UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022

 

or

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to _________

 

Commission File Number: 001-39946

 

AGRIFY CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada   30-0943453
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

76 Treble Cove Rd.

Building 3

Billerica, MA 01862

(Address of principal executive offices, including zip code)

 

(617) 896-5243

(Registrant’s phone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001 per share   AGFY   NASDAQ Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES  ☒  NO  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 

 

YES  ☒  NO  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES  ☐  NO  

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding as of August 10, 2022
Common Stock, $0.001 par value   26,591,438

 

 

 

 

 

 

   

TABLE OF CONTENTS

 

      Page
PART I FINANCIAL INFORMATION   1
       
ITEM 1. FINANCIAL STATEMENTS   1
       
  Condensed Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021   1
       
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 (unaudited) and 2021 (unaudited)   2
       
  Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 (unaudited) and 2021 (unaudited)   3
       
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 (unaudited) and 2021 (unaudited)   4
       
  Notes to Condensed Consolidated Financial Statements   5
       
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   48
       
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk   67
       
ITEM 4. Controls and Procedures   67
       
PART II OTHER INFORMATION   68
       
ITEM 1. Legal Proceedings   68
       
ITEM 1A. Risk Factors   68
       
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds   68
       
ITEM 3. Defaults Upon Senior Securities   68
       
ITEM 4. Mine Safety Disclosures   68
       
ITEM 5. Other Information   68
       
ITEM 6. Exhibits   69
       
SIGNATURES   70

 

i

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

AGRIFY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

    June 30,
2022
    December 31,
2021
 
    (Unaudited)        
Assets            
Current assets:            
Cash and cash equivalents   $ 18,608     $ 12,014  
Restricted cash     30,000        
Marketable securities     11,323       44,550  
Accounts receivable, net of allowance for doubtful accounts of $2,740 and $1,415 at June 30, 2022 and December 31, 2021, respectively     10,468       7,222  
Inventory, net of reserves of $1,871 and $942 at June 30, 2022 and December 31, 2021, respectively     41,871       20,498  
Prepaid and refundable taxes     210        
Prepaid expenses and other current assets     5,925       2,452  
Total current assets     118,405       86,736  
Loan receivable, net of allowance for doubtful accounts of $7,079 and $0 at June 30, 2022 and December 31, 2021, respectively     35,090       22,255  
Property and equipment, net     11,932       6,232  
Right-of-use, net     2,866       1,479  
Goodwill           50,090  
Intangible assets, net           14,072  
Other non-current assets     2,920       1,184  
Total assets   $ 171,213     $ 182,048  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable   $ 4,157     $ 9,151  
Accrued expenses and other current liabilities     27,456       28,764  
Operating lease liabilities, current     1,084       814  
Long-term debt, current     9,615       1,089  
Deferred revenue     3,753       3,772  
Total current liabilities     46,065       43,590  
Other non-current liabilities     236       318  
Operating lease liabilities, non-current     1,908       704  
Long-term debt     45,014       12  
Total liabilities     93,223       44,624  
Commitments and contingencies (Note 17)    
 
     
 
 
Stockholders’ equity:                
Common Stock, $0.001 par value per share, 50,000,000 shares authorized, 26,591,430 and 22,207,103 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively     25       21  
Preferred Stock, $0.001 par value per share, 2,895,000 shares authorized, no shares issued or outstanding            
Preferred A Stock, $0.001 par value per share, 105,000 shares authorized, no shares issued or outstanding            
Additional paid-in capital     238,854       196,013  
Accumulated deficit     (161,258 )     (58,975 )
Total stockholders’ equity     77,621       137,059  
Non-controlling interests     369       365  
Total liabilities and stockholders’ equity   $ 171,213     $ 182,048  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1

 

  

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

 

   Three Months ended
June 30,
   Six Months ended
June 30,
 
   2022   2021   2022   2021 
Revenue (including $1,140, $10,895, $2,411 and $16,413 from related parties, respectively)  $19,329   $11,825   $45,350   $18,833 
Cost of goods sold   17,717    11,298    39,568    18,846 
Gross profit (loss)   1,612    527    5,782    (13)
                     
General and administrative   19,378    4,399    29,137    8,857 
Selling and marketing   2,332    782    4,422    1,398 
Research and development   2,438    774    4,522    1,656 
Change in contingent consideration   (907)   
    (907)   
 
Impairment of goodwill and intangible assets   69,904        69,904     
Total operating expenses   93,145    5,955    107,078    11,911 
Loss from operations   (91,533)   (5,428)   (101,296)   (11,924)
Interest (expense) income, net   (1,927)   55    (1,245)   23 
Other expenses   
    (63)   
    (63)
Gain on extinguishment of notes payable   
    
    
    2,685 
Other (expense) income, net   (1,927)   (8)   (1,245)   2,645 
Net loss before income taxes   (93,460)   (5,436)   (102,541)   (9,279)
Income tax benefit   (62)   
    (262)   
 
Net loss   (93,398)   (5,436)   (102,279)   (9,279)
Income attributable to non-controlling interests   3    200    4    167 
Net loss attributable to Agrify Corporation  $(93,401)  $(5,636)  $(102,283)  $(9,446)
Net loss per share attributable to Common Stockholders – basic and diluted
  $(3.51)  $(0.28)  $(4.00)  $(0.57)
Weighted-average common shares outstanding – basic and diluted
   26,582,104    20,344,278    25,591,114    16,661,948 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2

 

 

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

   Common Stock   Preferred A Stock   Additional
Paid-In
   Accumulated   Total
Stockholders’
Equity
attributable
to
   Non-
Controlling
   Total
Stockholders’
 
   Shares   Amount   Shares   Amount   Capital   Deficit   Agrify   Interests   Equity 
Balance at January 1, 2021   4,211,677   $4    100,000   $
   $19,827   $(26,510)  $(6,679)  $225   $(6,454)
Stock-based compensation       
        
    2,135    
    2,135    
    2,135 
Beneficial conversion feature associated with amended Convertible Promissory Notes       
        
    3,869    
    3,869    
    3,869 
Conversion of Convertible Notes   1,697,075    2    
    
    13,098    
    13,100    
    13,100 
Issuance of Common Stock – Initial Public Offering (“IPO”), net of fees   6,210,000    6    
    
    56,955    
    56,961    
    56,961 
Issuance of Common Stock – Secondary public offering, net of fees   6,388,888    6    
    
    79,833    
    79,839         79,839 
Conversion of Preferred A Stock   1,373,038    1    (100,000)   
    (1)   
    
    
    
 
Exercise of options   174,223    
    
    
    439    
    439    
    439 
Exercise of warrants   240,233    
        
    5    
    5    
    5 
Net loss       
        
    
    (3,810)   (3,810)   (33)   (3,843)
Balance at March 31, 2021   20,295,134   $19    
   $
   $176,160   $(30,320)  $145,859   $192   $146,051 
Stock-based compensation                   931        931        931 
Exercise of options   78,565                282        282        282 
Net loss                       (5,636)   (5,636)   200    (5,436)
Balance at June 30, 2021   20,373,699   $19       $   $177,373   $(35,956)  $141,436   $392   $141,828 

 

    Common Stock     Preferred A Stock     Additional
Paid-In-
    Accumulated     Total
Stockholders’
Equity
attributable
to
    Non-
Controlling
    Total
Stockholders’
 
    Shares     Amount     Shares     Amount     Capital     Deficit     Agrify     Interests     Equity  
Balance at January 1, 2022     22,207,103     $ 21           $     $ 196,013     $ (58,975 )   $ 137,059     $ 365     $ 137,424  
Stock-based compensation                             953             953             953  
Issuance of Common Stock and warrants in private placement     2,450,350       2                   25,795             25,797             25,797  
Issuance of debt and warrants in private placement                             13,230             13,230             13,230  
Acquisition of Lab Society     297,929                         1,903             1,903             1,903  
Exercise of options     4,220                         10             10             10  
Exercise of warrants     1,583,288       2                   (1 )           1             1  
Net loss                                   (8,882 )     (8,882 )     1       (8,881 )
Balance at March 31, 2022     26,542,890     $ 25           $     $ 237,903     $ (67,857 )   $ 170,071     $ 366     $ 170,437  
Stock-based compensation                             940             940             940  
Exercise of options     4,286                         10             10             10  
Exercise of warrants     44,254                         1             1             1  
Net loss                                   (93,401 )     (93,401 )     3       (93,398 )
Balance at June 30, 2022     26,591,430     $ 25           $     $ 238,854     $ (161,258 )   $ 77,621     $ 369     $ 77,990  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

 

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

    Six Months ended
June 30,
 
    2022     2021  
Cash flows from operating activities            
Net loss attributable to Agrify Corporation   $ (102,283 )   $ (9,446 )
Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities:                
Depreciation and amortization     2,193       313  
Impairment on goodwill and intangible assets     69,904        
Amortization of premium on investment securities     1,055       63  
Amortization of debt discount     1,228        
Interest on investment securities     (1,247 )     (73 )
Provision for doubtful accounts     8,630        

Provision for slow-moving inventory

    929        
Debt issuance costs     2,422        
Deferred income taxes     (262 )      
Compensation in connection with the issuance of stock options     1,893       3,066  
Non-cash interest (income) expense     (1,010 )     46  
Gain on extinguishment of notes payable, net           (2,685 )
Loss from disposal of fixed assets     8       25  
Change in fair value of contingent consideration     (907 )     —   
Income attributable to non-controlling interests     4       167  
Changes in operating assets and liabilities, net of acquisitions:                
Accounts receivable     (4,305 )     (11,122 )
Inventory     (20,171 )     (4,477 )
Prepaid expenses and other current assets     (2,714 )     (2,723 )
Prepaid and refundable taxes     (16 )      
Right-of-use assets, net     86       25  
Other non-current assets     (1,514 )      
Accounts payable     (4,943 )     86  
Accrued expenses and other current liabilities     (4,000 )     12,841  
Deferred (expense) revenue, net     (2,560 )     57  
Net cash used in operating activities     (57,580 )     (13,837 )
                 
Cash flows from investing activities                
Purchases of property and equipment     (6,398 )     (1,102 )
Purchase of securities     (211,030 )     (50,280 )
Proceeds from the sale of securities     214,449        
Issuance of loan receivables     (20,443 )     (483 )
Cash paid for business combination, net of cash acquired     (3,513 )      
Net cash used in investing activities     (26,935 )     (51,865 )
                 
Cash flows from financing activities                
Proceeds from issuance of Common Stock and warrants in private placement     65,000        
Proceeds from issuance of debt and warrants in private placement, net of fees     25,770        
Proceeds from IPO, net of fees           56,961  
Proceeds from Secondary public offering, net of fees           79,839  
Proceeds from exercise of options     19       721  
Proceeds from exercise of warrants     2       5  
Short-term loan payable     2,513        —  
Repayments of debt     (2,008 )      
Payments of financing leases     (187 )     (94 )
Net cash provided by financing activities     91,109       137,432  
Net increase in cash and cash equivalents     6,594       71,730  
Cash and cash equivalents at the beginning of period     12,014       8,111  
Cash and cash equivalents at the end of period   $ 18,608     $ 79,841  
Cash, cash equivalents, and restricted cash at end of period                
Cash and cash equivalents   $ 18,608     $ 79,841  
Restricted cash     30,000        
Total cash, cash equivalents, and restricted cash at the end of period   $ 48,608     $ 79,841  
Supplemental disclosures of non-cash investing activities                
Equipment sold for loan receivable to customer   $     $ 289  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

 

 

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 — Overview, Basis of Presentation and Significant Accounting Policies

 

Description of Business

 

Agrify Corporation (“Agrify” or the “Company”) is one of the most innovative providers of advanced cultivation and extraction solutions for the cannabis industry, bringing data, science, and technology to the forefront of the market. The Company’s proprietary micro-environment-controlled Agrify Vertical Farming Units (or “VFUs”) enable cultivators to produce the highest quality products with what it believes to be an unmatched consistency, yield, and Return on Investment (“ROI”) at scale. The Company’s comprehensive extraction product line, which includes hydrocarbon, ethanol, solventless, post-processing, and lab equipment, empowers producers to maximize the quantity and quality of extract required for premium concentrates. 

 

The Company believes it’s the only company with an automated and fully integrated grow solution in the industry. The Company’s cultivation and extraction solutions seamlessly combines its integrated hardware and software offerings with a broad range of associated services including consulting, engineering, and construction and is designed to deliver the most complete commercial indoor farming solution available from a single provider. The totality of its product offerings and service capabilities forms an unrivaled ecosystem in what has historically been a highly fragmented market. As a result, the Company believes it’s well situated to create a dominant market position in the indoor agriculture sector.

 

The Company was formed in the State of Nevada on June 6, 2016 as Agrinamics, Inc., and subsequently changed its name to Agrify Corporation. The Company is sometimes referred to herein by the words “we,” “us,” “our,” and similar terminology.

 

The Company has nine wholly-owned subsidiaries, which are collectively referred to as the “Subsidiaries”:

 

  AGM Service Corp LLC (formerly AGM Service Corp Inc.);

 

  TriGrow Systems, LLC (“TriGrow”, which acted as the Company’s exclusive distributor and which was acquired in January 2020 as TriGrow Systems, Inc. and converted to TriGrow Systems, LLC in May 2020);

 

  Ariafy Finance, LLC;

 

  Agxiom, LLC;

 

  Harbor Mountain Holdings, LLC (“HMH”) (acquired in July 2020);

 

  Cascade Sciences, LLC (“Cascade”) (which was acquired by the Company on October 1, 2021);

 

  Precision Extraction NewCo, LLC (“Precision”) (which was a newly formed subsidiary in connection with the October 1, 2021 acquisition of Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions and Cascade); and

 

  PurePressure, LLC (“PurePressure”) (which was acquired by the Company on December 31, 2021); and

 

  Lab Society NewCo, LLC (“Lab Society”) (which was a newly formed subsidiary in connection with the February 1, 2022 acquisition of LS Holdings Corp).

