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are recognized
using the straight-line method over the estimated useful life of each asset, as follows:
| | |
Estimated Useful Life (Years) |
| Computer and office equipment | |
2 to 3 |
| Furniture and fixtures | |
2 |
| Software | |
3 |
| Vehicles | |
5 |
| Research and development laboratory equipment | |
5 |
| Machinery and equipment | |
3 to 5 |
| Leased equipment at customer | |
5 to 13 |
| Trade show assets | |
3 to 5 |
| Leasehold improvements | |
Lower of estimated useful life
or remaining lease term |
Estimated
useful lives are periodically assessed to determine if changes are appropriate. Maintenance and repairs are charged to expense as incurred.
When assets are retired or otherwise disposed of, the cost of these assets and related accumulated depreciation or amortization are eliminated
from the consolidated balance sheet and any resulting gains or losses are included in the consolidated statement of operations in the
period of disposal. Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated
once 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 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 fiscal 2021 and fiscal 2020.
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 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.
The
finite-lived useful lives are as follows:
| Trade names |
|
5 to 7 years |
| Acquired developed technology |
|
5 to 8 years |
| Non-compete agreements |
|
5 years |
| Customer relationships |
|
5 to 8 years |
| Capitalized website costs |
|
3 to 5 years |
In
performing the review of the recoverability 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 originally estimated
useful life. If, as a result of examining any of these factors, the Company concludes that the carrying value of intangible asset exceeds
its estimated fair value, an impairment charge will be recognized and reduce the carrying value of the asset to its estimated fair value.
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 Accounting Standards Codification Topic 815 of the FASB. The
accounting treatment of derivative financial instruments requires that the Company record certain embedded conversion options (“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 instrument is determined to not be a derivative liability, the Company then evaluates for the existence of a beneficial conversion
feature (“BCF”) by comparing the commitment date fair value to the effective conversion price of the instrument. The Company
records a BCF as 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.
Leases
The
Company determines at the inception of a 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 the consolidated balance sheet for all leases with an initial lease term of greater than 12 months. Leases with an initial term of
12 months or less are not recorded on the balance sheet, but payments are recognized as expense on a straight-line basis over the lease
term.
The
Company’s 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 recognized. Deferred revenue is recognized as revenue
as the related performance obligations are satisfied. Deferred revenue that will be recognized during the succeeding twelve-month
period is recorded as a current liability and the remaining portion is recorded as a noncurrent 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
value of the accounts receivable and accounts payable approximates their carrying value due to the short-term nature of these instruments.
Stock-Based Compensation
The Company measures all stock options and other
stock-based awards granted to employees and directors 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 and comprehensive loss in the same manner in which the award’s recipient’s
payroll costs are classified.
The fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model. The Company historically had been a private company and
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
excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.
Significant
judgments are used in determining fair values 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 fair values of assets and liabilities made after the end of the measurement period are recorded within the
Company's operating results.
For contingent consideration arrangements, a liability
is recognized at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations. Additional information
regarding the Company’s contingent consideration arrangements may be found in Note 5 – Fair Value Measures included elsewhere
in the notes to the consolidated financial statements.
Revenue
Recognition
Overview
The
Company generates revenue from the following sources: (1) equipment sales, (2) services sales and (3) construction contracts.
The
Company recognizes revenue from contracts with customers using a five-step model, which is described below:
| ● | identify
the customer contract; |
| ● | identify
performance obligations that are distinct; |
| ● | determine
the transaction price; |
| ● | allocate
the transaction price to the distinct performance obligations; and |
| ● | recognize
revenue as the performance obligations are satisfied. |
Identify
the customer contract
A
customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have
been identified, payment terms are identified, the contract has commercial substance and collectability, and consideration is probable.
Specifically, the Company obtains written/electronic signatures on contracts and a purchase order, 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 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 into enters contracts that can include various combinations of equipment, services and construction, which are generally capable
of being distinct and accounted for as separate performance obligations. Contracts with customers often include promises to transfer
multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations
that should be accounted for separately versus together may require significant judgment. Once the Company determines the performance
obligations, it determines the transaction price, which includes estimating the amount of variable consideration to be included in the
transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on the
SSP. The corresponding revenue is recognized as the related performance obligations are satisfied.
Judgment
is required to determine the SSP for each distinct performance obligation. The Company determines SSP based on the price at which the
performance obligation is sold separately and the methods of estimating SSP under the guidance of Accounting Standards Codification (“ASC”)
606-10-32-33. If the SSP is not observable through past transactions, the Company estimates the SSP, taking into account available information
such as market conditions, expected margins, and internally approved pricing guidelines related to the performance obligations. The Company
licenses its software as a SaaS type subscription license, whereby the customer only has a right to access the software over a specified
time period. The full value of the contract is recognized ratably over the contractual term of the SaaS subscription, adjusted monthly
if tiered pricing is relevant. The Company typically satisfies its performance obligations for equipment sales when equipment is made
available for shipment to the customer; for services sales as services are rendered to the customer and for construction contracts both
as services are rendered and when contract is completed.
The
Company utilizes the cost-plus margin method to determine the SSP for equipment and buildout services. It 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
SSP for services in time and materials contracts is determined by observable prices in standalone services arrangements.
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 contracts have 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 years ended December 31, 2021 and 2020, the Company did not have any such financial
income.
Payment terms with customers typically require
payment 30 days from 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 a 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 fulfils
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.
The Company generally provides a one-year warranty
on its 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, the Company accrues 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 the Company’s consolidated balance sheets.
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.
Shipping and Handling Charges
The Company incurs costs related to shipping and
handling of its manufactured products. These costs are expensed as incurred as a component of cost of sales. Shipping and handling charges
related to the receipt of raw materials are also incurred, which are recorded as a cost of the related inventory.
Equity Method Investments
Investments in affiliates which are 50% or
less owned by the Company for which the Company exercises significant influence but does not have control are accounted for on the equity
method. The Company has investments in equity investments without readily determinable fair values, which represents investments in entities
where the Company does not have the ability to significantly influence the operations of the entities.
An assessment of whether or not the Company (as
a holder of 50% of TPI) has the power to direct activities that most significantly impact TPI’s economic performance and to identify
the party that obtains the majority of the benefits of the investment was performed as of December 31, 2021 and December 31, 2020, and
will be performed as of each subsequent reporting date. After each of these assessments, the Company concluded that the activities that
most significantly impact TPI’s economic performance are the growth, marketing, sale, and distribution of products using TPI’s
technology and IP, each of which are solely directed by TPI. Based on our consideration of these assessments, the Company concluded that
the Company’s investment in TPI should be accounted for under the equity method.
The carrying value of the Company’s investment
in TPI was $0 as of December 31, 2021 and December 31, 2020. The Company did not recognize revenue from TPI for the years ended December
31, 2021 and 2020.
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 asset will not be realized.
The
Company follows 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. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company
has not recorded a liability for unrecognized tax benefits. As of December 31, 2021, tax years 2016 through 2021 remain open for IRS
audit. The Company has received no notice of audit from the IRS for any of the open tax years.
The
Company recognizes the benefit of a tax position when it is effectively settled. ASC 740-10-25-10, “Basic Recognition Threshold”
provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. ASC 740-10-25-10 clarifies that a tax position can be effectively settled upon the completion of an examination
by a taxing authority. For tax positions considered effectively settled, the Company recognizes the full amount of the tax benefit.
For the period ended December 31, 2021, the Company
recorded a deferred tax liability of approximately $25 thousand, comprised of its change in deferred tax liability during the year related
to its indefinite lived intangible asset balance. The indefinite lived intangibles are not all available as a source of income and thus
are not fully available to offset the Company's deferred tax assets. As of December 31, 2021, the Company has federal and state net operating
loss (NOL) carryforwards of approximately $52.2 million and $28.9 million, respectively. The Company has not yet filed its 2018, 2019,
2020 and 2021 federal and state tax returns.
There was no federal income tax expense for the
years ended December 31, 2021 and 2020 due to the Company’s net losses. The Company has not yet filed its 2018, 2019, 2020 and
2021 federal and state tax returns.
Net Loss Per Share
Basic and diluted net loss per share attributable
to common stockholders is presented in conformity with the two-class method required for participating securities. Basic loss per share
is computed 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 antidilutive and accordingly, basic net loss per share equals diluted net loss per share.
Net loss per share calculations for all periods
have been adjusted to reflect the reverse stock split effected on January 12, 2021. Net loss per share was calculated based on the weighted
average number of common stock outstanding.
Note 3 — Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred
in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or
obtain internal-use software. The new standard requires capitalized costs to be amortized on a straight-line basis generally over the
term of the arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related
to the hosting arrangements. The Company adopted this standard effective January 1, 2020, using a prospective approach. The adoption
of this new standard did not have a material impact on the Company’s consolidated financial statements. Subsequent impact will
depend on the magnitude of implementation costs to be incurred. Implementation costs capitalized subsequent to adoption will be recognized
in operating expenses in the statements of operations over the non-cancelable period of the hosting arrangement plus any renewal periods
reasonably certain to be taken.
Pending Accounting Pronouncements
In June 2016, the Financial Accounting Standards
Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit
Losses (Topic 326), which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale
debt securities and accounts receivable. The guidance establishes a new “expected loss model” that requires entities to estimate
current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are
to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. ASU 2016-13 is
effective in the first quarter of fiscal 2024. The Company is currently evaluating if this guidance will have a material effect to its
consolidated financial statements.
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 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 U.S. 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. Early adoption is permitted, but no earlier than fiscal years
beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating
the impact of the new standard on its consolidated financial statements and related 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 U.S. GAAP. The amendment in this update is effective for fiscal years beginning after December
15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
The guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendment in this
update. The Company is evaluating the potential impact of this adoption on its consolidated financial statements and related disclosures.
All other Accounting Standards Updates issued
but not yet effective are not expected to have a material effect on the Company’s future financial statements.
Note 4 — Revenue and Deferred Revenue
Revenue
During the years ended December 31, 2021 and 2020,
the Company generated revenue from the following sources: (1) equipment sales, (2) services sales and (3) construction contracts.
The Company sells its equipment and services to
customers under a combination of a contract and purchase order. Equipment revenue includes sales from proprietary products designed and
engineered by the Company such as Agrify Vertical Farming Units (“VFUs”), container farms, integrated grow racks, and LED
grow lights, and non-proprietary products designed, engineered, and manufactured by third parties such as air cleaning systems and pesticide-free
surface protection.
Construction contracts normally provide for payment
upon completion of specified work or units of work as identified in the contract. Although there is considerable variation in the terms
of these contracts, they are primarily structured as time-and-material contracts. The Company enters 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 two main sub-contractors to execute the construction contracts.
Disaggregation of Revenue —
The following table provides revenue disaggregated by timing of revenue recognition:
| | |
Year ended
December 31, | |
| (Dollar Amounts in Thousands) | |
2021 | | |
2020 | |
| Transferred at a point in time | |
$ | 23,624 | | |
$ | 4,907 | |
| Transferred over time | |
| 36,235 | | |
| 7,180 | |
| | |
$ | 59,859 | | |
$ | 12,087 | |
In
accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end
of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable.
The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A,
including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the
right to invoice practical expedient.
The Company generally provides a one-year warranty
on its products for materials and workmanship but may provide multiple year warranties as negotiated, and will pass on the warranties
from its vendors, if any, which generally covers 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. As of December 31, 2021, the Company maintains a reserve for warranty
returns of $398 thousand. No warranty reserve was recorded by the Company as of December 31, 2020. The reserve for warranty returns is
included in accrued expenses and other current liabilities in the Company’s consolidated balance sheets.
