Agrify Corporation

Good morning, and thank you for standing by. Welcome to the Agri-Fi fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anna Kate Heller, Investor Relations. Please go ahead.

Good morning, and welcome to Agrify's fourth quarter fiscal year 2021 earnings call. With us on today's call are Raymond Cheng, Chief Executive Officer, and Timothy Oaks, Chief Financial Officer. Today, management will review the highlights and financial results for the fourth quarter and provide a business and operational update. Following management's remarks, there will be a question and answer session. A reminder that today's conference call is being recorded and a replay will be available on Agrify's investor relations website at ir.agrify.com. Please note that we will be referring to information that's contained within our press release and slides, which can be accessed on the website as well. Before we begin, we'd like to remind everyone that management's 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 or unknown risks and uncertainties, many of 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 implied by any such forward-looking statements. Important factors that could cause or contribute to such differences include the risk 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 therein, whether as a result of new information, future events, or otherwise. I will now turn it over to Raymond.

Thanks, Anna-Kate, and thank you, everyone, for joining us on the call today. We are looking forward to providing you with an update on our business as there are many accomplishments and opportunities we would like to bring to your attention. I will begin by highlighting our 2021 performance and some recent company developments. And Tim will review our financial results. And we will also give you the outlook for 2022. During 2021, we drove explosive year over year growth. We launched our total turnkey solution for cannabis cultivators. We created a significant backlog of future high margin recurring revenues. We drove tremendous pipeline velocity. We implemented innovative technological advancements to our vertical farming units via FEWSS, and we established ourselves as the leader in premium extraction solution through a series of well-executed acquisitions. Let's first discuss our growth. I'm pleased to report that in fiscal year 2021, our annual revenue grew from 395% to $59.9 million This is up from 12.1 million in 2020. It's important to note in the fourth quarter of 2021, our quarterly revenue was 25.3 million. This represents a 481 year-over-year increase when compared to 4.4 million in Q4 2020. In 2021, Agrify generated over 377 million in new bookings. This is an increase of 919% from 37 million of new bookings in 2020, a tenfold increase. In addition, we are pleased to make you aware that we currently have a total qualified pipeline of over $570 million. It's important to note when it comes to our bookings and pipeline numbers, Agrify only includes the first three years of the expected revenue for the TTK deals and from the total value of extraction product sales. Even though our TTK arrangements have a 10-year term, From a bookings and pipeline perspective, once again, we only include the facility construction costs and the first two years of the SAS and estimated production success fees. I would like to now discuss our total turnkey solution, TTK. The Agrify TTK program is the only solution of its kind in the cannabis industry whereby Agrify forges long-term partnerships with qualified customers and provides them with ingredients needed to launch and operate world-class cultivation and extraction facilities. This includes design and build-out of their cultivation and extraction facility, the installation and implementation of our state-of-the-art cultivation extraction products, process design, training, grow recipes, product formulations, data analytics, and consumer branding. Let me assure you that this program addresses some of the biggest pain points in the industry. Since launching our TTK solution only 10 months ago, we have secured six customers. These customers include successful entrepreneurs who are very passionate about the cannabis industry, a social equity applicant, a minority female entrepreneur, and proven serial cannabis executives who have successfully built and exited a billion-dollar cannabis enterprise. The strongest validation to this TTK is that we currently have 3,729 VFUs under contract from our six TTK and non-TTK VFU customers. We believe each VFU deployed will conservatively produce 35 pounds per year of production. Once all 3,729 VFUs are commissioned, we expect our customers to cumulatively produce approximately 130,000 pounds of dry flour on an annual basis, which will in return create 76 million of high margin recurring revenue annually for Agrify. Again, that's $76 million of high recurring SAS and production revenues to Agrify on an annual basis. Over the life of all of these engagements, the estimated total cumulative revenue to be generated by Agrify will be approximately $837 million, of which we project $750 million will be from very high margin production success fees, SAS fees, and interest fees, all providing a significant return on investment for our value shareholders. Our current TTK engagements are at different stages of development, but I'm pleased to report that we expect to start generating high margin recurring SAS and production fees in the third quarter of this fiscal year. I would like to now shift to our extraction division. Cannabis represents a potential of medicinal and pharmaceutical advancements. Cannabis products produces over 550 different phytochemicals, over 120 of which are cannabinoids like THC and CBD, which are well-known. But other cannabinoid variants like CBGV, THCV, CBN, CBDV are less well-known, but potentially could offer just as much, if not more, significant value. As we continue to learn more about complex chemical compositions of cannabis, the need for quality extraction and distillation solution is clear. Distillation enables the identification, isolation, and separation of valuable cannabis metabolites. The ability to take cannabis compounds distilled into their pure forms and then we combine them into specific purposeful end products for both medicinal and recreational needs is super exciting. Having extraction and post-processing capability presented a great opportunity for Agri-Fight to become far more vertically integrated with our customers while increasing our wallet share of each. Given this opportunity, Agrify decided to strategically expand its reach by establishing itself as the leader in the cannabis extraction industry. In the last six months, we have acquired four of the top brands in the industry. Precision Extraction, Cascade Sciences, Pure Pressure, and Lab Society. Combined, these four acquisitions provide Agrify with, one, the most comprehensive extraction solution from a single provider. Second, the best product brand names in the extraction industry with highly complementary solutions. Third, the most innovative and high-quality products. fourth, over 7,000 customers, including the majority of MSOs. And lastly, the addition of some of the best and brightest cannabis minds in the industry. The extraction market is currently one of the fastest growing segments in cannabis. And in 2022, we expect our extraction division to be accretive, and produced annual revenues of 62 to 65 million, with growth profit margin of 30 percent or greater. We also look forward to launching our new extraction TTK program, and we hope to announce our first extraction TTK engagement shortly. At this point, I would like to turn the call over to Agri-Vice CFO, Kim Oakes.