 

5

 

 

The Company also has ownership interests in the following companies:

 

  Teejan Podoponics International LLC (“TPI”) (the Company has owned 50% of TPI since December 2018);

 

  Agrify-Valiant, LLC (“Agrify-Valiant”) (the Company owns 60% of Agrify-Valient, which was formed in December 2019); and

 

  Agrify Brands, LLC (“Agrify Brands”) (formerly TriGrow Brands, LLC) (the Company owns 75% of Agrify Brands, which ownership position was created as part of the January 2020 acquisition of TriGrow).

 

Reverse Stock Split

 

On January 12, 2021, the Company effected a 1-for-1.581804 reverse stock split (“Reverse Stock Split”) of its Common Stock, $0.001 par value per share (“Common Stock”). All share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented unless otherwise indicated.

 

Initial Public Offering and Secondary Public Offering

 

On February 1, 2021, the Company closed its initial public offering, or (“IPO”), of 6,210,000 shares of its Common Stock (inclusive of 810,000 shares of Common Stock from the full exercise of the over-allotment option of shares granted to the underwriters). The offer and sale of all of the shares in the IPO were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File Nos. 333- 251616 and 333-252490), which was declared effective by the SEC on January 27, 2021. In the IPO, Maxim Group LLC and Roth Capital Partners acted as the underwriters. The IPO price for shares of Common Stock was $10.00 per share. The total gross proceeds from the IPO were $62.1 million.

 

After deducting underwriting discounts and commissions of $4 million and offering expenses paid or payable by us of approximately $1 million, the net proceeds from the IPO were approximately $57 million. The Company used the net proceeds from the IPO for its current working capital needs, to support revenue growth, to increase inventory to meet customer demand forecasts, and to support operational growth.

 

On February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) of 5,555,555 shares of its Common Stock for a price of $13.50 per share, less certain underwriting discounts, and commissions. On March 22, 2021, the Company closed on the sale of an additional 833,333 shares of Common Stock on the same terms and conditions pursuant to the exercise of the underwriters’ over-allotment option. The exercise of the over-allotment option brought the total number of shares of Common Stock sold by the Company in connection with the February Offering to 6,388,888 shares and the total net proceeds received in connection with the February Offering to approximately $80 million, after deducting underwriting discounts and estimated offering expenses. The Company used the net proceeds from the IPO for its current working capital needs, to support revenue growth, to increase inventory, to meet customer demand forecasts, and to support operational growth.

 

Coronavirus (“COVID-19”) Pandemic Impact and Uncertainties 

 

The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility that may negatively affect its business operations and financial results. As a result, if the pandemic or its effects persist or worsen, its accounting estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant (although the potential effects cannot be estimated at this time). The Company has experienced minimal business interruption as a result of the COVID-19 pandemic. The COVID-19 pandemic to date has resulted in supply chain delays of its inventory, higher operating costs and increased shipping costs, among other impacts. As events surrounding the COVID-19 pandemic can change rapidly, the Company cannot predict how it may disrupt its operations or the full extent of the disruption.

 

6

 

 

The Paycheck Protection Program

 

In May 2020, the Company received an unsecured Paycheck Protection Program Loan (“PPP Loan”) from the Bank of America pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), administered by the U.S. Small Business Administration (the “SBA”). The Company received total loan proceeds of approximately $779 thousand from the PPP Loan. The Company’s application for the forgiveness of the outstanding balance of the PPP Loan was denied by the SBA. On June 23, 2022, the Company received a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and bears interest at a rate of 1.00% per year. The PPP loan is payable in 34 equal combined monthly principal and interest payments of approximately $24 thousand commencing August 7, 2022.

 

Preparation of Condensed Consolidated Financial Statements

 

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and filed with the SEC (“Form 10-K”), except for the recently adopted accounting pronouncements described below.

 

The condensed consolidated financial statements included herein reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021, condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2022 and 2021, and the condensed consolidated cash flows for the six months ended June 30, 2022 and 2021.

 

The condensed consolidated balance sheet as of December 31, 2021 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 31, 2022. The results for interim periods are not necessarily indicative of a full year’s results.

 

Basis of Presentation and Principles of Consolidation

 

Accounting for Wholly-Owned Subsidiaries

 

The accompanying consolidated financial statements have been prepared in accordance with GAAP and include the accounts of Agrify Corporation and its wholly-owned subsidiaries, as described above in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies, in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The Company includes results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.

 

Accounting for Less Than Wholly-Owned Subsidiaries

 

For the Company’s less than wholly-owned subsidiaries, which include TPI, Agrify-Valiant, and Agrify Brands, the Company first analyzes whether these entities are a variable interest entity (a “VIE”) in accordance with ASC Topic 810 Consolidation (“ASC 810”), and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. The financial results of a VIE are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets. The Company continuously re-assesses (i) whether the joint venture is a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If it is determined that the joint venture qualifies as a VIE and the Company is the primary beneficiary, the Company’s financial interest in the VIE is consolidated.

 

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Based on the Company’s analysis of these entities, the Company has determined that Agrify-Valiant, LLC and Agrify Brands, LLC are each a VIE, and that the Company is the primary beneficiary. While the Company owns 60% of Agrify-Valiant, LLC’s equity interests and 75% of Agrify Brands, LLC’s equity interests, the remaining equity interests in Agrify-Valiant, LLC and Agrify Brands, LLC are owned by unrelated third parties, and the agreement with these third parties provides the Company with greater voting rights. Accordingly, the Company consolidates its interest in the financial statements of Agrify-Valiant, LLC and Agrify Brands, LLC under the VIE rules, and reflects the third parties’ interests in the consolidated financial statements as a non-controlling interest. The Company records this non-controlling interest at its initial fair value, adjusting the basis prospectively for the third parties’ share of the respective consolidated investments’ net income or loss or equity contributions and distributions. These non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holders based on its economic ownership percentage. The investment in 50% of the shares of TPI is treated as an equity investment as the Company cannot exercise significant influence.

 

Going Concern

 

In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern”, the Company’s management evaluated whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the financial statements’ issuance date. The following matters raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.

 

The Company has incurred operating losses since its inception and has negative cash flows from operations. The Company also has an accumulated deficit of $161.3 million as of June 30, 2022. In addition, for the quarter ending June 30, 2022, the Company will recognize significant impairment charges to the carrying value of its goodwill and intangible assets and will be in default of certain financial debt covenants associated with its $65 million senior secured promissory note (the “SPA Note”). As a result of its default, the Company is actively working to restructure its existing SPA Note in order to avoid having the note called by the lender. If the lender were to call the debt instrument due to the default, the Company would not have sufficient cash on hand as of June 30, 2022 to pay off the existing debt and default penalty amounts. Cash on hand is approximately $59.9 million, while the debt liability, including the potential default penalty, would be approximately $75.0 million as of June 30, 2022.

 

Subsequent to the end of the second quarter of 2022, the Company reached an agreement in principle with its institutional lender to amend its existing SPA Note and to modify certain financial covenants which, once complete, should give the Company additional flexibility to operate and meet its long-term strategic goals while also allowing it to responsibly adjust to the many challenges currently facing the cannabis industry.

 

These financial statements have been prepared on a going concern basis, which implies the Company believes these conditions raise substantial doubt about its ability to continue as a going concern within the next twelve-months from the date these financial statements are available to be issued. The Company’s continuation as a going concern is dependent upon its ability to obtain necessary debt or equity financing to continue operations until the Company begins generating sufficient cash flows from operations to meet its obligations.

 

There is no assurance that the Company will ever be profitable. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

Use of Estimates

 

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual of expenses. The Company bases its estimates on historical experience, known trends and other market-specific, other relevant factors that it believes to be reasonable under the circumstances and management’s judgement. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual financial results could differ from those estimates.

 

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Fiscal Year

 

For the Company and its Subsidiaries, the fiscal year ends on December 31, each year.

 

Emerging Growth Company

 

The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act. As a result, the Company is permitted to, and intends to, rely on exemptions from certain disclosure requirements that are applicable to companies that are not emerging growth companies.

 

In addition, the JOBS Act provides that an “emerging growth company” can use the extended transition period for complying with new or revised accounting standards.

 

The Company will remain an “emerging growth company” until the earliest to occur of:

 

reporting $1.0 billion or more in annual gross revenues;

 

the issuance, in a three-year period, of more than $1.0 billion in non-convertible debt;

 

the end of the fiscal year in which the market value of Common Stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter; or

 

December 31, 2026.

 

As of June 30, 2022, the market value of Common Stock held by non-affiliates did not exceed $700 million.

 

Reclassifications

 

Certain amounts in the Company’s prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. In this Form 10-Q, the Company has reclassified selling, general and administrative expenses to two separate line items in the accompanying consolidated statement of operations as general and administrative expenses and selling and marketing expenses for the three and six months ended June 30, 2022 and 2021.

 

Cash, Cash Equivalents, and Restricted Cash

 

Cash and cash equivalents consist principally of cash and deposits with maturities of three months or less as of June 30, 2022 and December 31, 2021. All cash equivalents are carried at cost, which approximates fair value. Restricted cash represents cash required to be held as collateral for the Company’s SPA Note. Accordingly, these balances contain restrictions as to their availability and usage and are classified as restricted cash in the consolidated balance sheets. Additional information relating to the Company’s SPA Note may be found in Note 9 – Debt, included elsewhere in the notes to the consolidated financial statements.

 

Marketable Securities

 

The Company’s marketable security investments primarily include investments held in mutual funds, municipal bonds, and corporate bonds. The mutual funds are recorded at fair value in the accompanying consolidated balance sheets as part of cash and cash equivalents. The municipal and corporate bonds are considered to be held-to-maturity securities and are recorded at amortized cost in the accompanying consolidated balance sheets. The fair value of these investments was estimated using recently executed transactions and market price quotations. The Company considers current assets to be those investments which will mature within the next 12 months, including interest receivable on the long-term bonds.

 

Accounts Receivable, Net

 

Accounts receivable, net, primarily consists of amounts for goods and services that are billed and currently due from customers. Accounts receivable balances are presented net of an allowance for credit losses, which is an estimate of billed amounts that may not be collectible. In determining the amount of the allowance at each reporting date, management makes judgments about general economic conditions, historical write-off experience, and any specific risks identified in customer collection matters, including the aging of unpaid accounts receivable and changes in customer financial conditions. Accounts receivable balances are written off after all means of collection are exhausted and the potential for non-recovery is determined to be probable. Adjustments to the allowance for credit losses are recorded as general and administrative expenses in the consolidated statements of operations.

 

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Concentration of Credit Risk and Significant Customer

 

Financial instruments that potentially subject the Company to a concentration of credit risk primarily consist of cash, cash equivalents, restricted cash, and accounts receivable. Cash equivalents primarily consist of money market funds with original maturities of three months or less, which are invested primarily with U.S. financial institutions. Cash deposits with financial institutions, including restricted cash, generally exceed federally insured limits. Management believes minimal credit risk exists with respect to these financial institutions and the Company has not experienced any losses on such amounts.

 

The tables below show customers who account for 10% or more of the Company’s total revenues and 10% or more of the Company’s accounts receivable for the periods presented:

 

Revenue

 

For the three months ended June 30, 2022 and 2021, the Company’s customers that accounted for 10% or more of the total revenue were as follows:

 

   Three Months ended
June 30, 2022
   Three Months ended
June 30, 2021
 
(In thousands)  Amount   % of Total
Revenue
   Amount   % of Total
Revenue
 
New England Innovation Academy (“NEIA”) – Related Party   *    *   $10,895    92.1%
Company Customer Number – 139  $4,835    25.0%   *    * 

 

* Customer revenue, as a percentage of total revenue, was less than 10%

 

For the six months ended June 30, 2022 and 2021, the Company’s customers that accounted for 10% or more of the total revenue were as follows:

 

   Six Months ended
June 30, 2022
   Six Months ended
June 30, 2021
 
(In thousands)  Amount   % of Total
Revenue
   Amount   % of Total
Revenue
 
New England Innovation Academy (“NEIA”) – Related Party   *    *   $16,355    86.8%
Company Customer Number – 139  $8,628    19.0%   *    * 
Company Customer Number – 136  $6,146    13.6%   *     * 

 

*Customer revenue, as a percentage of total revenue, was less than 10%

 

Accounts Receivable, Net

 

As of June 30, 2022 and December 31, 2021, the Company’s customers that accounted for 10% or more of the total accounts receivable, net, were as follows:

 

   As of
June 30, 2022
   As of
December 31, 2021
 
(In thousands)  Amount   % of Total
Accounts
Receivable
   Amount   % of Total
Accounts
Receivable
 
                 
NEIA – Related Party  $2,414    23.1%  $3,498    48.4%
Company Customer Number - 126  $1,541    14.7%  $1,541    21.3%

 

*Customer accounts receivable balance, as a percentage of total accounts receivable balance, was less than 10%

 

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Inventories

 

The Company values all of its inventories, which consist primarily of significant raw material hardware components, at the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a First-In, First-Out basis. Write-offs of potentially slow-moving or damaged inventory are recorded through specific identification of obsolete or damaged material. The company takes physical inventory at least once annually at all inventory locations.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are recognized using the straight-line method over the estimated useful life of each asset, as follows:

 

   Estimated Useful Life (Years) 
Computer and office equipment   2 to 3 
Furniture and fixtures   2 
Software   3 
Vehicles   5 
Research and development of laboratory equipment   5 
Machinery and equipment   3 to 5 
Leased equipment at customer   5 to 13 
Trade show assets   3 to 5 
Leasehold improvements   Lower of estimated useful
life or remaining lease term
 

 

The estimated useful lives of the Company’s property and equipment are periodically assessed to determine if changes are appropriate. The Company charges maintenance and repairs to expenses as incurred. When the Company retires or disposes of assets, the carrying cost of these assets and related accumulated depreciation or amortization are eliminated from the consolidated balance sheet and any resulting gain or loss are included in the consolidated statement of operations in the period of retirement or disposal. Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service.

