Item 7. Management’s Discussion and Analysis
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.
40
Overview
We
are one of the most innovative providers of advanced cultivation and extraction solutions for the cannabis industry, bringing data, science,
and technology to the forefront of the market. Our proprietary micro-environment-controlled Agrify VFUs enable cultivators to produce
the highest quality products with what we believe to be an unmatched consistency, yield, and Return on Investment at scale. Our comprehensive
extraction product line, which includes hydrocarbon, ethanol, solventless, post-processing, and lab equipment, empowers producers to
maximize the quantity and quality of extract required for premium concentrates.
Our
cultivation and extraction solutions seamlessly combine our integrated hardware and software offerings with a broad range of associated
services including consulting, engineering, and construction and are designed to deliver the most complete commercial indoor farming
solution available from a single provider. The totality of our product offerings and service capabilities forms an unrivaled ecosystem
in what has historically been a highly
fragmented
market. As a result, we believe we are well situated to create a dominant market position in the indoor agriculture sector.
Agrify
Corporation was incorporated in the state of Nevada on June 6, 2016, originally incorporated as Agrinamics, Inc. (“Agrinamics”).
On September 16, 2019, Agrinamics amended its articles of incorporation to reflect a name change to Agrify Corporation.
Our
corporate headquarters are located in Troy, Michigan. We also lease properties located within various geographic regions in which we
conduct business, including Colorado, Georgia and Michigan.
Reverse
Stock Splits
On
October 18, 2022, we effected a 1-for-10 reverse stock split on our Common Stock.
On
July 5th, 2023, we effected a 1-for-20 reverse stock split on our Common Stock. All share and per information has been retroactively
adjusted to give effect to the reverse stock splits for all periods presented, unless otherwise indicated.
Recent
Business Developments
At
the beginning of 2023, we announced a strategic plan to foster sustainable long-term growth through cost efficiencies and enhanced sales
and growth initiatives. We have been focused on growing our cultivation business by helping our existing Agrify Total Turn-Key customers
to bring their facilities online and driving additional sales through our RDP. As a result, we have successfully installed and commenced
our Las Vegas customer, Nevada Holistic Medicine, our Denver Colorado customer, Denver Greens, and signed several new customers such
as Golden Lake Business Park in California, and Harvest Works in New Jersey. As a testimony to the Vertical Farming Unit’s (“VFU”)
ability to produce high quality flower, Nevada Holistic Medicine is already consistently harvesting 9 pounds of A-grade flower per VFU,
or roughly 64 grams per canopy square foot, and seeing 90%+ A-grade flower produced with exceptional color, trichome, and terpene levels.
Similarly,
since we have streamlined our expansive extraction portfolio of technologies, we have successfully supported the deployment of several
turnkey solvent-based and solventless extraction packages to customers in California, Michigan, and the East Coast. In addition, we have
released several new technologies and products into the market based on customer feedback, including our first peer-reviewed Cannabeast
13 Distillation Unit, a Diamond Miner, Stitch-less Double Filtration Rosin Bags, and the revamped PX30 Hydrocarbon Extractor. We have
also made significant strides to receive UL Compliance for Precision Extractions’ EXP Explosion Proof Rooms in an effort to continue
our commitment to safety and quality within cannabis extraction facilities.
These
industry developments illustrate the continuous innovation, and commitment to safety within the cannabis sector as our company adapts
to evolving market demands. More importantly, our growing partnership across the Country is a strong testimony to operators’ continued
trust in Agrify’s team and technologies in the most competitive markets.
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Recent
Developments
Note
Acquisition and Warrant Issuance
On
October 27, 2023, following the execution of the Modification Agreement (as defined below), CP Acquisitions LLC (the “New Lender”),
an entity affiliated with and controlled by Raymond Chang, our Chairman and Chief Executive Officer, and I-Tseng Jenny Chan, a member
of our Board of Directors, purchased from the Former Lender the Senior Secured Note issued by us to the Former Lender on August 19, 2022
(the “Exchange Note”) and the Senior Secured Convertible Note issued by us to the Former Lender on March 10, 2023 (the “Convertible
Note”). As a condition to the Note Purchase, we and the New Lender entered into an acknowledgment and release (the “Release
Agreement”) with the Former Lender, pursuant to which we and the New Lender released the Former Lender from any claims, demands,
actions, suits, obligations and causes of action arising on or before the date thereof.
On
October 27, 2023, as a condition precedent to the Note Purchase, we entered into a letter agreement (the “Letter Agreement”)
with the Former Lender. Pursuant to the Letter Agreement, we agreed, immediately prior to the note purchase transaction, to exchange
$3.0 million in principal and approximately $1.1 million in accrued but unpaid interest outstanding under the Exchange Note for a warrant
(the “Exchange Warrant”) to purchase 2,809,669 shares of common stock. Additionally, we agreed to exchange the 375,629 shares
of common stock held in abeyance for the Former Lender under the terms of the letter agreement between us and the Former Lender dated
as of April 26, 2023 for a warrant to purchase 375,629 shares of common stock (the “Abeyance Warrant”).
Each
of the Exchange Warrant and the Abeyance Warrant has an exercise price of $0.001 per share, became exercisable upon issuance, has a term
of five years from the date of issuance and is exercisable on a cash basis or on a cashless exercise basis at the Former Lender’s
election. The Former Lender exercised the Exchange Warrant and Abeyance Warrant in full during January and February 2024.
Note
Amendment and Secured Promissory Note
On
July 12, 2023, we issued an unsecured promissory note in favor of GIC Acquisition, LLC (“GIC”), an entity that is owned and
managed by Raymond Chang, our Chairman and Chief Executive Officer. On October 27, 2023, we and GIC amended and restated the Note (the
“GIC Note”). Pursuant to the terms of the GIC Note, as restated, the maturity date was extended until December 31, 2023 and
we granted a junior security interest in our assets. On January 25, 2024, we and GIC amended and restated the GIC Note to increase the
principal amount thereunder to $1.0 million, all of which is currently outstanding under the GIC Note, and to extend the maturity date
until June 30, 2024.
Concurrently
with the restatement of the GIC Note, we issued a junior secured promissory note (the “Junior Secured Note”) to the New Lender.
