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spk08: Good day, and thank you for standing by. Welcome to the Agri-Fi second quarter 2022 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 this session, you will need to press star 1-1 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. Please go ahead.
spk07: Good morning and welcome to Agrify's second quarter 2022 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 second 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, 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 questions. 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 filing to 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.
spk05: Thanks, Anna K. And thank you, everyone, for joining us on the call today. I'm going to begin by providing some recent updates on our business. And then our CFO, Tim Oakes, is going to discuss our Q2 financial results in greater detail. After that, I'll go over our outlook for the remainder of 2022. And then we will open up for questions on the call. The second quarter was a challenging quarter for the entire cannabis industry. Unfortunately, we are not immune to what's been happening around us. We're currently seeing cannabis prices plummeting in several key states, significant capital constraints, delays in construction, local permitting, and license issuance across many of our customers. Global supply chains continue to be an issue, which leads to a longer lead time for critical components and equipment. For the second quarter, we ended up generating 19.3 million in revenue. which equates to a 63.5% increase from the prior year period. We also generated approximately $29 million in new bookings. Even though we believe that our temporary dip in performance was largely attributed to the significant changes in a broader business environment, we also determined that there were a number of adjustments that we could make in order to better align our strategy, resources, and execution plan with the new realities of the market. The advantage of Agrifly is that our organization and technology are incredibly versatile, which allows us to transform our business based on changing market conditions and customer needs. Before diving into some of the substantive changes we have made in response to the industry-wide pressures, I would like to quickly highlight some of the things that are already working in our favor as we persevere through this turbulent time. One, interest and enthusiasm in our highly differentiated portfolio of cultivation extraction solutions remain strong. Our pipeline of qualified sales opportunity currently stands at over 250 million. Our diversified mix of products and services give us tremendous flexibility to adjust our sales approach to capitalize on whatever market opportunities are most attractive at any point in time. Our continued emphasis on innovation has resulted in a flourishing product development pipeline. In June, Lab Society introduced the Canobie 13 short-path thin-film distillation system to the market. Precision Extraction Solutions just launched the PX10 hydrocarbon cannabis extraction equipment. We will be starting production on the new version 3.7 of our vertical farming units, VSUs, and we have enhanced our rapid deployment program, which I will touch upon a little later on in the presentation. Our products continue to have global appeal. Even though some of the domestic markets that we serve have temporary softens, we are getting tons of interest in our cultivation extraction solutions from a wide variety of international customers. And it's worth noting that we are currently having minimal marketing dollars spent allocated to these global growth initiatives. We have a massive customer database to leverage for some compelling cross-selling and up-selling opportunities. And lastly, with many companies struggling to succeed in this new macro operating environment, we expect that there will be more consolidation in the industry We obviously have done M&A in the past, as well as post-merger integration, and believe we are uniquely positioned to potentially fortify our business further through additional strategic acquisitions. To combat what we're seeing in the markets, we have decided to take a different approach to build our install base and capture market share on the cultivation side. While we continue to believe in the long-term vision of our Agify Total Turnkey Solution, TTK, deployments of this magnitude become far less practical in environments where access to capital is difficult and expensive. Consequently, we have decided not to pursue any additional TTK opportunities without a pre-committed construction loan partner. This should help us with cash conservation as less capital would be tied up in projects where substantial upper end capital is required, plus usually at 15 plus months construction period. Instead, we are going to shift our focus to the following. Number one, finalizing our existing TTP projects. We have two TTP customer sites coming online in Q3, with another one going live in Q1 of 2023. The total number of EFUs in these three facilities will be approximately 800 plus. And we expect SAS revenue to start in fourth quarter this month, this year, and production success fees to kick in in Q1 of 2023. Admittedly, we did encounter some unforeseen delays in the late stages of our two projects with construction and permitting issues, but we have learned from that and I'm pleased to report that we have overcome most of these major hurdles. We believe these three imminent TTK engagements with customers in Nevada, Washington, and Massachusetts will serve as an excellent proof of concept for the underlying business model and the attractive returns of our TTK program. Ultimately, we are confident that this will help attract third-party financing partners for other TTK projects in the future. Second, given this new operating environment in which capital has become increasingly difficult to access, we will be focusing the majority of our new business development efforts on further activating and accelerating our rapid deployment program, officially launched in the spring of this year. We have since refined and enhanced our rapid deployment program, RDP, based on customer feedback. The RDPs are designed to offer our customer best-in-class, plus-in-play cultivation extraction capability with an accelerated path to profitability. RDP program