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spk03: please press star then zero. I'd now like to hand the conference over to Anna Kate Heller with Investor Relations.
spk01: Good morning and welcome to Agrify's first quarter 2022 earnings call. With us on today's call are Raymond Chang, Chief Executive Officer, and Timothy Oaks, Chief Financial Officer. Today, management will review the highlights and financial results for the first 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 would like to remind everyone that management's remarks contain forward-looking statements and management may make additional forward-looking statements in response to your question. Such statements involve a number of known and 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 such forward-looking statements. Important factors that could cause or contribute to such differences include the risks detailed in our public filings with the Securities and Exchange Commission and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events, or otherwise. I will now turn it over to Raymond.
spk06: Thanks, Anna Kate. I just want to thank you all for joining us on the call today. I'm going to begin by highlighting our overall performance in Q1 and providing some recent updates on our business. And then our Chief Financial Officer, Tim Oakes, is going to discuss our Q1 financial results in greater detail. After that, I will go over our outlook for 2022, and then we will open up for questions. We are pleased to report our revenue for the first quarter of 2022 was slightly higher than our guidance of $25.5 million. Revenue for the quarter was $26 million. an increase of 271 percent from the prior period. We generated over 43 million in new bookings during the quarter, of which our extraction division had record quarterly bookings of 20 million. We currently have a total pipeline of over 375 million. As a reminder, when it comes to our bookings and pipeline numbers, Agri-Fi reports the total value of our extraction solutions and non-TTK cash-based VFU purchases. But for our TTK engagements, we only include the first three years of the expected revenue. Even though the partnership is typically 10 years, from a bookings and pipeline perspective, we only include the upfront facility construction costs and the first two years of the SAS and estimated production success rates, which is based on the assumption that each of our VFUs will produce 35 pounds of dry flour per year. I would like to first share with you the significant progress we're making with our extraction division. In the last seven months, we have strategically propelled ourselves to the top of the rapidly growing cannabis extraction industry. becoming the formidable leader in this space through the intentional acquisition of the four leading extraction brands. We have successfully integrated finance, legal, HR, IT, and marketing. We have consolidated the sales team and established territories with targeted accounts. We have 19 employees that are part of our extraction division's sales team. The team is focused on upselling and cross-selling all of our high-quality extraction solution, as well as our services related to lab design, installation, and training. In addition, we're seeing our VFU customers buying extraction solutions and our extraction customer wanting to learn more about our VFUs. As mentioned in our prior call, Once integrated, we plan to expand our TTK program into the extraction site. Last week, our extraction division announced the launch of the PX5, the most advanced and scalable passive hydrocarbon extractor in the industry. The PX5's unique passive recovery design offers immediate economic benefits to cannabis operators of any size by increasing the daily production up to 33 percent, savings of up to 40 percent annually in energy costs, and increasing hourly extracted production by over 200 percent. Yesterday, our extraction division announced a multimillion-dollar sale to Boone Labs that will outfit a new production facility with a complete range of Agrify offerings. including 72 of our vertical farming units, VFUs, solidness extraction, hydrocarbon extraction, and ice water hash solution. This is our cultivation and extraction coming together for a complete agrified sales to a single customer. As mentioned earlier, our extraction division had a record quarterly new bookings in Q1 of 20 million. We continue to expect our extraction division to be accretive and produce revenue of between 62 to 65 million for fiscal year of 2022 with gross profit margin of 30 percent or greater. Now, I will turn to the cultivation side of our business and, of course, our total turnkey solution. In April, we announced our first New Jersey TTK with Loudwellness. Loudwellness is one of the only 18 licensed cultivation and manufacturing operators in New Jersey. This 500 VFE's partnership is expected to generate approximately $118 million of high margin production success and SaaS fees over the next 10 years. We estimate the commissioning of the VFEs for this project to be in Q2 of 2023, with the first harvest happening in Q3 of 