Pursuant to the Junior Secured Note, the New Lender loaned an aggregate of approximately $4.0 million to us. The Junior Secured Note
bore interest at a rate of 10% per annum, had a maturity date of December 31, 2023, and could be prepaid without any fee or penalty.
The Junior Secured Note was a junior secured obligation.
Note
Amendment, Consolidation and Conversion
On
January 25, 2024, following stockholder approval at an annual meeting of stockholders on January 8, 2024, we and the New Lender consolidated
the outstanding principal and interest due under the Junior Secured Note and the Exchange Note into the Convertible Note and amended
and restated the Convertible Note (as amended and restated, the “Restated Note”), with an outstanding principal amount of
approximately $18.9 million at the time of issuance of the Restated Note. The Restated Note amended the terms of the Convertible Note
by, among other things, (i) reducing the conversion price to $1.46 per share of common stock, (ii) increasing the beneficial ownership
limitation to 49.99% with respect to any individual or group, provided that the New Lender may assign its right to receive shares upon
conversion to Mr. Chang and/or Ms. Chan or their affiliates, in which case the 49.99% beneficial ownership limitation will apply to each
of them individually, (iii) extending the maturity date to December 31, 2025, (iv) increasing the interest rate from 9% to 10% per annum,
(v) increasing the default interest from 15% to 18% per annum, and (vi) providing for the payment of interest every six months, or in
lieu of cash interest payments, we may issue shares as payments-in-kind at a conversion price equal to the higher of (i) $1.46 or (ii)
a 20% discount to our trailing seven-day volume weighted average price as of the date of interest payment. Immediately following the
execution of the Restated Note, the New Lender immediately elected to convert approximately $3.9 million of outstanding principal into
an aggregate of 2,671,633 shares of common stock, and assigned its rights to receive such shares to entities affiliated with Mr. Chang
and Ms. Chan. Following the conversion, there was $15.0 million in principal amount outstanding under the Restated Note.
42
Mack
Molding Settlement and Warrant Issuance
Immediately
prior to the note purchase described above on October 27, 2023, and with an effective date as of October 18, 2023, we entered into a
Modification and Settlement Agreement (the “Modification Agreement”) with Mack Molding Company (“Mack”). Pursuant
to the Modification Agreement, we and Mack agreed to settle an outstanding dispute of approximately $8.24 million under a Supply Agreement
between the parties dated December 7, 2020 (the “Supply Agreement”) by reducing the aggregate amount due to Mack and extending
the timeline for payment. The Modification Agreement requires us to make payments of $500,000 and $250,000 to Mack on or before November
1, 2023 and February 15, 2024, respectively. Following the November 1, 2023 payment, we will be entitled to take possession of certain
Vertical Farming Units (“VFUs”) that were assembled under the Supply Agreement. The Modification Agreement also requires
us to purchase from Mack a minimum of 25 VFUs per quarter for each quarter during 2024 and a minimum of 50 VFUs per quarter for the six
quarters beginning with the first quarter of 2025. We are required to pay a storage fee of $25,000 per month for VFUs subject to the
Modification Agreement.
Additionally,
as part of the Modification Agreement, we agreed to issue to Mack a warrant (the “Mack Warrant”) to purchase 750,000 shares
of common stock. The Mack Warrant has an exercise price of $4.00 per share, was exercisable upon issuance, has a term of three years
from the date of issuance and is exercisable on a cash basis unless at the time of exercise there is no effective registration statement
for the resale of the underlying shares, in which case the Mack Warrant may be exercised on a cashless exercise basis at Mack’s
election.
Nasdaq
Notices and Hearing
On
April 18, 2023, we received a notice (the “April Nasdaq Notice”) from The Nasdaq Stock Market LLC (“Nasdaq”)
that we were noncompliance with Nasdaq Listing Rule 5250(c)(1) as a result of our failure to file our Annual Report on Form 10-K (the
“Form 10-K”) with the SEC by the required due date.
On
May 17, 2023, we received a second notice from Nasdaq (the “May Nasdaq Notice”) that we remained noncompliant with Nasdaq
Listing Rule 5250(c)(1) as a result of our failure to file our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the
“First Quarter Form 10-Q”) with the SEC by the required due date.
On
August 16, 2023, we received a third notice from Nasdaq that we remain noncompliant with Nasdaq Listing Rule 5250(c)(1) as a result of
our failure to file our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 (the “Second Quarter Form 10-Q”)
with the SEC by the required filing date (the “August Nasdaq Notice” and, together with the April Nasdaq Notice and the May
Nasdaq Notice, the “Nasdaq Notices”).
On
October 17, 2023, we received a Staff Delisting Determination (the “Staff Determination”) from the Listing Qualifications
Department of Nasdaq notifying us that we were not in compliance with Nasdaq’s continued listing requirements under the Listing
Rule as a result of our failure to file the First Quarter Form 10-Q, the Second Quarter Form 10-Q and the Form 10-K (collectively, the
“Delinquent Reports”) in a timely manner. We filed each of the Delinquent Reports between November 28, 2023 and January 3,
2024.
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On
December 1, 2023, we received a notice Nasdaq stating that because we reported stockholders’ equity of $(17.17) million in our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, we were no longer in compliance with Nasdaq Listing Rule 5550(b)(1),
which requires that listed companies maintain a minimum of $2.5 million in stockholders’ equity.
We
timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”), which hearing was held on January 11, 2024. At
the hearing, we presented a plan to regain compliance with Nasdaq Listing Rule 5550(b)(1). On January 30, 2024, we received formal notice
that the Panel had granted our request for an exception through April 15, 2024 to evidence compliance with Rule 5550(b)(1), which represents
the full extent of the Panel’s discretion to grant continued listing. As a result, there can be no assurance that we can regain
compliance by the end of the extension period.
Additionally,
on March 5, 2024, we received a deficiency letter from the Listing Qualifications Department of Nasdaq notifying us that, for the last
30 consecutive business days, the bid price for our common stock had closed below $1.00 per share, which is the minimum closing price
required to maintain continued listing on the Nasdaq Stock Market under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”).