features eight vertical farming units with an option for a small extraction laboratory add-on, all in a pre-packaged, self-contained, and quick-to-deploy format. The RPT program will allow us to show up at our customer's facility with two trucks and get them up and running in less than 30 days. The only requirement will be power, water, an existing or a modular clean room. This program lowers the entry barriers and upfront investment for organizations and entrepreneurs who want to experience the many benefits of our complete solution with urgency and allows our customers to get to cash flow much sooner. The modular nature of our VFUs lend itself to frictionless expansion opportunities. In the current environment where capital is limited, this solution offers the quickest way to accelerate widespread adoption of our VFUs, our VFU Agrify Insight software, as well as our extraction solutions. We understand and recognize changing industry dynamics and have pivoted our approach. Lower the entry barrier build the install base, and create a quicker path to a high margin of recurring SaaS, consumable, and production revenues. We plan to roll out this offering to a limited set of customers in Q3 and Q4, and we'll officially showcase our PD offering at the MJBizCon later this year. We intend to start taking orders for a greater volume of RPD starting in Q1 of 2023. Three, pursue more global opportunities. Within the last few months, we have received VFU orders from two international markets, Portugal and New Zealand. As cannabis liberalization and legalization movements continue to gain momentum globally, we intend to achieve even more strategic growth abroad in the future. In looking specifically at countries in the European Union, quality control is absolutely imperative because EU GMP standards are very high. and EUGMP certification is a top priority for medical cannabis producers. Agrify's solution fills this need for quality control to a level of precision that is unparalleled. Our VFUs and Agrify Insight software provides clearly defined processes with controls and accountability at every step, which enables consistency far beyond that of other modern cannabis cultivation methodologies. Additionally, any producers with export and import licenses in the EU, can sell to any other EU country, making cross-border commerce fluid and giving producers the runway to scale quickly. As a result, we are very confident that our offering will become highly attractive throughout the European market, which is expected to eventually become one of the world's largest markets for legal cannabis. As for extraction, our leading extraction brands continue to innovate. In June, Lab Society introduced the Cannabis 13 to the market. This cutting-edge, short-pass, thin-film distillation system offers cannabis operators unprecedented flexibility, ease of use, dependability, consistency, and quality when extracting cannabis oil. Earlier this month, our precision solution launched the new PX10 hydrocarbon cannabis extraction equipment, which offers two times the capacity and twice the output of its predecessor, the PX5. By bringing four of the top extraction companies into our broader organization, we now offer the most comprehensive set of extraction solutions on the market and our portfolio of innovative products continue to grow. In recent months, we have also integrated all of our individual extraction sales team into a single entity and we have aggregated their individual sales database to form a centralized database that can be leveraged for a variety of interesting cross-selling and upselling opportunities. We believe there are synergies that we are just starting to tap into, and we believe this will pay off eventually with more dividends in the future. Our notable MSO wins in the extraction side in second quarter includes a $1.3 million from Trulie, an $800,000 order from Verano. The ultimate validation for the broader vision of our combined entity is encapsulated in our recent agreement with New Zealand-based Orifam, which we announced at the end of June. Orifam, which is a licensed cultivator and distributor of medical cannabis, committed to purchase 20 VFUs that will be used to grow cannabis, as well as several cutting-edge extraction technologies, including our C1-D1 extraction pot, a C15 centrifuge extraction system, and the cannabis 13 thin-film distillation systems. We expect to form many more partnerships in the future, both domestically and globally, where we provide our customer with a complete package of cultivation and extraction solutions. Given the industry downturn, we've also implemented a series of cost reduction and cost efficiency measures in order to preserve our cash during these challenging times. For example, we reduced our headcount by 7.5%, which should result in millions of dollars of annualized cost savings. We have brought on marketing activities in-house and have decreased our marketing expense substantially. Our marketing team has proven track record and actified of being able to drive impact while operating in a very lean manner. We have consolidated many of our facilities into fewer locations in order to streamline operations. For example, we consolidated five locations in Georgia into one building, and in Colorado, we proved all our Portland location and four Lab Society locations into one Denver complex. We will be repatriating our production from our contract manufacturer back to our own facility in Georgia during fourth quarter as we attempt to materially reduce the cost of DSUs and improve capacity. managing our supply chain and inventory needs to be closely aligned with our near-term revenue expectations. And lastly, we are no longer offering customer sales on credit, which will ensure we will receive a higher portion of revenue upfront. Despite the tough macro environment, I want to assure you that the underlying health of our company is strong, and we even remain undeterred in our quest to be hugely successful over the long run. In summary, The ability to respond swiftly to challenges remain nimble in a dynamic operating environment is at the core of who we are at Agrifine. We believe we have responsibly adapted to the headwinds that we are currently facing, and we have instituted appropriate measures to confront these obstacles head on. Now I'd like to turn this call over to Tim to talk about the financial results for the second quarter.