2023. On the MSO front, we also were very excited to announce our second agreement with a prominent multi-state operator, this time with Greenlight Cannabis. Greenlight is a rapidly growing MSO in the United States with 28 locations across five states. Under the agreement with Greenlight, we will be installing VFUs that will enable Greenlight to increase its growth canopy in order to achieve rapid business growth and geographic expansion under one standard. Internationally, we are pleased that in April we consummated our first VFU agreement with a European customer. Biocan Pharmaceutical, which is based in Portugal, will be deploying 190 VFUs at its 25,000 square feet state-of-the-art cultivation facility. The engagement with Biocan will help Agrifly begin to pave a path for success on a global scale as we continue to put in place the ability to manufacture our VFUs locally and provide quality VFU installation and support for future European-based customers. As of today, Agrify has contractual commitments of 4,569 VFUs that will be powered by the Agrify Insight cultivation and production software. 3,783 of these VFUs were committed to as part of the TTK program, which required customers to pay both production and SAS fees for up to 10 years. And it also typically includes Agrify providing a variety of other value added services. The remaining 786 VFUs were sold to customers through one-time equipment sales, but still required these customers to pay monthly SAS fees on a per-VFU basis. Assuming 35 pounds of production per year per VFU, cumulatively, all of the VFUs under agrified TTK solutions or just SAS agreements will produce an estimated $923 million in total revenue over the course of the next 10 years, of which $674 million is in anticipated high margin production success fees, 129 million in anticipated high margin SAS, and approximately 95 million is in construction related fees. It is important to reiterate once more that our TTK business assumes that each Agri-Fi VFU produces 35 pounds of cannabis flowers per year. or on average seven pounds per harvest with five harvests per year. We are extremely pleased to share with you that one of our VFU customers in Nevada has consistently produced over nine pounds per harvest over the last two months. With certain strains hitting as high as 11 plus pounds and with THC concentration as high as 34%. At a productivity rate of 5.2 turns per year, this customer is on track to produce close to 50 pounds of dried flowers per VFU on an annual basis. This is a strong validation of the robust capabilities and the performance of our VFUs. I would also like to update you on our progress with various customer facilities. As this is tied to when our anticipated high margin recurring revenue from our TTK customers and non-TTK VFU customers will begin to formalize. In the state of Nevada, we will begin to charge our non-TTK VFU customer, White Cloud, SAS fees this quarter. Next week, we will begin VFE conventioning with our Las Vegas-based TTK customer, Treehouse, and we'll begin charging both SAS and production success fees next quarter. In Washington and Colorado, we expect to go live with Hannah and Greenstone in early July, and we'll begin to charge SAS fees in the third quarter with anticipated production success fees coming in in the fourth quarter of this year. Furthermore, we expect to begin commissioning our VFEs for the Massachusetts-based TTK partner, Button Marys, before the end of 2022, and charging SAS and production fees in the first quarter of 2023. We have also moved ahead with the A&E and several plans with our Florida TTK customer Gold Leaf and our Arizona partner. I'm also pleased to inform you that El Mirage officially received their license through the Social Equity Lottery on April 8th under the name of Woodstock One. El Mirage is our Arizona TTK partner. As you can see, we are making excellent headwind with our customer deployment schedules, and we expect to start generating high-margin recurring SAS and production fees sooner than initially planned. Now, let's spend a minute to talk about our future TTK financing. We plan to finance our future cultivation facility construction requirements with debt-based investment partners, which include REITs, among other types of investors. We expect our debt-based investment partners to finance an average 60 to 80 percent of the construction, while Agrify contributes the remaining capital. Today, we are pleased to announce that we have recently entered into a term seat with our first debt-based construction financing partner, and we expect to finalize that partnership along with a new GTK project in the near future. The combination of our current balance sheet and this leveraged financing structure should give Agrify the ability to scale significantly while maximizing shareholders' value. In summary, we are very pleased with the accomplishments achieved for the first four months of the year, and we look forward to generating high margin recurring revenues in the second half of 2022. Now I would like to turn the call over to Tim to talk about the results from the quarter.