 

Goodwill

 

Goodwill is defined as the excess of cost over the fair value of assets acquired and liabilities assumed in a business combination. Goodwill is tested for impairment annually, and more frequently if events and circumstances indicate that the asset might be impaired. The Company has determined that it is a single reporting unit for the purpose of conducting the goodwill impairment assessment. A goodwill impairment charge is recorded if the amount by which the Company’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Factors that could lead to a future impairment include material uncertainties such as a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and/or a decline in the Company’s market value as a result of a significant decline in the Company’s stock price.

 

During the three-month period ended June 30, 2022, the Company identified a potential impairment triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there may be an impairment to the carrying value of its long-lived assets and accordingly performed interim testing to determine the proper fair value of its long-lived assets as of June 30, 2022.

 

Based on its interim testing, the Company noted that the carrying value of equity exceeded the calculated fair value 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 a second-quarter impairment charge of $69.9 million. Additional information regarding the Company’s interim testing on goodwill may be found in Note 7 – Intangible Assets, Net and Goodwill, included elsewhere in the notes to the consolidated financial statements. 

 

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Intangible Assets

 

The Company initially records intangible assets at their estimated fair values and reviews these assets periodically for impairment. Identifiable intangible assets, which consist principally of acquired customer-related acquired assets, acquired and/or developed technology, non-compete agreements, and trade names, are reported net of accumulated amortization, and are being amortized over their estimated useful lives at amortization rates that are proportional to each asset’s estimated economic benefit. The Company’s intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. The Company reviews the carrying value of these intangible assets annually, or more frequently if indicators of impairment are present.

 

The finite-lived useful lives are as follows:

 

Trade names  5 to 7 years
Acquired developed technology  5 to 8 years
Non-compete agreements  5 years
Customer relationships  5 to 8 years
Capitalized website costs  3 to 5 years

 

In performing the review of the recoverability of intangible assets, the Company considers several factors, including whether there have been significant changes in legal factors or the overall business climate that could affect the underlying value of an asset. The Company also considers whether there is an expectation that the asset will be sold or disposed of before the end of its remaining estimated useful life. If, as the result of examining any of these factors, the Company concludes that the carrying value of the intangible asset exceeds its estimated fair value, the Company recognizes an impairment charge and reduces the carrying value of the asset to its estimated fair value.

 

During the three-month period ended June 30, 2022, the Company identified a potential impairment triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there may be an impairment to the carrying value of its long-lived assets and accordingly performed interim testing to determine the proper fair value of its long-lived assets as of June 30, 2022.

 

Based on its interim testing, the Company noted that the carrying value of equity exceeded the calculated fair value 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 a second-quarter impairment charge of $69.9 million. Additional information regarding the Company’s interim testing on intangible assets may be found in Note 7 – Intangible Assets, Net and Goodwill, included elsewhere in the notes to the consolidated financial statements. 

 

Convertible Notes Payable

 

The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with ASC Topic 815 Derivatives and Hedging (“ASC815”). The accounting treatment of derivative financial instruments requires that the Company identify and record certain embedded conversion options (“ECOs”), certain variable-share settlement features, and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Bifurcated embedded conversion options, variable-share settlement features and any related freestanding instruments are recorded as a discount to the host instrument which is amortized to interest expense over the life of the respective note using the effective interest method.

 

If the Company determines that an instrument is not a derivative liability, it then evaluates whether there is a beneficial conversion feature (“BCF”), by comparing the commitment date fair value to the effective current conversion price of the instrument. The Company records a BCF as a debt discount which is amortized to interest expense over the life of the respective note using the effective interest method. BCFs that are contingent upon the occurrence of a future event are recognized when the contingency is resolved.

 

Debt Issue Costs and Debt Discount

 

The Company may record debt issuance costs and/or debt discounts in connection with issuing of debt. The Company may cover these costs by paying cash or issuing equity (such as warrants). These costs are amortized to interest expense over the expected life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

 

Original Issue Discount

 

For certain convertible debt issued by the Company, it may provide the debt holder with an original issue discount. The Company would record the original issue discount to debt discount, reducing the face amount of the note, and is then amortized to interest expense over the life of the debt.

 

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Leases

 

The Company determines at the inception of a right-of-use asset contract if such arrangement is or contains a lease. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company classifies leases at the lease commencement date as operating or finance leases and records a right-of-use asset and a lease liability on its consolidated balance sheet for all leases with an initial lease term of greater than 12 months. A lease with an initial term of 12 months or less is not recorded on the balance sheet, but related payments are recognized as an expense on a straight-line basis over the lease term.

 

The Company’s right-of-use asset contracts may contain both lease and non-lease components. Non-lease components may include maintenance, utilities, and other operating costs. The Company combines the lease and non-lease components of fixed costs in its lease arrangements as a single lease component. Variable costs, such as utilities or maintenance costs, are not included in the measurement of right-of-use assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs.

 

Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term. The Company determines the present value of future lease payments by using its estimated secured incremental borrowing rate for that lease term as the interest rate implicit in the lease is not readily determinable. The Company estimates its secured incremental borrowing rate for each lease based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.

 

Certain of the Company’s right-of-use asset leases include options to extend or terminate the lease. The amounts determined for the Company’s right-of-use assets and lease liabilities generally do not assume that renewal options or early-termination provisions, if any, are exercised unless it is reasonably certain that the Company will exercise such options.

 

Deferred Revenue

 

Deferred revenue includes amounts collected or billed in excess of revenue that it can recognize. The Company recognizes deferred revenue as revenue as the related performance obligation is satisfied. The Company records deferred revenue that will be recognized during the succeeding twelve-month period as a current liability on the consolidated balance sheet.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses. The estimated fair value of the accounts receivable and accounts payable approximates their carrying value due to the short-term nature of these instruments.

 

Stock-Based Compensation

 

The Company measures all stock options and other stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Historically, the Company has issued stock options to employees, directors and consultants with only service-based vesting conditions and records the expense for these awards using the straight-line method.

 

The Company classifies stock-based compensation expense in its consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified.

 

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The Company estimates the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model. Before the IPO, the Company was a private company and therefore lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of similar publicly-traded companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

 

Business Combinations

 

The Company accounts for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.

 

The Company’s management exercises significant judgments in determining the fair value of assets acquired and liabilities assumed, as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company’s current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to the fair value of assets and liabilities made after the end of the measurement period are recorded within the Company’s operating results.

 

For contingent consideration arrangements, the Company recognizes a liability at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations. Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements. 

 

Revenue Recognition

 

Overview

 

The Company generates revenue from the following sources: (1) equipment sales, (2) providing services and (3) construction contracts.

 

In accordance with ASC 606 “Revenue Recognition”, the Company recognizes revenue from contracts with customers using a five-step model, which is described below:

 

identify the customer contract;

 

identify performance obligations that are distinct;

 

determine the transaction price;

 

allocate the transaction price to the distinct performance obligations; and

 

recognize revenue as the performance obligations are satisfied.

 

Identify the customer contract

 

A customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability, and consideration is probable. Specifically, the Company obtains written/electronic signatures on contracts and a purchase order, if said purchase orders are issued in the normal course of business by the customer.

 

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Identify performance obligations that are distinct

 

A performance obligation is a promise by the Company to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

 

Determine the transaction price

 

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies.

 

Allocate the transaction price to distinct performance obligations

 

The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer. The Company’s contracts typically contain multiple performance obligations, for which the Company accounts for individual performance obligations separately, if they are distinct. The standalone selling price reflects the price the Company would charge for a specific piece of equipment or service if it was sold separately in similar circumstances and to similar customers.

 

Recognize revenue as the performance obligations are satisfied

 

Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer.

 

Significant Judgments

 

The Company enters into contracts that may include various combinations of equipment, services and construction, which are generally capable of being distinct and accounted for as separate performance obligations. Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once the Company determines the performance obligations, it determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on the SSP. The corresponding revenue is recognized as the related performance obligations are satisfied.

 

Judgment is required to determine the SSP for each distinct performance obligation. The Company determines SSP based on the price at which the performance obligation is sold separately and the methods of estimating SSP under the guidance of ASC 606-10-32-33. If the SSP is not observable through past transactions, the Company estimates the SSP, taking into account available information such as market conditions, expected margins, and internally approved pricing guidelines related to the performance obligations. The Company licenses its software as a SaaS type subscription license, whereby the customer only has a right to access the software over a specified time period. The full value of the contract is recognized ratably over the contractual term of the SaaS subscription, adjusted monthly if tiered pricing is relevant. The Company typically satisfies its performance obligations for equipment sales when equipment is made available for shipment to the customer; for services sales as services are rendered to the customer and for construction contracts both as services are rendered and when contract is completed.

 

The Company utilizes the cost-plus margin method to determine the SSP for equipment and build-out services. This method is based on the cost of the services from third parties, plus a reasonable markup that the Company believes is reflective of a market-based reseller margin.

 

The Company determines the SSP for services in time and materials contracts by observable prices in standalone services arrangements.

 

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The Company estimates variable consideration in the form of royalties, revenue share, monthly fees, and service credits at contract inception and updated at the end of each reporting period if additional information becomes available. Variable consideration is typically not subject to constraint. Changes to variable consideration were not material for the periods presented.

 

If a contract has payment terms that differ from the timing of revenue recognition, the Company will assess whether the transaction price for those contracts include a significant financing component. The Company has elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if the Company expects that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service, will be one year or less. For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative estimate of the financing component and its relative significance, requires judgment. Accordingly, the Company imputes interest on such contracts at an agreed-upon interest rate and will present the financing components separately as financial income. For the three months and six months ended June 30, 2022 and 2021, the Company did not have any such financial income.

 

Payment terms with customers typically require payment 30 days from the invoice date. The Company’s agreements with its customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise concern over delivered products or services, the Company has endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented.

 

The Company has elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service. Accordingly, the Company will accrue all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. The Company has payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.

 

The Company receives payment from customers based on specified terms that are generally less than 30 days from the satisfaction of performance obligations. There are no contract assets related to performance under the contract. The difference in the opening and closing balances of the Company’s deferred revenue primarily results from the timing difference between the Company’s performance and the customer’s payment. The Company fulfills obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. Accounts receivables are recorded when the customer has been billed or the right to consideration is unconditional. The Company recognizes deferred revenue when consideration has been received or an amount of consideration is due from the customer, and the Company has a future obligation to transfer certain proprietary products.

 

In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable. The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the right to invoice practical expedient.

 

The Company generally provides a one-year warranty on its products for materials and workmanship but may provide multiple-year warranties as negotiated, and will pass on the warranties from its vendors, if any, which generally covers this one-year period. In accordance with ASC 450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably estimated. The reserve for warranty returns is included in accrued expenses and other current liabilities in the Company’s consolidated balance sheets.

 

16

 

 

Research and Development Costs

 

The Company expenses research and development costs as incurred. Research and development expenses include payroll, employee benefits and other expenses associated with product development. The Company incurs research and development costs associated with the development and enhancement of both hardware and software products associated with its cultivation and extraction equipment, as well as its SaaS-based software offering, Agrify Insights™ cultivation software.

 

Capitalization of Internal Software Development Costs

 

The Company capitalizes certain software engineering efforts related to the continued development of Agrify Insights™ cultivation software under ASC 985-20. Costs incurred during the application development phase are only capitalized once technical feasibility has been established and the work performed will result in new or additional functionality. The types of costs capitalized during the application development phase include employee compensation, as well as consulting fees for third-party software developers working on these projects. Costs related to the research and development are expensed as incurred until technical feasibility is established as well as post-implementation activities. Internal-use software is amortized on a straight-line basis over the estimated useful life of the asset, which ranges from two to five years.

 

Shipping and Handling Charges

 

The Company incurs costs related to shipping and handling of its manufactured products. These costs are expensed as incurred as a component of cost of goods sold. Shipping and handling charges related to the receipt of raw materials are also incurred, which are recorded as a cost of the related inventory.

 

Equity Method Investments

 

Investments in affiliates that are 50% or less owned by the Company for which the Company exercises significant influence but does not have control are accounted for on the equity method. The Company has investments in equity investments without readily determinable fair values, which represents investments in entities where the Company does not have the ability to significantly influence the operations of the entities.

 

An assessment of whether or not the Company (as a holder of 50% of TPI) has the power to direct activities that most significantly impact TPI’s economic performance and to identify the party that obtains the majority of the benefits of the investment was performed as of June 30, 2022 and December 31, 2021 and will be performed as of each subsequent reporting date. After each of these assessments, the Company concluded that the activities that most significantly impact TPI’s economic performance are the growth, marketing, sale, and distribution of products using TPI’s technology and IP, each of which are solely directed by TPI. Based on the consideration of these assessments, the Company concluded that the Company’s investment in TPI should be accounted for under the equity method.