spk06: Thank you, Raymond. Good morning, everyone, and thank you for joining us on today's earnings call. Similar to our recent earnings calls, I'll speak to our second quarter 2022 financial results, and then I'll pass the call back to Raymond for closing remarks. I would caution, this is going to be a bit lengthy, so please bear with me. Revenue in the second quarter of 2022 was $19.3 million, compared to revenue of $11.8 million in the second quarter of 2021. This represents a $7.5 million, or 63.5% year-over-year increase in comparative quarterly revenue. The increase in our second quarter 2022 revenue was solely attributable to the incremental revenue generated by our extraction division of approximately $10 million, which was partially offset by a decline in our design and build revenue of approximately $1.7 million and cultivation equipment revenue of $759,000. Second quarter 2022 revenue performance was clearly below our expectations. Our second quarter revenue, most notably our extraction-related revenue, was materially impacted by the current instability in the overall cannabis industry, which resulted in a slowdown in new bookings, as well as customer-requested delays in shipping. Both of these factors combined to reduce our anticipated second quarter 2022 extraction-related revenues. Our design and build revenue performance was, as expected, given the near completion status of several of our TTK projects. Bookings for the second quarter of 2022 were approximately $29 million, of which 10.6 million of the bookings amount was related to extraction products. The bookings amounts also include TTK-related bookings, which consists of construction and recurring SAS and production fees, as well as product bookings, including both cultivation and extraction equipment amounts. We enter the third quarter of fiscal 2022 with approximately $779 million in backlog. A significant portion of our reported backlog amount is derived from future TTK-related recurring revenue streams associated with both our staff and production success fees, which account for 89% of the total backlog amount. Total gross profit in the associated gross profit margin in the second quarter of 2022 was $1.6 million, or roughly 8% of total revenue, compared to gross profit of $527,000, or 5% of total revenue in the year-ago quarter. Gross profit and gross margin improvements in the comparative year-over-year quarterly period is driven by the incremental profit and margin contributions from our extraction-related product sales. Extraction-related revenues achieve a gross margin of approximately 23% in the second quarter of 2022 with cultivation-associated revenue, including GTK-related revenues, which in the current quarter consisted primarily of design-build revenue contributing a negative gross profit margin of approximately 7%. The primary driver of our lower than anticipated gross profit performance in the second quarter of 2022 is directly related to the quarterly reserves that were provided for slow-moving inventory and warranting costs, which totaled $929,000 and $181,000, respectively. In total, these items accounted for a 570 basis point decline in our second quarter gross profit margin. Moving on to operating expenses. Second quarter 2022 general and administrative expenses increased by $15 million, or 341% to $19.4 million, compared to $4.4 million in the year-ago quarter. The comparative increase in G&A expenses in 2022 is largely attributable to an $8.6 million increase in bad debt reserves associated with trade and notes receivable, an $800,000 approval in accordance with a tentative agreement to settle one of the company's legal disputes, and increases in G&A expenses related to the incremental G&A assumed in connection with our recent acquisitions. Additional drives of the comparative increase in second quarter 2022 G&A expenses are related to increases in depreciation and amortization expense associated with the intangible assets and one-time charges related to restructuring charges and direct acquisition costs. As it relates to our second quarter 2022 increase in bad debt reserves, Approximately $7.1 million of the current quarter reserve is specifically related to Greenstone Holdings. The company established the reserve based upon its review of Greenstone's financial stability, which could impact future collectability of the amounts owed to Agri-Fi. Greenstone's financial instability is in large part associated with the unfavorable conditions within the Colorado cannabis market. The company will continue to monitor the operations of Greenstone in an effort to collect all outstanding receivables. But due to the uncertain nature of Greenstone's business at this time, the company has made the decision to place a partial reserve against the outstanding receivable amounts. Sales and marketing expenses totaled $2.3 million in the second quarter of 2022, compared to $782,000 in the second quarter of 2021. The comparative increase in second quarter 2022 sales and marketing expenses is also directly 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 and marketing programs. Each of these necessary to drive rapid growth. Research and development expense in the second quarter of 2022 totaled $2.4 million compared to $774,000 in the year-ago quarter. The increase in research and development expense is essentially reflective of the company's need to improve and upgrade our Agrifi Insight SaaS software as well as the hardware features and functionality of our vertical farming units. Comparative second quarter 2022 increases in R&D expenses are related to current quarter addition of the extraction division R&D teams, third-party consulting, and payroll and related expenses, as well as additional material costs. We expect to continue to invest in future developments of our VFUs, our Agrify Insights cultivation software, and our extraction products. Although we will continue