spk09: Thank you, Raymond, and good morning, everyone, and thank you for joining us on today's earnings call. Similar to our last earnings call, I'll speak to our first quarter 2022 financial results, and then I'll pass the call back to Raymond for closing remarks. Overall, our first quarter 2022 financial performance is in line with our expectations. Revenue in the first quarter of 2022 was $26 million, compared to revenue of $7 million in the first quarter of 2021. This represents a 271% year-over-year increase in comparative quarterly revenue. The comparative increase in our first quarter 2022 revenue is attributable to incremental revenue from our extraction division of approximately $12.4 million, combined with an increase in TTK-related design and build work. Organically, excluding the extraction revenue contribution, which was not part of our revenue mix in the first quarter of 2021, first quarter cultivation-related revenue increased by 94%. Non-cannabis and related party revenues declined from 5.5 million, or 79% of total revenue in the year-ago first quarter period, to 1.3 million, or 4.9% of total revenue in the first quarter of 2022. Bookings in the first quarter of 2022 were approximately 43 million, of which, as Raymond mentioned, 20 million was related to extraction products. The bookings amount includes TTK-related bookings, which consists of construction and recurring SAS and production success fees, as well as product bookings, including both cultivation and extraction equipment amounts. We enter the second quarter of fiscal 2022 with approximately $923 million in backlog, compared to $82 million in backlog entering the second quarter of fiscal 2021. A significant portion of our reported backlog amount is derived from the future TTK related recurring revenue streams associated with both our SAS and production success fees. Total gross profit in the associated gross profit margin in the first quarter of 2022 was $4.2 million, or 16% of total revenue, compared to a negative gross margin of $540,000, or 8% of total revenue in the year-ago quarter. Gross profit and gross margin improvements in the comparative year-over-year quarterly periods is solely related to the incremental profit and margin contributions provided by the company's extraction product sales. Extraction-related revenues achieved a gross margin of approximately 33% in the first quarter of 2022, with cultivation-associated revenue, including TTK-related revenues, which in the current quarter consisted primarily of design and build revenue, contributing a gross margin of approximately 1%. Moving on to operating expenses, first quarter 2022 general and administrative expenses increased by $5.3 million, or 118%, to $9.8 million, compared to $4.5 million in the year-ago quarter. The comparative increase in G&A expense in 2022 is related to overall growth in the scale of the business, including incremental G&A assumed in connection with our recent acquisitions, plus increases in depreciation, amortization expense associated with the intangible assets, and one-time charges related to direct acquisition costs, investment banker termination fees, and restructuring charges. These increases were offset by a decrease in stock-based compensation expense. The company recorded a significant amount of stock-based compensation during the first quarter of 2021, in connection with its initial public offering, which triggered the accelerated vesting of outstanding unvested stock options granted to employees. Sales and marketing expenses totaled $2.1 million in the first quarter of 2022, compared to $600,000 in the first quarter of 2021. The comparative increase is also related to the company increasing the scale of its business and strategically focusing on investments in sales and marketing activities, such as headcount, trade shows, marketing programs, et cetera, necessary to drive our rapid growth. Research and development expense in the first quarter of 2022 totaled $2.1 million compared to $900,000 in the year-ago quarter. The increase in research and development expense is essentially reflective of the company's need to improve and upgrade the Agrify Insight SaaS software, as well as the hardware features and functionality of its vertical farming unit. The company, as of March 31, 2022, is currently monitoring two separate contingent earn-out consideration arrangements associated with the acquisitions of Pure Pressure and Lab Society. Each of the arrangements contains two consecutive 12-month earn-out periods. The potential additional consideration that can be earned under each of the two earn-outs is capped at $1.5 million per year under the Pure Pressure earn-out arrangement and $1.75 million per year under the Lab Society earn-out arrangement. The company has made initial estimates with respect to the probability of achievement of the additional consideration and recorded it as part of our initial purchase price accounting associated with each acquisition. We will continue to evaluate on a routine periodic basis future performance against our initial assumptions and estimates on a quarterly basis. Any identified changes to our original assumptions that generate a change to our initial fair value estimates of the probable earn-out achievement will result in either an increase to or a reduction to our future periodic operating expenses. Lightly touching upon other income and expenses, the company is reporting total other income of $662,000 for the first quarter of 2022 compared to total other expense of $32,000 in the first quarter of 2021. The increase in other income is directly related to the interest accrued on the outstanding loan receivable balances associated with our TTK-related construction advances. During the first quarter of 2021, the company recognized a gain on the extinguishment of the convertible promissory notes in the amount of $2.7 million in connection with the derecognition of the net carrying amount of the extinguished debt. As it relates to our reported income tax benefit, the benefit from income taxes in the first quarter of 22 was primarily due to a discrete income tax benefit of $200,000 attributable to a non-recurring partial release of the company's U.S. valuation allowance as a result of the Lab Society acquisition. No provision or benefit for income taxes was reported in the first quarter of 2021. We consolidate the results of operations of less than wholly owned entities in our consolidated results of operations, specifically Agrify Valiant LLC, which is a joint venture limited liability company in which we are 60% majority owner and Valiant America LLC owns the remaining 40%. The reported net income or loss in each of the presented quarterly periods ended March 31st, 2022 and 2021 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, and operating expenses resulted in a net loss of $8.9 million, or 36 cents per diluted share, during the first quarter of 2022, compared to a loss of 3.8 million, or 33 cents per diluted share, in the first quarter of 2021. Adjusted EBITDA amounted to a loss of 6.1 million during the first quarter of 2022, compared to an adjusted EBITDA loss of 4.2 million in the year-ago quarter. 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 on the investor relations section of our website at ir.agrify.com. Finally, providing an update on our cash, restricted cash, and marketable securities balances, we enter the second quarter of 2022 with a combined amount of cash, restricted cash, and marketable securities of $93.4 million. compared to a balance of $56.5 million as of December 31st, 2021. The net increase in our cash-related balances is largely due to the two capital raising activities completed by the company during the first quarter of 2022. As discussed during our fourth quarter full-year 2021 earnings call, we noted that in January 22, we announced the closing of a $27.3 million private placement, and additionally, in March 2022, we announced the finalization of a debt facility arrangement, which enabled the company, subject to certain performance requirements, to access up to approximately $135 million in debt financing. Upon closing, the company made an initial draw of $65 million against the debt facility. Offsetting the increases in cash provided from our two first quarter transactions were outflows of cash associated with our current quarter loss from operations, approximately $16.4 million in inventory bills, approximately $12.5 million in TCK-related construction payments, $3.7 million in purchases of property and equipment, $3.5 million in purchase price consideration paid in connection with the Lab Society acquisition, and approximately $2.7 million in debt issuance costs associated with the debt facility. With that, I'd now like to turn the call back to Raymond for final comments.