 

The carrying value of the Company’s investment in TPI was $0 as of June 30, 2022 and December 31, 2021. The Company did not recognize revenue from TPI for the three and six months ended June 30, 2022 and June 30, 2021.

 

Income Taxes

 

The Company accounts for income taxes pursuant to the provisions of ASC Topic 740, “Income Taxes,” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.

 

The Company follows the provisions of ASC 740-10-25-5, “Basic Recognition Threshold.” When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10-25-6, the benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of June 30, 2022, tax years 2016 through 2021 remain open for IRS audit. The Company has received no notice of audit from the IRS for any of the open tax years.

 

17

 

 

The Company recognizes the benefit of a tax position when it is effectively settled. ASC 740-10-25-10, “Basic Recognition Threshold” provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. ASC 740-10-25-10 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority. For tax positions considered effectively settled, the Company recognizes the full amount of the tax benefit.

 

Net Loss Per Share

 

The Company presents basic and diluted net loss per share attributable to Common Stockholders in conformity with the two-class method required for participating securities. The Company computes basic loss per share by dividing net loss available to Common Stockholders by the weighted-average number of common shares outstanding. Net loss available to Common Stockholders represents net loss attributable to Common Stockholders reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities as the holders of the participating securities do not have a contractual obligation to share in any losses. Diluted loss per share adjusts basic loss per share for the potentially dilutive impact of stock options and warrants. As the Company has reported losses for all periods presented, all potentially dilutive securities including stock options and warrants, are anti-dilutive and accordingly, basic net loss per share equals diluted net loss per share.

 

Net loss per share calculations for all periods have been adjusted to reflect the Reverse Stock Split effected on January 12, 2021. Net loss per share was calculated based on the weighted-average number of Common Stock outstanding.

 

Recently Adopted Accounting Pronouncements

 

In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in ASU No. 2020-06 simplify the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exceptions for contracts in an entity’s own equity. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The adoption of this new accounting guidance had no impact on the Company’s consolidated financial position.

 

Pending Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities and accounts receivable. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. ASU 2016-13 is effective in the first quarter of fiscal 2024. The Company is currently evaluating the potential impact of this adoption on its consolidated financial statements and related disclosures.

 

18

 

 

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 606): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with U.S. GAAP. The amendment in this update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendment in this update. The Company is currently evaluating the potential impact of this adoption on its consolidated financial statements and related disclosures.

 

The Company does not believe that any other ASU issued but not yet effective, if adopted, will have a material effect on the Company’s future financial statements.

 

Note 2 — Revenue and Deferred Revenue

 

Revenue

 

During the three and six months ended June 30, 2022 and 2021, the Company generated revenue from the following sources: (1) equipment sales, (2) services sales and (3) construction contracts.

 

The Company sells its equipment and services to customers under a combination of a contract and purchase order. Equipment revenue includes sales from proprietary products designed and engineered by the Company such as Agrify Vertical Farming Units (“VFUs”), container farms, integrated grow racks, and LED grow lights, and non-proprietary products designed, engineered, and manufactured by third parties such as air cleaning systems and pesticide-free surface protection.

 

Construction contracts normally provide for payment upon completion of specified work or units of work as identified in the contract. Although there is considerable variation in the terms of these contracts, they are primarily structured as time-and-material contracts. The Company enters into time-and-materials contracts under which the Company is paid for labor and equipment at negotiated hourly billing rates and other expenses, including materials, as incurred at rates agreed to in the contract. The Company uses three main sub-contractors to execute the construction contracts.

 

The following table provides the Company’s revenue disaggregated by the timing of revenue recognition:

 

   Three Months ended
June 30,
   Six Months ended
June 30,
 
(In thousands)  2022   2021   2022   2021 
Transferred at a point in time  $10,244   $1,124   $23,018   $1,353 
Transferred over time   9,085    10,701    22,332    17,480 
Total revenue  $19,329   $11,825   $45,350   $18,833 

 

In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable, because the majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the right to invoice practical expedient.

 

19

 

 

The Company generally provides a one-year warranty on its products for materials and workmanship but may provide multiple year warranties as negotiated, and generally transfers to its customers the warranties it receives from its vendors, if any, which generally cover this one-year period. In accordance with ASC 450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably estimated. The Company maintains a reserve for warranty returns of $579 thousand and $398 thousand for June 30, 2022 and December 31, 2021, respectively. The Company’s reserve for warranty returns is included in accrued expenses and other current liabilities in its consolidated balance sheets. Additional information regarding the Company’s warranty reserve may be found in Note 3 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements.

 

Deferred Revenue

 

Changes in the Company’s current deferred revenue balance for the six months ended June 30, 2022 and the year ended December 31, 2021 were as follows:

 

(In thousands)  Six Months
ended
June 30,
2022
   Year ended
December 31,
2021
 
Deferred revenue – beginning of period  $3,772   $152 
Additions   7,493    3,758 
Interest income on deferred revenue   
    4 
Recognized   (7,512)   (142)
Deferred revenue – end of period  $3,753   $3,772 

 

Deferred revenue balances primarily consist of customer deposits on its cultivation and extraction solutions equipment. As of June 30, 2022 and December 31, 2021, all of the Company’s deferred revenue balances were reported as current liabilities in the accompanying consolidated balance sheets.

 

Note 3 – Supplemental Consolidated Balance Sheet Information

 

Accounts Receivable

 

Accounts receivable consisted of the following as of June 30, 2022 and December 31, 2021: 

 

(In thousands)   June 30,
2022
    December 31,
2021
 
Accounts receivable, gross   $ 13,208     $ 8,637  
Less allowance for doubtful accounts     (2,740 )     (1,415 )
Accounts receivable, net   $ 10,468     $ 7,222  

 

NEIA, a related party, accounted for $2.4 million and $3.5 million of the Company’s accounts receivable, net as of June 30, 2022 and December 31, 2021, respectively.

 

The changes in the allowance for doubtful accounts consisted of the following:

 

(In thousands)  Six Months ended
June 30,
2022
   Year ended
December 31,
2021
 
Allowance for doubtful accounts - beginning of period  $1,415   $54 
Provision for doubtful accounts   1,553    1,187 
Other adjustments   (228)   174 
Allowance for doubtful accounts - end of period  $2,740   $1,415 

 

Bad debt expense was $1.6 million and $0 for the three months ended June 30, 2022 and 2021, respectively, and $1.6 million and $0 for the six months ended June 30, 2022 and 2021, respectively.

 

20

 

 

Prepaid Expenses and Other Current Receivables

 

Prepaid expenses and other current receivables consisted of the following as of June 30, 2022 and December 31, 2021:

 

(In thousands)  June 30,
2022
   December 31,
2021
 
Prepaid insurance  $1,645   $492 
Prepaid materials   208    
 
Prepaid software   210    173 
Prepaid expenses, other   772    541 
Deferred costs   
    353 
Deferred issuance costs, net   908    
 
Other note receivables (1)   1,612    807 
Other receivables, other   570    86 
Total prepaid expenses and other current assets  $5,925   $2,452 

 

(1) Other note receivables relate to the current portion of one of its loan receivable balances related to the total turn-key solution (“TTK Solution”) program.

 

Property and Equipment, Net

 

Property and equipment, net consisted of the following as of June 30, 2022 and December 31, 2021:

 

(In thousands)   June 30,
2022
    December 31,
2021
 
Computer and office equipment   $ 572     $ 473  
Furniture and fixtures     505       385  
Leasehold improvements     1,000       841  
Machinery and equipment     990       898  
Software     308       174  
Vehicles     143       143  
Research and development of laboratory equipment     254       163  
Leased equipment at customer     602       619  
Trade show assets     80       80  
Total property and equipment, gross     4,454       3,776  
Accumulated depreciation     (1,530 )     (780 )
Construction in progress     9,008       3,236  
Total property and equipment, net   $ 11,932     $ 6,232  

 

Depreciation expense for the three months ended June 30, 2022 and 2021 was $438 thousand and $109 thousand, respectively, and $817 thousand and $199 thousand for the six months ended June 30, 2022 and 2021, respectively.

 

Other Non-Current Assets

 

Other non-current assets consisted of the following as of June 30, 2022 and December 31, 2021:

 

(In thousands)  June 30,
2022
   December 31,
2021
 
Deferred debt issuance costs, non-current, net  $1,514   $
 
Long-term deferred commissions expense   1,244    1,101 
Security deposits   162    83 
Total other non-current assets  $2,920   $1,184 

 

21

 

 

Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following as of June 30, 2022 and December 31, 2021: 

 

(In thousands)  June 30,
2022
   December 31,
2021
 
Accrued acquisition liability (1)  $10,579   $9,198 
Sales tax payable (2)   5,724    5,290 
Accrued construction costs   5,155    8,803 
Compensation related fees   3,180    3,491 
Accrued professional fees   1,348    1,104 
Accrued warranty costs   579    398 
Accrued consulting fees   133    75 
Accrued inventory purchases   586    201 
Financing lease liabilities   166    156 
Accrued non-income taxes   
    48 
Other current liabilities   6    
 
Total accrued expenses and other current liabilities  $27,456   $28,764 

 

(1) Accrued acquisition liabilities include both the contingent consideration and the value of held back Common Stock associated with the 2022 acquisition of Lab Society and the 2021 acquisitions of Precision, Cascade and PurePressure.
   
(2) Sales tax payable primarily represents identified sales and use tax liabilities arising from the acquisition of Precision and Cascade. These amounts are included as part of the initial purchase price allocations and are the subject matter of an indemnification claim under the Precision and Cascade acquisition agreement.

 

Warranty Accrual

 

The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs:

 

 

(In thousands)  Six Months ended
June 30,
2022
   Year ended
December 31,
2021
 
Warranty accrual – beginning of period  $398   $
 
Liabilities accrued for warranties issued during period   181    398 
Warranty accrual – end of period  $579   $398 

 

Note 4 — Fair Value Measures

 

Fair Values of Assets and Liabilities

 

In accordance with ASC Topic 820 “Fair Value Measurement”, the Company measures fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows:

 

  Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
     
  Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active.
     
  Level 3: Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions about how market participants would price the asset or liability.

 

Valuation techniques for assets and liabilities include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

 

22

 

  

At June 30, 2022 and December 31, 2021, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:

 

   June 30, 2022   December 31, 2021 
   Fair Value Measurements Using Input Types   Fair Value Measurements Using Input Types 
(In thousands)  Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
Assets                                
Mutual funds (included in cash and cash equivalents)  $
   $
   $
   $
   $178   $
   $
   $178 
Municipal bonds   4,683    
    
    4,683    9,961    
    
    9,961 
Corporate bonds   6,640    
    
    6,640    34,589    
    
    34,589 
Total assets  $11,323   $
   $
   $11,323   $44,728   $
   $
   $44,728 
Liabilities                                        
Contingent consideration  $
   $
   $6,766   $6,766   $
   $
   $6,137   $6,137 

 

Fair Value of Financial Instruments

 

The Company has certain financial instruments which consist of cash and cash equivalents, marketable securities, and contingent consideration. Fair value information for each of these instruments is as follows:

 

Cash and cash equivalents, accounts receivable, accounts payable and deferred revenue liabilities fair values approximate their carrying values, due to the expected duration of these instruments.

 

Marketable securities classified as current held-to-maturity securities are recorded at amortized cost, which at June 30, 2022, approximated fair value.

 

The Company’s deferred consideration was recorded in connection with acquisitions during the first quarter of 2022 and fiscal 2021 using an estimated fair value discount at the time of the transaction. As of June 30, 2022 and December 31, 2021, the carrying value of the deferred consideration approximated fair value, respectively.

 

Marketable Securities

 

As of June 30, 2022, the Company held investments in mutual funds, municipal bonds and corporate bonds. The Company records mutual funds at fair value in the accompanying consolidated balance sheet as part of cash and cash equivalents. The municipal and corporate bonds are considered held-to-maturity securities and are recorded at amortized cost in the accompanying consolidated balance sheet. The fair values of these investments were estimated using recently executed transactions and market price quotations. The Company considers current assets those investments which will mature within the next 12 months including, interest receivable on the long-term bonds. 

 

23

 

 

The composition of the Company’s marketable securities are as follows:

 

(In thousands)  June 30,
2022
   December 31,
2021
 
Current marketable securities        
Municipal bonds  $4,683   $9,961 
Corporate bonds   6,640    34,589 
  $11,323   $44,550 

 

The amortized cost and estimated fair value of marketable securities as of June 30, 2022, are as follows:

 

(In thousands)  Amortized
Cost
   Unrealized
Loss
   Estimated
Fair Value
 
Current marketable securities            
Municipal bonds  $4,683   $        (6)  $4,677 
Corporate bonds   6,640    (3)   6,637 
   $11,323   $(9)  $11,314 

 

Contingent Consideration

 

The Company has classified its net liability for contingent earn-out considerations to the sellers relating to one acquisition completed during the first quarter of 2022 and two acquisitions completed during fiscal 2021. The fair value for the contingent consideration associated with these acquisitions is within Level 3 of the fair value hierarchy because the associated fair value is determined using significant unobservable inputs, which included the key assumptions to model future revenue, costs of goods sold and operating expense projections. A description of the Company’s acquisitions completed during the first quarter of 2022 and fiscal 2021 are included within Note 8 – Business Combinations, included elsewhere in the notes to the consolidated financial statements.

 

(In thousands)  Six Months ended
June 30,
2022
   Year ended
December 31,
2021
 
Contingent consideration – beginning of period  $6,137   $
 
Accrued contingent consideration   1,420    4,725 
Accretion of contingent consideration   116     
Change in estimated fair value   (907)   1,412 
Contingent consideration – end of period  $6,766   $6,137 

 

The Company included contingent consideration within accrued expenses and other current liabilities in its consolidated balance sheets as of June 30, 2022 and December 31, 2021, respectively.