Thank you, Raymond. Good morning, everyone, and thank you for joining us on today's earnings call. I'll speak to our financial results for the fourth quarter and full year of 2021. Then Raymond will provide guidance and closing remarks, and then we'll open up the call for analyst questions. Overall, it's been a very active and exciting 12 months for the company. In the fourth quarter, certainly no different. Our fourth quarter and full year results are reflective of the strategic investments and the changes we have made to our business model. Specifically, our fourth quarter financial performance has been positively influenced by our total turnkey solution, which I'll refer to as a TTK arrangement, and the positive effects of our recent acquisition activity, which we successfully leveraged to expand our top-line revenue and improve our gross margin and other operating metrics. Moving on to specific commentary on our financial results, revenue in the fourth quarter of 2021 was $25.3 million, compared to revenue of 4.4 million in the fourth quarter of 2020. This represents a 481% year-over-year increase in quarterly revenue. On a full-year basis, revenue for fiscal 2021 totaled 59.9 million, compared to full-year 2020 revenue of 12.1 million, representing a year-over-year increase of 395%. The primary drivers of the revenue increase in both the fourth quarter and full-year periods of 2021 are related to an increase in the construction-related revenues, as well as the incremental revenue contribution associated with the company's October 1, 2021 acquisition of Precision Extraction Solutions and Cascade Sciences, which contributed $12.3 million of extraction-related equipment revenue in the fourth quarter of 2021. Bookings in the fourth quarter of 2021 were in excess of $250 million. The $250 million bookings includes TTK-related bookings as well as our equipment-related bookings, which includes both cultivation and extraction equipment revenues. We entered the first quarter of fiscal 22 with approximately $837 million in backlog compared to $59 million in backlog entering fiscal 2021. As stated earlier by Raymond, it is important to note that for the TTK arrangements portion of both our reported bookings and backlog amounts, we only include the first three years of expected future revenue, which is typically the construction and the first two years of SAP and estimated production fee revenues, even though these are five- to ten-year partnerships that could offer as much as three-and-a-half to four times more revenue potential. Total gross margin for the fourth quarter of 2021 was $5.6 million, or 22% of total revenue, compared to a negative gross margin of $290,000, or 7% of total revenue in the year-ago quarter. For full-year fiscal 2021, the company is reporting gross margin of $5.2 million, or approximately 9% of total revenue, compared to gross margin of $570,000, or 5% of total revenue in fiscal year 2020. Gross margin improvements in the comparative year-over-year, quarterly, and fiscal year periods is primarily the result of two specific fourth quarter of 2021 activities. First, the company recorded a VFU sale of older VFU models, which resulted in a gross margin well above the company's historical gross margin on standalone VFU equipment sales. Second was the positive lifting gross margin associated with our extraction equipment revenue, which is expected to generate gross margin of approximately 30%, which is also well above the company's historical gross margin performance. While we are certainly pleased with our gross profit margin performance in the fourth quarter of 2021, we would like to highlight that that performance isn't necessarily reflective of our expected near-term quarterly gross margin performance. Until such time as we are able to report meaningful SaaS software and production fee revenues, which we currently expect to begin in the late third or early fourth quarter of 2022, we anticipate that our quarterly gross margin performance, aided by our extraction-related equipment sales, to be in roughly a mid-teens range. Moving on to SG&A expense. This is going to be a bit complicated, so I'm going to ask you to bear with me for a minute. I think SG&A in the fourth quarter requires a little deeper dive compared to some of our other financial statement line items. SG&A expense in the fourth quarter of 2021, which excludes charges associated with changes in the fair value of contingent consideration, which is associated with our October 1st, 2021 acquisition of Precision and Cascade, totaled $16.1 million compared to $2.9 million in the fourth quarter of 2020. As it relates to the increase in SG&A in the fourth quarter of 2021, the company has significantly increased in scale during 2021, and that's in terms of headcount, professional fees, public company fees, et cetera, compared to 2020, and has also added incremental SG&A expense in connection with both certain one-time charges, which we'll discuss in a minute, and the 2021 acquisition of Precision and Cascades. Maybe a more meaningful review of fourth quarter 2021 SG&A expenses would be to compare them on a sequential basis to the third quarter of 2021. Fourth quarter 2021 SG&A expenses, again, which totaled $16.1 million, increased by $7.5 million compared to SG&A expenses of $8.6 million in the third quarter of 2021. Breaking down the $7.5 million increase in sequential quarterly G&A expense, We note that fourth quarter 2021 SG&A expense includes, in order of magnitude, the following. Acquisition-related expenses, which are associated with both the precision cascade and peer pressure acquisitions. An incremental increase in SG&A expenses related to the operations of precision and cascade, which began on October 1st, 2021, and did not impact the third quarter of 2021. Expenses related to the establishment of reserves against our outstanding accounts receivable balances, an increase in depreciation and amortization, which is essentially related to the amortization now being recorded against the identified intangible assets associated with our acquisitions, and an increase in stock-based compensation. On a full-year basis, fiscal 2021 SG&A expense totaled $35 million, compared to SG&A expense of $9.8 million in the year-ago full-year period. The primary drivers of the year-over-year increase in full-year SG&A expense are essentially reflective of of the previously described fourth quarter items, which are driven in large part by the company's February 2021 initial public offering, growth in the scale of business, and our fourth quarter acquisitions. Moving on to research and development, fourth quarter 2021 research and development expenses totaled $1.4 million compared to $1 million in the fourth quarter of 2020. On a full year basis, fiscal 2021 research and development expenses totaled $3.9 million compared to $3.4 million in the full-year fiscal 2020 period. In both periods, the overall increase in research and development expense is attributable to the company's investments in the continued development of both its vertical farming units as well as the continued development enhancement of our SaaS-based software, Agrify Insights. A standalone operating expense that we carved out of SG&A expense this quarter is relates to $1.4 