to invest in future R&D activities, we will seek to streamline our R&D processes and to reduce R&D expenses as we move through the rest of fiscal 2022. Operating expenses in the second quarter of 2022 includes a $69.9 million non-cash charge associated with the full impairment of our goodwill and intangible assets. During the three-month period ended June 30, 2022, the company identified a potential impairment triggering event related to both a sustained decline in our stock price and our associated market capitalization, as well as a second quarter slowdown in the cannabis industry as a whole. In light of those factors, we deemed that it was necessary to perform an interim detailed analysis to support the current carrying value of our long-lived assets, including our goodwill and intangible assets as of June 30, 2022. The results of our interim testing identified that the carrying book value of the cultivation and extraction division's equity balances significantly exceeded their calculated fair value of equity by an amount greater than the aggregate value of our goodwill and intangible assets. Accordingly, the company concluded that the entire carrying value of its goodwill and intangible assets should be impaired, resulting in the second quarter non-cash impairment charges of $69.9 million. The company, as of June 30, 2022, is currently monitoring two separate contingent earn-out consideration arrangements associated with the acquisitions of peer pressure and lab societies. 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 last society earn-out arrangement. The company made initial estimates with respect to the probability of achievement of the additional consideration to be earned under each respective earn-out period and recorded it as part of our initial purchase price accounting. associated with each acquisition. Operating expenses in the second quarter of 2022 also includes a $907,000 reduction in operating expenses, which is primarily attributable to a change in our field fair value estimates of the contingent consideration associated with the currently active Lab Society earn-out. During our periodic review of our field fair value estimates, we noted that Lab Society's actual revenue performance related to the first earn-out period trailed our initially projected estimates. Accordingly, we revised our estimated probabilities of earn-out achievement, which resulted in a reduction of the original estimated earn-out achievement of approximately $1 million. This change in contingent consideration, as required by GAAP, was recorded as a current period reduction to operating expense. 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 fair value estimates of probable earn out achievement will result in either an increase or a reduction to our future periodic operating expenses. Lightly touching upon other income and expenses, the company is reporting total interest expense of 1.9 million during the second quarter of 2022. compared to interest income of $55,000 in the second quarter of 2021. The primary driver of the increase in interest expense during the second quarter of 2022 is directly related to interest expense associated with our $65 million debt facility, combined with the current quarter amortization of the associated debt discount. The interest expense was partially offset by interest income recorded on our TTK-related construction advances. The company is recognizing a $62,000 income tax benefit during the second quarter of 2022. No provision for income taxes was recorded during the second quarter of 2021. The income tax benefit in the three months ended June 30, 2022 was primarily attributable to the goodwill and intangible asset impairment charges recorded during the second quarter of 2022, which resulted in a $62,000 tax benefit related to the reversal of the deferred tax liability on indefinite liabilities. We consolidate the results of operations of 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 owns the remaining 40%. The reported net income or loss in each of the presented quarterly periods ended June 30, 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 $93.4 million or $3.51 per diluted share during the second quarter of 2022 compared to a loss of $5.6 million or $0.28 per diluted share in the year-ago quarter. Adjusted EBITDA amounted to a loss of $19.4 million during the second quarter of 2022 compared to an adjusted EBITDA loss of $4.5 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 sections of our website at www.agrify.com. Quickly providing an update on our cash, restricted cash, and marketable security balances, We entered the third quarter of 2022 with a combined amount of cash, restricted cash, and marketable securities of $59.9 million, compared to a balance of $56.6 million as of December 31, 2021. As of June 30, 2022, the company is in default of certain financial debt covenants associated with its $65 million senior secured promissory note. Specifically, the company did not achieve its second quarter revenue or adjusted EBITDA targets. We have reached a tentative agreement in principle with our institutional lender to amend our existing credit facility to modify and eliminate certain financial covenants, which once complete should give us additional flexibility to operate and meet our long-term strategic goals, while also allowing us to responsibly adjust to the challenges currently facing the cannabis industry. We expect that the restructuring will involve repayment of the existing note with a combination of cash on hand and through the issuance of the new note, with a reduced principal amount, no amortization of monthly loan repayment, and the flexibility of early repayment. We will provide a further update once the agreement has been finalized. That concludes our prepared financial comments. And with that, I will now turn the call back to Raymond for final comments. Thank you, Tim.
