RYM - NASDAQ

Good morning and welcome to Agrify’s First Quarter 2021 Earnings Call. With us in today’s call are Raymond Chang, Chief Executive Officer; David Kessler, Chief Science Officer; and Niv Krikov, Chief Financial Officer. Today, management will review the highlights and financial results for the first quarter as well as three side developments and provide a business and operational update. Following management’s prepared remarks, there will be a question-and-answer session. A reminder, that this conference is being recorded. Before we begin, we would like to remind everyone that prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, which are outside the company’s control that could cause its future results, performance or achievements to differ significantly from the results, performance or achievements expressed or amplified by such forward-looking statements. Important factors that could cause or contribute to such differences include risks detailed in our public filings with the Securities and Exchange Commission and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein rather as a result of new information, future events or otherwise. Now, at this time, it is my pleasure to turn the call over to Mr. Raymond Chang, Agrify’s CEO. Please go ahead, Mr. Chang.

Thank you, operator. Before we get started, I would like to thank everyone for joining us on the call today. During this call, I will provide an update on our continued successful execution of our growth strategy. And I will also highlight some recent noteworthy company developments that we are excited about. Our Chief Science Officer, David Kessler will detail our recent customer successes and some of our latest research and development initiatives and results. And my CFO, Niv Krikov will also review our financial results. Agrify entered 2021 with positive momentum, which drove a strong financial performance for the quarter. And I am extremely pleased to report that we achieved record quarterly company revenue of $7 million for Q1 of 2021, representing a 600% increase over Q1 2020 revenue and a consecutive quarterly increase of 60% from $4.4 million in Q4 of 2020. During the quarter, we have also focused heavily on building our sales pipeline. And we successfully increased our customer backlog by more than 38% to over $82 million from $59 million at the end of Q4 2020. The strong improvement we are seeing in our financial results is driven by the continuous successes we are seeing from our existing customers’ facilities, resulting in not only a growing pipeline of opportunities, but also in customer reengagements for expanded partnership. I am proud to share that as of today, we have expanded our partnerships with every single one of our product customers, with 3 of our 4 legacy customers purchasing additional products and services and the fourth in events discussions. Yes, we are talking about 100% reengagement with all of our customers. This is by far the strongest testimony of Agrify delivering value. And not only are our customers returning, but we are also expanding the scope of our partnership and further aligning our interests while generating high-recurring SaaS and production based success fees. As a result of these new and expanded engagements, we increased the expected annual recurring revenue of our early customers for $1.2 million of annual SaaS to over $10 million of estimated high margin recurring SaaS and production-based success fees. This represents over an 800% increase in the lifetime value of these customers. I would now like to turn the line over to my Chief Science Officer, David Kessler, who will share more on the reason why our customers have been so pleased with our solutions.

Thank you, Raymond. As you can see, the results our customers are experiencing following the implementation of our VFU solution has been outstanding. Data, science and technology drive everything we do at Agrify. For example, one of our clients achieved repeated levels of consistency across multiple strains, across multiple harvest batches, with less than 1% variation in the total cannabinoid profile and less than 0.01% variation in the terpene profile. This consistency, combined with exceptional quality, driven by a model of continuous improvement, allows them to sell their flower for prices 25% plus above the state average. With cannabinoid levels greater than 30% and terpene levels peaking at 5.4%, this client has penetrated the competitive Nevada dispensary landscape, including Planet 13, Green Thumb Industries, and Jardin amongst others. Catching in nearly $500 premium per pound, this client has built a reputation on producing exceptional flower in Agrify VFUs. As we continue to improve and enhance the performance of our VFUs, we are confident that we will be able to successfully deliver on our four fundamental missions: highest yield, highest consistency, highest quality, at the lowest possible cost. These missions drive success, because we win when our customers win. And I will now turn the call back to Raymond to discuss our first Agrify TTK Solution partner.