The Notice had no immediate effect on the listing of our common stock on Nasdaq. In accordance with Nasdaq Listing Rule 5810(c)(3)(A),
we have 180 calendar days to regain compliance with the Minimum Bid Requirement. To regain compliance with the Minimum Bid Requirement,
the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive trading days during this 180-day
compliance period, unless the Staff exercises its discretion to extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(H). The
compliance period for us will expire on September 3, 2024.
We
will take all possible actions to restore our compliance with Nasdaq, but we can provide no assurances that the listing of our common
stock will be restored or that we otherwise will remain listed on Nasdaq. If we fail to continue to satisfy the continued listing requirements
of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq will take steps to delist
our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair stockholders’
ability to sell or purchase our common stock when they wish to do so, as well as adversely affect our ability to issue additional securities
and obtain additional financing in the future.
Public
Offering
On
February 27, 2024, we entered into a placement agency agreement with Alexander Capital, LP as placement agent, pursuant to which we agreed
to issue and sell an aggregate of 2,760,000 shares of common stock, and, in lieu of common stock to certain investors that so chose,
pre-funded warrants to purchase 3,963,684 shares of common stock. The public offering price for each share of common stock was $0.38,
and the offering price for each pre-funded warrant was $0.379, which equals the public offering price per share of the common stock,
less the $0.001 per share exercise price of each pre-funded warrant. The Offering was made pursuant to a registration statement on Form
S-1 that we filed with the Securities and Exchange Commission on January 26, 2024 and was declared effective on February 14, 2024. Raymond
Chang, our Chairman and Chief Executive Officer, participated in the offering on the same terms as other investors. The net proceeds
from the public offering were approximately $2.2 million, after deducting placement agent fees and commissions and expenses. The public
offering closed on February 28, 2024.
44
Use
of Estimates
The
preparation of consolidated financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”)
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 consolidated 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, the valuation of inventory, and useful life of fixed assets and intangible assets.
Financial
Overview
Critical
Accounting 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 GAAP. The preparation of consolidated financial statements in conformity with GAAP requires
us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
On an ongoing basis, we evaluate estimates, which include estimates related to accruals, stock-based compensation expense, reported amounts
of revenues and expenses during the reported period, fair value of warrant liabilities, sales tax liabilities, and net realizable value
of inventory and collectibility of trade accounts and loans receivable. 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. See below for detail on how certain accounting estimates are determined.
Revenue
Recognition
We
enter into contracts that may include various combinations of equipment, services and construction, which are generally capable of being
distinct and accounted for as separate performance obligations. Contracts with customers often include promises to transfer multiple
products and services to a customer. Determining whether products and services are considered distinct performance obligations that should
be accounted for separately versus together may require significant judgment. Once we determine the performance obligations, it determines
the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any.
We then allocate the transaction price to each performance obligation in the contract based on the SSP. The corresponding revenue is
recognized as the related performance obligations are satisfied.
Judgment
is required to determine the SSP for each distinct performance obligation. We determine SSP based on the price at which the performance
obligation is sold separately and the methods of estimating SSP under the guidance of ASC 606-10-32-33. If the SSP is not observable
through past transactions, we estimate the SSP, considering available information such as market conditions, expected margins, and internally
approved pricing guidelines related to the performance obligations. We license our software as a Software-as-a-Service (“SaaS”)
type subscription license, whereby the customer only has a right to access the software over a specified time period. The full value
of the contract is recognized ratably over the contractual term of the SaaS subscription, adjusted monthly if tiered pricing is relevant.
We typically satisfy our performance obligations for equipment sales when equipment is made available for shipment to the customer; for
services sales as services are rendered to the customer and for construction contracts both as services are rendered and when contract
is completed.
We
utilize the cost-plus margin method to determine the SSP for equipment and build-out services. This method is based on the cost of the
services from third parties, plus a reasonable markup that we believe is reflective of a market-based reseller margin.
45
We
determine the SSP for services in time and materials contracts by observable prices in standalone services arrangements.
We
estimate variable consideration in the form of royalties, revenue share, monthly fees, and service credits are estimated at contract
inception and updated at the end of each reporting period if additional information becomes available. Variable consideration is typically
not subject to constraint. Changes to variable consideration were not material for the periods presented.
If
a contract has payment terms that differ from the timing of revenue recognition, we will assess whether the transaction price for those
contracts includes 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, 2023 and 2022, we did not have
any such financial income.
Payment
terms with customers typically require payment 30 days from the invoice date. Our agreements with customers do not provide for any refunds
for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise
a concern over delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been
insignificant in all periods presented.
We
have elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not
as a promised good or service. Accordingly, we will accrue all fulfillment costs related to the shipping and handling of consumer goods
at the time of shipment. We have payment terms with its customers of one year or less and has elected the practical expedient applicable
to such contracts not to consider the time value of money. Sales, value add, and other taxes we collect concurrent with revenue-producing
activities are excluded from revenue.
We
receive payment from customers based on specified terms that are generally less than 30 days from the satisfaction of performance obligations.
There are no contract assets related to performance under the contract. The difference in the opening and closing balances of our deferred
revenue primarily results from the timing difference between our performance and the customer’s payment. We fulfill obligations
under a contract with a customer by transferring products and services in exchange for consideration from the customer. Accounts receivables
are recorded when the customer has been billed or the right to consideration is unconditional. We recognize deferred revenue when consideration
has been received or an amount of consideration is due from the customer, and we have a future obligation to transfer certain proprietary
products.
In
accordance with ASC 606-10-50-13, we are required to include disclosure on its remaining performance obligations as of the end of the
current reporting period. Due to the nature of our contracts, these reporting requirements are not applicable. The majority of our remaining
contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part
of a contract that has an original
expected
duration of one year or less and (ii) the right to invoice practical expedient.
We
generally provide a one-year warranty on our products for materials and workmanship but may provide multiple-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.
46
Stock
Compensation
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 consolidated financial statements. If the actual forfeiture rate is lower than the estimated forfeiture
rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized
in our consolidated 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.