Deferred
Revenue
Significant changes in the Company’s current
deferred revenue balance for the years ended December 31, 2021 and 2020:
| | |
Year ended
December 31, | |
| (Dollar Amounts in Thousands) | |
2021 | | |
2020 | |
| Total current deferred revenue, beginning of period | |
$ | 152 | | |
$ | — | |
| Additions | |
| 3,758 | | |
| 152 | |
| Interest income on deferred revenue | |
| 4 | | |
| — | |
| Recognized | |
| (142 | ) | |
| — | |
| Total current deferred revenue, end of period | |
$ | 3,772 | | |
$ | 152 | |
Deferred revenue balances primarily consist of
customer deposits on our cultivation and extraction solutions equipment. As of December 31, 2021 and 2020, all of our deferred revenue
balances were reported as current liabilities in the accompanying consolidated balance sheets.
Note 5 — Fair Value Measures
Fair Values of Assets and Liabilities
The Company measures fair value at the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability
(the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows:
| |
Level 1: |
Observable inputs such as quoted prices for identical assets or liabilities in active markets. |
| |
Level 2: |
Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments
in active markets or for similar markets that are not active. |
| |
Level 3: |
Unobservable inputs for which there is little or no market data which require the Company to develop
its own assumptions about how market participants would price the asset or liability. |
Valuation techniques for assets and liabilities
include methodologies such as the market approach, the income approach, or the cost approach, and may use unobservable inputs such as
projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized
to the extent that observable inputs are not available or cost-effective to obtain.
At December 31, 2021 and December 31, 2020,
the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:
| |
|
December 31, 2021 |
|
|
December 31, 2020 |
|
| |
|
Fair Value Measurements Using Input Types |
|
|
Fair Value Measurements Using Input Types |
|
| (Dollar Amounts 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) |
|
$ |
178 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
178 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| Held to maturity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Municipal bonds |
|
|
9,961 |
|
|
|
— |
|
|
|
— |
|
|
|
9,961 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Corporate bonds |
|
|
34,589 |
|
|
|
— |
|
|
|
— |
|
|
|
34,589 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Total held to maturity securities |
|
$ |
44,728 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
44,728 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Notes payables, net of discount |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
12,493 |
|
|
$ |
12,493 |
|
| Derivative liabilities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,141 |
|
|
|
7,141 |
|
| Contingent consideration |
|
|
— |
|
|
|
— |
|
|
|
6,137 |
|
|
|
6,137 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Total liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6,137 |
|
|
$ |
6,137 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
19,634 |
|
|
$ |
19,634 |
|
Fair Value of Financial Instruments
The Company has certain financial instruments which consist of cash
and cash equivalents, marketable securities, accounts receivable, loan receivable, accounts payable, notes payable, derivative liabilities,
deferred revenue, and long-term debt. Fair value information for each of these instruments is as follows:
| |
● |
Cash and cash equivalents, accounts receivable, accounts payable and deferred revenue liabilities fair values approximate their carrying values, due to the expected duration of these instruments. |
| |
|
|
| |
● |
Marketable securities classified as held to maturity securities are recorded at amortized cost, which as of December 31, 2021, approximated fair value. |
| |
● |
The Company had certain derivative instruments accounted for at fair value. The Company held a convertible promissory note with a preferential conversion feature which qualifies as a derivative instrument. The fair value assumptions consider the nature of the conversion feature and the expected timeline to a qualifying conversion event. |
| |
|
|
| |
● |
The Company’s deferred consideration was recorded in connection with acquisitions during the year ending December 31, 2021 using an estimated fair value discount at the time of the transaction. As of December 31, 2021, the carrying value of the deferred consideration approximated fair value. |
Marketable Securities
As of December 31, 2021, the Company held investments
consisting of mutual funds, municipal bonds, and corporate bonds. The mutual funds are recorded at fair value in the accompanying consolidated
balance sheet as part of cash and cash equivalents. The municipal and corporate bonds are considered held to maturity 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 those investments which will mature within the next 12
months including interest receivable on the long-term bonds.
The composition of the Company’s marketable
securities are as follows:
| (Dollar Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Current marketable securities: | |
| | |
| |
| Municipal bonds | |
$ | 9,961 | | |
$ | — | |
| Corporate bonds | |
| 34,589 | | |
| — | |
| Total current marketable securities | |
$ | 44,550 | | |
$ | — | |
The amortized cost and estimated fair value of
held to maturity securities as of December 31, 2021, are as follows:
(Dollar Amounts in Thousands) | |
Amortized
cost | | |
Unrealized
loss | | |
Estimated
fair value | |
| Current marketable securities (due within 1 year) | |
| | |
| | |
| |
| Municipal bonds | |
$ | 9,961 | | |
$ | (9 | ) | |
$ | 9,952 | |
| Corporate bonds | |
| 34,589 | | |
| (72 | ) | |
| 34,517 | |
| | |
$ | 44,550 | | |
$ | (81 | ) | |
$ | 44,469 | |
Contingent Consideration
The Company has classified its net liability for
contingent earnout considerations relating to the two acquisitions completed in Fiscal 2021. The fair value for the contingent consideration
associated with these acquisitions is within Level 3 of the fair value hierarchy because the associated fair value is determined
using significant unobservable inputs, which included the key assumptions to model future revenue, costs of goods sold and operating expense
projections. A description of the Company’s acquisitions completed in Fiscal 2021 is included within Note 13 – Business Combinations
included elsewhere in the notes to the consolidated financial statements.
The contingent earnout payments for each acquisition
are based on the achievement of certain revenue thresholds. During the fourth quarter of 2021, the fair value of the contingent earnout
consideration increased by $1.4 million due to the actual revenue achievement for the period ended December 31, 2021, being greater than
the initially projected revenue achievement incorporated into our initial purchase price allocation. This amount, as required by ASC 805,
was recorded as part of our operating expenses in the fourth quarter of 2021.
(Dollar Amounts in Thousands) | |
December 31,
2021 | |
| Contingent consideration – beginning of year | |
$ | — | |
| Accrued contingent consideration | |
| 4,725 | |
| Change in estimated fair value | |
| 1,412 | |
| Contingent consideration – end of year | |
$ | 6,137 | |
Contingent consideration is included within accrued
expense in the consolidated balance sheets as of December 31, 2021.
Note 6 — Loan Receivable
A portion of the capital raised from the Company’s
2021 public offering has been allocated to launch Agrify’s total turn-key solution (“TTK Solution”) program, the industry’s
first end-to-end solution for the Company’s customers that provides access to capital for construction costs, equipment lease(s)
to VFUs and other related operating equipment, subscription to the Company’s Agrify Insights software, and business consultation
services, which will enable the Company’s customers to go to market sooner.
The
Company’s initial allowable investment in the Agrify TTK Solution engagements is currently capped at $50.0 million, as approved
by the Company’s Board of Directors. As of December 31, 2021, the Company has committed $20.3 million to the Agrify TTK Solution
for five customers under contract and the remainder $1.9 million is related to non-TTK Solutions contracts. Of the five customers under
the Agrify TTK Solution, Greenstone Holdings is a related party.
The loan agreements entered into with customers
receiving the Agrify TTK Solution generally provide for loans ranging from approximately $200 thousand up to $13.5 million with maturity
dates of approximately two to three years after the completion of the construction projects. Typically, the TTK Solution construction
loans have interest rates ranging from 12% to 18% per annum.
The
breakdown of loans receivable as of December 31, 2021 and December 31, 2020 is as follows:
| (Dollar
Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Company
A – TTK Solution | |
$ | 5,542 | | |
$ | — | |
| Greenstone
Holdings – TTK Solution – Related Party | |
| 11,177 | | |
| — | |
| Company
C – TTK Solution | |
| 2,439 | | |
| — | |
| Company
D – TTK Solution | |
| 1,105 | | |
| — | |
| Company
E – TTK Solution | |
| 46 | | |
| — | |
| Non-TTK
Solutions | |
| 1,946 | | |
| — | |
| Loan
receivable | |
$ | 22,255 | | |
$ | — | |
The Company analyzed whether any of the above
customers are a variable interest entity (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 Holdings is a VIE.
As of December 31, 2021, two of the Company’s employees own approximately 36.6% of the equity of Greenstone Holdings, however,
since the Company is not the primary beneficiary of Greenstone Holdings, the Company is not required to consolidate Greenstone Holdings.
Note
7 — Accounts Receivable
Accounts
Receivable consisted of the following as of December 31, 2021 and December 31, 2020:
| (Dollar
Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Accounts
receivable, gross | |
$ | 8,637 | | |
$ | 4,068 | |
| Less
allowance for doubtful accounts | |
| (1,415 | ) | |
| (54 | ) |
| Accounts
receivable, net | |
$ | 7,222 | | |
$ | 4,014 | |
NEIA, a related party, accounted for $3.5 million
and $1.7 million of accounts receivable, net as of December 31, 2021 and December 31, 2020, respectively.
The changes in the allowance for doubtful accounts
consisted of the following:
| | |
Fiscal Year | |
| (Dollar Amounts in Thousands) | |
2021 | | |
2020 | |
| Balance as of the beginning of the year | |
$ | 54 | | |
$ | — | |
| Provision for doubtful accounts | |
| 1,187 | | |
| 54 | |
| Other adjustments | |
| 174 | | |
| — | |
| Balance as of the end of the year | |
$ | 1,415 | | |
$ | 54 | |
Bad
debt expense was $1.2 million and $54 thousand, for the year ended December 31, 2021 and 2020, respectively.
Note
8 — 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 prepaid inventory is short-term,
non-bearing interest that is applied to the purchase of products once it is delivered. The Company reserves for slow-moving inventory
and inventory that is being evaluated under the Company’s quality control process. The reserves are based upon management’s
expected method of disposition.
Inventory
consisted of the following as of December 31, 2021 and December 31, 2020:
| (Dollar Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Raw materials | |
$ | 6,393 | | |
$ | 4,337 | |
| Prepaid inventory | |
| 2,237 | | |
| 833 | |
| Finished goods | |
| 12,810 | | |
| — | |
| Gross inventory | |
| 21,440 | | |
| 5,170 | |
| Inventory reserves | |
| (942 | ) | |
| — | |
| Total inventory, net | |
$ | 20,498 | | |
$ | 5,170 | |
Inventory
Reserves
The
Company establishes inventory reserves for obsolete, slow moving and defective items. Inventory reserves for obsolete, slow moving or
defective items are calculated as the difference between the cost of inventory and its estimated net realizable value. Changes in inventory
reserve are as follows:
| (Dollar Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Inventory reserves – beginning of the year | |
$ | — | | |
$ | — | |
| Increase in inventory reserves | |
| 942 | | |
| — | |
| Inventory write-offs | |
| — | | |
| — | |
| Inventory reserves – end of year | |
$ | 942 | | |
$ | — | |
Note
9 — Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consisted of the following as of December 31, 2021 and December 31, 2020:
| (Dollar Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Prepaid insurance | |
$ | 492 | | |
$ | — | |
| Prepaid software | |
| 173 | | |
| 48 | |
| Prepaid expenses, other | |
| 541 | | |
| 148 | |
| Deferred costs | |
| 353 | | |
| — | |
| Other note receivables (1) | |
| 807 | | |
| — | |
| Other receivables, other | |
| 86 | | |
| 168 | |
| Prepaid expenses and other current assets | |
$ | 2,452 | | |
$ | 364 | |
Note 10 — Property and Equipment, Net
Property and equipment, net consisted of the
following as of December 31, 2021 and December 31, 2020:
(Dollar Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Computer and office equipment | |
$ | 473 | | |
$ | 128 | |
| Furniture and fixtures | |
| 385 | | |
| 16 | |
| Leasehold improvements | |
| 841 | | |
| 10 | |
| Machinery and equipment | |
| 898 | | |
| 868 | |
| Software | |
| 174 | | |
| — | |
| Vehicles | |
| 143 | | |
| 62 | |
| Research and development laboratory equipment | |
| 163 | | |
| — | |
| Leased equipment at customer | |
| 619 | | |
| — | |
| Trade show assets | |
| 80 | | |
| — | |
| Total property and equipment, gross | |
| 3,776 | | |
| 1,084 | |
| Accumulated depreciation | |
| (780 | ) | |
| (211 | ) |
| Construction in progress | |
| 3,236 | | |
| — | |
| Property and equipment, net | |
$ | 6,232 | | |
$ | 873 | |
Depreciation expense for the years ended December 31, 2021 and 2020
was $655 thousand and $188 thousand, respectively. During the year ended December 31, 2021, the Company retired $119 thousand of fixed
assets, with an accompanying accumulated depreciation of $84 thousand, resulting in a loss on disposal of $36 thousand.