In mid-March, we announced that we have launched the industry’s total first Total Turn-Key Solution, otherwise known as Agrify TTK Solution. This is a first of its kind, where qualified strategic partners will gain access to the capital, best in kind cultivation equipment and world class expertise and support they need to quickly establish a cutting-edge indoor cultivation facility. Just last week, we announced that we had officially signed our first TTK partner, Bud & Mary’s. Interest in our TTK solution has been extremely high. And while we have allocated an initial $50 million capital towards this program, we are seeing interest at a 7x to 8x that level. This allows us to be incredibly selective with a vigorous vetting process to do our best to ensure we select qualified long-term partners with solid fundamentals, experienced team and operations in attractive states, with favorable regulatory landscapes. Our first partner, Bud & Mary’s is a vertically integrated operator in the state of Massachusetts, a Tier 4 license holder that is licensed for dispensary as well as home delivery and is backed by a group of successful entrepreneurs. Additionally, they had a brand new state-of-the-art 50,000 square foot facility, which is owned outright by their parent company, Bud & Mary’s LLC. The agreement will consist of a phased approach for the build-out of their facility, with the expected installation of 774 VFUs in the initial construction phase and up to an additional 426 VFUs installed in subsequent phrases. Under the terms of the agreement, Agrify will provide senior financing of up to $13.5 million for construction, which will be repaid within 24 months following the commencement of the first commercial production at the facility. Our senior position, give us a blanket security interest on all the assets and licenses of Bud & Mary’s. Under the terms, Agrify will receive 6 monthly SaaS revenue and equipment lease fees of $300 per month per VFU as well as additional production based fees that range from $600 to $700 per pound, depending on the yield. In the event, Bud & Mary’s managed to sell at a price higher than $3,000 Agrify would also enjoy our proportional upside. In the event that it is under, we would reduce our per pound price proportionally, but no less than $500 per pound minimum. We anticipate that this contract will result in over $28 million of revenue generation per year, once fully installed for up to 10 years. We are extremely excited to get our TTK partnership underway and are actively engaging with several more potential opportunities and expect to announce further partners throughout 2021. We believe this program will allow us to secure opportunities in the customer journey in the earlier part of the customer journey, increase adoption of our core technologies, accelerate recognition of yield-based and recurring SaaS revenue and achieve several times higher return on our investments. Our business is all about building largest possible install base and the TTK model allows us to work with the best partners, align our interests and secure and accelerate long-term high margin recurring revenues. I would now like to turn back the call to David who will share further on our exciting new research and development partnerships.

Data is an essential and powerful tool for Agrify. And to that end, we have entered into a binding letter of intent to partner with Atlantis Hydroponics to build a research and development facility in Georgia focused on the hemp industry. This facility will conduct research on increasing concentrations of particular phytochemicals and metabolites such as CBG, CBD, CBN and various terpenes via the manipulation of and control over abiotic elements of the growing environment, such as temperature, humidity and light spectrum. Agrify and our new partners at Atlantis Hydroponics believe this research will lead to a better understanding of chemotypic expression and ultimately, how to deliver safer and more consistent phyto-derived medicines and products. We anticipate having greater control over the chemotypic of the plant will be a key factor in producing higher market value products as the industry evolves and customers demand more CPG-like quality and consistency for both recreational and medical consumption. Maximizing the genetic potential of the cannabis plant involves two factors: nature and nurture. Agrify technology affords high fidelity control over the cultivation environment. But to complement this control over nurture, we are pleased to announce a partnership with Front Range Biosciences. This relationship will combine our cutting-edge indoor agricultural cultivation solution with Front Range Biosciences expertise in creating unique and exceptional cannabis and hemp cultivars. This partnership will leverage granularly controlled cultivation environment to elicit the best performance from unique cultivars and achieve maximum yield, consistency and terpene expression with minimal variant in the cannabinoid level. I will now turn the call back over to Raymond for an operational update.

As we continue to grow our customer relationships and rollout our TTK solution, we believe we are well equipped to rapidly scale our ability to produce and install our VFUs. Mack Molding is our first elected major contract manufacturer with over 1.5 million square feet of manufacturing space across North America in 11 different facilities. I am very pleased to announce that the first VFU coming out of Mack Moldings production line is expected to be in July. Currently, Mack Moldings has enough capacity to produce over 3,800 units per year, with additional capacity available on demand. We are also gearing up with our joint venture partner, Valiant-America on facility design and construction. Internally, we have also aggressively hired to have sufficient staff to install commission and service our VFUs. The ramp is expected to continue to meet our pent-up demand. Now, I will pass the call to Niv Krikov, my CFO, who will review the financial results.