million in expense involved to a change in our originally estimated fair value of contingent consideration to be earned by the former members of Precision and Cascade. From an accounting perspective, ASC 805, which specifically relates to accounting for business combinations, requires the company to determine an initial estimate as the amount of potential contingent consideration to be earned as part of an acquisition as of the date of the acquisition. The former members of Precision and Cascade could have earned up to a capped amount of $15 million in additional consideration based upon the achievement of certain revenue thresholds ending December 31, 2021. Based on their fourth quarter revenue performance, the former members of Precision and Cascade earned additional contingent consideration of $5.4 million during the quarter. This amount exceeded the company's initial estimate at the time of the acquisition by approximately $1.4 million. As per the guidelines of ASD 805, the company is required to record this increase as an operating expense in the period incurred and not as an increase to goodwill. The company's December 31, 2021 acquisition of Pure Pressure contains two consecutive 12-month earnouts. The potential additional consideration that can be earned under each of the two earnout periods is capped at $1.5 million per year. The company has made an initial estimate with respect to the probability of achievement of the additional consideration and recorded it as part of our initial purchase price accounting. We will continue to evaluate Pure Pressure's future performance against our initial estimates on a quarterly basis. Any identified changes to our original assumptions that generate a change in our estimates will result in either an increase or reduction in our future periodic operating expenses. Likely touching upon other income and expenses, The company is reporting total other income of $98,000 for the fourth quarter of 2021 compared to total other expense of $8.9 million in the fourth quarter of 2020. For the full year fiscal 2021 period, the company is reporting total other income of $2.8 million compared to total other expense of $9 million in the full year fiscal 2020 period. In all periods, the changes in other income and expense are directly related to to the convertible promissory notes entered into between the company and certain investors in fiscal 2020, which were subsequently amended by the company's board of directors in January 2021. During the fourth quarter of 2020, in the full year fiscal 2020, the company recognized an aggregate loss on the extinguishment of convertible promissory notes in the amount of $5.6 million, which represented the difference between the net carrying amount of the notes and the reacquisition price of the notes. During the year ended December 31st, 2021, the company recognized a gain on extinguishment of $2.7 million in connection with the derecognition of the net carrying amount of the extinguished debt. Also, during the fourth quarter of 2020, the company recognized other expense of $2.9 million in connection with a change in fair value of derivative liabilities associated with the fair value of the variable share settlement features. The company did not have any derivative liabilities during the portion of fiscal 2021 as a result of the extinguishment of the original convertible promissory notes. As it relates to income taxes, the company is reporting a provision of income taxes of $25,000 during the fourth quarter and full year fiscal 2021 periods. No provision for income taxes was recorded by the company in the comparative 2020 quarterly fiscal year periods. The company has historically generated losses from operations and is currently in a cumulative loss position. Accordingly, the company has established a full valuation allowance against the carrying value of its deferred tax assets. We recognize net income and or net loss attributable to controlling interest in our financial statements. We consolidate the results of operations of two less than wholly owned entities into our consolidated results of operations, Agrify Valiant LLC, a joint venture limited liability company, in which we are 60% majority owner, and Valiant America LLC, which owns 40% of Agrify Valiant LLC. The reported net income or loss in each of the presented quarterly and fiscal year periods ended December 31st in 2021 and 2020 represents the portion of the periodic income or loss attributable to the non-controlling parties. Finally, The net results of the previously discussed changes in revenue, gross margin, operating expenses resulted in a net loss during the fourth quarter of 2021 of $13.3 million or $0.60 per diluted share. Net loss during the fourth quarter of 2020 was $13.1 million or $2.23 per diluted share. Similarly, the previously described changes in our operations resulted in a net loss of $32.5 million or $1.69 per share in fiscal 2021 compared to a net loss of 21.6 million or $5.32 per share in fiscal year 2020. Adjusted EBITDA amounted to a loss of 5.5 million during the fourth quarter of 2021 compared to an adjusted EBITDA loss of 2.8 million in the year-ago quarter. For the full year fiscal 2021 period, adjusted EBITDA was a loss of 20 million compared to an adjusted EBITDA loss of $8.4 million in the full-year fiscal 2020 period. Additional information regarding our use of non-GAAP measures, including a reconciliation to the most comparable GAAP measures, can be found in the press release we issued earlier this morning, which is also available in the investor relations section of our website at www.agrify.com. Finally, I want to provide some color in our combined cash and marketable securities balances as we exit 2021. As of December 31st, 2021, the company is reporting a combined cash and marketable securities balance of $56.6 million. This represents a decrease of $56.7 million from a combined balance of $113.3 million as of September 30, 2021. The biggest drivers of the change in our periodic balances are primarily associated with our two 2021 acquisitions, of which we paid aggregate upfront cash consideration and other expenses of approximately $42 million. Our inventory bill related to the production of VFU units to be deployed under our TTK arrangements, as well as funding our operating expenses like payroll and other such operating types. Obviously, given the upfront investment nature of our TGK arrangements, which require significant investment by the company in both construction and VFU equipment costs, near-term access to capital is critical to the company. In the first quarter of 2022, we announced two separate capital-raising activities. In January, we announced the closing of a $27.3 million private placement, and additionally, last week, we announced the finalization of a debt facility, which will enable the company, subject to certain performance requirements, to access up to $135 million in additional debt financing. Both of these transactions have served to strengthen our balance sheet and enable us to continue to execute our goal of driving top-line growth and generating sustainable long-term shareholder value. With that, I'd now like to turn the call back to Raymond to provide 2020 guidance in his final comments. Thank you, Tim.