spk06: Thank you, Tim. I would like to turn to our guidance for fiscal year 2022. Given our strong performance to date, we are reiterating our revenue expectation of between $140 million and $142 million for 2022, reflecting an increase of approximately 134 percent when compared to the $59.9 million generated in fiscal year of 2021. To give you a little bit more color on cadence for the year, we expect that more than 60% of our projected revenue for the year will be achieved in the second half. In summary, we are thrilled to carry our strong momentum into 2022. We have continued to make tremendous progress on the successful execution of our business and growth strategies in a number of ways. We have expanded our customer base across our cultivation and extraction divisions. We have entered new markets with our VFUs, including Europe, New Jersey, and we continue to sign agreements with prominent MSOs across both our cultivation and extraction divisions. We also continue to push forward on all of our TTK projects, and further innovate and improve our product offerings. We are especially excited to have new customer facilities coming online this quarter and more in the second half of 2022 and first half of 2023, which will be a crucial inflection point for our business model as more and more of our high-margin recurring revenue streams begin to flow in. I look forward to providing you with further exciting updates on our progress over the next several quarters. I would like to now open up the call to questions from our audience. Operator, please go ahead.
spk03: If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Our first question comes from Aaron Gray with Alliance Global Partners.
spk02: Hi, good morning, and thank you for the questions. Good morning, Aaron. Good morning. So first question for me, just you want to think a little bit longer term with the TTK program and the performance-based fees. More specifically, just on the floor pricing, I know you guys have announced for some of them the $500 just In terms of certain markets where you might see more pricing pressure over time, particularly because Massachusetts is obviously a key market for you guys for TCK programs, how do you think about potentially adjusting that over the long term? Obviously, it's mostly margin for you guys, so not too big of an impact, just less revenue maybe dropping down, but just to make sure your partners are able to succeed over the long term, and maybe you could provide some color in terms of what you're doing in some of the more mature markets like Colorado and Washington. that could provide some line of sight in terms of, you know, how that could turn over time in other markets. Thank you.
spk06: Sure. Um, Aaron, great question. Um, you know, obviously we understand very clearly that our success, you know, hinges on our customers, you know, success, right? So, um, you know, I think it's very, you know, we always encourage our customers to basically go beyond just, you know, per pound fee. Um, they really need to look at basically the overall return on investment out of that, you know, the facility that they operate. And, you know, with AgriPrize's solution, you know, we have the ability to help them to basically have the maximum yield, and more importantly, is to have the lowest cost of production and also be able to produce premium flowers so they can basically sell it you know, with premium pricing in any market that they operated, right? And which in return, they'll get the highest return on investments, right? So with that in mind, first of all, you know, we do get much better higher yields. If you actually triple stack, then you get as much as, you know, 90 to 100 grams per square foot. And then on top of it, basically the per pound fee, on the operating costs, our customers are seeing somewhere in the low threes versus the industry at $400 to $500 per pound. So it's basically convincing them that working with us, they'll have the highest return on investment to be able to protect themselves, to be able to compete in any market that they operate in, You know, that's basically how they're going to win in the long run. Obviously, you know, we will look at our, you know, per pound fee, you know, on a market-by-market basis. And right now, the new TTK programs are only being rolled out in selective markets where the premium, you know, flower pricing is still relatively high. The Colorado, Washington, and Nevada projects are basically our legacy projects that we converted them over to TTK, and they are benefiting by enjoying our lower production fees, slightly lower production fees, to basically help them to be able to compete in those markets, but for now, we are only offering the new TTK programs to selective new markets where the premium pricing is still high. But we understand that overall, at the end of the day, we need to basically help our customers to be the most competitive, cost-competitive operator in each of the markets they operate in, and also to be able to enjoy the highest revenue because the premium quality of flowers that they produce. I mean, You know, right now, for example, the customer that we mentioned in Nevada, White Cloud, because they're consistently producing, you know, very high THC products, I mean, as high as 34%, you know, their products are completely sold out, right, and still be able to command a premium pricing, you know, in that market. And I think that's basically where the market is going. It's really bifurcating. You know, it's either you go for really, really dirt cheap or you have to basically go for the premium.