spk05: I would now like guidance for fiscal year 2022. Given the life pressures we have discussed during this call, and our decision to temporarily move resources away from pursuing more TTK customers, which will lead to a notable reduction in our low margin revenue from our facility design and build services. We're updating our revenue expectations to between 70 to 75 million, reflecting an increase of approximately 7% when compared to 59.9 million generated in 2021. I would now like to open up the call to questions. Operators, please go ahead.
spk08: Certainly. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. One moment. And our first question will come from Scott Fortune of Roth Capital Partners. Your line is open.
spk03: Yeah, good morning. Can you kind of unpack a little bit more of the revenue mix and provide a little more color on the changes there on the quarter as far as the business segments regarding, you know, obviously there's extraction, TTK construction, and the VFU installments. Kind of what shifted kind of the change as you've seen kind of going forward to into the second half as far as the mix of your business here going forward? That would be helpful.
spk06: sure scott i'll start i'll start with the easy part which is just going to be the breakdown of the of the revenue number and then raymond will jump in and just give you the overall flavor and flair as to what's going on within the specific channels um of the 19.3 million in revenue in the second quarter about 10 million dollars of that is each is extraction equipment related and then the residual 9.3 is primarily the design and build as well as some other uh standalone dfu equipment revenue yeah so
spk05: Scott, I think basically on a going-forward basis, we still expect to have continuous strong demand on our extraction equipment. That will continue. And I think basically what's happening on the VSU side, as I mentioned on the call, our goal right now is to really just finalize our three existing facilities. And since two of the three will actually be coming online this quarter, the design and built revenue obviously will decline significantly. But I do believe that, you know, with the RPD program that we plan to launch at MJBizCon, we believe that it will be significant pickup of the cultivation DSU-related revenues, probably starting from Q1 of 2023. Okay.
spk03: Okay. Well, again, expanding upon that, can you provide kind of expectations, you know, as you roll out this rapid deployment program? Kind of what are you targeting for expectations for the average number of VFUs to, for this program to, you know, to get up and run quick deployment, as you mentioned? And are there any supply chain issues to provide? that number of VFUs for these opportunities? Just kind of provide a little more color on the kind of expectations for the, obviously, VFUs to start, deploy, and then obviously there's going to be follow-on as they realize the, you know, the growing potential for these VFUs from that standpoint. Sure.
spk05: Happy to, Scott. So basically, the VFUs, the RPD program, you will be rolling out a set of eight VFUs, a multiple of eight, right? So at a minimum, you know, we can show up at the facility with eight of our VFUs in one truck and literally, you know, there will be a plug and play solution and you can get up and running in less than 30 days. This is actually a significant, significant, you know, improvement compared to, you know, in the past where usually typically it's a 15 plus months construction period. This is really a plug and play solutions where everything is hooked up. All you need is a clean room, power, and water source, and we can get you up and running in no time. Several reasons why we pick, you know, a multiple of eight, right? One is because we expect the cultivation period to be about eight weeks cycle. So basically, we want you to harvest on a weekly basis, but just cycle through the ABA to use one week at a time, right? So it's basically in a multiplication of eight. And then secondly, it just so happened that it fits very nicely in one of our trucks, and so we can deploy that very quickly. But you could actually purchase, again, multiple sets of eight. And on top of that, you also do have the option. to add on an extraction, a small extraction lab. And so if you actually purchase the VFU alone, it will be less than $1 million. And if you add on an extraction, it will probably be about $1.5 to $1.6 million total investments. But you could get up and running in no time, start cash flowing, right? and basically start taking advantage of, you know, the integrated cultivation extraction solutions that we offer. I really believe that this huge advantage associated with this RPD program, it lowers the entry barriers significantly, and then now basically becomes very quickly deployable, and, you know, and you can scale your business from there. Start with one of our solutions. If you like it, we can add multiple sets of eight and get you up and running in no time.