Note 11 — Intangible Assets and Goodwill
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 an impairment test of goodwill during the fourth quarter of each year or sooner if indicators of potential impairment
arise. There were no such indicators in the years ended December 31, 2021 and December 31, 2020.
Intangible assets were
as follows:
| | |
Intangible Assets, Gross | | |
Accumulated Amortization | | |
Intangible Assets, Net | |
(Dollar Amounts in Thousands) | |
January 1,
2021 | | |
Additions
and
retirements,
net | | |
December 31,
2021 | | |
January 1,
2021 | | |
Expense
and
retirements,
net | | |
December 31,
2021 | | |
January 1,
2021 | | |
December 31,
2021 | |
| Trade names | |
$ | 930 | | |
$ | 1,488 | | |
$ | 2,418 | | |
$ | (88 | ) | |
$ | (139 | ) | |
$ | (227 | ) | |
$ | 842 | | |
$ | 2,191 | |
| Customer Relationships | |
| 850 | | |
| 5,326 | | |
| 6,176 | | |
| (89 | ) | |
| (213 | ) | |
| (302 | ) | |
| 761 | | |
| 5,874 | |
| Acquired developed Technology | |
| — | | |
| 4,911 | | |
| 4,911 | | |
| — | | |
| (191 | ) | |
| (191 | ) | |
| — | | |
| 4,720 | |
| Non-compete | |
| — | | |
| 1,202 | | |
| 1,202 | | |
| — | | |
| (60 | ) | |
| (60 | ) | |
| — | | |
| 1,142 | |
| Capitalized website costs | |
| 139 | | |
| 106 | | |
| 245 | | |
| (48 | ) | |
| (52 | ) | |
| (100 | ) | |
| 91 | | |
| 145 | |
| Total | |
$ | 1,919 | | |
$ | 13,033 | | |
$ | 14,952 | | |
$ | (225 | ) | |
$ | (655 | ) | |
$ | (880 | ) | |
$ | 1,694 | | |
$ | 14,072 | |
Amortization expenses recorded in selling, general
and administrative in the consolidated statements of operations were $655 thousand and $218 thousand for the years ended December 31,
2021 and 2020, respectively.
Estimated future amortization expense on finite-lived
intangible assets is as follows:
| Years Ending December 31 (Dollar Amounts in Thousands), | |
Amount | |
| 2022 | |
$ | 2,444 | |
| 2023 | |
| 2,409 | |
| 2024 | |
| 2,401 | |
| 2025 | |
| 2,375 | |
| 2026 | |
| 2,124 | |
| 2027 and thereafter | |
| 2,319 | |
| Total | |
$ | 14,072 | |
The changes in goodwill are as follows:
| (Dollar Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Balance, beginning of period | |
$ | 632 | | |
$ | — | |
| Goodwill additions | |
| 49,458 | | |
| 632 | |
| Balance, end of period | |
$ | 50,090 | | |
$ | 632 | |
There was no goodwill impairment identified for
the years ended December 31, 2021 and December 31, 2020, respectively.
Note 12 — Accrued Expenses and Other Current Liabilities
Accrued expenses consisted of the following as
of December 31, 2021 and December 31, 2020:
| (Dollar Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Accrued acquisition liability (1) | |
$ | 9,198 | | |
$ | — | |
| Sales tax payable (2) | |
| 5,290 | | |
| — | |
| Accrued construction costs | |
| 8,803 | | |
| 4,468 | |
| Compensation related fees | |
| 3,491 | | |
| 225 | |
| Accrued professional fees | |
| 1,104 | | |
| 1,135 | |
| Accrued warranty expenses | |
| 398 | | |
| — | |
| Accrued consulting fees | |
| 75 | | |
| 97 | |
| Accrued inventory purchases | |
| 201 | | |
| 164 | |
| Financing lease liabilities | |
| 156 | | |
| 148 | |
| Accrued non-income taxes | |
| 48 | | |
| — | |
| Other current liabilities | |
| — | | |
| 313 | |
| Total accrued expenses and other current liabilities | |
$ | 28,764 | | |
$ | 6,550 | |
Note 13 — Business Combination
Acquisition of Precision and Cascade
On September 29, 2021 (the “Execution Date”),
the Company entered into a Plan of Merger and Equity Purchase Agreement, as amended by an amendment dated as of October 1, 2021 (as amended,
the “Purchase Agreement”), with Sinclair Scientific, LLC, a Delaware limited liability company (“Sinclair”),
Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions, a Michigan limited liability company (“Precision”);
and each of the equity holders of Sinclair named therein (collectively, the “Sinclair Members”). On October 1, 2021, the
Company consummated the transactions contemplated by the Purchase Agreement.
Subject to the terms and conditions set
forth in the Purchase Agreement, (1) Sinclair transferred, to the Company, and the Company purchased (the “Interest
Purchase”) from Sinclair, 100% of the equity interests of Cascade Sciences, LLC, a Delaware limited liability company
(“Cascade”), such that immediately after the consummation of such Interest Purchase, Cascade became a wholly owned
subsidiary of the Company, and (2) Precision merged (the “Merger”) with and into a newly-formed wholly owned subsidiary
of the Company, Precision Extraction NewCo, LLC.
The aggregate consideration for the Interest
Purchase and the Merger consisted of: (a) the sum of $30 million, plus consideration payable to holders of outstanding Sinclair
equity awards, subject to certain adjustments for working capital, cash and indebtedness, payable in connection with the Interest Purchase;
(b) the number of shares of the Company’s common stock, subject to adjustment, equal to the quotient of (i) $20.0 million divided
by (ii) the volume-weighted average price per share of the Company’s common stock on The Nasdaq Capital Market for the 30 consecutive
trading days ending on the Execution Date (the “VWAP Price”), issuable in connection with the Merger; and (c) the True-Up
Buyer Shares, if any (as defined below), issuable in connection with the Merger.
The Purchase Agreement includes customary post-closing
adjustments, representations and warranties and covenants of the parties. The Sinclair Members may become entitled to additional shares
of the Company’s common stock (the “True-Up Buyer Shares”) and cash (together with the True-Up Buyer Shares, the “Aggregate
True-Up Payment) based on the eligible net revenues (as defined in the Purchase Agreement) achieved by the Cascade and Precision businesses
during the fiscal year ending December 31, 2021. However, in no event shall the aggregate purchase price paid by the Company pursuant
to the terms of the Purchase Agreement, taking into account any Aggregate True-Up Payment in favor of the Sinclair Members, exceed $65.0 million.
Transaction and related costs, consisting primarily
of professional fees, directly related to the acquisition, totaled $4.0 million for the year ended December 31, 2021. All transaction
and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocation for the business
combination has been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available
during the respective measurement period (up to one year from the acquisition date). Fair values still under review as of December 31,
2021 include values assigned to identifiable intangible assets and goodwill.
The following table sets forth the components
and the allocation of the purchase price for the business combination:
| (Dollar Amounts in Thousands) | |
|
| Purchase price consideration: | |
|
| Cash paid to Sinclair Members at close | |
$ | 23,000 | |
| Cash contributed to escrow accounts at close | |
| 7,000 | |
| Cash paid for excess net working capital | |
| 1,430 | |
| Stock issued at close | |
| 14,535 | |
| Fair value of contingent consideration to be achieved | |
| 3,953 | |
| Fair value of total consideration transferred | |
| 49,918 | |
| Total purchase price, net of cash acquired | |
$ | 48,630 | |
| | |
| | |
| Fair value allocation of purchase price: | |
| | |
| Cash and cash equivalents | |
$ | 1,288 | |
| Accounts receivable | |
| 897 | |
| Inventory | |
| 6,761 | |
| Prepaid and other assets | |
| 1,736 | |
| Property and equipment, net | |
| 970 | |
| Operating lease right of use assets | |
| 730 | |
| Capitalized web costs, net | |
| 2 | |
| Accounts payable and accrued expenses | |
| (9,196 | ) |
| Deferred revenue | |
| (5,419 | ) |
| Long-term debt | |
| (1,961 | ) |
| Operating lease liabilities, current | |
| (392 | ) |
| Operating lease liabilities, noncurrent | |
| (362 | ) |
| Acquired intangible assets | |
| 9,889 | |
| Goodwill | |
| 44,975 | |
| Total purchase price | |
$ | 49,918 | |
Identified intangible assets consist of trade
names, technology, non-compete agreements, and customer relationships. The fair value of intangible assets and the determination of their
respective useful lives were made in accordance with ASC 805 and are outlined in the table below:
| (Dollar Amounts in Thousands) |
|
Asset
Value |
|
Useful Life |
| Identified intangible assets: |
|
|
|
|
| Trade names |
|
$ |
1,260 |
|
6 to 7 years |
| Acquired developed technology |
|
|
3,818 |
|
5 years |
| Non-compete agreements |
|
|
1,202 |
|
5 years |
| Customer relationships |
|
|
3,609 |
|
7 to 8 years |
| Total identified intangible assets |
|
$ |
9,889 |
|
|
The Company’s initial fair value estimates
related to the various identified intangible assets were determined under various valuation approaches including the Income Approach,
Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project revenues, operating
expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine
the weighted average cost of capital to be used as a discount rate.
The Company amortizes its intangible assets assuming
no residual value over periods in which the economic benefit of these assets is consumed.
The amount of revenue of Precision and Cascade
included in the consolidated statement of operations from the acquisition date of October 1, 2021 to December 31, 2021 was $12.3 million.
The following pro forma financial information
summarizes the combined results of operations for the Company, Precision and Cascade, as though the acquisition of Precision and Cascade
occurred on January 1, 2020.
The unaudited pro forma financial information
was as follows:
| |
Year
ended
December 31, | |
| (Dollar
Amounts in Thousands) | |
2021 | | |
2020 | |
| Revenue,
net | |
$ | 90,821 | | |
$ | 52,723 | |
| Net
loss before non-controlling interest | |
| (35,783 | ) | |
| (25,571 | ) |
| Income
(loss) attributable to non-controlling interest | |
| 140 | | |
| (22 | ) |
| Net
loss | |
$ | (35,923 | ) | |
$ | (25,549 | ) |
The pro forma financial information for all periods
presented above has been calculated after adjusting the results of Precision and Cascade to reflect the business combination accounting
effects resulting from these acquisitions, including acquisition costs and the amortization expense from acquired intangible assets as
though the acquisition occurred on January 1, 2020. The historical consolidated financial statements have been adjusted in the pro forma
combined financial statements to give effect to pro forma events that are directly attributable to the business combination.