spk02: Okay, thanks for that, Carl. That was really appreciated. So second question for me, last month you guys announced, you know, the VFU rapid deployment pack. I know still, you know, very early days, but just want to talk about maybe, you know, how the conversations are going, especially with some of the, you know, larger MSOs, because now it's a little bit less capital intensive for them to, you know, try the VFUs. not have to change the infrastructure of their own facilities, now more of a plug-and-play, if you will. So I just want to know in terms of that initiative and how it's kind of spurred maybe more R&D-type initiatives with some of the larger players. Thank you.
spk06: Yeah, Aaron, you know, we understand that we have to listen to our customers, right? And, you know, in the early conversation with the MSOs, everybody was interested in trying our VFUs. Because obviously, why wouldn't you want to look at a new technology that could help you to improve yield, consistency, and be able to operate at a lower cost? But obviously, having to go in and retrofit and have to go through renovation and all kinds of biosecurity risks, that was a major turnoff for a lot of the MSOs. So the interest wasn't there. It was basically people not wanting to bother with all these retrofitting issues. So basically, we had to kind of be there at the right time and only looking at new facilities. And even then, they questioned whether or not our units would perform and et cetera. So it was a difficult sale. But we developed this rapid deployment program. And I can tell you as a result of that, the conversations have just basically gone out the roof. We have, you know, basically have so many MSO interests, and we will be announcing several more additional rapid deployment programs with MSOs in the very near future.
spk03: Our next question comes from Scott Fortune with Roth Capital Partners.
spk04: Good morning. Thanks for the question. Hey, Raymond. Good morning. Can you provide a little more color on addressing the build-out timings on the TTK facilities in light of, you know, we've seen inflation headwinds here, costs and labor issues, and delays in licensing, you know, with Massachusetts and some of the other states within the industry. But just provide an update on the TTK deals in the pipeline or that you've signed and the timing to generate cash flow, kind of make sure that's still on track here for the second half.
spk06: Sure, Scott. So let me start with Treehouse in Nevada. As I mentioned earlier, Treehouse, we are beginning commissioning of our BFUs actually as early as next week. So we can expect both SAS and production revenues coming out of that facility next quarter. Our two TTK projects, Washington and Colorado, so Hannah and Greenstone. We are also, we'll begin commissioning the VFUs before the end of this quarter, and we are also expecting both production and SAS revenue coming out of both of those facilities in Q3. Button Mary's, which is obviously the larger TDK project in Massachusetts, we will begin commissioning of our VFUs before the end of this year with expected SaaS and production revenues in first quarter of 2023. And lastly, the two big ones, El Mirage and Florida Gold Leaf, Those two projects, we have kicked off the architectural and engineering design plan with those guys, and we are expecting that both of these projects probably will have commissioning of our BFUs, sometimes towards the end of Q2 or beginning of Q3 of 2023, with expected production and SAS fees coming in in Q4 of 2023.
spk04: Perfect. So, Rob, those projects that you're building out are remaining on track despite some of the challenges going forward with everything else going forward.
spk06: That is correct. In fact, you know, based on the timing that I shared, you know, as you can see, the production and SaaS fees, you know, it's actually going to start kicking in in Q3 of this year, which is you know, earlier than expected. And in fact, this quarter, we will start to collect SAS fees from our customer, White Cloud in Nevada. As you know, that's a non-TTK customer, but the SAS fee will begin to kick in actually this quarter.
spk03: Our next question comes from Eric Delorier with Craig Hallam.