 

See below for additional information related to each acquisition’s contingent consideration.

 

Contingent Consideration – Lab Society

 

The Company, in its review of actual revenue performance as compared to its originally projected revenue estimates, noted that Lab Society’s revenue trend is materially below the originally estimated revenue trends incorporated into the Company’s original fair value estimates at the time of the acquisition. As a result, the Company has reduced its fair value estimate of achievement for Lab Society’s first earn-out period. During the second quarter ended June 30, 2022, the Company reduced the estimated fair value of the contingent consideration liability associated with Lab Society’s first earn-out period by approximately $1.0 million. As required by ASC 805, the change in contingent consideration was recorded as a reduction in operating expenses during the second quarter of 2022.

 

Contingent Consideration – Precision and Cascade

 

The earn-out period for the potential contingent consideration to be earned by the former members of Precision and Cascade concluded on December 31, 2021. The Company, during the second quarter of 2022, increased the amount of the contingent consideration earned by the former members of Precision and Cascade by approximately $121 thousand, to reflect the final contingent consideration amount due. This amount, as required by ASC 805, was recorded as an increase in operating expenses during the second quarter of 2022. The Company has not yet paid the $5.6 million in total contingent consideration to the members of Precision and Cascade as of June 30, 2022. The Company expects to make payment on the contingent consideration in August 2022.

 

24

 

 

Note 5 — Loan Receivable

 

A portion of the capital raised from the Company’s IPO has been allocated to launch the Company’s TTK Solution program. The TTK Solution is the industry’s first-of-its-kind program in which the Company engages with qualified cannabis operators in the early phases of their business plans and provides critical support, typically over a 10-year period, which includes: access to capital for construction costs, the design and build-out of their cultivation and extraction facilities, state-of-the-art cultivation and extraction equipment, subscription to the Company’s Agrify Insights™ cultivation software, process design, training, implementation, proven grow recipes, product formulations, data analytics, and consumer branding, which will enable the Company’s customers to go to market faster and better.

 

During the quarter ended June 30, 2022, the Company established a reserve of approximately $7.1 million specifically related to Greenstone Holdings (“Greenstone”). The Company established the reserve based upon its review of Greenstone’s financial stability, which would impact collectability, which is primarily the result of unfavorable market conditions within the Colorado 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 reserve against the receivables. Greenstone is a related party as of June 30, 2022 and December 31, 2021.

 

The loan agreements entered into with customers receiving the TTK Solution generally provide for loans with maturity dates of approximately two to three years after the completion of the construction projects. Typically, the TTK Solution construction loans have interest rates ranging from 12% to 18% per year.

 

The breakdown of loans receivable by customer as of June 30, 2022 and December 31, 2021 is as follows:

 

(In thousands)  June 30,
2022
   December 31,
2021
 
Company Customer Number 139 – TTK Solution  $14,730   $5,542 
Greenstone – TTK Solution – Related Party   12,457    11,177 
Company Customer Number 136 – TTK Solution   8,691    2,439 
Company Customer Number 125 – TTK Solution   4,809    1,105 
Company Customer Number 140 – TTK Solution   46    46 
Company Customer Number 71 – Non-TTK Solution (1)   1,401    1,946 
Other – Non-TTK Solutions   35    
 
Greenstone – TTK Solution – Related Party – Allowance for doubtful accounts (2)   (7,079)   
 
Total loan receivable  $35,090   $22,255 

 

(1) The current portion of loan receivable are included within Note 3 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial statements.

 

(2)

The Greenstone allowance for doubtful accounts balance consisted of capital advances, accrued interest and VFUs sales. See below for more detailed information about the Greenstone TTK Solution transaction and the current reserve balance.

 

25

 

 

At this time, the Company is not aware of, nor has it identified any risk or potential performance failure associated with any of its other TTK Solution arrangements with the noted exception of the Greenstone TTK Solution, as described above.

 

The Company analyzed whether any of the above customers are a VIE in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. Based on the Company’s analysis, the Company has determined that Greenstone is a VIE. As of June 30, 2022, two of the Company’s employees own approximately 36.6% of the equity of Greenstone, however, since the Company is not the primary beneficiary and does not hold significant influence over Greenstone business decisions, the Company is not required to consolidate Greenstone.

 

Note 6 — Inventory

 

Inventories are stated at the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a First-In, First-Out basis. Such costs include the acquisition cost for raw materials and operating supplies. The Company’s standard payment terms with suppliers may require making payments in advance of delivery of the Company’s products. The Company’s prepaid inventory is a short-term, non-interest-bearing asset that is applied to the purchase of products once they are delivered.

 

Inventory consisted of the following as of June 30, 2022 and December 31, 2021:

 

(In thousands)  June 30,
2022
   December 31,
2021
 
Raw materials  $16,405   $6,393 
Prepaid inventory   9,429    2,237 
Finished goods   17,908    12,810 
Inventory, gross   43,742    21,440 
Inventory reserves   (1,871)   (942)
Total inventory, net  $41,871   $20,498 

 

Inventory Reserves

 

The Company establishes an inventory reserve for obsolete, slow-moving, and defective inventory. The Company calculates inventory reserves for obsolete, slow-moving, or defective items as the difference between the cost of inventory and its estimated net realizable value. The reserves are based upon management’s expected method of disposition.

 

Changes in the Company’s inventory reserve are as follows:

 

(In thousands)  Six Months ended
June 30,
2022
   Year ended
December 31,
2021
 
Inventory reserves – beginning of period  $942   $
 
Increase in inventory reserves   929    942 
Inventory reserves – end of period  $1,871   $942 

 

Note 7 — Intangible Assets, Net and Goodwill

 

Intangible assets are initially recorded at fair value and tested periodically for impairment. Goodwill represents the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination and is tested at least annually for impairment. The Company performs its goodwill impairment testing annually during the fourth quarter, or sooner if indicators or if circumstances were to occur that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying amount. The Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill.

 

26

 

 

The Company has concluded that there was an impairment triggering event during the three months ended June 30, 2022 that required the Company to perform a detailed analysis of the current carrying value of its goodwill and intangible assets. For intangible asset and goodwill impairment testing purposes, the Company has one reporting unit.

 

During the three-month period ended June 30, 2022, the Company’s market capitalization fell below total net assets. In addition, financial performance continued to weaken during the quarter, which is contrary to prior experience. Management reassessed business performance expectations, following persistent adverse developments in equity markets, deterioration in the environment in which the Company operates, lower than expected sales, and an increase in operating expenses. These indicators, in the aggregate, required impairment testing for intangible assets and goodwill.

 

Based on the results of this testing, the Company determined that the carrying values of the aggregate value of its goodwill and intangible assets were not recoverable. The Company recorded impairment charges during the second quarter of 2022, representing a full impairment of the carrying value of its goodwill and intangible assets. The Company recorded an impairment charge of approximately $69.9 million, representing the carrying values of intangible assets and goodwill, which totaled $15.2 million and $54.7 million, respectively

 

Goodwill consisted of the following:

 

(In thousands)  Six Months ended
June 30,
2022
   Year ended
December 31,
2021
 
Goodwill - beginning of period  $50,090   $632 
Goodwill acquired during period   4,368    49,458 
Goodwill impairment loss   (54,747)   
 
Goodwill purchase accounting adjustment   289    
 
Goodwill - end of period  $
   $50,090 

 

Intangible assets, net as of June 30, 2022 was as follows:

 

   Intangible Assets, Gross   Accumulated Amortization and Impairment   Intangible Assets, Net 
(In thousands)  January 1,
2022
   Additions
and
Retirements,
net
   June 30,
2022
   January 1,
2022
   Expense
and
Retirements,
net
   June 30,
2022
   January 1,
2022
   June 30,
2022
 
Trade names  $2,418   $317   $2,735   $(227)  $(2,508)  $(2,735)  $2,191   $
 
Customer relationships   6,176    713    6,889    (302)   (6,587)   (6,889)   5,874    
 
Acquired developed technology   4,911    1,432    6,343    (191)   (6,152)   (6,343)   4,720    
 
Non-compete agreements   1,202    
    1,202    (60)   (1,142)   (1,202)   1,142    
 
Capitalized website costs   245    
    245    (100)   (145)   (245)   145    
 
Total intangible assets, net  $14,952   $2,462   $17,414   $(880)  $(16,534)  $(17,414)  $14,072   $
 

 

27

 

 

Intangible assets, net as of December 31, 2021 was as follows:

 

   Intangible Assets, Gross   Accumulated Amortization   Intangible Assets, Net 
(In thousands)  January 1,
2021
   Additions
and
Retirements,
net
   December 31,
2021
   January 1,
2021
   Expense
and
Retirements,
net
   December 31,
2021
   January 1,
2021
   December 31,
2021
 
Trade names  $930   $1,488   $2,418   $(88)  $(139)  $(227)  $842   $2,191 
Customer relationships   850    5,326    6,176    (89)   (213)   (302)   761    5,874 
Acquired developed technology   
    4,911    4,911    
    (191)   (191)   
    4,720 
Non-compete agreements   
    1,202    1,202    
    (60)   (60)   
    1,142 
Capitalized website costs   139    106    245    (48)   (52)   (100)   91    145 
Total intangible assets, net  $1,919   $13,033   $14,952   $(225)  $(655)  $(880)  $1,694   $14,072 

 

Amortization expense recorded in general and administrative in the consolidated statements of operations were $1.4 million and $57 thousand for the three months ended June 30, 2022 and 2021, respectively, and $703 thousand and $115 thousand for the six months ended June 30, 2022 and 2021, respectively.

 

Note 8 — Business Combination

 

Acquisition of Lab Society

 

On February 1, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lab Society, a newly-formed wholly-owned subsidiary of the Company (“Merger Sub”), Michael S. Maibach Jr., as the Owner Representative thereunder, and each of the shareholders of Lab Society (collectively, the “Owners”), pursuant to which the Company agreed to acquire Lab Society. Concurrently with the execution of the Merger Agreement, the Company consummated the merger of Lab Society with and into Merger Sub, with Merger Sub surviving such merger as a wholly-owned subsidiary of the Company (the “Lab Society Acquisition”).

 

The aggregate consideration for the Lab Society Acquisition consisted of: (a) $4.0 million in cash, subject to certain adjustments for working capital, cash, and indebtedness of Lab Society at closing; (b) 425,611 shares of Common Stock (the “Buyer Shares”); and (c) the Earn-out Consideration (as defined below), to the extent earned.

 

The Company withheld 127,682 of the Buyer Shares issuable to the Owners (the “Holdback Lab Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Merger Agreement. The Holdback Lab Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions of the Merger Agreement. 

 

The Merger Agreement includes customary post-closing adjustments, representations and warranties, and covenants of the parties. The Owners may become entitled to additional consideration with a value of up to $3.5 million based on the eligible net revenues achieved by the Lab Society business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 50% will be payable in cash and the remaining 50% will be payable by issuing shares of Common Stock. Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements. 

 

28

 

 

Transaction and related costs, consisting primarily of professional fees, directly related to the acquisition, totaled approximately $38 and $66 thousand for the three months and six months ended June 30, 2022, respectively. All transaction and related costs were expensed as incurred and are included in general and administrative expenses.

 

The Company has prepared purchase price allocations for the business combination with Lab Society on a preliminary basis. Changes to those allocations may occur as additional information becomes available during the respective measurement period (up to one year from the acquisition date).

 

The following table sets forth the components and the allocation of the purchase price for the business combination:

 

(In thousands)    
Purchase price consideration    
Estimated closing proceeds  $4,002 
Transaction expenses   80 
Closing buyer shares   1,904 
Holdback buyer shares   816 
Earn-out consideration   1,420 
Estimated working capital adjustment   (255)
Fair value of total consideration transferred   7,967 
Total purchase price, net of cash acquired  $7,401 
      
Fair value allocation of purchase price     
Cash and cash equivalents  $565 
Accounts receivable   511 
Inventory   2,130 
Prepaid expenses and other current receivables   55 
Right - of-use assets, net   304 
Property and equipment, net   177 
Prepaid and refundable taxes   194 
Accounts payable, accrued expenses, and other current liabilities   (1,244)
Deferred revenue   (963)
Deferred tax liability   (237)
Finance lease liabilities, current   (36)
Finance lease liabilities, non-current   (35)
Operating lease liabilities, current   (112)
Operating lease liabilities, non-current   (192)
Acquired intangible assets   2,462 
Goodwill   4,388 
Total purchase price  $7,967 

 

Identified intangible assets consist of trade names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below:

 

(In thousands)  Asset
Value
   Useful Life
Identified intangible assets       
Trade names  $317   5 years
Acquired developed technology   1,432   8 years
Customer relationships   713   6 years
Total identified intangible assets  $2,462    

 

The Company’s initial fair value estimates related to the various identified intangible assets of Lab Society were determined under various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending, and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate.

 

29

 

 

During the three-month period ended June 30, 2022, the Company identified a potential impairment triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there may be an impairment to the carrying value of its long-lived assets and accordingly performed interim testing to determine the proper fair value of its long-lived assets as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 7 – Intangible Assets, Net and Goodwill, included elsewhere in the notes to the consolidated financial statements.

 

The amount of revenue of Lab Society included in the consolidated statement of operations from the acquisition date of February 1, 2022 to June 30, 2022 was $3.1 million.