The pro forma financial information is for informational
purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on
January 1, 2020.
Acquisition of PurePressure
On December 31, 2021, the Company entered into a Membership
Interest Purchase Agreement (the “Pure Purchase Agreement”) with PurePressure, LLC, a Colorado Limited liability company (“PurePressure”)
and the members of PurePressure (collectively, the “Members”), Benjamin Britton as the Member Representative thereunder, and
each of the Members. Concurrently with the execution of the Pure Purchase Agreement, the Company consummated the acquisition of all the
outstanding equity interests of PurePressure, such that immediately after the consummation of such purchase, PurePressure became a wholly
owned subsidiary of the Company (the “Acquisition”).
The aggregate consideration for the Acquisition
consisted of: (a) $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness of PurePressure at
closing; (b) 329,179 shares of the Company’s common stock (the “Buyer Shares”); and (c) the Earn-out Consideration
(as defined below), to the extent earned.
The Company withheld 88,878 of the Buyer Shares
issuable to certain Members (the “Holdback Buyer Shares”) for the purpose of securing any post-closing adjustment owed to
the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Pure Purchase Agreement.
The Holdback Buyer Shares shall be released following the twelve (12) month anniversary of the Closing Date in accordance with and subject
to the conditions of the Pure Purchase Agreement.
The Pure Purchase Agreement includes customary
post-closing adjustments, representations and warranties and covenants of the parties. The Members may become entitled to additional
consideration with a value of up to $3.0 million based on the eligible net revenues achieved by the PurePressure business during the
fiscal years ending December 31, 2022 and December 31, 2023, of which 40% will be payable in cash and the remaining 60% will be payable
by issuing shares of the Company’s common stock (collectively, the “Earn-out Consideration”).
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). Fair values still under review as of December 31, 2021 include
values assigned to identifiable intangible assets and goodwill.
The following table sets forth the components
and the allocation of the purchase price for the business combination:
| (Dollar Amounts in Thousands) | |
|
| Purchase price consideration: | |
|
| Estimated closing proceeds | |
$ | 3,613 | |
| Indebtedness paid | |
| 320 | |
| Transaction expenses | |
| 115 | |
| Closing buyer shares | |
| 2,211 | |
| Holdback buyer shares | |
| 654 | |
| Earn-out consideration | |
| 707 | |
| Estimated working capital adjustments | |
| 330 | |
| Fair value of total consideration transferred | |
| 7,950 | |
| Total purchase price, net of cash acquired | |
$ | 7,647 | |
| | |
| | |
| Fair value allocation of purchase price: | |
| | |
| Cash and cash equivalents | |
$ | 303 | |
| Accounts receivable, net | |
| 48 | |
| Inventory | |
| 1,537 | |
| Property and equipment, net | |
| 219 | |
| Right of use assets, net | |
| 191 | |
| Prepaid expenses and other receivables | |
| 61 | |
| Other non-current assets | |
| 16 | |
| Accounts payable and accrued expenses | |
| (706 | ) |
| Deferred revenue | |
| (762 | ) |
| Operating lease liabilities, current | |
| (117 | ) |
| Operating lease liabilities, noncurrent | |
| (74 | ) |
| Finance lease liabilities, current | |
| (4 | ) |
| Finance lease liabilities, noncurrent | |
| (10 | ) |
| Notes payable, current | |
| (260 | ) |
| Notes payable, noncurrent | |
| (12 | ) |
| Acquired intangible assets | |
| 3,037 | |
| Goodwill | |
| 4,483 | |
| Total purchase price | |
$ | 7,950 | |
Identified intangible assets consist of trade
names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives
were made in accordance with ASC 805 and are outlined in the table below:
| (Dollar Amounts in Thousands) | |
Asset
Value | |
Useful
Life |
| Identified intangible assets: | |
| |
|
| Trade name | |
$ | 227 | |
5 years |
| Acquired
developed technology | |
| 1,093 | |
8 years |
| Customer
relationships | |
| 1,717 | |
5 years |
| Total
identified intangible assets | |
$ | 3,037 | |
|
Subject to certain customary limitations, (i)
the Members will indemnify the Company and its affiliates, officers, directors and other agents against certain losses related to, among
other things, breaches of the Members’ and PurePressure’s representations and warranties, indebtedness, transaction expenses,
pre-closing taxes and the failure to perform covenants or obligations under the Pure Purchase Agreement, and (ii) the Company will indemnify
the Members and their respective affiliates, officers, directors and other agents against certain losses related to, among other things,
breaches of the Company’s representations and warranties and the failure to perform covenants or obligations under the Pure Purchase
Agreement.
Acquisition of TriGrow
On January 22, 2020, the Company completed the acquisition
of all outstanding shares of TriGrow. TriGrow is an integrator and distributor of the Company’s premium indoor grow solutions for
the indoor controlled agriculture marketplace. As part of the acquisition, the Company received TriGrow’s 75% interest in Agrify
Brands, LLC (formerly TriGrow Brands, LLC), a licensor and marketing supporter of established portfolio of consumer brands that utilize
the Company’s growing technology. In consideration of TriGrow’s shares, the Company issued to TriGrow’s shareholders
595,552 shares of Agrify common stock. In addition, the closing conditions included the assumption of TriGrow’s outstanding obligation
to invest $1.1 million (the “Funding Amount”) in a form of a so called “profit interest” investment in CCI Finance,
LLC (“CCI”). The Company satisfied this obligation and made payment of the Funding Amount on January 24, 2020 pursuant to
a Profits Interest Agreement with CCI. Under the Profits Interest Agreement, in return for the Company’s investment of the Funding
Amount, CCI is obligated to share with the Company 28.5% of the net revenue generated from its equipment lease agreement with its customer,
payable at least annually by CCI to the Company. The revenue sharing percentage is reduced from 28.5% to 20% once the Company has received
payments equaling an 18% Internal Rate of Return on the Funding Amount (the “Preferred Return”) prior to the fifth anniversary
of the agreement. The revenue sharing terminates upon the later of five years, or the Company’s attainment of the Preferred Return.
To date, no revenue has been generated and shared with the Company under this agreement.
As part of the acquisition of TriGrow, the Company made available 121,539 shares
of its common stock for issuance to certain executives of TriGrow upon TriGrow’s and/or the Company’s receipt of $10.0 million
of accumulative purchase orders for TriGrow and/or the Company’s equipment, products, and services, for the period from November
21, 2019 through June 30, 2020 as a result of the efforts of the TriGrow executives. Such common stock of the Company is to be distributed
by the Company to certain executives of the surviving corporation responsible for achievement of such milestone, in the Company’s
sole discretion. The Company concluded the earn-out, if materialized, will be considered as post combination services. Additionally, the
Company concluded that the value associated with the earn-out to be de minimis. No earn-out was ever earned.
The purchase price for this business combination
was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition
date, with the remaining unallocated purchase price recorded as goodwill. The fair value assigned to identifiable intangible assets acquired
was determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and
assumptions determined by the Company.
Transaction and related costs, consisting
primarily of professional fees, directly related to the acquisition, totaled $45 thousand for the year ended December 31, 2020. All
transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The following table sets forth the components
and the allocation of the purchase price for the business combination:
| (Dollar Amounts in Thousands) | |
| |
| Components of Purchase Price: | |
| |
| Obligation to invest cash in profit interest | |
$ | 1,140 | |
| Capital stock consideration | |
| 1,356 | |
| Noncontrolling Interest | |
| 207 | |
| Total purchase price | |
$ | 2,703 | |
| | |
| | |
| Allocation of Purchase Price: | |
| | |
| Net tangible assets, including cash acquired of $44 | |
$ | 543 | |
| | |
| | |
| Identifiable intangible assets: | |
| | |
| Brand rights | |
| 930 | |
| Customer relationships | |
| 850 | |
| Total identifiable
intangible assets | |
| 1,780 | |
| Goodwill | |
| 380 | |
| Total purchase price
allocation | |
$ | 2,703 | |
Trade names and Customer relationships were assigned estimated
useful lives of ten years and nine years, respectively, the weighted average of which is approximately 9.5 years.
The amount of revenue of TriGrow included in the Company’s
consolidated statement of operations from the acquisition date of January 22, 2020 to December 31, 2020 was $4.0 million.
Acquisition of Harbor Mountain Holdings, LLC
In July 2020, the Company acquired all the outstanding equity
interests of HMH, located in the Atlanta, GA area, that has been producing and assembling many of the Company’s products. As part
of the acquisition, the Company waived net receivable owed amounting to $214 thousand and assumed lease liabilities for existing equipment
and premises. On September 20, 2021, the Company issued an aggregate of 8,000 shares of common stock to an executive of HMH for achieving
certain milestones from the acquisition date through March 31, 2021. The common shares were valued at $176 thousand based on the Company’s
Stock Price at closing September 20, 2021. The value of the shares is included in research and development in the condensed consolidated
statements of operations.
The purchase price for this business combination
was allocated by management to the tangible and intangible assets acquired and liabilities assumed based on their book value which estimated
their fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill.
Transaction and related costs, consisting
primarily of professional fees, directly related to the acquisition, totaled $35 thousand for the year ended December 31, 2020. All
transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The following table sets forth the components
and the allocation of the purchase price for the business combination:
| (Dollar Amounts in Thousands) | |
| |
| Components of Purchase Price: | |
| |
| Waiver of net receivable
owed to Agrify | |
$ | 214 | |
| Total purchase price | |
$ | 214 | |
| | |
| | |
| Allocation of Purchase Price: | |
| | |
| Net tangible assets (liabilities): | |
| | |
| Cash | |
$ | 4 | |
| Property and Equipment | |
| 817 | |
| Accounts payable | |
| (187 | ) |
| Accrued expenses | |
| (23 | ) |
| Financing lease liabilities | |
| (649 | ) |
| Net tangible liabilities | |
| (38 | ) |
| Goodwill | |
| 252 | |
| Total purchase price
allocation | |
$ | 214 | |
The amount of revenue of HMH included in the Company’s
consolidated statement of operations from the acquisition date of July 22, 2020 to December 31, 2020 was $0.
The following pro forma financial information summarizes the
combined results of operations for us, TriGrow and HMH, as though the acquisition of TriGrow and HMH occurred on January 1, 2020.
The unaudited pro forma financial information was as follows:
| | |
Year ended
December 31, | |
| (Dollar Amounts in Thousands) | |
2020 | |
| Revenue, net | |
$ | 12,121 | |
| Net loss before non-controlling interest | |
$ | (22,743 | ) |
| Loss attributable to non-controlling interest | |
| 65 | |
| Net loss | |
$ | (22,678 | ) |
The pro forma financial information for all periods presented
above has been calculated after adjusting the results of TriGrow and HMH to reflect the business combination accounting effects resulting
from these acquisitions, including acquisition costs and the amortization expense from acquired intangible assets as though the acquisition
occurred on January 1, 2020. The historical consolidated financial statements have been adjusted in the pro forma combined financial statements
to give effect to pro forma events that are directly attributable to the business combination.
The pro forma financial information is for informational purposes
only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1,
2020.