spk08: Great. Thank you for taking my question here. So first question on the REIT or kind of debt partnership that you touched on in your prepared remarks. I just wanted to clarify if this was for one or more specific projects or if this is an enterprise-level partnership. Thanks.
spk06: Hi, Eric. Good morning. So, you know... It's very similar to kind of my TTK approach. We want to make sure that we set a nice template of how we want to work with REITs. And so this first deal that I talked about today, it's only at the enterprise level, but we want to make sure that the terms are reasonable and also that, you know, obviously the market will react favorably and also gives us the maximum leverage to be able to scale that, you know, over time. However, you know, we are continuing to have conversations with multiple REITs beyond just kind of at the enterprise level, but we want to basically kick off with this particular one just to kind of set the framework and set the expectation and just to make sure that we structure everything correctly. So we don't want to basically jump the gun and regret it over time. So we're doing this very carefully because we know that our shareholders desire us to be able to maximize their values, and we want to make sure that we bring in the right partner under the right terms.
spk08: Okay, so I suppose just to clarify here, it sounds like that it is sort of for you know, one or more specific projects at first and then, you know, kind of proceeding from there.
spk06: Yes. The term sheet that we sign is for one project. They do have capacity to go beyond one. But, you know, we want to start with one. And then while at the same time, we are also having conversation with bigger REITs. that basically talks about multiple projects. But, you know, again, we want to do it carefully just to make sure we have all the terms and then structure the deal correctly.
spk08: Yeah, no, that makes sense. Second question here. So there's a big inventory investment in the quarter. I mean, you know, obviously there's supply chain stuff going on, so... you know, certainly could be reasonable here. Could you just kind of flesh that out a bit more? What kind of inventories were involved there? Is this kind of extraction or on the VFU side of things? And then overall, any kind of indication on how to think of working capital flows for the rest of 22 would be really helpful, and maybe you can remind us how to think of the construction loans and how those impact working capital. Thank you. Tim, would you like to take this, please?
spk09: Yeah, I will, Raymond. Thank you. All right, Eric, so first question related to inventory. Inventory, the build-in inventory of 16.4 is really related to the investment in the DFU production, right? As Raymond talked about, right, we have a lot of deliveries on the DFU in terms of commissioning. They're going to start to come up in the back half of the year in the early part of 2023. So that investment right now is investment in sort of the longer lead items, as you mentioned, to defeat supply chain issues. as well as we've got about $2.5 million in an inventory prepayment in connection with our trying to bring online two additional contract manufacturers in order to offset and give us better leverage, not only from a manufacturing capacity point of view, but also from a price point of view, as opposed to relying on a single source CM. So that really accounts for the drive in inventory. In terms of addressing the second part of your question, I think, is really working capital needs. You know, we have heavily invested at this point in time, obviously, in the inventory. We have invested heavily in acquisitions, and we have also heavily invested in the TTK on the construction piece, right, that upfront cost in terms of the outlay of the financing. As we move through the rest of the year, a lot of those initial legacy contracts, as That will start to lessen a bit on the construction revenue side, on the construction financing side. So you will start to see sort of or would expect to see sort of a reduced outlay of capital on the TTK construction front until the newer engagements that we've recently announced start to complete their design, build, and their A&E studies. We will then, towards the back half of the year, start to recycle on construction. the capital needs for the company really are going to be in the inventory production side. You will see that manifest in the increase in inventory as we move through time, and then ultimately you will see that inventory flip into a fixed asset because of the lease-based model on the VFUs contributed to those TTK arrangements. So you would expect to see that, and you would expect to see, as we have shown in the recent past quarters, continued investments in sort of what we describe on the balance sheet as loans receivable. In terms of, you know, when does the construction start to flip? As these constructions start to come to completion, those outstanding finance amounts will start to pay down over a 12- to 24-month period, and you would start to see a reduction in the loan receivable amount and an increase in cash from the repayments of principal and interest on those outstanding finance balances.
spk03: Our next question comes from Anthony Vendetti with Maxim Group.
spk05: Thanks.
spk03: Good morning, Anthony.
spk05: Good morning, Raymond. Just a couple questions on the backlog. So backlog increased by 77 million. What's the total backlog now, and do you expect most of that backlog to be recognized over what time frame?
spk06: Kim, would you like to take that?
spk09: Yeah, certainly, Raymond. So, Anthony, right now as we enter the quarter, we're looking at a backlog of about $923 million. That obviously, I think as Raymond went through his comments, plays out over time because the larger chunk of that is related to the future SaaS software fees as well as the production fees. So that backlog converts to revenue in our world, you know, comfortably over a six- to eight-year period.