 

Acquisition of Precision and Cascade 

 

On September 29, 2021 (the “Execution Date”), the Company entered into a Plan of Merger and Equity Purchase Agreement, as amended by an amendment dated as of October 1, 2021 (as amended, the “Purchase Agreement”), with Sinclair Scientific, LLC, a Delaware limited liability company (“Sinclair”), Mass2Media, LLC, Precision, a Michigan limited liability company; and each of the equity holders of Sinclair named therein (collectively, the “Sinclair Members”). On October 1, 2021, the Company consummated the transactions contemplated by the Purchase Agreement.

 

Subject to the terms and conditions set forth in the Purchase Agreement, (1) Sinclair transferred, to the Company, and the Company purchased (the “Interest Purchase”) from Sinclair, 100% of the equity interests of Cascade, a Delaware limited liability company, such that immediately after the consummation of such Interest Purchase, Cascade became a wholly-owned subsidiary of the Company, and (2) Precision merged (the “Merger”) with and into a newly-formed wholly-owned subsidiary of the Company, Precision Extraction NewCo, LLC.

 

The aggregate consideration for the Interest Purchase and the Merger consisted of: (a) the sum of $30 million in cash, plus consideration payable to holders of outstanding Sinclair equity awards, subject to certain adjustments for working capital, cash and indebtedness, payable in connection with the Interest Purchase; (b) the number of shares of Common Stock, subject to adjustment, equal to the quotient of (i) $20.0 million divided by (ii) the volume weighted-average price per share of Common Stock on The Nasdaq Capital Market for the 30 consecutive trading days ending on the Execution Date (the “VWAP Price”), issuable in connection with the Merger; and (c) the True-Up Buyer Shares, if any (as defined below), issuable in connection with the Merger.

 

The Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Sinclair Members may become entitled to additional shares of Common Stock (the “True-Up Buyer Shares”) and cash (together with the True-Up Buyer Shares, the “Aggregate True-Up Payment) based on the eligible net revenues (as defined in the Purchase Agreement) achieved by the Cascade and Precision businesses during the fiscal year ending December 31, 2021. However, in no event shall the aggregate purchase price paid by the Company pursuant to the terms of the Purchase Agreement, taking into account any Aggregate True-Up Payment in favor of the Sinclair Members, exceed $65.0 million. As of June 30, 2022, the fair value of the contingent earn-out consideration totaled $5.6 million based on Sinclair Members achieving certain revenue targets. Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value Measures and Note 19 – Subsequent Events, included elsewhere in the notes to the consolidated financial statements.

 

Transaction and related costs, consisting primarily of professional fees, directly related to the acquisition, totaled approximately $25 thousand and $63 thousand for the three and six months ended June 30, 2022, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses. The purchase price allocation for the business combination has been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the measurement period (up to one year from the acquisition date).

 

30

 

 

The following table sets forth the components and the allocation of the purchase price for the business combination:

 

(In thousands)    
Purchase price consideration    
Cash paid to Sinclair Members at the close  $23,000 
Cash contributed to escrow accounts at the close   7,000 
Cash paid for excess net working capital   1,430 
Stock issued at the close   14,535 
Fair value of contingent consideration to be achieved   3,953 
Fair value of total consideration transferred   49,918 
Total purchase price, net of cash acquired  $48,630 
      
Fair value allocation of purchase price     
Cash and cash equivalents  $1,288 
Accounts receivable   897 
Inventory   6,761 
Prepaid expenses and other current receivables   1,736 
Property and equipment, net   970 
Right-of-use assets, net   730 
Capitalized web costs, net   2 
Accounts payable and accrued expenses   (9,223)
Deferred revenue   (5,419)
Long-term debt   (1,961)
Operating lease liabilities, current   (392)
Operating lease liabilities, non-current   (362)
Acquired intangible assets   9,889 
Goodwill   45,002 
Total purchase price  $49,918 

 

Identified intangible assets consist of trade names, technology, non-compete agreements, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below:

 

(In thousands)  Asset
Value
   Useful Life
Identified intangible assets       
Trade names  $1,260   6 to 7 years
Acquired developed technology   3,818   5 years
Non-compete agreements   1,202   5 years
Customer relationships   3,609   7 to 8 years
Total identified intangible assets  $9,889    

 

31

 

 

The Company’s initial fair value estimates related to the various identified intangible assets were determined under various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate.

 

During the three-month period ended June 30, 2022, the Company identified a potential impairment triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there may be an impairment to the carrying value of its long-lived assets and accordingly performed interim testing to determine the proper fair value of its long-lived assets as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 7 – Intangible Assets, Net and Goodwill, included elsewhere in the notes to the consolidated financial statements.

 

Acquisition of PurePressure

 

On December 31, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Pure Purchase Agreement”) with PurePressure, LLC, a Colorado Limited liability company (“PurePressure”), and the members of PurePressure (collectively, the “Members”), Benjamin Britton as the Member Representative thereunder, and each of the Members. Concurrently with the execution of the Pure Purchase Agreement, the Company consummated the acquisition of all the outstanding equity interests of PurePressure, such that immediately after the consummation of such purchase, PurePressure became a wholly-owned subsidiary of the Company (the “Acquisition”).

 

The aggregate consideration for the Acquisition consisted of: (a) $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness of PurePressure at closing; (b) 329,179 shares of Common Stock (the “Buyer Shares”); and (c) the Earn-out Consideration (as defined below), to the extent earned.

 

The Company withheld 88,878 of the Buyer Shares issuable to certain Members (the “Holdback Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Pure Purchase Agreement. The Holdback Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions of the Pure Purchase Agreement.

 

The Pure Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Members may become entitled to additional consideration with a value of up to $3.0 million based on the eligible net revenues achieved by the PurePressure business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 40% will be payable in cash and the remaining 60% will be payable by issuing shares of Common Stock (collectively, the “Earn-out Consideration”). Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements.

 

Subject to certain customary limitations, (i) the Members will indemnify the Company and its affiliates, officers, directors and other agents against certain losses related to, among other things, breaches of the Members’ and PurePressure’s representations and warranties, indebtedness, transaction expenses, pre-closing taxes and the failure to perform covenants or obligations under the Pure Purchase Agreement, and (ii) the Company will indemnify the Members and their respective affiliates, officers, directors and other agents against certain losses related to, among other things, breaches of the Company’s representations and warranties and the failure to perform covenants or obligations under the Pure Purchase Agreement.

 

Transaction and related costs, consisting primarily of professional fees, directly related to the acquisition, totaled approximately $1 thousand and $563 thousand for the three and six months ended June 30, 2022, respectively. All transaction and related costs were expensed as incurred and are included in general and administrative expenses.

 

The purchase price allocation for the business combination has been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement period (up to one year from the acquisition date).

 

32

 

 

The following table sets forth the components and the allocation of the purchase price for the business combination:

 

(In thousands)    
Purchase price consideration    
Estimated closing proceeds  $3,613 
Indebtedness paid   320 
Transaction expenses   115 
Closing buyer shares   2,211 
Holdback buyer shares   654 
Earn-out consideration   707 
Estimated working capital adjustments   330 
Fair value of total consideration transferred   7,950 
Total purchase price, net of cash acquired  $7,647 
      
Fair value allocation of purchase price     
Cash and cash equivalents  $303 
Accounts receivable, net   48 
Inventory   1,537 
Property and equipment, net   219 
Right-of-use assets, net   191 
Prepaid expenses and other current receivables   61 
Other non-current assets   16 
Accounts payable and accrued expenses   (765)
Deferred revenue   (762)
Operating lease liabilities, current   (117)
Operating lease liabilities, non-current   (74)
Finance lease liabilities, current   (4)
Finance lease liabilities, non-current   (10)
Notes payable, current   (260)
Notes payable, non-current   (12)
Acquired intangible assets   3,037 
Goodwill   4,542 
Total purchase price  $7,950 

 

Identified intangible assets consist of trade names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below:

 

(In thousands)  Asset
Value
   Useful Life
Identified intangible assets       
Trade name  $227   5 years
Acquired developed technology   1,093   8 years
Customer relationships   1,717   5 years
Total identified intangible assets  $3,037    

 

33

 

 

During the three-month period ended June 30, 2022, the Company identified a potential impairment triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there may be an impairment to the carrying value of its long-lived assets and accordingly performed interim testing to determine the proper fair value of its long-lived assets as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 7 – Intangible Assets, Net and Goodwill, included elsewhere in the notes to the consolidated financial statements. 

 

Note 9 – Debt

 

The Company’s debt consisted of:

 

   June 30,
2022
   December 31,
2021
 
         
Note payable – SPA Note  $65,000   $
 
PPP Loan   779    804 
Navitas Loan   32    
 
Other notes payable (1)   848    297 
Total debt   66,659    1,101 
Less: unamortized debt discount   (12,030)   
 
Total debt, net of debt discount   54,629    1,101 
Less: current portion, net of current unamortized debt discount   (9,615)   (1,089)
Long-term debt  $45,014   $12 

 

(1)Other notes payable relate to a one-year insurance premium that was financed over nine months.

 

Note Payable

 

Securities Purchase Agreement

 

On March 14, 2022, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with an accredited investor (the “Investor”), pursuant to which the Company agreed to issue and sell to the Investor, in a private placement transaction, in exchange for the payment by the Investor of $65 million, less applicable expenses, as set forth in the Securities Purchase Agreement, (i) a SPA Note in an aggregate principal amount of $65 million, and (ii) a warrant (the “SPA Warrant”) to purchase up to an aggregate of 6,881,108 shares of Common Stock.

 

The SPA Note is a senior secured obligation of the Company and ranks senior to all indebtedness of the Company. The Company will be required to make amortization payments equal to 4.0% of the original principal amount of the SPA Note on the first day of each calendar month starting on February 1, 2023 and extending through the maturity date of March 1, 2026 (the “Maturity Date”), at which time all remaining outstanding principal and accrued but unpaid interest will be due. The SPA Note has a stated interest rate of 6.75% per year, and the Company is required to pay interest on March 1, June 1, September 1, and December 1 of each calendar year through the Maturity Date. Following the one-year anniversary of the SPA Note’s issuance, the Company may, in lieu of paying interest in cash, pay such interest in kind, in which case interest on the SPA Note will be calculated at the rate of 8.75% per year and will be added to the principal amount of the SPA Note.

 

At any time following the one-year anniversary of the SPA Note’s issuance, the Company may prepay all (but not less than all) of the SPA Note by redemption at a price equal to 106.75% of the then-outstanding principal amount under the SPA Note, plus accrued but unpaid interest. The Investor will also have the option of requiring the Company to redeem the SPA Note if the Company undergoes a fundamental change at a price equal to 107% of the then-outstanding principal amount under the SPA Note, plus any accrued interest.

 

The Securities Purchase Agreement provides for up to two additional closings subject to certain conditions set forth in the Securities Purchase Agreement and on substantially the same terms as the initial closing. Each subsequent closing would result in the issuance of a senior secured note with an original principal amount of $35.0 million and warrants to purchase shares of Common Stock for up to 65% of such principal amount divided by the closing price of Common Stock on the trading day immediately prior to such subsequent closing.

 

The SPA Note imposes certain customary affirmative and negative covenants upon the Company, as well as covenants that (i) restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, (ii) restrict the ability of the Company and its subsidiaries from making certain investments, subject to specified exceptions, (iii) restrict the declaration of any dividends or other distributions, subject to specified exceptions, (iv) require the Company to maintain specified earnings and adjusted EBITDA targets, and (v) require the Company to maintain minimum amounts of cash on hand. If an event of default under the SPA Note occurs, the Investor can elect to redeem the SPA Note for cash equal to 115% of the then-outstanding principal amount of the SPA Note (or such lesser principal amount accelerated by the Investor), plus accrued and unpaid interest, including default interest, which accrues at a rate per year equal to 15% from the date of a default or event of default.

 

34

 

 

For the quarter ending June 30, 2022, the Company is in default of certain of financial debt covenants associated with its SPA Note. As a result of this default, the lender would have the ability to call the balance of the note, along with a 115% penalty, amounting to a total repayment obligation of approximately $75.0 million ($65.0 million in principal and $9.8 million of default penalty), plus increase the interest due on the outstanding unpaid balance(s) from 6.75% to 15%. All amounts due would immediately become a current liability in the event the lender were to call the note. If the lender were to call the debt instrument due to the default, the Company would not have sufficient cash on hand as of June 30, 2022 to pay off the existing debt and default penalty amounts. As of June 30, 2022, cash (including restricted cash), cash equivalents and marketable securities totaled approximately $59.9 million, which would be insufficient to cover the combined amount of debt liability, including the default penalty amount.

 

Subsequent to the end of the second quarter of 2022, the Company reached an agreement in principle with its institutional lender to amend its existing SPA Note and to modify certain financial covenants which, once complete, should give the Company additional flexibility to operate and meet its long-term strategic goals while also allowing it to responsibly adjust to the many challenges currently facing the cannabis industry.

 

Until the date the SPA Note is fully repaid, the Investor has, subject to certain exceptions, the right to participate for up to 30% of any debt, Preferred Stock, or equity-linked financing of the Company or its subsidiaries.

 

Each SPA Warrant issued in the initial closing has an exercise price of $6.75 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, is immediately exercisable, and has a term of five and one-half years from the date of issuance and is exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the SPA Warrant (the “SPA Warrant Shares”), in which case the SPA Warrant is also exercisable on a cashless exercise basis at the Investor’s election. The Securities Purchase Agreement requires the Company to file resale registration statements with respect to the SPA Warrant Shares as soon as practicable and in any event within 45 days following the initial closing and any subsequent closings.