Net
Realizable Value of Inventory
The
Company values all its inventories, which consist primarily of significant raw material hardware components, at the lower of cost or
net realizable value, with cost principally determined by the weighted-average cost method on a first-in, first-out basis. Write-offs
of potentially slow-moving or damaged inventory are recorded through specific identification of obsolete or damaged material. The Company
takes physical inventory at least once annually at all inventory locations.
Fair
Value of Warrant Liabilities
The
estimated fair value of the warrant liabilities on December 31, 2023 and 2022 is determined using Level 3 inputs. Inherent in a Black-Scholes
option-pricing model are assumptions used in calculating the estimated fair values that represent the Company’s best estimate.
The volatility rate is determined utilizing the Company’s own share price and the share price of competitors over time.
Collectibility
of Trade Accounts and Loans Receivable
Accounts
receivable, net, primarily consists of amounts for goods and services that are billed and currently due from customers. Accounts receivable
and loan receivable balances are presented net of an allowance for credit losses, which is an estimate of billed or borrowed amounts
that may not be collectible. In determining the amount of the allowance at each reporting date, management makes judgments about general
economic conditions, historical write-off experience, and any specific risks identified in customer or counterparty collection matters,
including the aging of unpaid accounts receivable and changes in customer financial conditions. Accounts and loans receivable balances
are written off after all means of collection are exhausted and the potential for non-recovery is determined to be probable. Adjustments
to the allowance for credit losses are recorded as general and administrative expenses in the consolidated statements of operations.
47
Sales
Tax Liabilities
Prior
to acquisition, Precision Extraction NewCo had an unrecorded liability for uncollected sales taxes for sales made in 18 states where
state sales tax filings were not submitted, leaving the entity with a potential sales tax liability. To assess Precision Extraction NewCo’s
potential liability, the company analyzed invoice data encompassing customer details, their location, product/service taxability, and
sales prices. Through this analysis, Precision NewCo determined its nexus across various states and estimated the corresponding sales
tax liabilities. Of the 18 states identified with tax obligations, sales to tax-exempt customers were excluded from liability calculations.
In Q1 2022, Precision NewCo’s taxable revenue stood at approximately $4 million, with an associated sales tax liability of around
$190,000, equivalent to 4.7% of the taxable revenue for that period. This ratio served as the basis for projecting the sales tax liability
for the remainder of 2022. For the assessment of penalties and interest, the company adhered to the guidelines outlined by the State
of Michigan. As per Michigan’s Sales Tax Return Form 5080, penalties are capped at 25%, while interest is calculated based on the
prevailing rates provided on the official.gov website. These penalties and interest charges were factored into the overall sales tax
liability in accordance with Michigan’s guidelines. Starting from November 1, 2022, all Precision Extraction NewCo customers have
been transitioned to Agrify. All sales from November 1, 2022, until today are accounted for under Agrify. Sales tax is accrued and paid
under Agrify.
Revenue
Recognition
Overview
We
generate revenue from the following sources: (1) equipment sales, (2) providing services and (3) construction contracts.
In
accordance with ASC 606 “Revenue Recognition”, we recognize revenue from contracts with customers using a five-step model,
which is described below:
● identify
the customer contract;
● identify
performance obligations that are distinct;
● determine
the transaction price;
● allocate
the transaction price to the distinct performance obligations; and
● recognize
revenue as the performance obligations are satisfied.
Identify
the customer contract
A
customer contract is generally identified when there is approval and commitment from both us and its customer, the rights have been identified,
payment terms are identified, the contract has commercial substance and collectability, and consideration is probable. Specifically,
we obtain written/electronic signatures on contracts and a purchase order, if said purchase orders are issued in the normal course of
business by the customer.
Identify
performance obligations that are distinct
A
performance obligation is a promise by us to provide a distinct good or service or a series of distinct goods or services. A good or
service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together
with other resources that are readily available to the customer, and our promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.
48
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.
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.
49
The
fair value estimates related to the various identified intangible assets were determined under various valuation approaches including
the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project
revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period,
as well as determine the weighted average cost of capital to be used as a discount rate.
Goodwill
and Intangible Assets
Amortization
of acquired intangible assets is the result of the acquisition of TriGrow Systems, LLC (“TriGrow”), which occurred in 2020,
the acquisition of Precision Extraction NewCo, LLC (“Precision”) and Cascade Sciences, LLC (“Cascade”) which
occurred in 2021, the acquisition of PurePressure, LLC (“PurePressure”), which also occurred in 2021, and the acquisition
of Lab Society, which occurred in 2022. As a result of these transactions, customer relationships, acquired developed technology, non-compete
agreements and trade names were identified as intangible assets, and are amortized over their estimated useful lives.
We
recognize the excess of the purchase price over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized
but is tested for impairment at least annually in the fourth quarter of the year, or more frequently if events or changes in circumstances
indicate that the carrying amount of the goodwill may not be recoverable. We have determined that we are a single reporting unit for
the purpose of conducting the goodwill impairment assessment. A goodwill impairment charge is recorded if the amount by which our 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 our market value as a result of a significant
decline in our stock price.
During
the three-month ended June 30, 2022, we identified an impairment-triggering event associated with both a sustained decline in our stock
price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors,
we deemed that there was an impairment to the carrying value of our property and equipment and accordingly performed interim testing
as of June 30, 2022. Based on our interim testing, we noted that the entire carrying value of our goodwill and intangible assets should
be impaired. Additional information regarding our interim testing on goodwill and intangible assets may be found in Note 7 – Goodwill
and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.
Convertible
Notes Payable
We
evaluate our convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative
financial instruments to be separately accounted for in accordance with ASC Topic 815 Derivatives and Hedging (“ASC 815”).
The accounting treatment of derivative financial instruments requires that we identify and 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. We reassess the classification of
our 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
we determine that an instrument is not a derivative liability, we then evaluate whether there is a beneficial conversion feature (“BCF”),
by comparing the commitment date fair value to the effective current conversion price of the instrument. We record a BCF as a debt discount
which is amortized to interest expense over the life of the respective note using the effective interest method. BCFs that are contingent
upon the occurrence of a future event are recognized when the contingency is resolved.