Note 14 — Debt
Paycheck Protection Program Loans under the Coronavirus Aid,
Relief, and Economic Security Act
In May and July 2020, the Company entered into
two separate PPP Loans with Bank of America pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act administered
by the U.S. Small Business Administration (“SBA”).
The Company received total proceeds of approximately $779
thousand and $44 thousand from the unsecured PPP Loans, which are scheduled to mature on May 7, 2022 and July 27, 2025, respectively.
Subject to certain conditions, the PPP Loan may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act
and the PPP. In September 2021, the PPP Loan in the amount of $44 thousand was 100% forgiven by the SBA. As a result, the Company recorded
a gain of $45 thousand on the forgiveness on the loan and the associated accrued interest. The Company’s submission to have the
remaining $779 thousand PPP Loan forgiven is currently being reviewed by the SBA. If the remaining principal amount from the $779 thousand
PPP Loan is not forgiven in full, the Company would be obligated to repay any principal amount not forgiven and interest accrued thereon.
PurePressure SBA Debt
As part of the acquisition of PurePressure, $159 thousand
of debt remained outstanding from SBA loan as of December 31, 2021. This debt has subsequently been paid as a part of the PurePressure
acquisition.
.
Note 15 — Convertible Promissory Notes
On January 11, 2021, the Company’s
Board of Directors and shareholders approved the amendment to the conversion formula of the Convertible Promissory Notes (the “Notes”)
issued by the Company on dates between August 2020 and November 2020. Pursuant to the amendment, immediately prior to the consummation
of a public transaction, the outstanding principal amount of the Notes, together with all accrued and unpaid interest, shall convert
into a number of fully paid and non-assessable shares of common stock, at a conversion price of $7.72.
While the original conversion feature was bifurcated
from the host instrument, the Company determined that the amended conversion feature would not require bifurcation. Since the accounting
for the conversion feature changed because of the amendment, the Company applied extinguishment accounting pursuant to its accounting
policy.
During the year ended December 31, 2020, the Company recognized
an aggregate loss on extinguishment of $5.6 million for the difference between the net carrying amount of the extinguished debt of $10.0
million (inclusive of $11.8 million of principal, $4.2 million of debt discount and $2.4 million of derivative liabilities) and the reacquisition
price of the debt in the same aggregate principal amount of $11.8 million, plus the fair value of the new notes’ conversion features
of an aggregate of $3.9 million.
During the year ended December 31, 2021, the Company recognized
a gain on extinguishment of $2.7 million in connection with the derecognition of the net carrying amount of the extinguished debt of $19.7
million (inclusive of $13.1 million of principal, $7.1 million of derivative liabilities, less $587 thousand of debt discount) and the
recognition of the $17.0 million fair value of the new convertible notes (including the same principal amount of $13.1 million plus the
$3.9 million fair value of the beneficial conversion feature).
On February 1, 2021, in conjunction with the closing of the
Company’s IPO, the Notes in the aggregate principal amount of $13.1 million were converted into 1,697,075 shares of common stock
at the election of the Company at a conversion price of $7.72 per share.
Note
16 — Derivative Liabilities
During the year ended December 31, 2020, the Company
recorded Level 3 derivative liabilities that were measured at fair value at issuance in the aggregate amount of $2.8 million related to
the variable-share settlement features of certain convertible notes payable. During the year ended December 31, 2020, the Company modified
the conversion terms of certain notes which resulted in the recognition of an additional $1.4 million of Level 3 derivative liabilities,
with a corresponding debit to loss on extinguishment. See Note 15 — Convertible Promissory Notes included elsewhere in the notes
to the consolidated financial statements.
On December 31, 2020, the Company recomputed the fair value
of the variable-share settlement features recorded as derivative liabilities to be $7.1 million. The Company recorded a loss of $2.9 million
on the change in fair value of these derivative liabilities during the year ended December 31, 2020. The variable-share settlement features
were valued using a combination of a discounted cash flow and a Black-Scholes valuation technique. At issuance, the significant unobservable
inputs used in the discounted cash flow were a discount rate of approximately 20% and a probability of a Public Transaction occurring
of 56%. The Black-Scholes assumptions were as follows:
| Volatility | |
40% |
| Risk-free interest rate | |
0.09% – 0.16% |
| Dividend yield | |
0.00% |
| Expected term (years) | |
0.75 – 1.75 |
| Forfeiture rate | |
0.00% |
As of December 31, 2020, the significant unobservable inputs
used in the discounted cash flow were a discount rate of approximately 20% and a probability of a Public Transaction occurring of 90%.
The Black-Scholes assumptions were as follows:
| Volatility | |
40% |
| Risk-free interest rate | |
0.09% – 0.16% |
| Dividend yield | |
0.00% |
| Expected term (years) | |
0.66 – 1.75 |
| Forfeiture rate | |
0.00% |
Note 17 — Capital Structure
On January 9, 2020, the Company increased its
authorized number of shares to 53,000,000, consisting of: 50,000,000 shares of common stock, par value $0.001 per share, and 3,000,000
shares of preferred stock, par value $0.001 per share. At that time, it also designated 100,000 shares of the 3,000,000 authorized shares
of preferred stock, par value $0.001 per share, as Series A Convertible Preferred Stock (“Series A Preferred Stock”).
Series A Convertible Preferred Stock
Beginning in the first quarter of 2020, the Company issued
an aggregate of 60,000 shares of Series A Preferred Stock, for an aggregate purchase price of $6.0 million. In May 2020, the Company completed
an offering of Series A Preferred Stock with the issuance of an additional 40,000 shares of Series A Preferred Stock for an aggregate
purchase price of $4.0 million.
Amendment of Conversion Formulas
On January 11, 2021, the Company’s Board
of Directors approved the amendment to the conversion formula of the Series A Preferred Stock and Notes. After the amendment:
| | 1. | the Series A Preferred Stock is convertible, at any time after issuance or immediately prior to the closing of a public transaction, into common stock in an amount of shares equal to (i) the product of the Series A Preferred Stock original price plus accrued but unpaid dividends on the shares being converted, multiplied by the number of shares of Series A Preferred Stock being converted, divided by (ii) a conversion price of $7.72 per share (after the reverse split taking effect); and |
| | | |
| | 2. | immediately prior to the consummation of a public transaction, the outstanding principal amount of the Notes together with all accrued and unpaid interest shall convert into a number of fully paid and non-assessable shares of common stock equal to the quotient of (i) the outstanding principal amount of the Notes together with all accrued and unpaid interest thereunder immediately prior to such public transaction divided by (ii) a conversion price of $7.72 (after the reverse split taking effect). |
On January 11, 2021, the Company’s shareholders
approved the amendment to the Series A Preferred Stock.
Initial Public Offering
On February 1, 2021, the Company completed an
initial public offering (“IPO”) for the sale of 5,400,000 shares of common stock at a price of $10.00 per share. The Company
also granted the underwriters: (a) a 45-day option to purchase up to 810,000 additional shares of common stock on the same terms and
conditions for the purpose of covering any over-allotments in connection with the IPO, and (b) warrants to purchase 162,000 shares of
common stock (equal to 3% of the aggregate number of shares of common stock issued in the IPO) at an exercise price of $12.50 per share
(which is equal to 125% of the IPO price). Subsequently, the underwriters exercised the over-allotment option, and on February 4, 2021,
the Company closed on the sale of an additional 810,000 shares of common stock for a price of $10.00 per share and granted to the underwriters
warrants to purchase 24,300 additional shares of common stock (equal to 3% of the amount of shares issued as part of the exercised of
the over-allotment option) at an exercise price of $12.50 per share. The exercise of the over-allotment option brought the total number
of shares of common stock sold by the Company in connection with the IPO to 6,210,000 shares and the total net proceeds received in connection
with the IPO to approximately $57.0 million, after deducting underwriting discounts and estimated offering expenses.
Immediately prior to the closing of the Company’s
IPO, all outstanding shares of Series A Preferred Stock and Notes were converted into 1,373,038 shares of common stock and 1,697,075
shares of common stock, respectively, at a conversion price of $7.72 per share.
Subsequent Public Offering
On February 19, 2021, the Company consummated
a secondary public offering (the “February Offering”) for the sale of 5,555,555 shares of common stock for a price of $13.50
per share. The Company also granted the underwriters: (a) a 45-day option to purchase up to 833,333 additional shares of common stock
on the same terms and conditions for the purpose of covering any over-allotments in connection with the February Offering, and (b) warrants
to purchase 166,667 shares of common stock (equal to 3% of the aggregate number of shares of common stock issued in the February Offering)
at an exercise price of $16.875 per share (which is equal to 125% of the February Offering). Subsequently, the underwriters exercised
the over-allotment option, and on March 22, 2021, the Company closed on the sale of an additional 833,333 shares of common stock for
a price of $13.50 per share and granted to the underwriters warrants to purchase 25,000 additional shares of common stock (equal to 3%
of the amount of shares issued as part of the exercised of the over-allotment option) at an exercise price of $16.875 per share. The
exercise of the over-allotment option brought the total number of shares of common stock sold by the Company in connection with the February
Offering to 6,388,888 shares and the total net proceeds received in connection with the February Offering to approximately $80 million,
after deducting underwriting discounts and estimated offering expenses.
Underwriter Termination
On September 14, 2021, the Company entered into a letter agreement and waiver (the
“Letter Agreement”), to amend the terms of its underwriting agreement with the representative of the underwriters in the IPO.
Pursuant to the Letter Agreement, the representative agreed to waive the right of first refusal included in the underwriting agreement
in consideration of (i) a cash payment to the representative of $2.4 million and (ii) the right to participate as a co-manager with ten
percent (10%) of the economics with respect to the Company’s next public offering of securities, payable in cash upon the closing
of such offering.
Stock Subscriptions Receivable
The outstanding balance of the stock subscription
was paid in January 2020.
Issuance of Common Stock in Connection with Acquisitions
On September 20, 2021, as part of the acquisition
of HMH, the Company issued an aggregate of 8,000 shares of common stock to an executive of HMH for achieving certain milestones from the
acquisition date through March 31, 2021. The common shares were valued at $176 thousand based on the Company’s closing stock price
on September 20, 2021. The value of the shares is included in research and development in the condensed consolidated statements of operations.
Refer to Note 13 – Business Combinations included elsewhere in the notes to the consolidated financial statements.
On October 1, 2021, the Company issued an aggregate
of 666,403 shares of its common stock to the Precision and Cascade shareholders in connection with the Company’s acquisition
of Precision and Cascade. Refer to Note 13 – Business Combinations included elsewhere in the notes to the consolidated financial
statements.
On December 31, 2021, the Company issued an aggregate
of 240,301 shares of its common stock to the PurePressure shareholders in connection with the Company’s acquisition of PurePressure.
Refer to Note 13 – Business Combinations included elsewhere in the notes to the consolidated financial statements.
Stock Option Plan
On September 4, 2019, the Company adopted and approved the
2019 Stock Option Plan (the “2019 Plan”) which provided for the issuance of 1,743,744 shares of its common stock. On August
10, 2020 and October 8, 2020, the Company’s board of directors and stockholders, respectively, approved an increase to the maximum
number of shares of common stock authorized for issuance over the term of the 2019 Plan from 1,743,744 shares to 3,355,083 shares. As
of December 31, 2021, there are no shares available to be granted under the 2019 Plan. Prior to the consummation of the Company’s
IPO, the Company cancelled the 2019 Plan and converted the outstanding stock options to the 2020 Plan, as more fully described below.