Now that we have covered our accomplishments, and financial results for 2021, I would like to share our revenue guidance for Q1 2022 and for the fiscal year of 2022. In Q1, we expect our revenue to be $25.5 million. This will be an increase of approximately 264 percent from the $7 million we generated in Q1 of 2021. For the full year of 2022, we expect revenue to be 140 to 142 million, reflecting an increase of approximately 134% when compared to 59.9 million we generated in 2021. In the second half of fiscal 2022, we anticipate our revenue mix will move towards more favorable high-margin extraction, SAS, and production success fees. Lastly, we want to reiterate to our value shareholders that agrifice demand has never been stronger. Currently, we have over $570 million of qualified pipeline opportunities, and that number continues to grow at a rapid rate. We believe it is prudent to respond to our current high demand and seize the opportunity to gain additional market share to further separate Agrify from any potential competitors. With the recent equity financing and debt facility in place, Agrify is in a position to drive continued accelerated growth. In addition, we are exploring partnerships with large REITs for construction financing and equipment financing companies for our VFUs. These type of financing structure will provide Agrify with significant scale while maximizing shareholders' values. At this point, I would like to open up the call to questions from our audience. Operator, please go ahead.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Aaron Gray with Alliance Global Partners. Your line is open.

Hi, good morning, and thank you for the questions and for the commentary there, guys. So first question for me, Raymond, just on the guide you gave for 1Q, $25.5 million. So just could you offer some commentary in terms of how that relates to kind of 4Q, specifically because of some, you know, added acquisitions, you know, within there, so, you know, roughly flat up slightly a little bit. So was there some seasonality in there? Because I know the legacy, you know, extraction, you know, is kind of more one-time purchases, so not sure whether or not there was some buying habits that create some seasonality or just some color there in terms of the sequential growth you're looking for. Thank you.