 

The SPA Warrant provides that in no event will the number of shares of Common Stock issued upon exercise of the SPA Warrant result in the Investor’s beneficial ownership exceeding 4.99% of the Company’s shares outstanding at the time of exercise (which percentage may be decreased or increased by the Investor, but to no greater than 9.99%, and provided that any increase above 4.99% will not be effective until the sixty-first day after notice of such request by the Investor to increase its beneficial ownership limit has been delivered to the Company).

 

The Securities Purchase Agreement also contains customary representations and warranties of the Company and the Investor. There is no material relationship between the Company or its affiliates and the Investor other than in respect of the Securities Purchase Agreement, the SPA Note and the SPA Warrant.

 

The following table provides a breakdown of the SPA Note balances as of June 30, 2022:

 

(In thousands)  Balance at
January 1,
2022
   Additions   Payments   Amortization
of Debt
Discount
   Balance at
June 30,
2022
 
Direct issuance costs  $
    2,669    
    (247)  $2,422 
                          
Accrued interest expense  $
    (1,195)   829    
   $(366)
                          
Principal  $
   $65,000   $
   $
   $65,000 
Notes payable, discount   
    (13,258)   
    1,228    (12,030)
Net carrying amount  $
   $51,742   $
   $1,228   $52,970 

 

The following table summarizes the short-term and long-term portions of the SPA Note as of June 30, 2022:

 

(In thousands)  Short-Term   Long-Term   Notes
Payable, Net
 
             
Direct issuance costs  $908   $1,514   $2,422 
                
Principal  $13,000   $52,000   $65,000 
Unamortized discount   (4,511)   (7,519)   (12,030)
Net carrying amount  $8,489   $44,481   $52,970 

 

35

 

 

As of June 30, 2022, future minimum principal payments were as follows:

 

Years ending December 31 (In thousands),        
         
Remaining 2022     $ 980  
2023       28,894  
2024       31,483  
2025       5,302  
2026 and thereafter        
Total future payments     $ 66,659  

 

Paycheck Protection Program Loan

 

Paycheck Protection Program Loans under the Coronavirus Aid, Relief, and Economic Security Act

 

In May 2020, the Company entered into a PPP Loan with Bank of America pursuant to the PPP under the CARES Act administered by the SBA.

 

The Company received total proceeds of approximately $779 thousand from the unsecured PPP Loan, which was originally scheduled to mature on May 7, 2022. The Company’s submission to have the remaining $779 thousand PPP Loan forgiven was denied by the SBA. On June 23, 2022, the Company received a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and bears interest at a rate of 1.00% per year. The PPP loan is payable in 34 equal combined monthly principal and interest payments of approximately $24 thousand commencing August 7, 2022.

 

The breakdown of PPP Loan balances by current and non-current as of June 30, 2022 and December 31, 2021 were as follows:

 

(In thousands)  Balance Sheet
Location
   June 30,
2022
   December 31,
2021
 
PPP Loan, current   Long-term debt,
current
   $255   $792 
PPP Loan, non-current   Long-term debt    524    12 
Total PPP Loan outstanding       $779   $804 

 

PurePressure SBA Debt

 

As part of the acquisition of PurePressure, $159 thousand of debt remained outstanding from a standard SBA loan as of December 31, 2021. This debt has subsequently been paid as a part of the PurePressure acquisition.

 

Note 10 — Leases

 

Leases 

 

The determination if any arrangement contained a lease at its inception was done based on whether or not the Company has the right to control the asset during the contract period. The lease term was determined assuming the exercise of options that were reasonably certain to occur. Leases with a lease term of 12 months or less at inception were not reflected in the Company’s balance sheet and those lease costs are expensed on a straight-line basis over the respective term. Leases with a term greater than 12 months were reflected as non-current right-of-use assets and current and non-current lease liabilities in the Company’s consolidated balance sheets.

 

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As the implicit interest rate in its leases was generally not known, the Company’s used its incremental borrowing rate as the discount rate for purposes of determining the present value of its lease liabilities. At June 30, 2022 and December 31, 2021, the Company’s weighted-average discount rate utilized for its leases was 7.35% and 7.16%, respectively.

 

When a contract contained lease and non-lease elements, both were accounted as a single lease component. 

 

The Company had several non-cancelable finance leases for machinery and equipment. The Company’s finance leases have remaining lease terms of one year to five years.

 

The Company had several non-cancelable operating leases for corporate offices, warehouses, showrooms, research and development facilities and vehicles. The Company’s leases have remaining lease terms of one year to five years, some of which include options to extend. Some leases include payment for common area maintenance associated with the property. 

 

Additional information on the Company’s operating and financing lease activity is as follows:

 

   Three Months ended
June 30,
   Six Months ended
June 30,
 
(In thousands)  2022   2021   2022   2021 
Operating lease cost  $291   $70   $536   $84 
Finance lease cost:                    
Amortization of right-of-use assets   46    45    94    90 
Interest on lease liabilities   9    11    18    22 
Total lease cost  $346   $126   $648   $196 

 

(In thousands)  Balance Sheet
Location
   June 30,
2022
   December 31,
2021
 
Assets            
Right-of-use assets, net   Right-of-use, net   $2,866   $1,479 
Finance lease assets   Property and equipment, net    344    380 
Total lease assets       $3,210   $1,859 
                
Liabilities               
Current:               
Operating   Operating lease liabilities, current   $1,084   $814 
Financing   Accrued expenses and other current liabilities    166    156 
Non-current:               
Operating   Operating lease liabilities, non-current    1,908    704 
Financing   Other non-current liabilities    236    293 
Total lease liabilities       $3,394   $1,967 
Weighted-average remaining lease term – operating leases        3.64 years     3.11 years 
Weighted-average remaining lease term – finance leases        2.60 years     2.36 years 
Weighted-average discount rate – operating leases        6.72%   8.03%
Weighted-average discount rate – finance leases        7.97%   6.29%

 

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Maturities of operating and finance lease liabilities as of June 30, 2022 are as follows:

 

Years ending December 31 (In thousands),  Operating
Lease
   Finance
Lease
 
         
Remaining 2022  $649   $89 
2023   971    199 
2024   614    97 
2025   493    51 
2026   461    11 
Thereafter   200     
Total minimum lease payments   3,388    447 
Less imputed interest   (396)   (45)
Total lease liabilities  $2,992   $402 

 

Note 11 — Convertible Promissory Notes

 

On January 11, 2021, the Company’s Board of Directors and shareholders approved the amendment to the conversion formula of the Convertible Promissory Notes (the “Convertible Notes”) issued by the Company on dates between August 2020 and November 2020. Pursuant to the amendment, immediately prior to the consummation of a public transaction, the outstanding principal amount of the Convertible Notes, together with all accrued and unpaid interest, shall convert into a number of fully paid and non-assessable shares of Common Stock, at a conversion price of $7.72.

 

While the original conversion feature was bifurcated from the host instrument, the Company determined that the amended conversion feature would not require bifurcation. Since the accounting for the conversion feature changed because of the amendment, the Company applied extinguishment accounting pursuant to its accounting policy.

 

Accordingly, the Company recognized a gain on extinguishment of $2.7 million in connection with the derecognition of the net carrying amount of the extinguished debt of $19.6 million (inclusive of $13.1 million of principal, $7.1 million of derivative liabilities, less $587 thousand of debt discount) and the recognition of the $16.9 million fair value of the new convertible notes (including the same principal amount of $13.1 million plus the $3.8 million fair value of the beneficial conversion feature).

 

On February 1, 2021, in conjunction with the closing of the Company’s IPO, the Convertible Notes in the aggregate principal amount of $13.1 million were converted into 1,697,075 shares of Common Stock at the election of the Company at a conversion price of $7.72 per share.

 

Note 12 — Stockholders’ Equity

 

On January 9, 2020, the Company increased its authorized number of shares of Common Stock to 53,000,000, consisting of: 50,000,000 shares of Common Stock, and 3,000,000 shares of Preferred Stock. Additional information regarding the Company’s amendment to the Articles of Incorporation may be found in Note 19 - Subsequent Events, included elsewhere in the notes to the consolidated financial statements. On January 9, 2020, the Company designated 100,000 shares of the 3,000,000 authorized shares of Preferred Stock, as Series A Convertible Preferred Stock (“Series A Preferred Stock”).

 

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Series A Convertible Preferred Stock

 

Beginning in the first quarter of 2020, the Company issued an aggregate of 60,000 shares of Series A Preferred Stock, for an aggregate purchase price of $6.0 million. In May 2020, the Company completed an offering of Series A Preferred Stock with the issuance of an additional 40,000 shares of Series A Preferred Stock for an aggregate purchase price of $4.0 million.

 

Amendment of Conversion Formulas

 

On January 11, 2021, the Company’s Board of Directors approved the amendment to the conversion formula of the Series A Preferred Stock and Convertible Notes. After the amendment:

 

1.the Series A Preferred Stock is convertible, at any time after the issuance or immediately prior to the closing of a public transaction, into Common Stock in an amount of shares equal to (i) the product of the Series A Preferred Stock original price plus accrued but unpaid dividends on the shares being converted, multiplied by the number of shares of Series A Preferred Stock being converted, divided by (ii) a conversion price of $7.72 per share (after the reverse split taking effect); and

 

2.immediately prior to the consummation of a public transaction, the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest shall convert into a number of fully paid and non-assessable shares of Common Stock equal to the quotient of (i) the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest thereunder immediately prior to such public transaction divided by (ii) a conversion price of $7.72 (after the reverse split taking effect).

 

On January 11, 2021, the Company’s shareholders approved the amendment to the Series A Preferred Stock.

 

Initial Public Offering

 

On February 1, 2021, the Company completed an IPO for the sale of 5,400,000 shares of Common Stock at a price of $10.00 per share. The Company also granted the underwriters: (a) a 45-day option to purchase up to 810,000 additional shares of Common Stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the IPO, and (b) warrants to purchase 162,000 shares of Common Stock (equal to 3% of the aggregate number of shares of Common Stock issued in the IPO) at an exercise price of $12.50 per share (which is equal to 125% of the IPO price). Subsequently, the underwriters exercised the over-allotment option, and on February 4, 2021, the Company closed on the sale of an additional 810,000 shares of Common Stock for a price of $10.00 per share and granted to the underwriters warrants to purchase 24,300 additional shares of Common Stock (equal to 3% of the amount of shares issued as part of the exercised of the over-allotment option) at an exercise price of $12.50 per share. The exercise of the over-allotment option brought the total number of shares of Common Stock sold by the Company in connection with the IPO to 6,210,000 shares and the total net proceeds received in connection with the IPO to approximately $57.0 million, after deducting underwriting discounts and estimated offering expenses.

 

Immediately prior to the closing of the Company’s IPO, all outstanding shares of Series A Preferred Stock and Convertible Notes were converted into 1,373,038 shares of Common Stock and 1,697,075 shares of Common Stock, respectively, at a conversion price of $7.72 per share.

  

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Subsequent Public Offering

 

On February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) for the sale of 5,555,555 shares of Common Stock for a price of $13.50 per share. The Company also granted the underwriters: (a) a 45-day option to purchase up to 833,333 additional shares of Common Stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the February Offering, and (b) warrants to purchase 166,667 shares of Common Stock (equal to 3% of the aggregate number of shares of Common Stock issued in the February Offering) at an exercise price of $16.875 per share (which is equal to 125% of the February Offering). Subsequently, the underwriters exercised the over-allotment option, and on March 22, 2021, the Company closed on the sale of an additional 833,333 shares of Common Stock for a price of $13.50 per share and granted to the underwriters warrants to purchase 25,000 additional shares of Common Stock (equal to 3% of the amount of shares issued as part of the exercised of the over-allotment option) at an exercise price of $16.875 per share. The exercise of the over-allotment option brought the total number of shares of Common Stock sold by the Company in connection with the February Offering to 6,388,888 shares and the total net proceeds received in connection with the February Offering to approximately $80.0 million, after deducting underwriting discounts and estimated offering expenses.

 

Private Placement

 

On January 25, 2022, the Company entered into a Securities Purchase Agreement (the “Securities Agreement”) with an institutional investor and other accredited investors for the sale by the Company of (i) 2,450,350 shares (the “SA Shares”) of Common Stock, (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to an aggregate of 1,570,644 shares of Common Stock and (iii) warrants to purchase up to an aggregate of 3,015,745 shares of Common Stock (the “Common Warrants” and, collectively with the Pre-Funded Warrants, the “SA Warrants”), in a private placement offering. The combined purchase price for one share of Common Stock (or one Pre-Funded Warrant) and accompanying fraction of a Common Warrant was $6.80.

 

Subject to certain ownership limitations, the SA Warrants are exercisable six months from issuance. Each Pre-Funded Warrant was exercisable into one share of Common Stock at a price per share of $0.001 (as adjusted from time to time in accordance with the terms thereof). Each Common Warrant is exercisable into one share of Common Stock at a price per share of $7.48 (as adjusted from time to time in accordance with the terms thereof) and will expire on the fifth anniversary of the initial exercise date. The institutional investor that received the Pre-Funded Warrants fully exercised such warrants in March 2022.

  

Raymond Chang, Chairman and Chief Executive Officer of the Company, and Stuart Wilcox, who is currently our Chief Operating Officer, and at the time was a member of the Company’s Board of Directors, participated in the private placement on essentially the same terms as other investors, except for having a combined purchase price of $6.90 per share.

 

The gross proceeds to the Company from the private placement were approximately $27.3 million, before deducting the placement agent’s fees and other offering expenses, and excluding the proceeds, if any, from the exercise of the SA Warrants.