spk05: Six to eight years. Okay, okay. And I know some of it's over ten years, but most of it over six to eight. Okay.
spk09: And, Anthony, sorry, let me interrupt. You just need to also consider that some of that front-loaded piece is construction-related, and as we talked about our legacy contracts, those legacy construction pieces are starting to come to conclusions. So Raymond highlighted that as we look at towards the end of the second quarter of this year and enter the third and fourth quarter, we will start to recognize the leading edge of that pent-up backlog related to the SAS fees and the production fees.
spk00: Okay.
spk06: Yeah, so, Anthony, if I may, you know, out of that $900-plus million, you know, good 80% plus is really production and SAS fees. And most of that, you know, will be over a 10-year period, right? But as you know, you know, we do, you know, get involved with the construction side of things, and that's basically kind of a book and burn, you know, over 12 months period. So kind of the six to seven is sort of like what the average, if you kind of look at that entire $900 million. But, you know, the high margin SaaS and production fees typically are 10 years, and they all kind of come on the back end of that revenue streams.
spk05: Sure, sure. Understood. And then the rapid VFUs, which are attracted to the MSOs, you said you're having some, I guess, multiple conversations with MSOs about that. Can you give us an update on CuraLeaf? I know that was one that was sort of, that signed up for like a test run and Just give us an update of where that project is and what the opportunity is with Cure Relief at this point.
spk06: Sure, I'm happy to. So they have officially submitted to the town of Muton, that's where the R&D facility is, basically the application for construction. So everything is up. We are proceeding forward. A&E plan is now done, and they are moving forward with the construction process. You know, this is one of the reasons why we basically developed the RDP, you know, the Rapid Deployment Program, because, you know, what we realized is that it is really, really a hassle, right, you know, basically for them to have to basically go back in and retrofit and apply for construction permits and, you know, all that stuff, right? And it was a big lesson learned, right? It did take us a long time to kind of get this up. They're moving forward, so we're very excited about that. But at the same time, it also reminded us that we really do need to have this RDP program so that basically they can have 10 units, they can have 20 units, and it's a plug-and-play, and this will help them to accelerate and be able to put our equipment to test. Now, one of the other things that, Anthony, I really want to reiterate is, I am most excited about the fact that what is happening at our customer site today. As you guys all know, we estimate 35 pounds of VFU production per VFU on an annual basis. I just shared with you guys this morning, White Clouds is hitting somewhere close to 50 pounds production. That is an extremely exciting development. It really validates our business and we expect that number to continue to grow up. It's not only on the yield side, which obviously people only talk about that, but hitting as high as 34% TSC. This is a very strong validation, and I would say public is one of the more important pieces of information I share today, and we expect to continue to see progress on the advantage of our technologies, and we're super excited about that.
spk03: Our next question comes from Harrison Vivas with Cowan.
spk07: Great. Thanks so much for taking the question. Just wanted to double back on REIT partnerships. So I understand it's still early days and you're establishing a framework for how you're structuring deals. But once you do sort of kind of establish a repeatable framework, does this accelerate your ability to execute against your existing pipeline or does it sort of expand your pipeline? Can you kind of discuss the opportunity set once you've established a repeatable deal structure with REITs? Thanks.
spk06: Harrison, thank you, and thank you for joining the call today. You know, here's the thing. It's about industry headwind and, you know, people seeing slowdown, you know, et cetera, et cetera. But I can tell you that the interest, the amount of, you know, people wanting to engage with us, we're continuously turning away deals because we're just way too busy. And, you know, right now we're being super selective as to the partners that, you know, we want to, you know, team up with. And, you know, obviously one of the challenges is, you know, how are we going to finance all of these TTK projects, right? Because obviously we don't want to do it just, you know, completely 100% from our own balance sheets. So setting the right framework for REIT partnership will allow us to be able to incredibly scale up that business, right? But at the same time, even though, you know, we're in multiple engagement and have, you know, basically like term sheets from people, but I want to make sure that we structure this correctly because you only, really only, you know, you allow one chance to do it right. And we want to make sure the first deal is done right so that it sets the expectation, it sets a template, and basically we can be, you know, we can scale from there, right? But once we can put a re-partnership in place, then I see, you know, tremendous leverage out of our business because, you know, Harrison, you know, right now for every TTK deal that we do, about 60% of the upfront cost is related to construction, right? And the 40% is basically related to the additional, you know, equipment that we have to put in. So if we can actually have a repartnership to take away 60% of that upfront, then we only have to worry about financing the 40%. And I believe once we start showing these recurring revenues, which we will begin to do, you know, starting from next quarter, then we will be able to find, you know, maybe some partners on the equipment financing side for our VFUs. Then under that scenario, then this model becomes extremely scalable. So that's kind of, you know, what we're, you know, putting in place. I understand.