Yes, there is slightly a seasonality effect in the extraction side of the business. But in addition to that, actually we have a couple of large bookings for our VFU units, cash deals in the state of Illinois. But unfortunately, as you know, there's been kind of a social equity legal lawsuits involving some of the licensees, license applicants, sorry. And so it's actually pushed back our shipment of the VFUs by, you know, one, two quarters. You know, we booked these deals in fourth quarter. and we were originally expecting to ship in fourth quarter in Q1, but the legal law is just dragging out a little bit. But as soon as we get the clarification of that, we do expect to ship those units very shortly. They are actually already finished in production. So a little bit of seasonality, and I do believe that the business will pick up in Q2 – And as I mentioned earlier, we're not seeing any slowdown in the momentum, and we will continue to execute.

All right, great. Thanks so much for that detail. And then obviously you've had a number of acquisitions for in terms of the extraction side. Those had historically been more, you know, kind of one-time purchases. You guys are looking to add in some more reoccurring sales to the TTK that you alluded to earlier in the call. So I just wanted to know in terms of how you're looking to bring on that reoccurring model to those legacy more one-time purchase business, both for legacy customers who already have that extraction equipment as well as for newer ones who might be, you know, buying the equipment or entering the TCK programs. Thank you.

Yeah, so as I mentioned earlier, Aaron, we are expecting to start receiving recurring revenues on the cultivation side. In fact, in Q3, towards the end of Q3 of this year. And this is obviously super exciting because that's really the biggest sort of potential for the company. And obviously, the number will be Ramping up, it will be small initially, but the significant flow will start coming in probably by Q2, Q3 of 2023 as we bring on more facilities. On the extraction side, as you know, up to this point, it's been more of a one-time transactional type of sales. We just sell the hardware, and there's very, very little recurring aspect of it. We are very, very close to signing our first extraction TTK deals. And our team is also working very hard to basically put the control software on top. I believe we will begin to recognize recurring extraction revenue in 2022 as well. And we remain confident that we will have extraction-based TTK deals announced shortly. and you will be able to see nice recurring revenues out of the extraction division in 2022 as well.