50
Warrant
Liabilities
We
do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial
instruments, including issued private placement stock purchase warrants, to determine if such instruments are derivatives or contain
features that qualify as embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”)
and ASC 815. We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s
specific terms and applicable authoritative guidance in ASC 480 and ASC 815. Our assessment considers whether the warrants are freestanding
financial instruments pursuant to ASC 480, whether they meet the definition of a liability pursuant to ASC 480, and whether the warrants
meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our own Common Stock
among other conditions for equity classification.
For
issued or modified warrants that meet all of the criteria for equity classification, they are recorded as a component of additional paid-in
capital at the time of issuance. For issued or modified warrants that are precluded from equity classification, they are recorded as
a liability at their initial fair value on the date of issuance and subject to remeasurement on each balance sheet date with changes
in the estimated fair value of the warrants to be recognized as an unrealized gain or loss in the consolidated statements of operations.
Capitalization
of Internal Software Development Costs
We
capitalize on certain software engineering efforts related to the continued development of Agrify Insights™ cultivation software
(“Agrify Insights™”) under ASC 985-20. Costs incurred during the application development phase are only capitalized
once technical feasibility has been established and the work performed will result in new or additional functionality. The types of costs
capitalized during the application development phase include employee compensation, as well as consulting fees for third-party software
developers working on these projects. Costs related to the research and development are expensed as incurred until technical feasibility
is established as well as post-implementation activities. Internal-use software is amortized on a straight-line basis over the estimated
useful life of the asset, which ranges from two to five years.
Income
Taxes
We
account for income taxes pursuant to the provisions of ASC Topic 740, “Income Taxes,” which requires, among other things,
an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes
it is more likely than not that the net deferred asset will not be realized.
We
follow the provisions of ASC 740-10-25-5, “Basic Recognition Threshold.” When tax returns are filed, it is highly certain
that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about
the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of
ASC 740-10-25-6, the benefit of a tax position is recognized in the consolidated financial statements in the period during which, based
on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including
the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax
positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than
50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with
tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits
in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon
examination. We believe our tax positions are all highly certain of being upheld upon examination. As such, we have not recorded a liability
for unrecognized tax benefits.
We
recognize the benefit of a tax position when it is effectively settled. ASC 740-10-25-10, “Basic Recognition Threshold” provides
guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized
tax benefits. ASC 740-10- 25-10 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing
authority. For tax positions considered effectively settled, we recognize the full amount of the tax benefit.
51
Accounting
for Stock-Based Compensation
We
follow the provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”) which establishes standards surrounding
the accounting for transactions in which an entity exchanges our equity instruments for goods or services. ASC 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. Refer to the Critical Accounting Estimates section above for further detail on accounting for stock compensation.
It
is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed
above.
Results
of Operations
We
have incurred recurring losses to date. Our consolidated financial statements have been prepared assuming that we will continue as a
going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification
of liabilities that might be necessary should we be unable to continue in operation.
Our
continuation as a going concern is dependent upon our ability to obtain the necessary debt or equity financing to continue operations
until we begin generating sufficient cash flows from operations to meet our obligations. If we are unable raise additional funds, we
may be forced to cease operations.
Comparison
of Years Ended December 31, 2023 and 2022
The
following table summarizes our results of operations for the years ended December 31, 2023 and 2022:
Year
Ended December 31,
(In thousands)
2023
2022
Revenue (including $0, and $2,417
from related parties, respectively)
$ 16,868
$ 58,259
Cost of goods sold
11,590
90,054
Gross
profit (loss)
5,278
(31,795 )
General and administrative
19,005
73,354
Selling and marketing
4,134
9,338
Research and development
2,295
8,179
Change in contingent consideration
(1,322 )
(2,156 )
Gain on disposal on property and equipment
144
—
Impairment of property and equipment
—
2,912
Impairment of goodwill
and intangible assets
—
69,904
Total
operating expenses
24,256
161,531
Loss
from operations
(18,978 )
(193,326 )
Interest expense, net
(1,853 )
(8,750 )
Change in fair value of warrant liabilities
4,695
51,461
Loss on extinguishment of long-term debt, net
(4,311 )
(38,985 )
Other income, net
1,799
1,316
Total
other income, net
330
5,042
Net loss before income
taxes
(18,648 )
(188,284 )
Income tax expense
(2 )
(23 )
Net
loss
(18,650 )
(188,307 )
Income attributable to non-controlling
interest
1
134
Net
loss attributable to Agrify Corporation
$ (18,649 )
$ (188,173 )
52
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 VFUs and Agrify Integrated Grow Racks with our Agrify Insights™, which are supplemented with environmental control
products, grow lights, facility build-out services, and extraction equipment.
We
generate revenue from sales of cultivation solutions, including ancillary products and services, Agrify Insights™, facility build-outs,
and extraction equipment and solutions. We believe that our product mix forms an integrated ecosystem that allows us to be engaged with
our potential customers from the early stages of the grow cycle - first during the facility build-out, to the choice of cultivation solutions,
running the grow business with our Agrify Insights™ and finally, our extraction, post-processing, and testing services to transform
harvest into a sellable product. We believe that the delivery of each solution in the various stages of 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, 2023 and 2022:
Year
Ended December 31,
(In thousands)
2023
2022
Change
%
Change
Cultivation solutions, including
ancillary products and services
$ 1,100
$ 711
$ 389
55 %
Agrify Insights software
188
74
114
154 %
Facility build-outs
882
23,129
(22,247 )
(96 )%
Extraction solutions
14,698
34,345
(19,647 )
(57 )%
Total
revenue
$ 16,868
$ 58,259
$ (41,391 )
(71 )%
Revenues
decreased by $41.4 million, or 71%, for the year ended December 31, 2023, as compared to the same period in 2022. The comparative decrease
in revenue was primarily driven by a $22.2 million reduction in facility build-outs due to winding down TTK solutions Facility build-outs
at the end of 2022. Additionally, there was a $19.6 million reduction in Extraction solutions due to an overall down-turn in the cannabis
industry and the difficulty of integrating four acquired extraction companies, which was offset by $0.5 million increase in cultivation
solutions and Agrify Insights software combined.