Under the 2019 Plan, the standard vesting schedule provided that 25% of the options vest 12 months following issuance and the balance
vests in 36 equal monthly installments thereafter. However, the Company’s board of directors was permitted to provide for alternative
or accelerated vesting schedules in approving each stock option grant. In many cases, the Company’s Board of Directors included
an accelerated vesting schedule under which 50% of the stock options granted vest immediately prior to a change of control transaction
or the Company’s first underwritten public offering.
2020 Omnibus Equity Incentive Plan
On December 18, 2020, the Company’s Board of Directors,
and on January 11, 2021, the Company’s stockholders, adopted and approved the 2020 Omnibus Equity Incentive Plan (the “2020
Plan”), which replaced the 2019 Plan. The 2020 Plan provides for the grant of stock options, SARs, performance share awards, performance
unit awards, distribution equivalent right awards, restricted stock awards, restricted stock unit awards and unrestricted stock awards
to non-employee directors, officers, employees and non-employee consultants of the Company or its affiliates. The aggregate number of
shares of common stock that may be reserved and available for grant and issuance under the 2020 Plan is 4,533,732 shares. Shares will
be deemed to have been issued under the 2020 Plan solely to the extent actually issued and delivered pursuant to an award. If any award
granted under the 2019 Plan or the 2020 Plan expires, is cancelled, or terminates unexercised or is forfeited, the number of shares subject
thereto is again available for grant under the 2020 Plan. The 2020 Plan shall continue in effect, unless sooner terminated, until the
tenth (10th) anniversary of the date on which it is adopted by the Board of Directors.
Stock-based Compensation
The Company’s stock option compensation expense was $5.6 million and $1.9
million for the years ended December 31, 2021 and 2020, respectively, and there was $3.7 million of total unrecognized compensation cost
related to unvested options granted under the Company’s options plans as of December 31, 2021. This stock option expense will be
recognized through 2025.
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 following table summarizes the Company’s
assumptions used in the valuation of options granted during the year ended December 31, 2021:
| Volatility | |
40% |
| Risk-free interest rate | |
1.10% – 1.63% |
| Dividend yield | |
0.00% |
| 0% Expected life (years) | |
10 |
| Forfeiture rate | |
0.00% |
The following table summarizes the Company’s
assumptions used in the valuation of options granted during the year ended December 31, 2020:
| Volatility | |
| 40% – 60% | |
| Risk-free interest rate | |
| 0.37% – 0.78% | |
| Dividend yield | |
| 0.00% | |
| 0% Expected life (years) | |
| 5 – 10 | |
| Forfeiture rate | |
| 0.00% | |
The Black-Scholes option-pricing model was developed
for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s
stock options and warrants have characteristics different from those of its traded stock, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of such stock options. The risk-free interest rate is based upon quoted market yields for
United States Treasury debt securities with a term similar to the expected term. The expected dividend yield is based upon the Company’s
history of having never issued a dividend and management’s current expectation of future action surrounding dividends. The Company
calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price
for a period consistent with the underlying instrument’s expected term. The expected lives for such grants were based on the simplified
method for employees and directors.
In arriving at stock-based compensation expense,
the Company estimates the number of stock-based awards that will be forfeited due to employee turnover. The Company’s forfeiture
assumption is based primarily on its 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 the Company’s 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 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.
Stock Option Activity
As of December 31, 2021, there were 311,823 shares
available to be granted under the Company’s 2020 Plan.
The following table presents option activity
under the Company’s stock option plans for the years ended December 31, 2020 and 2021:
| (Dollar Amounts, Excluding Exercise Price, in Thousands) | |
Number of
Options | | |
Weighted
Average
Exercise
Price | | |
Aggregate
Intrinsic
Value | |
| Options outstanding at December 31, 2019 | |
| 493,102 | | |
$ | 3.16 | | |
$ | — | |
| Granted | |
| 3,433,941 | | |
| 3.49 | | |
| | |
| Exercised | |
| — | | |
| — | | |
| | |
| Forfeited/Expired/Cancelled | |
| (793,934 | ) | |
| 3.20 | | |
| | |
| Options outstanding at December 31, 2020 | |
| 3,133,109 | | |
$ | 3.51 | | |
$ | — | |
| Granted | |
| 1,520,017 | | |
| 12.13 | | |
| | |
| Exercised | |
| (657,620 | ) | |
| 3.23 | | |
| | |
| Forfeited/Expired/Cancelled | |
| (431,217 | ) | |
| 3.98 | | |
| | |
| Options outstanding at December 31, 2021 | |
| 3,564,289 | | |
$ | 7.18 | | |
$ | 12,527 | |
| | |
| | | |
| | | |
| | |
| Options vested and exercisable as of December 31, 2021 | |
| 1,841,558 | | |
$ | 5.20 | | |
| | |
| Options vested and expected to vest as of December 31, 2021 | |
| 3,340,131 | | |
$ | 7.04 | | |
| | |
The following table summarizes information about
options vested and exercisable at December 31, 2021:
| |
|
|
Options Vested and Exercisable |
|
| Price ($) |
|
|
Number of
Options |
|
|
Weighted Average
Remaining Contractual
Life (Years) |
|
|
Weighted Average
Exercise Price |
|
| $ |
2.28 |
|
|
|
790,497 |
|
|
|
8.39 |
|
|
$ |
2.28 |
|
| $ |
4.86 |
|
|
|
755,402 |
|
|
|
8.81 |
|
|
$ |
4.86 |
|
| $ |
13.84-$14.49 |
|
|
|
295,659 |
|
|
|
9.14 |
|
|
$ |
13.86 |
|
The following table summarizes information about
options expected to vest after December 31, 2021:
| |
|
|
Options Vested to
Expected to Vest |
|
| Price ($) |
|
|
Number of
Options |
|
|
Weighted
Average
Remaining Contractual
Life (Years) |
|
|
Weighted Average
Exercise Price |
|
| $ |
2.28 |
|
|
|
1,023,122 |
|
|
|
8.39 |
|
|
$ |
2.28 |
|
| $ |
4.86 |
|
|
|
1,084,119 |
|
|
|
8.82 |
|
|
$ |
4.86 |
|
| $ |
7.68-$9.20 |
|
|
|
234,070 |
|
|
|
9.35 |
|
|
$ |
7.96 |
|
| $ |
13.84-$18.61 |
|
|
|
998,820 |
|
|
|
9.16 |
|
|
$ |
14.05 |
|
Warrants
As of December 31, 2021, warrants to purchase
271,844 shares of common stock were outstanding. The following table presents the Company’s warrant activity for the years
ended December 31, 2021 and 2020:
| | |
Number
of Warrants | | |
Weighted
Average
Exercise
Price | |
| Warrants outstanding at December 31, 2019 | |
| — | | |
$ | — | |
| Granted | |
| 828,171 | | |
| 0.02 | |
| Exercised | |
| — | | |
| — | |
| Warrants outstanding at December 31, 2020 | |
| 828,171 | | |
$ | 0.02 | |
| Granted | |
| 377,968 | | |
| 0.02 | |
| Exercised | |
| (934,295 | ) | |
| 0.02 | |
| Warrants outstanding at December 31, 2021 | |
| 271,844 | | |
$ | 0.02 | |
The Company received proceeds from the exercise of warrants of $8 thousand
during the year ended December 31, 2021. No warrants were exercised during the year ended December 31, 2020.
Subsequent to December 31, 2021, the Company completed a
private placement of our common stock and entered into a securities purchase agreement. Both of these arrangements include warrant issuance
provisions. On January 25, 2022, the Company issued a total of 4,586,389 warrants in connection with the private placement entered into
with an institutional investor and other accredited investors. The warrant issuance included 1,570,644 pre-funded warrants, with an exercise
price of $0.001, and 3,015,745 warrants with exercise prices ranging between $6.80 and $6.90. On March 23, 2022, the Company issued a
total of 6,881,108 warrants in connection with its entrance into a securities purchase agreement with an accredited investor. The warrants
issued have an exercise price of $6.75. Refer to Note 23 – Subsequent Events included elsewhere in the notes to the consolidated
financial statements.
Note 18 — Employee Benefit Plan
The Company maintains an employee’s savings
and retirement plan under Section 401(k) of the Internal Revenue Code (the “401k Plan”). All full-time U.S. employees
become eligible to participate in the 401k Plan. The Company’s contribution to the 401k Plan is discretionary. During the years
ended December 31, 2021 and 2020, the Company did not contribute to the 401k Plan.
Note 19 — Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief
and Economic Security (CARES) Act was enacted and signed into law. U.S. GAAP requires recognition of the tax effects of new legislation
during the reporting period that includes the enactment date. The CARES Act includes changes to the tax provisions that benefits business
entities and makes certain technical corrections to the 2017 Tax Cuts and Jobs Act. The tax relief measures for businesses include a
five-year net operating loss carryback, suspension of the annual deduction limitation of 80% of taxable income from net operating losses
generated in a tax year beginning after December 31, 2017, changes to the deductibility of interest, acceleration of alternative minimum
tax credit refunds, payroll tax relief, and a technical correction to allow accelerated deductions for qualified improvement property.
The CARES Act also provides other non-tax benefits to assist those impacted by the COVID-19 pandemic. The Company evaluated the impact
of the CARES Act and determined that its adoption did not have a material impact to the income tax provision for the years ended December
31, 2021 or December 31, 2020, respectively.
For the period ended December 31, 2021, the Company
recorded a tax provision of approximately $25 thousand, comprised of its change in deferred tax liability during the year related to its
indefinite lived intangible asset balance. The indefinite lived intangibles are not all available as a source of income and thus are not
fully available to offset the Company’s deferred tax assets. As of December 31, 2021, the Company has federal and state net operating
loss carryforwards of approximately $52.2 million and $28.9 million, respectively. The Company has not yet filed its federal and state
tax returns for 2018, 2019, or 2020. The net operating loss carryforwards for United States income taxes may be available to reduce future
years’ taxable income. Management believes that the realization of the benefits from these losses appears not more than likely due
to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company
has provided a 100% valuation allowance on its net operating loss carryforward deferred tax assets to reduce the assets to zero. Management
will review this valuation allowance periodically and make adjustments as necessary.
The following table summarizes the significant
differences between the U.S. Federal statutory tax rate and the Company’s effective tax rate for financial statement purposes for
the years ended December 31, 2021 and 2020:
| | |
December 31, |
| | |
2021 | |
2020 |
| US Federal statutory tax rate | |
| 21.00 | % | |
| 21.00 | % |
| State taxes | |
| 3.8 | % | |
| 3.0 | % |
| Permanent differences and other | |
| 0.1 | % | |
| 0.0 | % |
| Debt extinguishment | |
| 1.7 | % | |
| (5.5 | )% |
| Derivative liabilities | |
| 0.0 | % | |
| (2.8 | )% |
| Debt discount | |
| 0.0 | % | |
| (6.3 | )% |
| Prior period adjustments to opening deferred tax | |
| 2.2 | % | |
| 0.0 | % |
| Stock-based compensation | |
| (2.4 | )% | |
| 0.0 | % |
| Change in valuation allowance | |
| (26.4 | )% | |
| (9.4 | )% |
| | |
| 0.00 | % | |
| 0.00 | % |
The tax effects of temporary differences that
give rise to deferred tax assets and liabilities as of December 31, 2021 and 2020 are summarized as follows:
| | |
December 31, | |
| (Dollar Amounts in Thousands) | |
2021 | | |
2020 | |
| Net operating loss carryforward | |
$ | 12,565 | | |
$ | 4,324 | |
| Accruals, reserves, and other | |
| 2,529 | | |
| — | |
| Stock-based compensation | |
| 491 | | |
| — | |
| Research and development tax credit carryforward | |
| 571 | | |
| — | |
| Lease liability | |
| 333 | | |
| — | |
| Total deferred tax assets | |
| 16,489 | | |
| 4,324 | |
| Valuation allowance | |
| (13,852 | ) | |
| (3,077 | ) |
| Net deferred tax assets | |
$ | 2,637 | | |
$ | 1,247 | |
| Fixed assets | |
| (144 | ) | |
| (24 | ) |
| Intangible assets | |
| (1,888 | ) | |
| 26 | |
| Debt discount | |
| — | | |
| (1,249 | ) |
| Right of use asset | |
| (323 | ) | |
| — | |
| Deferred commissions | |
| (307 | ) | |
| — | |
| Total deferred tax liabilities | |
$ | (2,662 | ) | |
$ | — | |
| Net deferred tax liabilities | |
$ | (25 | ) | |
$ | — | |
The Company recognizes federal and state deferred
tax assets or liabilities based on the Company’s estimate of future tax effects attributable to temporary differences and carryovers.