spk03: Okay, I appreciate the cover. I will jump back in with you. Thank you.
spk08: Thank you. One moment. And our next question comes from Anthony Vendetti of Roth Capital. Your line is open.
spk04: Thanks. Yes, it's Anthony from Maxim Group. Okay, just a couple quick questions. The sales cycle, Raymond, you mentioned, has been extended. What was the sales cycle prior to this quarter, and how long do you think it's been extended? And then I just got a couple questions on the VFUs.
spk05: Yeah, I think, you know, Anthony, as you know, in the past, you know, with our large deployment of VFUs, it's not so much the sales cycle, but it's just the time it takes to basically get one of these facilities up and running. Typically, it's a 15-plus month, you know, construction period. Because essentially, sometimes it's greenfield. Even if it's not greenfield, typically to get a large 50,000, 60,000 square feet facility up and running, it's a 15 plus months cycle, construction period. So it's basically very long time until we start seeing that first recurring revenue kicking in. Obviously, the RTP program is going to shorten that significantly. It lowers the entry barrier. So instead of having to make a $20, $25, $30 million investment decision, it is now basically a one-half, $2 million investment decision, and we can get you up and running. And with eight of our VFUs, you'll get somewhere around 350 plus pounds of production on an annual basis, and you can start cash flowing. So it's actually a very, very significant game changer in our mind. But we are also seeing, as I mentioned on the call as well, just delays in permitting construction. So, for example, on our extraction side, before it used to be a much quicker book-to-burn ratio, meaning we would book the sales and immediately, almost like within two months, we would ship out the products. But we are seeing actually more and more delays because you know, a lot of the customer facilities are just not ready to receive our products. So we are seeing a slower, you know, book to burn on the extraction site. And I think that's basically like, you know, common, you know, theme across where we actually see, you know, basically, you know, it takes a long time to actually get local permitting and also time to basically just complete the construction of all these facilities.
spk04: Okay, great. And then just a quick... If you can just update us, I don't know if you gave this number, but how many VFUs do you currently have under contract or you have contractual commitments for at this point?
spk06: Yeah. I'll take that. In total, we have commitments for about 3,500 VFUs, just a little over 3,500. And those are VFUs that are deployed or to be deployed under PTK arrangements. as well as VFUs that have been shipped sort of on a standalone cash sale, one-off equipment basis.
spk04: Okay. And, I mean, you know, just looking at, like, we just went through the construction period, 350 pounds, I guess, of production per year if you do the rapid deployment program. Is there a price per pound difference? for cannabis that it becomes just, you know, maybe not profitable out of the gate or it takes much longer instead of in a year, it could take longer. And what's your sense of where the price per pound of cannabis is heading? Are you doing any forecasts on that or what seems to be the current market conditions?
spk05: Great question. So obviously, you know, with our TTK program, where we charge, you know, $600 per pound on a production front, you know, we are limiting that offering only to highly attractive, you know, limited license states, right, where the wholesale pricing would have to be, you know, for example, around $1,800, $2,000 plus, plus. to be able to justify, you know, that kind of, you know, unit economics, right? Because we are taking, you know, $600 per pound on the plus SASB on the production. However, you know, the rapid deployment program, it's very different. We're basically selling the hardware, so we will have positive margin on the hardware, and we're basically going to have recurring SASB plus consumable, And then on top of that, a much lower production fees. We're finalizing all these economics with our test customers at this point, but it will be a very different unit economics, you know, with the RPD program that, you know, I think will be a lot more universally adaptable and, you know, very different from RTTK. RTTK obviously is, you know, where we have to make substantial investments, you know, on the off-front. We need to make sure that we get, you know, the proper return on investments. But with the RPD program, it's going to be very universally adaptable because, like I said, it's 350-plus pounds of production. It gets you up and running in less than $1.5 million. You won't see that kind of offering anywhere else in the industry today.
spk04: Okay, great. Okay, thanks. I'll hop back in the queue.
spk01: Appreciate it.
spk08: One moment. It's our next question. We'll come from Eric DeLaure of Craig Halem. Your line's open.
