Agrify Corporation

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.

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.

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.