Cost
of Goods Sold
Cost
of goods sold represents a combination of the following: construction-related costs associated with our facility build-outs, internal
and outsourced labor and material costs associated with the assembly of both cultivation equipment (primarily VFUs), and extraction equipment,
as well as labor and parts costs associated with the sale or provision of other products and services.
The
following table provides a breakdown of our cost of goods sold for the years ended December 31, 2023 and 2022:
Year
Ended December 31,
(In thousands)
2023
2022
Change
%
Change
Cultivation solutions, including
ancillary products and services
$ 1,747
$ 27,513
$ (25,766 )
(94 )%
Facility build-outs
971
31,588
(30,617 )
(97 )%
Extraction solutions
8,872
30,953
(22,081 )
(71 )%
Total
cost of goods sold
$ 11,590
$ 90,054
$ (78,464 )
(87 )%
Cost
of goods sold decreased by $78 million, or 87%, for the year ended December 31, 2023, as compared to the same period in 2022. The year-over-year
decrease in cost of goods sold is associated with the decreased amount of subcontractor construction costs related to our facility build-outs,
the decline in sales of Extraction solutions, internal and outsourced labor and materials costs for the extraction solutions sales, and
cultivation solutions, including ancillary products and services.
53
Gross
(Loss) Profit
Year
Ended December 31,
(In thousands)
2023
2022
Change
%
Change
Gross profit (loss)
$ 5,278
$ (31,795 )
$ 37,073
(117 )%
Gross
profit totaled $5.3 million, or 31%, of total revenue during the year ended December 31, 2023 compared to a gross loss of $32 million,
or 55% of total revenue during the year ended December 31, 2022. The comparative $37.1 million year-over-year increase in gross profit,
as well as the comparative increase in gross profit margin, is primarily attributable to reduction in facility build-outs. Although sales
of Extraction Solutions decreased, they have higher margins. Additionally, there was a $114 thousand increase in revenue from Agrify
insight software which has 90% plus gross profit.
Operating
Expenses
Year
Ended December 31,
(In thousands)
2023
2022
Change
%
Change
General and administrative
$ 19,005
$ 73,354
$ (54,349 )
(74 )%
Selling and marketing
4,134
9,338
(5,204 )
(56 )%
Research and development
2,295
8,179
(5,884 )
(72 )%
Change in contingent consideration
(1,322 )
(2,156 )
834
(39 )%
Impairment of property and equipment
—
2,912
(2,912 )
(100 )%
Impairment of goodwill and intangible assets
—
69,904
(69,904 )
(100 )%
Gain on disposal
144
—
144
100 %
Total
operating expenses
$ 24,256
$ 161,531
$ (137,275 )
(340 )%
General
and administrative
General
and administrative (“G&A”) expenses consist principally of salaries and related costs, including stock-based compensation
and travel expenses, for personnel associated with executive and other administrative functions. Other G&A expenses include, but
are not limited to, professional fees for legal, consulting, depreciation and amortization, and accounting services, as well as facility-related
costs.
G&A
expenses decreased by $54.3 million, or 74%, for the year ended December 31, 2023, compared to the same period in 2022. The primary drivers
of the year-over-year decrease of G&A expenses were largely attributable to a decrease in bad debt expenses, of approximately $36.8
million, a decrease in depreciation expense, of approximately $1 million, a decrease in stock based compensation, of approximately $1.6
million, a decrease in salaries and related costs for personnel, of approximately $3.4 million, a decrease in insurance expenses of approximately
$0.6 million.
Selling
and marketing
Selling
and marketing expenses consist primarily of salaries and related costs of personnel, travel expenses, trade shows, and advertising expenses.
Selling
and marketing expenses decreased by $5.2 million, or 56%, for the year ended December 31, 2023, compared to the same period in 2022.
The decrease was primarily attributable to a reduction in salaries and related costs of personnel, of approximately $3.4 million, and
a reduction in trade show and advertising costs, of approximately $1.8 million.
54
Research
and development
Research
and development (“R&D”) expenses consisted primarily of costs incurred for the development of our Agrify Insights™
and next-generation VFUs, which includes:
● employee-related
expenses, including salaries, benefits, and travel;
● subcontractor
expenses incurred under agreements to provide engineering work related to the development
of our next-generation VFUs; and
● expenses
related to our facilities, depreciation, and other expenses, which include direct and allocated
expenses for rent and maintenance of facilities, insurance, and other supplies
R&D
expenses decreased by $5.9 million, or 72%, for the year ended December 31, 2023, compared to the same period in 2022. As a percentage
of net revenue, R&D expenses were 14% of total revenue for the year ended December 31, 2023, compared to 14% for same period in 2022.
We
expect to continue to invest in future developments for our VFUs, Agrify Insights™, and extraction products. Although we continue
to invest in R&D activities, we expect R&D expenses to decrease as a percentage of revenue as our revenue grows.
Change
in contingent consideration
Contingent
consideration increased $0.8 million for the year ended December 31, 2023, compared to $2.2 million for the same period in 2022.
Impairment
of property and equipment
Results
from a 50% reserve on equipment to be leased to Hannah Industries due to uncertainty of the project.
Impairment
of goodwill and intangible assets
During
the three months ended June 30, 2022, we identified an impairment-triggering event associated with both a sustained decline in our stock
price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors,
we deemed that there was an impairment to the carrying value of our property and equipment and accordingly performed interim testing
as of June 30, 2022.
Based
on our interim testing, we noted that the current carrying value of equity significantly exceeded the calculated fair value of equity,
by an amount greater than the aggregate value of our goodwill and intangible assets. Accordingly, we concluded that the entire carrying
value of our goodwill and intangible assets were impaired, resulting in a second-quarter impairment charge of $69.9 million. Additional
information regarding our interim impairment testing may be found in Note 7 - Goodwill and Intangible Assets, Net, included in the notes
to the consolidated financial statements.
55
Change
in Gain on Disposal
Gain
on disposal Increased $0.1 million for the year ended December 31, 2023, compared to $0 for the same period in 2022.