spk07: That's super helpful information. And then kind of just a clarifier, in response to an earlier question, you talked about prioritizing markets where premium prices for flour were holding in the most. Can you kind of specify what markets you're referencing and kind of how you see your state mix evolving over the next several years?
spk06: Thank you. Yeah. So, you know, obviously... The new TTK markets that we are focusing on are primarily all in limited license states, East Coast. So, for example, we're heavily invested here in Massachusetts, and that's our backyard, and we have to own our backyard for sure. Florida, that's also a limited license state, and the premium pricing is still holding up very nicely there. We're obviously entering into New Jersey. Obviously, that's a very exciting market, predicted to be probably New York, New Jersey, the second largest market outside of California. I know it's going to be difficult there, but I think initially there may be a supply-demand sort of imbalance because people are just trying to figure out how to bring supply into that market. but I think the premium market might still be able to hold nicely there. And then there are other smaller states that actually, again, limit the license primarily for medicinal use that we're looking at right now, but we're being very selective and looking only at the high premium pricing market for the moment.
spk03: Our next question comes from Pablo Zwanek with Cantor Fitzgerald.
spk10: Hi, this is Matthew Baker for Pablo. Thank you for taking my question. Hi, Matthew. Hey, morning, Raymond. Can you talk about the balance sheet cash burn and your funding needs over the next 12 months?
spk09: Tim, please take that.
spk10: Yep, absolutely, Raymond.
spk09: Thank you, Matthew. So at the end of the quarter, we end with cash and cash equivalents, ballpark $93 million. We've got $30 million of that restricted as part of the debt agreement we entered into in the latter part of March. So that gives us ballpark $64 million of cash as we look at moving through the year. Right now where we sit, as Raymond talked about, signing the term sheet with a potential investor or financer for some of our other TCK arrangements, we feel that we have enough to get through the rest of this year. It will be tight getting through the year. As we have done in the past, we will always look to find ways to sort of strengthen the balance sheet as we move through time, giving us, again, continued leverage on that balance sheet to continue to look at the expansion or investment in the growth of our top line.
spk10: Okay, thanks for the color there. Just for our second question, from like a value proposition point of view, what's the average cost per pound that your vertical farm units produce compared to the average cost of indoor cultivation? And then also on a, how does this compare in terms of potency?
spk06: Yeah. Um, great question. Um, so right now our customer is seeing an average around $320, um, OpEx, um, per pound. Um, and that's basically comparison to roughly four 50 to 500, um, industry average. So as you can see, it's significantly lower. And I believe that number, in fact, will go even further down with scale. The 320 number that I kind of referenced earlier is for a, you know, 200 plus VFU facility. And it actually does have tremendous sort of scalability. So you can expect that number to go even lower with higher volume production. So that's the first question. In terms of the second question, you know, as I mentioned earlier today, our customers are seeing as high as 34% THC in one of their strains, right? And it's not just the THC. It's the other cannabinoids and also terpene. And it's also not just, you know, the other cannabinoid and terpene being higher. but it's also the consistency, right? I mean, you know, the best, you know, thing about our solution is once you figure out the optimal grow recipe, you just continue to use that, operate at a curtain down, completely control environment, and you have the ability to repeat that same process over and over and over. And that's really what gives us, you know, the maximum advantage is not only being able to push something out once, but it's the ability to basically repeat that process over and over. And that's really what sets us apart.
spk03: I'm showing no further questions in queue at this time. I'd like to turn the call back to Rangman Cheng for closing remarks.
spk06: Gentlemen, I really want to thank you all for joining the call today. And one of the other things as a closing remark I do want to say is that You know, just based on our backlog, with 4,569 VFUs currently under contract. Starting from 2023 and onward, once we commissioned all of these VFUs, you would be expecting to generate $84 million of high recurring revenue on an annual basis. That's really the power of the business model that we have, and we're executing against that, and we're very happy to see a lot of our facilities coming into fruition, and the team is 100% focused, and we look forward to updating you with more positive developments in the quarters to come. Again, thank you for joining the call today, and look forward to updating you all in the next quarter. Thank you.
spk03: This concludes today's conference call. Thank you for participating.
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