The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available
evidence and judgment, are not expected to be realized. In assessing the realizability of deferred tax assets, the Company considers whether
it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.
The Company considers projected future taxable income and planning strategies in making this assessment. As of December 31, 2021, as a
result of a three-year cumulative loss and recent events, the Company concluded that a full valuation allowance was necessary to offset
its deferred tax assets. The Company also has indefinite lived intangibles and goodwill which generate a deferred tax liability that is
not available to fully offset its deferred tax assets due to uncertainty as to when the deferred tax liability will reverse as a source
of taxable income. As a result, the Company is in a net deferred tax liability position as of December 31, 2021. The Company intends to
maintain a valuation allowance until sufficient positive evidence exists to support its reversal. The Company will continue to evaluate
its deferred tax balances to determine any assets that are more likely than not to be realized.
As of December 31, 2021, the Company had federal
and state income tax net operating loss carryovers $52.2 million and $28.9 million, respectively. Of the federal balance, approximately
$675 thousand will expire if not utilized by 2037 and $51.5 million carry forward indefinitely but are only available to offset 80% of
taxable income per year. As of December 31, 2021, the Company also had federal research credits of approximately $571 thousand that will
expire if not utilized by 2041. The utilization of the Company’s net operating loss carryforwards and research tax credit carryovers
could be subject to annual limitations under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state tax provisions
due to ownership change limitations that may have occurred previously or that could occur in the future. These ownership changes limit
the amount of net operating loss carryforwards and other deferred tax assets that can be utilized to offset future taxable income and
tax, respectively. In general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership
of certain stockholders or public groups in the stock of the corporation by more than 50 percent points over a three-year period. The
Company has not conducted an analysis of an ownership change under section 382. To the extent that a study is completed, and an ownership
change is deemed to occur, the Company’s net operating losses and tax credits could be limited.
The Company does not have any uncertain tax positions
or events leading to uncertainty in a tax position. The Company’s 2016 through 2021 corporate income tax returns are subject to
Internal Revenue Service examination. In addition, to the extent that tax attributes are utilized in future years to offset taxable income
or income taxes, the IRS and state taxing authorities have the ability to examine the years in which those attributes were generated
and adjust the attributes.
Note 20 — Net Loss Per Share
Net loss per share calculations for all periods
have been adjusted to reflect the reverse stock split effected on January 12, 2021. Net loss per share was calculated based on the weighted
average number of common stock then outstanding.
Basic net loss per share is calculated using
the weighted-average number of common shares outstanding during the periods. Net loss per share, assuming dilution, is calculated using
the weighted-average number of common shares outstanding and the dilutive effect of all potentially dilutive securities, including common
stock equivalents and convertible securities. Net loss per share, assuming dilution, is equal to basic net loss per share because the
effect of dilutive securities outstanding during the periods, including options and warrants computed using the treasury stock method,
is anti-dilutive.
The components of basic and diluted net loss
per share were as follows:
| |
Year
ended
December 31, | |
| (Dollar
Amounts, Excluding Per Share Amounts, in Thousands) | |
2021 | | |
2020 | |
| Numerator: | |
| | |
| |
| Net loss attributable
to Agrify Corporation | |
$ | (32,465 | ) | |
$ | (21,617 | ) |
| Accrued
dividend attributable to Preferred A Stockholders | |
| (61 | ) | |
| (583 | ) |
| Net loss
available for common shareholders | |
$ | (32,526 | ) | |
$ | (22,200 | ) |
| Denominator: | |
| | | |
| | |
| Weighted-average common shares
outstanding – basic and diluted | |
| 19,090,932 | | |
| 4,175,867 | |
| Net loss
per share attributable to common stockholders – basic and diluted | |
$ | (1.69 | ) | |
$ | (5.32 | ) |
As of December 31, 2021 and 2020, the Company
excluded the following securities from net loss per share as the effect of including them would have been anti-dilutive. The shares shown
represent the number of shares of common stock which would be issued upon conversion in the respective years shown below:
| | |
Year ended
December 31, | |
| | |
2021 | | |
2020 | |
| Options outstanding | |
| 3,564,289 | | |
| 3,133,109 | |
| Warrants outstanding | |
| 271,844 | | |
| 828,173 | |
| | |
| 3,836,133 | | |
| 3,961,282 | |
Note 21 — Commitments and Contingencies
Leases
The determination if any arrangement contained
a lease at its inception was done based on whether or not the Company has the right to control the asset during the contract period.
The lease term was determined assuming the exercise of options that were reasonably certain to occur. Leases with a lease term of 12
months or less at inception were not reflected in the Company’s balance sheet and those lease costs are expensed on a straight-line
basis over the respective term. Leases with a term greater than 12 months were reflected as non-current right-of-use assets and current
and non-current lease liabilities in the Company’s consolidated balance sheets.
As the implicit interest rate in its leases was
generally not known, the Company’s used its incremental borrowing rate as the discount rate for purposes of determining the present
value of its lease liabilities. At December 31, 2021, the Company’s weighted average discount rate utilized for its leases was
7.16%.
When a contract contained lease and non-lease
elements, both were accounted as a single lease component.
The Company had several non-cancellable 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-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 common area maintenance associated with the property.
Additional information of the Company’s lease
activity, for the years ended December 31, 2021 and 2020, is as follows:
| (Dollar Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Operating lease cost | |
$ | 396 | | |
$ | — | |
| Finance lease cost: | |
| | | |
| | |
| Amortization of right-of-use assets | |
| 179 | | |
| 75 | |
| Interest on lease liabilities | |
| 42 | | |
| 22 | |
| Short-term lease cost | |
| — | | |
| 240 | |
| Total lease cost | |
$ | 617 | | |
$ | 337 | |
| | |
| | | |
| | |
| Weighted-average remaining lease term – finance leases | |
| 3.11 years | | |
| 3.95 years | |
| Weighted-average remaining lease term – operating leases | |
| 2.36 years | | |
| — | |
| Weighted-average discount rate – finance leases | |
| 8.03 | % | |
| 8.11 | % |
| Weighted-average discount rate – operating leases | |
| 6.29 | % | |
| — | % |
| (Dollar Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| | |
| | |
| |
| Right-of-use assets, net | |
$ | 1,859 | | |
$ | 544 | |
| | |
| | | |
| | |
| Operating lease liabilities, current | |
| 814 | | |
| — | |
| Operating lease liabilities, non- current | |
| 704 | | |
| — | |
| Total operating lease liabilities | |
$ | 1,518 | | |
$ | — | |
| | |
| | | |
| | |
| Finance lease liabilities, current | |
$ | 156 | | |
$ | 148 | |
| Finance lease liabilities, non- current | |
| 293 | | |
| 434 | |
| Total finance lease liabilities | |
$ | 449 | | |
$ | 582 | |
Maturities of operating and finance lease liabilities
as of December 31, 2021 are as follows:
| (Dollar Amounts in Thousands) |
|
Operating
leases |
|
|
Finance
leases |
|
| For the year ending December 31, |
|
|
|
|
|
|
| 2022 |
|
$ |
833 |
|
|
$ |
186 |
|
| 2023 |
|
|
471 |
|
|
|
159 |
|
| 2024 |
|
|
171 |
|
|
|
97 |
|
| 2025 |
|
|
107 |
|
|
|
51 |
|
| 2026 |
|
|
63 |
|
|
|
15 |
|
| Total minimum lease payments |
|
|
1,645 |
|
|
|
508 |
|
| Less imputed interest |
|
|
(127 |
) |
|
|
(59 |
) |
| Total lease liabilities |
|
$ |
1,518 |
|
|
$ |
449 |
|
Legal Proceedings
On January 5, 2021, the Company received a demand
letter from Nicholas Cooper and Richard Weinstein (two of the Company’s former employees) and one of Mr. Cooper’s affiliated
entities, asserting that Messrs. Cooper and Weinstein were entitled to compensation arising out of their employment by the Company, and
their partial ownership of TriGrow Systems, LLC. The demand letter asserts that the former employees are due certain sales commissions
under their applicable bonus plan, equity earn-outs based on certain sales targets, and various equity purchases through the Company’s
employee stock ownership plan. The demand letter also asserts various employment claims, including but not limited to, statutory wage
withholding violations, wrongful termination, breach of contract, breach of the duty of good faith and fair dealing, fraud in the inducement,
promissory estoppel, minority shareholder oppression, breach of fiduciary duty, unjust enrichment, and violations of state and federal
securities laws.
On January 19, 2021, Messrs. Cooper and Weinstein
filed a lawsuit against the Company in the United States District Court for the Western District of Washington, alleging the same claims
made in their demand letter based on the facts disclosed above. The plaintiffs are seeking relief in the form of monetary damages in an
amount to be determined. Messrs. Cooper and Weinstein are also seeking relief in the form of reinstatement and Mr. Weinstein is seeking
rescission of his Release of Claims Agreement. On March 10, 2021, the Company moved to dismiss all Cooper and Weinstein’s claims,
asserting that the claims failed to allege legal grounds for relief. On May 12, 2021, a Magistrate issued a preliminary Report and Recommendation,
which recommended dismissal of certain of Cooper and Weinstein’s claims, and recommended others for additional factual discovery.
On July 27, 2021, a District Judge entered an order partially adopting the Report and Recommendation, dismissing one claim with prejudice,
dismissing a second claim with leave to amend, and permitting the remaining claims to proceed.
Additionally, on July 29, 2021, the Company filed
a separate arbitration in Boston, Massachusetts against Cooper and Weinstein, in which the Company alleges that Cooper and Weinstein
were liable for certain conduct during the time they were TriGrow employees, including breach of fiduciary duty, unjust enrichment, usurpation
of corporate opportunity, conversion, fraudulent concealment, and false representation. Also on July 29, 2021, the Company submitted
a claim for indemnification to certain legacy TriGrow Systems, LLC. shareholders. The claim for indemnification relates to conduct
by Cooper and Weinstein during the time they were TriGrow employees. The Company does not believe these claims have any merit and intend
to vigorously defend against them.
Supply Agreement with Mack Molding Co.
In December 2020, the Company entered into a
five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack will become a key supplier of VFUs. In February
2021, the Company placed a purchase order with Mack amounting to approximately $5.2 million towards initial production of VFUs during
2021. In September 2021, the Company increased the purchase order with Mack to approximately $11.5 million towards production of VFUs
during 2021 and 2022. The Company believes the supply agreement with Mack will provide the Company with increased scaling capabilities
and the ability to more efficiently meet the potential future demand of its customers. The supply agreement contemplates that, following
an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack
each year based on the agreed upon pricing formula. The introductory period is not time-based but rather refers to the production of
an initial number of units after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage.