Thank you, Raymond and good morning everyone. Today, I will provide you with an overview of our first quarter 2021 financial results. For the quarter ended March 31, 2021, total revenue increased by 600% to $7 million compared to $1 million for the same period in 2020. Our Q1 2021 revenue consisted of facility build-out in hardware revenue, including delivery of the new VFUs to a customer. Gross loss for the first quarter in 2021 was $540,000 compared to gross profit of $41,000 for the same period in 2020, resulting in gross loss margin of 7.7% for Q1 2021 compared to gross profit margin of 4% in 2020. Margins were impacted as a result of our strategic decision to accelerate the migration of VFU production to Mack Molding, our contract manufacturer in order to meet increasing demand and to move forward with the production of our superior version 3.6 VFUs. These migration cost from our in-house production facility are reported in cost of goods sold. Lastly, margins were also impacted by our decision to invest in customer success and reengagement to accelerate top line growth in 2022 and beyond. For 2021, we remain focused on building our install base. Once our install base grows, we will begin to recognize higher margin SaaS revenue and yield based production fees, resulting in margin improvements. SG&A for the first quarter of 2021 was $5.1 million, up from $2.3 million for the same period in 2020. Research and development costs were $900,000 for Q1 2021 compared to $1.2 million in Q1 2020. Total operating expenses for the quarter was $6 million compared to $3.5 million for the same period in 2020. And during the first quarter of 2021, operating expenses included a one-time expense of $1.5 million related to investing acceleration of stock options on the date of our initial public offering. Net loss attributed to Agrify for the first quarter 2021 was $3.8 million compared to $3.4 million in 2020. Adjusted EBITDA loss for the first quarter of 2021 was $4.2 million compared to adjusted EBITDA loss of $2.6 million in the same period of 2020. This concludes my remarks on the financials. I will turn the call back over to Raymond for closing remarks.

Thank you, Niv. During the first quarter of 2021, we continue to execute on our key strategic initiatives and growth strategy. We focused on customer success and ensure that our TTK solution meets our customers need. Now, with strong third-party data and a well-capitalized balance sheet, we are in a great position to aggressively capture market share. In addition to our Agrify-TTK, we continue to actively engage in dialogue with leading multi-state operators, the MSOs and we expect to submit partnerships in the not so long future. Lastly, with the strong momentum we are seeing, I am pleased to announce that we are increasing our full year revenue guidance to $48 million to $50 million. This is a 25% increase from our prior guidance of $40 million. With strong customer validation, key growth drivers in place and the right team to execute, we are more confident than ever in the future of Agrify. This concludes our remarks. Now, I would like to open the call for questions. Operator, please go ahead.

[Operator Instructions] We have our first question from the line of Scott Fortune from ROTH Capital Partners. Your line is now open.

Good morning, congrats on a great quarter. And thanks for the questions. Real quick, on the raised guidance from $40 million to $48 million to $50 million, can you provide a little more detail on the revenue mix in that guidance between facility projects, VFU installs and the TTK software and service segment. And then kind of since the margin outlook from a gross margin side, which was in guidance potentially?

Sure, Scott, happy to. As mentioned 2021, we are focusing on driving our top line, as well as the installed user base. So for this year, it will still be leaning more towards the facility constructions. However, what I want to say is that we are seeing an accelerated move to higher margin SaaS revenue, as well as production fees revenue. And I believe that mix is going to start to kick in a big way, starting from 2022 and beyond. Just to kind of give you an example, right, the re-engagements with the four existing customers, had originally only been a hardware sales, and just recurring SaaS revenue. However, we have moved every single one of them to not only hardware sales, plus recurring, and on top, very exciting propound based production success fees. So we believe that in 2022, and beyond, we are going to see an accelerated high margin recurring SaaS and production fees. And it’s going to basically dramatically shift our margins in the long run. 2021, we will continue to focus on our top line growth. And as you know, in this industry, there is always a 6 months to 9 months sort of lead on the facility built out. And that’s where we are focusing on today is building the install base. But starting from 2022, we are going to see a very exciting shift to the high margin recurring revenues.

Perfect, thanks. Another follow-up for me, you have done a great job with this TTK solution. Can you just step through kind of the vetting process, as you mentioned your interest here for that solution, that’s 7x to 8x larger than your cap $50 million level right now. And help us understand customers, instance willingness to give up 30%, or whatever the profits were to work with the Agrify TTK Solution, better understand that vetting process and what the customers are partnering with you guys from that standpoint?