All right. Thank you very much. We'll jump right back into the Q&A. Good luck in 2022.

Thank you, Aaron.

Thank you. Our next question comes from Eric de la Reers with Craig Hallam Capital. Your line is open.

Great. Thank you for taking my question. So regarding the recurring revenues coming in in Q3, that was one quarter ahead of what we were looking for. Assuming that's coming from Bud and Mary's, I was just wondering if you could kind of give us an update on where that project is right now, and then sort of what other regulatory approvals are required there. and sort of what you guys are expecting from Massachusetts regulators. I know they have kind of been notoriously slow for approvals, so just wondering, you know, what kind of sort of sensitivity you've baked into that or just, you know, how to think about the remaining steps required for Bud and Mary's until these revenues start coming in. Thank you.

Hi, Eric. Actually, the third quarter recurring revenue is not coming from Bud and Mary's, but it's coming from some of the legacy customers that we have converted into the TTK programs, such as the facility in Vegas, the facility in Washington, and also the facility in Colorado that we will be bringing in. to fruition in the next, you know, quarter or two. Button Mary is still on schedule to have its completion in fourth quarter. So the recurring revenue, as I stated in Q3, is actually not coming from Button Mary. Button Mary is still pretty much on schedule for fourth quarter completion, and production will start going in in Q1 of next year. And it's really coming in from some of the legacy customers that we were able to accelerate the deployment, and we will start seeing those projects come into fruition and recurring revenues to kick in from those facilities.

Okay, that's very helpful, and that makes sense. Could you provide any additional color around the either number of VFUs from these legacy customers that'll be switching to sort of, you know, TTK recurring revenue or just any numbers that might help us frame the expectations for recurring revenues from these legacy customers. Thank you.

Yeah, so as I stated earlier, the total number of VFUs on the contract is 3,729. And these legacy customers that we're flipping on, probably sort of in the 400 aggregates, probably in the 400 VFU range. So those will be the first ones that we bring on board. And then obviously, button varies, will be 592. And then, you know, obviously we have other larger programs behind that. So the legacy customers you can roughly estimate to be around 400 units in total.

Thank you.

Thank you. Our next question comes from Scott Fortune with Roth Capital Partners. Your line is open.

Good morning, and thanks for the questions. Just a real quick follow-up on that, Raymond, as far as the VFUs, you know, you have a number of TTK under contracts, but you had some legacy projects, construction projects coming on board that were going to require non-TTK VFUs. What percent or numbers of that 3, 7, 29 So VFUs is just coming from one time non-TTK VFUs being added to the pipeline here.

The 3729 VFUs are primarily old TTKs and probably around, I would say, 300 in aggregate. It's non-TTK customers, cash customers. And as I've mentioned earlier, we actually have other additional cash customers, particularly, you know, several from the state of Illinois, from Michigan. But because of the licensing issue, the ship-out date got a little bit delayed. But we actually just heard very favorable sort of information legal decisions for the state of Illinois. So we are hopeful that the units will get shipped very shortly. Got it.

I appreciate that. And then follow up on your demands being strong. You have $570 million qualified pipeline to continue to gain market share here, obviously. Can you unpack that a little bit on kind of number of MSOs you're looking at talking to, kind of one-time versus kind of TTK in that qualified pipeline, just kind of validate the quality MSOs that are still looking at your technology moving forward here? Yes, Scott.

We are, in addition to obviously CareLeaf, we are in number of discussions with the MSOs. and we are confident that we will probably be announcing at least another partnership very, very shortly. Out of that $571 million pipeline that we mentioned, approximately $45 million is actually extraction-related, $313 million is TTK arrangement, and the rest of it is basically, you know, are extraction VFU equipment, non-TTK. So again, the breakdown is $44 million for extraction, about $313 million for TTK, and the rest of it is basically VFU units, but non-TTK arrangements.

If I can fit one more in on that, on the extraction side, can you provide a little more color where the growth is coming from in that business? Is this new MSOs adding capacity? Is this looking at new states that are going to come on board that will add to the growth? And how do you value the new customers? What's kind of driving the growth on the extraction side as you look at that core business there?