 

Issuance of Common Stock in Connection with Acquisitions 

 

On October 1, 2021, the Company issued an aggregate of 666,403 shares of its Common Stock to the Precision and Cascade shareholders in connection with the Company’s acquisition of Precision and Cascade. Refer to Note 8 – Business Combinations, included elsewhere in the notes to the consolidated financial statements.

 

On December 31, 2021, the Company issued an aggregate of 240,301 shares of its Common Stock to the PurePressure shareholders in connection with the Company’s acquisition of PurePressure. Refer to Note 8 – Business Combinations, included elsewhere in the notes to the consolidated financial statements.

 

On February 1, 2022, the Company issued an aggregate of 297,929 shares of its Common Stock to the Lab Society shareholders in connection with the Company’s acquisition of Lab Society. Refer to Note 8 – Business Combinations, included elsewhere in the notes to the consolidated financial statements.

 

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Note 13 — Stock-Based Compensation and Employee Benefit Plans

 

2022 Omnibus Equity Incentive Plan

 

On April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Omnibus Equity Incentive Plan (the “2022 Plan”), which replaced the 2020 Stock Option Plan (the “2020 Plan”). The 2022 Plan provides for the grant of stock options, stock appreciation right awards, performance share awards, restricted stock awards, restricted stock unit awards, other stock-based awards and cash-based awards. The aggregate number of shares of Common Stock that may be reserved and available for grant and issuance under the 2022 Plan is 5,296,647 shares, which includes the 2,000,000 shares authorized under the 2022 Plan, plus the rollover of 3,296,647 issued and outstanding awards under the 2020 Plan. Shares will be deemed to have been issued under the 2022 Plan solely to the extent actually issued and delivered pursuant to an award. If any award granted under the 2020 Plan or the 2022 Plan expires, is canceled, or terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2022 Plan. The 2022 Plan shall continue in effect, unless sooner terminated, until the tenth anniversary of the date on which it is adopted by the Board of Directors. 

 

Stock-based Compensation

 

The Company’s stock option compensation expense was $940 thousand and $931 thousand for the three months ended June 30, 2022 and 2021, respectively, and $1.9 million and $3.1 million for the six months ended June 30, 2022 and 2021, respectively. There was $3.4 million of total unrecognized compensation cost related to unvested options granted under the Company’s options plans as of June 30, 2022. This stock option expense will be recognized through 2025.

 

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying Common Stock, expected option life, and expected volatility in the market value of the underlying Common Stock. No stock options were granted during the six months ended June 30, 2022.

 

The following table summarizes the Company’s assumptions used in the valuation of options granted during the year ended December 31, 2021:

 

Volatility   40%
Risk-free interest rate   1.10% – 1.63% 
Dividend yield   0.00%
0% Expected life (years)   10 
Forfeiture rate   0.00%

 

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options and warrants have characteristics different from those of its traded stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the expected term. The expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s current expectation of future action surrounding dividends. The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a period consistent with the underlying instrument’s expected term. The expected lives for such grants were based on the simplified method for employees and directors.

 

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In arriving at stock-based compensation expense, the Company estimates the number of stock-based awards that will be forfeited due to employee turnover. The Company’s forfeiture assumption is based primarily on its employee turnover historical experience. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the Company’s financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized in the Company’s financial statements. The expense the Company recognizes in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period.

 

Stock Option Activity

 

As of June 30, 2022, there were 2,005,747 shares of Common Stock available to be granted under the Company’s 2022 Plan.

 

The following table presents option activity under the Company’s stock option plans for the six months ended June 30, 2022 and the year ended December 31, 2021:

 

(In thousands, except share and per share data)   Number of
Options
    Weighted-
Average
Exercise
Price
    Aggregate
Intrinsic
Value
 
Options outstanding at December 31, 2020     3,133,109     $ 3.51     $  
Granted     1,520,017       12.13          
Exercised     (657,620 )     3.23          
Forfeited     (430,214 )     3.98          
Canceled     (1,003 )     4.43          
Options outstanding at December 31, 2021     3,564,289       7.18     $ 12,572  
Granted                    
Exercised     (8,506 )     2.29          
Forfeited     (151,895 )     6.81          
Canceled     (112,988 )     11.65          
Options outstanding at June 30, 2022     3,290,900     $ 7.05     $  
                         
Options vested and exercisable as of June 30, 2022     2,276,891     $ 5.76          
Options vested and expected to vest as of June 30, 2022     3,158,959     $ 6.93          

 

2022 Employee Stock Purchase Plan

 

On April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the 2022 Employee Stock Purchase Plan ("ESPP"). The Company has initially reserved 500,000 shares of Common Stock for issuance under the ESPP. On June 30, 2022, 500,000 shares were available for future issuance.

 

Under the ESPP, eligible employees are granted options to purchase shares of Common Stock at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. Options to purchase shares are granted twice yearly on or about August 1 and February 1 and are exercisable on or about the succeeding January 31 and July 31, respectively, of each year. No participant may purchase more than $25,000 worth of Common Stock annually. No Common Stock was granted under the 2022 ESPP during the six months ended June 30, 2022.

 

 

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Employee Benefit Plan

 

The Company maintains an employee’s savings and retirement plan under Section 401(k) of the Internal Revenue Code (the “401k Plan”). All full-time U.S. employees become eligible to participate in the 401k Plan. The Company’s contribution to the 401k Plan is discretionary. During the three and six months ended June 30, 2022 and 2021, the Company did not contribute to the 401k Plan.

 

Note 14 — Stock Warrants 

 

The following table presents all warrant activity of the Company for the six months ended June 30, 2022 and the year ended December 31, 2021:

 

   Number of
Warrants
  

Weighted-
Average

Exercise Price

 
Warrants outstanding at December 31, 2020   828,171   $0.02 
Granted   377,968    0.02 
Exercised   (934,295)   0.02 
Warrants outstanding at December 31, 2021   271,844    0.02 
Granted   11,467,496    6.02 
Exercised   (1,627,542)   0.02 
Warrants outstanding at June 30, 2022   10,111,798   $6.82 

  

The Company received proceeds from the exercise of warrants of less than $1 thousand for both the three months ended June 30, 2022 and June 30, 2021, and $2 thousand and $5 thousand for the six months ended June 30, 2022 and 2021, respectively.

 

Note 15 — Income Taxes

 

The Company’s effective income tax rate was 0.1% and 0.0% for the three months ended June 30, 2022 and 2021, respectively. The income tax benefit was $(62) thousand and $0 for the three months ended June 30, 2022 and 2021, respectively. The difference between the Company’s effective tax rates for the 2022 and 2021 periods and the U.S. statutory tax rate of 21% was primarily due to a valuation allowance recorded against certain deferred tax assets. The change in income tax benefit for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to a goodwill impairment charge recorded during the second quarter of 2022 which resulted in a $(62) thousand benefit related to the reversal of the Company's deferred tax liability on indefinite-lived assets.

 

The Company’s effective income tax rate was 0.3% and 0.0% for the six months ended June 30, 2022 and 2021, respectively. The income tax benefit was $(262) thousand and $0 for the six months ended June 30, 2022 and 2021, respectively. The difference between the Company’s effective tax rates for the 2022 and 2021 periods and the U.S. statutory tax rate of 21% was primarily due to a valuation allowance recorded against certain deferred tax assets. The change in the income tax benefit for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily due to a discrete income tax benefit of $(200) thousand recorded during the first quarter of 2022, which is attributable to a non-recurring partial release of the Company's U.S. valuation allowance as a result of the Lab Society acquisition. Additionally, as a result of the goodwill impairment charge recorded during the second quarter of 2022, the Company recognized a small benefit related to the reversal of its opening deferred tax liability on indefinite-lived assets.

 

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Note 16 — Net Loss Per Share

 

Net loss per share calculations for all periods have been adjusted to reflect the Company’s Reverse Stock Split. Net loss per share was calculated based on the weighted-average number of its Common Stock then outstanding.

 

Basic net loss per share is calculated using the weighted-average number of Common Stock outstanding during the periods. Net loss per share, assuming dilution, is calculated using the weighted-average number of common shares outstanding and the dilutive effect of all potentially dilutive securities, including Common Stock equivalents and convertible securities. Net loss per share, assuming dilution, is equal to basic net loss per share because the effect of dilutive securities outstanding during the periods, including options and warrants computed using the treasury stock method, is anti-dilutive.

 

The components of basic and diluted net loss per share were as follows:

 

    Three Months ended
June 30,
    Six Months ended
June 30,
 
(In thousands, except share and per share data)   2022     2021     2022     2021  
Numerator:                        
Net loss attributable to Agrify Corporation   $ (93,401 )   $ (5,636 )   $ (102,283 )   $ (9,446 )
Accrued dividend attributable to Preferred A Stockholders                       (61 )
Net loss available for Common Stockholders   $ (93,401 )   $ (5,636 )   $ (102,283 )   $ (9,507 )
Denominator:                                
Weighted-average common shares outstanding – basic and diluted     26,582,104       20,344,278       25,591,114       16,661,948  
Net loss per share attributable to Common Stockholders – basic and diluted   $ (3.51 )   $ (0.28 )   $ (4.00 )   $ (0.57 )

 

The Company’s potential dilutive securities, which include stock options and warrants, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares equivalents presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect: 

 

   June 30,
2022
   December 31,
2021
 
Options outstanding   3,290,900    3,564,289 
Warrants outstanding   10,111,798    271,844 
    13,402,698    3,836,133 

 

Note 17 — Commitments and Contingencies

 

Legal Matters

 

Cooper and Weinstein Matter

 

On January 5, 2021, the Company received a demand letter from Nicholas Cooper and Richard Weinstein, (two of the Company’s former employees), and one of Mr. Cooper’s affiliated entities, asserting that Messrs. Cooper and Weinstein were entitled to compensation arising out of their employment by the Company, and their partial ownership of TriGrow Systems, LLC which had been acquired by the Company. The demand letter asserts that Messrs. Cooper and Weinstein are due certain sales commissions under their applicable bonus plan, equity earn-outs based on certain sales targets, and various equity purchases through the Company’s employee stock ownership plan. The demand letter also asserts various employment claims, including but not limited to, statutory wage withholding violations, wrongful termination, breach of contract, breach of the duty of good faith and fair dealing, fraud in the inducement, promissory estoppel, minority shareholder oppression, breach of fiduciary duty, unjust enrichment, and violations of state and federal securities laws.

 

On January 19, 2021, Messrs. Cooper and Weinstein filed a lawsuit against the Company in the United States District Court for the Western District of Washington, alleging the same claims made in their demand letter based on the facts disclosed above. The plaintiffs are seeking relief in the form of monetary damages in an amount to be determined. Messrs. Cooper and Weinstein are also seeking relief in the form of reinstatement and Mr. Weinstein is seeking rescission of his previously executed Release of Claims Agreement. On March 10, 2021, the Company moved to dismiss all Messrs. Cooper and Weinstein’s claims, asserting that the claims failed to allege legal grounds for relief. On May 12, 2021, a Magistrate issued a preliminary Report and Recommendation, which recommended dismissal of certain of Messrs. Cooper and Weinstein’s claims, and recommended others for additional factual discovery. On July 27, 2021, a District Judge entered an order partially adopting the Report and Recommendation, dismissing one claim with prejudice, dismissing a second claim with leave to amend, and permitting the remaining claims to proceed.

 

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Additionally, on July 29, 2021, the Company filed a separate arbitration in Boston, Massachusetts against Messrs. Cooper and Weinstein, in which the Company alleges that Messrs. Cooper and Weinstein were liable for certain conduct during the time they were TriGrow employees, including breach of fiduciary duty, unjust enrichment, usurpation of corporate opportunity, conversion, fraudulent concealment, and false representation. Also on July 29, 2021, the Company submitted a claim for indemnification to certain legacy TriGrow Systems, LLC. shareholders. The claim for indemnification relates to conduct by Messrs. Cooper and Weinstein during the time they were TriGrow employees. During the second quarter of 2022, the Company and Messrs. Cooper and Weinstein tentatively agreed to settle all claims and potential claims between themselves and any affiliated entities by the Company to Messrs. Cooper, Weinstein, and a related entity, subject to negotiation of a final settlement agreement, for approximately $800 thousand, which has been accrued as a liability as of June 30, 2022.

 

United States Customs Seizure Matter

 

On June 28, 2022, the Company was notified by the United States Customs and Border Protection (“CBP”) that they seized 123 cartons of horticulture grow lights appraised at approximately $623 thousand at the Port of Savannah, Georgia based on CBP’s interpretation of certain importation laws which prohibit the importation of certain goods that are subject to health and safety legal restrictions, including a prohibition on the importation of drug paraphernalia, in accordance with 21 U.S.C. § 863(a). The Company will dispute the seizure. The Company does not believe these claims have any merit and intends to vigorously defend its position.

 

Commitments

 

Supply Agreement with Mack Molding Co.

 

In December 2020, the Company entered into a five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack will become a key supplier of VFUs. In February 2021, the Company placed a purchase order with Mack amounting to approximately $5.2 million towards the initial production of VFUs during 2021. In September 2021, the Company increased the purchase order with Mack to approximately $11.5 million towards production of VFUs during 2021 and 2022. The Company believes the supply agreement with Mack will provide the Company with increased scaling capabilities and the ability to meet the potential future demand of its customers more efficiently. The supply agreement contemplates that, following an introductory period, the Company will negotiate a minimum percentage of the VFU requirements that the Company will purchase from Mack each year based on the agreed-upon pricing formula. The introductory period is not time-based but rather refers to the production of an initial number of units after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage. The Company believes this approach will result in both parties making a more informed decision with respect to the pricing and other terms of the supply agreement with Mack.

 

Distribution Agreements with Related Party