Other
Income, Net
Year
Ended December 31,
(In thousands)
2023
2022
Change
%
Change
Interest expense, net
$ (1,853 )
$ (8,750 )
$ 6,897
(79 )%
Other income, net
1,799
1,316
483
37 %
Change in fair value of warrant liabilities
4,695
51,461
(46,766 )
(91 )%
Loss on extinguishment
of notes payable
(4,311 )
(38,985 )
34,674
(89 )%
Total
other income, net
$ 330
$ 5,042
$ (4,712 )
(93 )%
Interest
income, net
Interest
expense was approximately $1.9 million for the year ended December 31, 2023 compared to interest expense of approximately $8.8 million
for the same period in 2022. The significant decrease in our interest expense was resulted from our continuous efforts to restructure,
modify and reduce our SPA Note and Exchange Note.
Other
income, net
Other
expense, net increased by $483 thousand, or 37%, for the year ended December 31, 2023, compared to the same period in 2022.
Change
in fair value of warrant liability
Change
in fair value of warrant liability decreased by $46.8 million, or (91)%, for the year ended December 31, 2023, compared to the same period
in 2022. The decrease is related to the fair value of warrants discussed in Note 4.
Loss
on extinguishment of notes payable
Change
in loss on extinguishment of notes payable decreased by $34.7 million, or (89)%, for the year ended December 31, 2023, compared to the
same period in 2022. The decrease is related to related to the extinguishment of the SPA Note recorded in prior period discussed in Note
9. Loss on extinguishment of notes payable was $4.3 million for the year ended December 31, 2023, compared to a loss of $39.0 million
for the same period in 2022.
56
Income
Tax Expense
Year
Ended December 31,
(In thousands)
2023
2022
Change
%
Change
Income tax expense
$ (2 )
$ (23 )
$ 21
(91 )%
Effective tax rate
— %
— %
Income
(Loss) Attributable to Non-Controlling Interest
We
consolidate the results of operations of two less than wholly-owned entities into our consolidated statements of operations. On December
8, 2019, we formed Agrify-Valiant, LLC (“Agrify-Valiant”), a joint-venture limited liability company in which we are the
60% majority owner and Valiant-America, LLC owns 40%. Agrify-Valiant started its operations during the second quarter of 2020. On October
27, 2022, we provided notice to Valiant-America of our intention to begin the winding up of Agrify-Valiant. 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 for these brands is ancillary to the sale
of our VFUs and provides a means to differentiate customers’ products in the marketplace. It is not a material aspect of our business
and we have not realized any royalty income. Accordingly, we are currently evaluating whether to continue this legacy business from an
operational standpoint, as well as from a legal and regulatory perspective.
Income
(loss) attributable to non-controlling interest represents the portion of profit (or loss) that is attributable to the non-controlling
interest calculated as a product of the net income of the entity multiplied by the percentage of ownership held by the non-controlling
interest.
Liquidity
and Capital Resources
Operating
Capital Requirements
We
have incurred operating losses since our inception and have negative cash flows from operations. We have an accumulated deficit of approximately
$265.8 million as of December 31, 2023. Our primary sources of liquidity are cash and cash equivalents, with additional liquidity accessible,
subject to market conditions and other factors, including limitations that may apply to us under applicable SEC regulations, from the
capital markets.
As of December 31, 2023, we had $0.4 million of cash, cash equivalents,
and restricted cash. We had no restricted cash and restricted marketable securities associated with the Exchange Note as of December 31,
2023. Current liabilities were $41.2 million as of December 31, 2023.
On
October 18, 2022, we entered into the ATM Program with the Agent pursuant to which we could issue and sell, from time to time, shares
of our Common Stock having an aggregate offering price of up to $50 million, depending on market demand, with the Agent acting as an
agent for sales. The ATM Program allowed us to sell shares of Common Stock pursuant to specific parameters defined by us as well as those
defined by the SEC and the ATM Program agreement. Beginning October 18, 2022 through December 31, 2022, we sold 306,628 shares of Common
Stock under the ATM at an average price of $50.85, resulting in gross proceeds of $15.6 million and net proceeds of $15.1 million after
commissions and fees to the Agent totaling $468 thousand. Subsequent to December 31, 2022 through April 1, 2023, after which time the
ATM program was discontinued, we sold an additional 323,082 shares of Common Stock under the ATM at an average price of $4.93, resulting
in gross proceeds of $1.6 million and net proceeds of $1.6 million after commissions and fees to the Agent totaling $48 thousand. For
the entire period from October 18, 2022 through April 1, 2023, we sold 629,710 shares of Common Stock under the ATM at an average price
of $27.29 per share, resulting in gross proceeds of $17.2 million, and net proceeds of $16.7 million after commissions and fees to the
Agent totaling $516 thousand. $3.0 million of the proceeds under the ATM Program were used to repay amounts due to the Investor under
the Exchange Note. We used the net proceeds generated from the ATM Program for working capital and general corporate purposes, including
repayment of indebtedness, funding its transformation initiatives and product category expansion efforts and capital expenditures. Due
to the late filing of this Annual Report on Form 10-K, we are no longer eligible to utilize the registration statement on Form S-3 relating
to the ATM Program, and do not anticipate any further sales under the ATM Program in the foreseeable future.
57
Our
current working capital needs are to support revenue growth, 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 possible future TTK arrangements. These arrangements require
a significant amount of upfront capital necessary to fund construction, associated with facility build-outs, and equipment. We do not
intend to enter into any new TTK Solutions for the foreseeable future, however, we have deployed this program with certain key customers.
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.
These
consolidated financial statements have been prepared based on the assumption that we will continue as a going concern for the next twelve-months
from the date these consolidated financial statements are available to be issued. However, we have incurred operating losses since our
inception and have negative cash flows from operations, and our significant operating losses raise substantial doubt about our ability
to continue as a going concern. Our continuation as a going concern is dependent upon our ability to obtain the necessary debt or equity
financing to continue operations until we begin generating sufficient cash flows from operations to meet our obligations. If we are unable
to raise additional funds, we may be forced to cease operations.
There
is no assurance that we will ever be profitable. The consolidated financial statements do not include any adjustments to reflect the
potential future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may
result should we be unable to continue as a going concern.
Indebtedness
We
entered into one Loan Agreement and Promissory Note with Bank of America pursuant to the Paycheck Protection Program (the “PPP”)
under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration.