Scott, what's most exciting is that we're seeing growth from pretty much everywhere. We're seeing customers responding to shifting of consumer demands, adding additional extraction equipment. We are seeing basically interest from large MSOs to large single-state operators to even some of the smaller guys. And obviously with the newer states coming online, there's really a lot of demands for some of these new cultivation facilities as well. And I think it's primarily driven by kind of a shifting of consumer preferences and Obviously, dry flowers are still commending, you know, 50% or so market share across every single state. But, you know, other farm products, it's really gaining traction, huge momentum. And we expect that trend to continue. So this is something that I believe we'll continue to see kind of a 25%, 30% CAGR trend.

um you know on the going forward basis and we're very you know excited about that thanks for the color i i will jump back in the queue congrats thank you our next question comes from anthony vendetta with maxim group your line is open sure thanks uh just a couple quick quick questions um on uh ramon on the

Bud and Mary's, right? Those are owned by Frozen Four. That's the holding company. Has there been any expansion with Frozen Four's other facility in terms of a new contract or a TTK arrangement? And then I have a follow-up question.

Yes, Anthony, thank you for that. Yes, we obviously, the partnership with Button Mary, Button Mary, as you said, is the subsidiary of Fozen 4. Fozen 4 is the parent company. Phase 1 is obviously Button Mary, and I've kind of shared the update on that, and that's 592 VFUs. And we are, basically we have an LLI executed with FOSEN IV for phase two expansion, which also will include the extraction manufacturing capacity as well. And that will be added to kind of a phase one at another location. in Massachusetts, so we are super excited to expand our, you know, relationship with, you know, this particular group. I think in total, we could see as much as, you know, 1,200, you know, VFUs. We are still doing the concept layout for Phase II expansion. And there's a possibility that, you know, this could actually be our first triple-stack DFU facility. So we're super excited about that possibility.

Okay. And then just in general on the TTK project, I think you have six, but if that number has changed a little bit, let me know. But in terms of generating recurring revenues from TTK, is that still – expected to happen at least for the first one by the end of this year, either late 3Q or sometime in 4Q22?

Anthony, so as you know, we actually converted some of the old legacy customers to become a TTK partner as well. So actually, the generation of SAS and production revenues, you know, it's going to happen starting from Q3 of this year. So it's basically accelerated to what we had previously forecasted. So you will start seeing some, you know, production and SAS revenue flowing in Q3 of 2022. But obviously that number is going to ramp up over time. and we believe that the more significant flow will probably be Q2 and Q3 of 2023 as we bring additional facilities online. But the initial generation of SaaS in production is now basically accelerated to Q3 of 2022. Okay, great. And then just

I know Tim mentioned this gross margin was much higher. I know that's not indicative of where or reflective of where it's going to be in the near term. Was that because there wasn't as much construction revenue this quarter? And is there any kind of guidance you could provide in terms of expectation for gross margin at the beginning of the year? Should that be revert back more towards the single digits in the beginning of the year, or how should we look at that?

Yeah, Anthony, I'll jump on that one. So Q4's gross margin at 22%, as you said, is I'd say abnormally high based upon where we've been. It is a combination, right? We recognize $12.3 million of revenue from the extraction equipment sales, that revenue comes at a 30% gross margin. So by default right out of the gate, that introduction to that mix of revenue automatically lifts our gross margin. We also had a TTK equipment sale in the quarter, of which we sold older model VFUs to a customer, of which came resulting in a higher gross margin than, as you mentioned, the low single-digit gross margin that we've historically recorded. That's what drives us to 22%. clearly based upon the singular sale of the BFU equipment. That is not sustainable go forward. So as we look at it, the mix of extraction revenue at a 30% gross margin will continue, obviously, into 2022. If we normalize that against the historical margin of Agrify, you're looking at, you know, the potential of a gross margin to be, as we said in the call, on the script call, about 18%-ish, right? It's going to be mid-teens from an expectation point of view because of that beneficial lift from the extraction equipment.

Okay, great. Yeah, that's helpful. Excellent. I'll jump back in the queue.

Thank you. Our next question comes from Gerald Pasquarelli with Cowan. Your line is open.