spk02: Thank you for taking my questions. So first on the pipeline, I believe you mentioned 250. I think last quarter you mentioned 375 million. I know that's a multi-year kind of pipeline. Could you just help us understand what has changed in the pipeline to make it go from about 375 million to 250? Thanks.
spk05: Well, Eric, as I mentioned, going forward, we are not entertaining any more TTK, large TTK, you know, basically deals, unless there's a, you know, construction re-partner secured. So, basically, we're narrowing our focus on the TTK front. And as you know, TTK is usually a three-year forward-looking, so those numbers tend to be, you know, much larger. But I think the elimination of, you know, basically, you know, TTK projects for now obviously impacted the pipeline number.
spk02: On the other hand... So I'd just like to clarify, is that... Sorry, I'm just looking to clarify if that... Maybe that previous pipeline number included unannounced wins. I'm just... I guess I'm looking to... clarify if there are any announced TTK customers that are no longer, you know, on the table here.
spk05: So, Eric, I think the confusion may be the difference between pipeline and, you know, backlog. Pipelines are opportunities that we have not yet secure, but we are in the conversations, right, in various stages of conversation from, you know, internally, we call it P1 to P4, depending on what stage they're in. But what you, I think what you're referring to is actually our backlog number, which is basically confirmed, you know, deals that, you know, we intend to roll out, you know, in the future. So I think those maybe, that's where maybe the confusion is.
spk02: Yeah, no, that helps. Thanks. So in terms of the TTK deals that you have left and maybe any other sort of working capital needs that you and Tim see on your plate here, understanding there's a big sort of repayment, refinancing going on, what are your cash needs right now in terms of servicing TTK and any other sort of working capital requirements?
spk06: Yeah, in terms of that, right, so Raymond mentioned, you know, we're not going to do TTKs without a repartner or a financing partner. So you look at what we've done for cash burn Q1, Q2, we've been in ballpark $30 million each quarter, I'm going to round. A lot of that money has obviously been spent to fund the construction aspect of TTK, as well as build inventory. As we look at, you know, sort of a Q3 cash need, as well as the repayment, the repayment opportunity on the debt that's outstanding, Q3, we would expect to be a significantly lower cash burn, given the fact that we have ordered a lot of our long lead items. I think Scott had asked about what inventory is on hand to sort of execute on the RDP initiative. We have enough inventory on hand right now, so we can pull in that throttle, if you will, or pull that lever to reduce spend. After repayment Q3, Q4, we envision that we have enough cash to get us into into Q1 before we kind of have to look at what we do next in terms of capital raises or seeking additional capital.
spk02: Okay. Okay. So I guess it sounds like you maybe have a principal amount already sort of agreed in principle with this new refinancing. Are you able to share that sort of potential new principal amount on the loan or, you know, what's your sort of cash balance after this refinancing is expected to be?
spk06: Yeah, I'm going to hold off on that, right, just out of sensitivity to where we are, right? Yes, you are correct. We do have a lot of the material major terms in terms of what the restructure is or will be in terms of form. I would just be hesitant from just a risk protection point of view to go out with specific game terms right now. But what Raymond and I have said in both of our comments or as we've talked about it, once we are done, which we expect to be in a very near-term window, we will obviously update the marketplace in terms of what the final agreements are as it relates to and what the final arrangements are as to what it relates to and what the terms of that restructure are.
spk02: That makes sense. And then, so I guess last one for me here. guide implies sort of 25 to 30 million in revenue for the second half. I know there's just kind of lots of moving parts in this more sort of construction side of the business. Could you just give us, help us understand sort of roughly how you're expecting that 25 to 30 million to flow through in terms of extraction or other hardware? Any sort of help with that sort of second half implied revenue guidance would be great. Thanks.
spk06: Yeah, and just thinking about the Q3, Q4, a lot of that revenue, Eric, or, you know, I'd say a significant portion of that revenue is going to be extraction related. You know, we are somewhat conservative looking in terms of what we expect extraction to do, given what we've seen right now in the near-term window over the last 90 days, right? Raymond mentioned a lot of the customers are delaying shipment or pulling back because of construction issues on their end. So given the slowdown in our ability to convert book to burn a backlog into revenue on extraction, we've taken a conservative approach in terms of what we expect the rollout to be in three and four. But the majority, the bulk of that revenue will be extraction related. Design build revenue will come down again in Q3 and Q4 relative to Q2 and Q1 of the first half of this year. Because as Raymond said, you know, a lot of the legacy construction projects are coming to close, as well as, you know, the ones we are committed to, we will continue to fund. But anything new, we'll have a co-funding partner. So that will reduce the need of the company to utilize balance sheet capital to fund additional PTKs.