Sure, Scott. So, we have developed a very rigorous scorecard as well as vetting process for our TTK partner selection. And as I mentioned, immediately follow our announcements. We are seeing so much interest that in fact, even though we currently committed only right now $15 million towards this program, the interest is easily 7x to 8x over. The rigorous vetting process includes obviously they have to have licenses. They have to have an existing building. They have to have host agreements. They have to have successful team. And they also have to have significant working capital to make sure that we truly together we can bring this project to fruition. So, just to give you a little background about our first partner Bud & Mary’s. So as mentioned, they are a Tier 4 license operator on the brand new facility in Bellingham, Massachusetts, 50,000 square feet. And the best part about the building is it’s got a super attractive, high ceiling which allows us to turn this 50,000 square feet to in excess of probably 80,000 – 90,000 square feet of canopy because of the height of the building. And we can actually double stack our VFU throughout the entire facility. We are also very attracted to Bud & Mary’s, not only because it has an experienced team, experienced cultivation operator, but they also have dispensary as well as a home delivery license here in Massachusetts. And obviously, they are also attracted to Agrify, because we are the industry’s first total solution provider. And in fact, they will probably, once they are way into building their facility in the traditional way. But they attended one of our webcast. And when we actually told them about the Agrify solution, their immediate reaction is, Oh, my gosh, we have to shift, because if we are actually going to basically compete against people who can actually produce CPG-like quality, Agrify is the right solution. And we are going to be working with them hand-in-hand, we are committing to have people in their facility to help them to build a state-of-the-art and world class cultivation facility. So again, the vetting process is extremely vigorous. We make sure that they have all licenses to have the facility, the right facility, and also operate in favorable markets, and have sufficient working capital to ensure that we can truly bring every project into fruition. And I am happy to basically share that more. But, we have scorecard it goes a very strong vetting process. And we are very proud of our selection of Bud & Mary’s as our first a total turn-key solution partner.

I appreciate it. Thanks for the color. I will jump back in the queue. Thanks.

Thank you. Our next question is from the line of Anthony Vendetti from Maxim Group. Please go ahead.

Thank you. Thanks, Raymond. Thanks, Niv and David for the commentary, it’s very helpful. Just to follow-up on the TTK solution, this program that you introduced. It’s been a well thrown out program from what I recall. And when you mentioned about the return on investment, I believe the IRR you calculated for most of these will be somewhere in the 40% to 50%. If you take into account the interest rate that they would pay on the loan as well as the annual SaaS revenue, and a percentage of the production this becomes an incredibly financially attractive partnership. And these are 10 year partnerships. Is that correct? Am I missing anything?

No. Anthony, you are absolutely correct. And the 40% to 50% IRR is kind of like our minimum threshold for these type of partnerships. And here is the key, Anthony, is not, when we talk to our partners, is not that, they are only looking for financial support. And in fact, a lot of them could have built out the facility on their own. The truth of the matter is what they are looking for to magnify. It’s really this turn-key aspect, right. We come and basically help them to build the facility, construct the facility correctly. Right, select the right design firm, the architectural firm, the engineering firm, and the general contractor, right. On top of that, we provide them with an integrated hardware and software solution that’s proven to work. And as you heard it earlier from David, we are seeing some really, really incredible results coming out of our customers. We have now data that shows that we can produce high quality flowers consistently and are allowing our customers to actually switch at a premium in the market, right. So, it’s not just looking for financial support, frankly speaking, if they are just looking for financial support, they could have just basically raised the money in equity or other debt instruments. But they are interested in partnering with Agrify, going into a 10 year partnership, because they know that our interests are completely aligned. They know that they have a partner that they can depend on. That will basically bring them to a complete success. And that’s the reason why they are willing to basically share this upside with us, because they figure what Agrify’s involvement, they can probably produce better quality, consistently, and probably have higher yield. And naturally, they are happy to share part of the upside with us. So, it’s indeed a mutually beneficial relationship that basically is set for 10 years.

Excellent. And then just, you mentioned about the low variability, and I think you had some data to show that in terms of your harvest, it’s very – they are very, very consistent because of all the systems you have in place to ensure that not just the success of the harvest and the yield, but the low variability, right. And it’s dramatically lower than the average cannabis grower, right. So, I was wondering if you can just give us a little bit of color of in terms of that data and how that differentiates you from the average grower?

Sure. And I will also ask David to jump in here, as well. But what we are seeing in the industry is that volatility and inconsistencies. These things are just killing the brands. Because consumers, what we are seeing, in fact David was at a Michigan conference earlier, whereby the question was asked, why is it that we get a lot of repeat customers, very rarely three key customers. And the answer is obvious, right. Consumers like the product the first time, they tried it again. And if you don’t give them the same consistency and quality, they switch, right. So Dave, do you want to come in here and basically talk about the level of consistency that we are seeing, and also the high quality and why is it that our customers switching higher price than most of the other operators?