We received total proceeds of approximately $779 thousand from the unsecured PPP Loan which was originally scheduled to mature in May
2022. We applied for forgiveness on the $779 thousand of our PPP Loan however was denied by the SBA. On June 23, 2022, we received a
letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and bears interest at a rate of 1.00% per year. The PPP
loan is payable in 34 equal combined monthly principal and interest payments of approximately $24 thousand that commenced on August 7,
2022.
On
March 14, 2022, we entered into a Securities Purchase Agreement with an institutional investor. The Purchase Agreement provides for the
issuance of the SPA Note in the aggregate amount of $65.0 million and a SPA Warrant to purchase up to an aggregate of 34,406 shares of
Common Stock, with the potential for two potential subsequent closings for notes with an original principal amount of $35.0 million each.
58
On
August 18, 2022, we entered into a Securities Exchange Agreement. Pursuant to the August 2022 Exchange Agreement, we partially paid $35.2
million along with approximately $300 thousand in repayments for other fees under the SPA Note and exchanged the remaining balance of
the SPA Note for an Exchange Note with an aggregate original principal amount of $35.0 million and a Note Exchange Warrant to purchase
71,139 shares of Common Stock. Additionally, we exchanged the SPA Warrant for a Modified Warrant for the same number of underlying shares
but with a reduced exercise price.
On
March 8, 2023, the Company entered into a new Securities Exchange Agreement. Pursuant to the March 2023 Exchange Agreement, we prepaid
approximately $10.3 million in principal amount under the Exchange Note and exchanged $10.0 million in principal amount of the remaining
balance of the Exchange Note for a new senior secured convertible note (the “Convertible Note”).
The
Convertible Note is a senior secured obligation and will rank senior to all of our indebtedness. The Convertible Note will mature on
August 19, 2025 (the “Maturity Date”) and has a 9.0% annualized interest rate, with interest to be paid monthly, in cash.
The principal amount of the Convertible Note will be payable on the maturity date, provided that the lender will be entitled to a cash
sweep of 30% of the proceeds of any at-the-market equity offering and 20% of the proceeds received by us in connection with any other
equity financing, which will reduce the outstanding principal amount under the Exchange Note. On October 27, 2023, CP Acquisitions LLC,
and entity affiliated with and controlled by Raymond Chang, acquired the Exchange Note and the Convertible Note. As of October 30, 2023,
there was approximately $6.7 million outstanding under the Exchange Note and $8.8 million outstanding under the Convertible Note.
At
any time, we may prepay all of the Exchange Note by redemption at a price equal to 102.5% of the then-outstanding principal amount under
the Note plus accrued but unpaid interest. The holder will also have the option of requiring us to redeem the Exchange Note on the one-year
or two-year anniversaries of issuance at a price equal to the then-outstanding principal amount under the Exchange Note plus accrued
but unpaid interest, or if we undergo a fundamental change at a price equal to 102.5% of the then-outstanding principal amount under
the Exchange Note plus accrued but unpaid interest.
Summary
Statement of Cash Flows
The
following table presents the major components of net cash flows from and used in operating, investing, and financing activities for the
years ended December 31, 2023 and 2022:
(In thousands)
December 31,
2023
December 31,
2022
Net cash (used in) provided by:
Operating
activities
$ (30,974 )
$ (72,021 )
Investing activities
25,174
(2,317 )
Financing
activities
(4,227 )
72,781
Net
decrease in cash, cash equivalents, and restricted cash
$ (10,027 )
$ (1,557 )
59
Cash
Flows from Operating Activities
For
the year ended December 31, 2023, we incurred a net loss of $18.6 million primarily due to the $4.7 million related to the change in
fair value of warrant liabilities, $1.9 million of depreciation and amortization, $2.7 million of stock based compensation expense, and
$24 thousand of debt issuance costs. Net cash was increased by changes in operating assets and liabilities of $13.7 million.
For
the year ended December 31, 2022, cash used in operating activities consists of net income adjusted for non-cash benefits and expenses,
and changes in operating assets and liabilities. Our primary source of cash provided by operating activities is cash collections from
our customers related to the sale of cultivation and extraction solutions. Our primary uses of cash from our operating activities include
payments for employee-related expenditures, payments for inventory due to increased demand forecasts, construction costs related to TTK
Solutions, acquisition-related costs and the payment of other operating expenses incurred in the ordinary course of business.
Cash
Flows from Investing Activities
For
the year ended December 31, 2023, net cash provided by investing activities was approximately $25.2 million, which included cash inflows
of $10.5 million in proceeds from sale of securities and $15.1 million in proceeds from repayment of loan receivable, and cash outflows
of $0.6 million related to a certain loan issuance of loan and $0.3 million in purchases of property and equipment.
For
the year ended December 31, 2022, cash provided by investing activities of $2.3 million. Cash used in investing activities consists primarily
of purchases of marketable securities of $294.7 million, proceeds of marketable securities of $329.0 million, payment of contingent contingent
liabilities of $3.3 million, cash paid associated with our 2022 acquisition of Lab Society and Sinclair of $2.2 million million, the
issuance of loans receivable if $23.0 million in connection with our financing of construction and equipment under its TTK Solutions
offering and purchases of property and equipment expenditures. The capital expenditures support growth and investment in property and
equipment of $8.1 million, to expand research, development, and testing capabilities and, to a lesser extent, the replacement of existing
equipment.
Cash
Flows from Financing Activities
For
the year ended December 31, 2023, net cash used in financing activities was $4.2 million. Net cash used in financing activities was primarily
driven by the repayment of certain of our debt instruments of $10.3 million, and payments on insurance financing loans of $1.3 million,
offset by proceeds generated from the sale of securities pursuant to our “at the market” program, net, of $1.5 million and
proceeds from issuance of a related party note of $4.4 million.
For
the year ended December 31, 2022, cash provided by financing activities was $72.8 million. This consists primarily of proceeds from the
issuance of Common Stock of $25.8, and warrants in private placements of $61.8 million, and proceeds from the initial and secondary public
offerings of $23.2 million. Cash used in financing activities consists primarily of repayment of debt of $38.0 million.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable.
60