spk02: I appreciate the color. Thanks, Tim.
spk08: One moment. Our next question will come from Aaron Gray. Alliance, your line is open.
spk01: Hi, thank you for the questions. So first question for me, I want to double back in terms of, you know, the pricing and some of the markets and focus specifically more on Massachusetts. And obviously one where about a year ago, you know, you see pricing down from about 400, you know, retail products to under, you know, 300 now. Just looking at the state reported data. So just around that state where you have a pretty sizable a TTK exposure kind of coming online. You know, how do you think about that 600 per pound? Like I know for Colorado, you had done a 300 per pound production fee with Greenstone back when you reported, you know, your 10K. So just getting a better dynamic of, you know, how you might have to adjust that as prices fall and specifically using Massachusetts as an example to provide some color in terms of the comfortability in terms of, you know, the wholesale pricing in the market relative to you know, the production service fee you need to have to make sure your partner can be successful? Thank you.
spk05: Yeah, so, Aaron, great question. I think, you know, basically, in fact, we're monitoring that number on almost on a weekly basis. I think 20 Massachusetts is actually holding pretty nicely at roughly about $2,200, you know, per pound. And I believe that at that level, the $600 per pound fee that we're charging still makes a lot of sense. In fact, you know, what we're doing is also if you actually layer on top extraction, you know, it's, you know, the customer could still be very, very, very profitable. And, you know, the next one that, you know, we have a commitment, a partnership on the CTK is down in Florida. And Florida also, you know, it's a still is one of those markets that still actually holds the wholesale pricing quite nicely. So, you know, again, TTK is not for every single state. That's the reason why we're getting out of Colorado and places where, you know, the price is plummeting. But in places that, you know, ongoing in Massachusetts and Florida, I believe that, you know, the $620 per pound fee pretty much still makes sense.
spk01: Okay, great. Thanks for that color there. And then you mentioned you're prepared to work. You expect some consolidation in the industry to help fortify your own position. So, you know, I believe you're talking about that more from an ancillary right position to expand it more in the extraction category and otherwise. But I just want to get some further color because it would seem your M&A targets would be more ancillary players, which they themselves benefit from expansion in the category, be it, you know, MSOs or other operators. So, Just wondering how you're thinking about, you know, the positioning, whether being able to fortify your own as you're seeing the sales kind of come in from those ancillary, you know, B2B-reliant players, and whether or not you're trying to fortify your own current position while also potentially seeing M&A opportunities, especially given your current capital position. So just if you could expand upon, you know, that commentary based on the remarks, that would be really helpful. Thanks. Sure.
spk05: And, you know, I think that definitely the additional add-ons, that we're considering are in the ancillary categories. And they're looking at other unique technologies that we can add on. But here's the situation. We have been actually out there talking to a lot of the ancillary players. The truth of the matter is a lot of big MSOs are cutting back on their spending at this point. Projects are getting delayed. So, you know, I think even the ancillary players are really hit, you know, basically taking a hit at this point. And what they realized is that they need to basically join, you know, companies like AgriFly where, you know, we could offer a very comprehensive set of solutions to basically have, continue to have this conversation with the MSOs. If you actually go in there with just a single piece of equipment, it's hard to get their attention. But if you actually go in there and say, look, we got a solution on this and we got a solution on that. And by the way, we could actually potentially upsell on you on some of these consumables. That basically makes it a very different conversation. And the fact of the matter is, if you look at the combination of the five big customer database that we have, it's the combination of the four extraction companies and with Agrify, we touch roughly 96% to 97% of all licensed cultivators out there. There's no one else in the industry that sort of thing.
spk01: And I think really where... Yeah, sorry about that.
spk05: So that's where our advantage really shows up. And that's the reason why a lot of people, they really want to, you know, basically work with us because they know that, you know, we can actually add on their products and be able to, you know, penetrate the market, you know, deeper with our strong presence in the market.
spk01: Okay. Thanks a lot, Raymond. I really appreciate the call, and I'll jump back into the queue.
spk08: I would now like to turn the conference back to Raymond Chang.
spk05: Well, thank you all for attending the call today. I look forward to our next call to call. Very much appreciate it.
spk08: Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
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