Thank you very much for taking the questions. So as a follow-up to the gross margin question, I guess just sort of a housekeeping item, does your kind of mid-teens target contemplate the 10% reduction in LED lighting costs that are going to be associated with your new BFUs, which I believe were slated to come on like at the end of 1Q22? If so, and again, not looking for guidance, but just from a cadence perspective, is it fair to assume that sequentially your gross margin should improve as we progress throughout the course of 2022? Thanks.

Gerald, so as you think about the cost reduction initiatives that we've implemented for the VFUs, you know, as we balance VFU production and revenue based upon what portion is TTK, what portion is standalone VFU equipment, The VFUs that are part of TTK are on a lease model, so they're not point-in-time sale. So you don't see them manifest themselves into our revenue stream as an individual equipment sale. So the standalone cash-based, I'll refer to it as a cash-based VFU equipment sale, that is not under a TTK arrangement. Yes, we will have or we have modeled and expected a lift in that standalone unit gross margin that is improved from the historical margin. However, given the weight of the revenue and the contribution to revenue of those standalone VFU equipment sales, it's not going to have a meaningful or result in a substantial lift in that gross margin. So again, near-term gross margin, we expect to be mid-teens as we move through Q1, Q2, Q3. Thinking about gross margin, as you asked in the latter part, on a full-year run for 2022, Obviously, with the introduction of SAS-based revenue and production fee revenue in, I'll call it the latter part of Q3 and into Q4, that recurring revenue stream is highly leverageable from a margin contribution point of view. Anywhere between 80% to 100% of that revenue stream will drop to the gross margin line. However, it is not a significant or meaningful component of the projected revenue for 2022 and However, again, you will start to see an incremental lift as that revenue starts to bleed in in the latter part of the year. Q4, probably more of a lift in Q4 than Q3, just due to timing of when we expect to receive it in the middle of the quarter. But, yes, you should start to see gross margin contribution sequentially lift on a quarterly basis as we move through the year.

Understood. That's super helpful, Culler. Thank you for the explanation. My second question is just on capital allocation. You've been highly acquisitive within extraction. just raised $135 million. And so as we look out to 2022, can you maybe just provide a brief or a high-level set, I guess, on your capital allocation priorities? Do you expect any more M&A? And if so, in what areas or, you know, are the use of your proceeds largely going to be, you know, used for building out your TTK partnerships and integration and costs associated with that? Any color you could provide there would be great.

Thank you.

Gerald, in terms of the acquisition, we're pretty much done when it comes to the extraction piece. We're very proud of the four companies that we acquired, and we believe we have pretty much everything we need. Yes, there are still... additional product developments that we're going to do internally to further enhance our overall offering. But with the acquisition of these four companies, we pretty much have everything we need. So in terms of M&As, we will always be, you know, looking for strategic and accretive opportunities. But as of now, you know, we have not yet identified, and so we think we're going to be probably focusing more on this kind of internal integration for now. That's on the acquisition side. In terms of how we're going to deploy the capital, yes, it will primarily be for the TTK projects. because we believe that's the area that is going to give, you know, all the shareholders the biggest long-term values. As you know, you know, every dollar that we deploy on the VFU side, you could potentially get as much as 10x return over the life of that partnership. So that's going to be the primary focus of our deployments. And, you know, as mentioned, you know, even as of today, you know, we have close to $370 million of that opportunity in our pipeline. And so that's going to be the primary focus. And the other thing that I do want to mention is that, obviously, the TTK deployment has two components, right? It has the upfront construction and then the VFU hardware, you know, lease program that Tim mentioned. You know, our goal is to continue to basically gain leverage. You know, by talking to REITs and other equipment financing partners, we will be able to find shareholder-friendly instruments to help build leverage on our business. And so that's kind of what we are focusing on for the moment.

Understood. Thank you very much for the color. I will hop back into the queue.

Thank you, and I'm showing no further questions. I'd like to turn the call back to Raymond Chang for closing remarks.

I want to thank everybody for attending the call today. We remained super excited about the prospect of Agrify, short-term and long-term, and we will stay focused to continue to execute our exciting business plan and look forward to updating you guys in our next earnings call. Thank you. Have a nice day.