The Company believes this approach will result in both parties making a more informed decision with respect to the pricing and other
terms of the supply agreement with Mack.
Distribution Agreements with Related Parties
On September 7, 2019, the Company entered into
a distribution agreement with Bluezone for distribution rights to the Bluezone products with certain exclusivity rights. The agreement
requires minimum purchases amounting to $480 thousand and $600 thousand for the first and second contract anniversary years. The agreement
auto renews for successive one-year periods unless earlier terminated. In March 2021, the Company notified Bluezone of non-renewal of
the agreement which means it ended on May 31, 2021. The Company exceeded the minimum purchase amount for the first year and purchased
approximately $309 thousand of the committed $660 thousand second year purchases through December 31, 2021. Bluezone is a related party
to the Company.
On March 9, 2020, the Company entered into a distribution
agreement with Enozo Technologies Inc. (“Enozo”), for an initial term of five years with auto renewal for successive one-year
periods unless earlier terminated. The agreement contains the following minimum purchases to retain exclusive distributor status for one
of the Company’s products: for the period from the contract date until December 31, 2021 for $375 thousand, for the year ended December
31, 2022 for $750 thousand, and for the year ended December 31, 2023 for $1.1 million, which amount may increase by 3% for the later years.
The Company had $40 thousand in purchases of Enozo product for the year ended December 31, 2021, compared to $38 thousand for the year
ended December 31, 2020. Enozo is a related party to the Company.
Committed Purchase Agreement with Related Parties
4D Bios, Inc.
On September 18, 2021, the Company entered into an amended purchase
agreement with 4D Bios, Inc. (“4D”) to secure purchases of horticultural equipment. The original agreement required minimum
purchases of between $577 dollars and $607 dollars per unit of 4D products until December 31, 2020. The amended agreement requires minimum
purchases of $582 dollars per unit with a final payment of approximately $864 thousand paid to 4D. 4D is a related party to the Company.
For the year ended December 31, 2020, the Company’s purchase
commitment totaled $1.9 million. The Company settled all outstanding commitments, leaving no open committed purchases as of December
31, 2021.
Greenstone Holdings
On December 29, 2021, Greenstone
Holdings purchased 239 VFUs from the Company of which 60 VFUs were already in Greenstone Holdings possession under a lease agreement.
Under the lease agreement, Greenstone Holdings owed Agrify a production service fee of $300 per pound of flower produced and contained
an option to purchase the equipment within the lease agreement. The term of this agreement was for ten years but was terminated upon signing
the purchase agreement for the 239 VFUs. The remaining 179 VFUs were shipped to Greenstone Holdings storage facility on December 30, 2021
and December 31, 2021.
Note 22 — 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.
The following table describes the net purchasing
(sales) activity with entities identified as related parties to the Company:
| | |
Year ended
December 31, | |
| (Dollar Amounts in Thousands) | |
2021 | | |
2020 | |
| Bluezone | |
$ | 309 | | |
$ | 694 | |
| 4D Bios (1) | |
| 1,312 | | |
| 1,128 | |
| Enozo | |
| 40 | | |
| 123 | |
| Cannae Policy Group | |
| 50 | | |
| — | |
| Topline Performance Solutions | |
| 11 | | |
| — | |
| Valiant Americas, LLC. | |
| 6,048 | | |
| 7,085 | |
| Cannaquip | |
| 209 | | |
| — | |
| NEIA | |
| (22,010 | ) | |
| (3,916 | ) |
| Greenstone Holdings | |
| (9,429 | ) | |
| (9 | ) |
| Living Green Farm | |
$ | (58 | ) | |
$ | — | |
The following table summarizes net related party
(payable) receivable as of December 31, 2021 and December 31, 2020:
| (Dollar Amounts in Thousands) | |
December 31,
2021 | | |
December 31,
2020 | |
| Bluezone | |
$ | — | | |
$ | 7 | |
| Cannae Policy Group | |
| (8 | ) | |
| — | |
| Cannaquip | |
| (21 | ) | |
| — | |
| Greenstone Holdings | |
| 11,177 | | |
| — | |
| Living Green Farm | |
| 34 | | |
| — | |
| NEIA | |
| 3,500 | | |
| 1,665 | |
| Valiant Americas, LLC. | |
$ | (922 | ) | |
$ | 4,246 | |
Note 23 — Subsequent Events
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 (i) 2,450,350 shares (the “Shares”) of the Company’s common stock,
par value $0.001 per share (the “Common Stock”), (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase
up to an aggregate of 1,570,644 shares of Common Stock and (iii) warrants to purchase up to an aggregate of 3,015,745 shares of Common
Stock (the “Common Warrants” and, collectively with the Pre-Funded Warrants, the “Warrants”), in a private
placement offering. The combined purchase price for one share of Common Stock (or one Pre-Funded Warrant) and accompanying fraction
of a Common Warrant was $6.80.
Subject to certain ownership limitations, the
Warrants are exercisable six months from issuance. Each Pre-Funded Warrant is exercisable into one share of Common Stock at a price per
share of $0.001 (as adjusted from time to time in accordance with the terms thereof). Each Common Warrant is exercisable into one share
of Common Stock at a price per share of $7.48 (as adjusted from time to time in accordance with the terms thereof) and will expire on
the fifth anniversary of the initial exercise date.
Raymond Chang, Chairman and Chief Executive Officer
of the Company, and Stuart Wilcox, a member of the Company’s Board of Directors, participated in the private placement on the same
terms as other investors except for a combined purchase price of $6.90.
The gross proceeds to the Company from the private
placement were approximately $27.3 million, before deducting the placement agent’s fees and other offering expenses, and excluding
the proceeds, if any, from the exercise of the Warrants.
Acquisition of Lab Society; Purchase Consideration
On February 1, 2022,
the Company 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 the Company (“Merger Sub”), Michael S. Maibach Jr. as the
Owner Representative thereunder, and each of the shareholders of Lab Society (collectively, the “Owners”), pursuant to which
the Company agreed to acquire Lab Society. Concurrently with the execution of the Merger Agreement, the Company consummated the merger
of Lab Society with and into Merger Sub, with Merger Sub surviving such merger as a wholly owned subsidiary of the Company (the “Lab
Society Acquisition”).
The aggregate consideration
for the Lab Society Acquisition consisted of: (a) $4.0 million in cash, subject to certain adjustments for working capital, cash and
indebtedness of Lab Society at closing; (b) 425,611 shares of the Company’s common stock (the “Buyer Shares”); and
(c) the Earn-out Consideration (as defined below), to the extent earned.
The Company withheld
127,682 of the Buyer Shares issuable to the Owners (the “Holdback Lab Buyer Shares”) for the purpose of securing any post-closing
adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the
Merger Agreement. The Holdback Lab Buyer Shares shall be released following the twelve (12) month anniversary of the Closing Date in
accordance with and subject to the conditions of the Merger Agreement.
The Merger Agreement
includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Owners may become entitled
to additional consideration with a value of up to $3.5 million based on the eligible net revenues achieved by the Lab Society business
during the fiscal years ending December 31, 2022 and December 31, 2023, of which 50% will be payable in cash and the remaining 50% will
be payable by issuing shares of the Company’s common stock.
Securities Purchase Agreement
On March 14, 2022,
the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with an accredited investor
(the “Investor”), pursuant to which, among other things, the Company agreed to issue and sell to the Investor, in a private
placement transaction (the “Private Placement”), in exchange for the payment by the Investor of $65 million, less applicable
expenses as set forth in the Securities Purchase Agreement, (i) a senior secured promissory note in an aggregate principal amount
of $65 million (the “Note”), and (ii) a warrant (the “Warrant”) to purchase up to an aggregate of 6,881,108
shares of common stock of the Company, par value $0.001 per share (“Common Stock”).
The Note will be a senior
secured obligation of the Company and ranks senior to all indebtedness of the Company. The Company will be required to make amortization
payments equal to 4.0% of the original principal amount of the Note on the first day of each calendar month starting on February 1, 2023
and extending through the maturity date of March 1, 2026 (the “Maturity Date”), at which time all remaining outstanding principal
and accrued but unpaid interest will be due. The Note will have a stated interest rate of 6.75% per annum, and the Company will be required
to pay interest on March 1, June 1, September 1 and December 1 of each calendar year through and including the Maturity Date. Following
the one-year anniversary of the Note’s issuance, the Company may, in lieu of paying interest in cash, pay such interest in kind,
in which case interest on the Note will be calculated at the rate of 8.75% per annum and will be added to the principal amount of the
Note.
At any time following the
one-year anniversary of the Note’s issuance, the Company may prepay all (but not less than all) of the Note by redemption at a price
equal to 106.75% of the then-outstanding principal amount under the Note plus accrued but unpaid interest. The Investor will also have
the option of requiring the Company to redeem the Note if the Company undergoes a fundamental change at a price equal to 107% of the then-outstanding
principal amount under the Note plus any accrued interest thereon.
The Securities Purchase
Agreement provides for up to two additional closings subject to certain conditions set forth in the Securities Purchase Agreement and
on substantially the same terms as the initial closing. Each subsequent closing would result in the issuance of a senior secured note
with an original principal amount of $35.0 million and warrants to purchase shares of Common Stock equal to 65% of such principal amount
divided by the closing price of the Common Stock on the trading day immediately prior to such subsequent closing.
The Note will impose certain
customary affirmative and negative covenants upon the Company, as well as covenants that (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, (iii) restrict the declaration
of any dividends or other distributions, subject to specified exceptions, (iv) require the Company to maintain specified earnings
and adjusted EBITDA targets, and (v) require the Company to maintain minimum amounts of cash on hand. If an event of default under
the Note occurs, the Investor can elect to redeem the Note for cash equal to 115% of the then-outstanding principal amount of the Note
(or such lesser principal amount accelerated by the Investor), plus accrued and unpaid interest, including default interest, which accrues
at a rate per annum equal to 15% from the date of a default or event of default.
Until the date the Note
is fully repaid, the Investor will, subject to certain exceptions, have the right to participate for up to 30% of any debt, preferred
stock or equity-linked financing of the Company or its subsidiaries.
Each Warrant to be issued
in the initial closing will have an exercise price of $6.75 per share, subject to adjustment for stock splits, reverse stock splits, stock
dividends and similar transactions, will be immediately exercisable, 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 Warrant (the “Warrant Shares”), in which case the Warrant shall also be exercisable on a cashless exercise
basis at the Investor’s election. The Securities Purchase Agreement requires the Company to file resale registration statements
with respect to the Warrant Shares as soon as practicable and in any event within 45 days following the initial closing and any subsequent
closings.
The Warrant will provide
that in no event will the number of shares of Common Stock issued upon exercise of the Warrant result in the Investor’s beneficial
ownership exceeding 4.99% of the Company’s shares outstanding at the time of exercise (which percentage may be decreased or increased
by the Investor, but to no greater than 9.99%, and provided that any increase above 4.99% will not be effective until the sixty-first
(61st) day after notice of such request by the Investor to increase its beneficial ownership limit has been delivered to the Company).
The Securities Purchase
Agreement also contains customary representations and warranties of the Company and the Investor. There is no material relationship between
the Company or its affiliates and the Investor other than in respect of the Securities Purchase Agreement, the Note and the Warrant.
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