I would be happy to Raymond and thank you for the question, everybody, understanding that Cannabis is an incredibly diverse phytochemical manufacturing plant. It produces over 545 different chemical compounds, and environment influences how much of each compound is actually produced. So, when 25 different growers were giving a genetically identical cutting, the results varied tremendously, the cannabinoid levels from 15% to 28%, and the terpene profile from less than 1% to over 5%. This exhibit and typifies how impactful the environment is actually influencing the chemo typic, or chemical output and expression. So, Agrify’s technology, which records almost 1 million data points per chamber per year, and has the ability to granularly reproduce those cultivation environments, essentially, minimize the level of chemical variation by controlling and recreating the exact perfect environment time and time again. And because every individual vertical farm unit or VFU is independent from all the others. Our operators are able to do iterative experiments, and gradually, but continuously and quickly improve their cultivation best practices to elicit the best results. And then they have the ability because of that data collection to repeat the exact environments time and time again. This is what leads to and drives that level of consistency, but also the iterative process that allows our customers to increase the quality and consistency of their flower more quickly than traditional cultivators that have very few limited rooms to learn about how to optimize their crop.

Thank you. That was very helpful Raymond and David. Just to follow-up a little bit on being able to charge a higher price, obviously, if you can produce a particular flower or particular cannabinoid with very, very low variability that seems to indicate you will obviously be able to get a higher price and particularly as this industry evolves, and brands try to compete with one another. It seems like that that would be a differentiating or competitive advantage for a company like Agrify that can provide that high consistency or low variability is that correct?

Anthony, you are absolutely correct. What we are doing and this is what I tell our customers, is we are helping them to pacify this industry. And what I mean by that is, consumers expect that every time they open a tin Pepsi, it tastes the same, it has the same effect. And this actually isn’t the whole true for the Cannabis industries as well. And our unique technology and solution offering that allow them to build strong brands that to have very loyal customer base, and to be able to deliver that level of consistency and quality, every single time. And this is not just a dream. This is something that as we have shown through our data, third-party validated data, that we are delivering this type of consistency and quality in such an early day of our development. And we believe that the quality and consistency are only going to improve over time.

Okay, it makes sense. And then just a question on the MSOs, it seems like this would be even more important to the larger operators. Can you talk about your discussions with the MSOs? And I know it’s a longer sales process. But can you give us a little bit of an idea of how those discussions are proceeding at this point?

The discussions are proceeding very, very well. And we are expecting to cement partnership, not so long future. The MSOs are excited about what we offer. And obviously they do have a more vigorous qualifying process. But however, the data that we are showing them is extremely, extremely compelling. And we are confident that we will be announcing partnership with the MSOs in not so long future. This is really kind of the technology, the Holy Grail for this industry, especially for the MSOs, because if they really want to build their brands, across different states. This is the technology that will help them to ensure that they can deliver the highest quality and consistency and yield across different state territories. So, we are very confident that we will be cementing these partnerships and look forward to announcing them in not so long distance future.

Okay, excellent. Just last question on the backlog, you mentioned the backlog increased to $82 million, it’s up 38%. Can you increase the guidance for this year from $48 million to $50 million? Can you just talk about the backlog number of $82 million, approximately what percent of that backlog should be recognized or expected to be recognized in the next 12 months?

Yes. So Anthony, we expect the majority of that backlog to be recognized in the next 12 months. As you know, the industry typically leads with a 9 months to 12 months construction period, and then installation of equipment. And then obviously the recurring – high margin recurring SaaS and production fees thereafter. We are very pleased to be able to say that we are increasing our guidance from $40 million to now $48 million to $50 million for 2021. And we do expect that the majority of the $83 million backlog that we share will also be recognized in the next 12 months.

Excellent. Thank you so much for all the color. I will hop back in the queue.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Chang.

I want to again thank everybody for attending the call today. And as mentioned, we believe that we are in the best shape ever in the history of the company and we are very excited about the strong momentum that we are seeing in the industry. And we look forward to reporting even more positive results in our next Q2 upcoming earnings call. This concludes my remark and look forward to speaking with everybody again in few months. Thank you and appreciate the time.