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 September 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   The 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 November 10, 2022
Common Stock, $0.001 par value   8,876,362

 

 

 

 

 

TABLE OF CONTENTS

 

        Page
PART I   FINANCIAL INFORMATION   1
         
ITEM 1.   FINANCIAL STATEMENTS   1
         
    Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021   1
         
    Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 (unaudited) and 2021 (unaudited)   2
         
    Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 (unaudited) and 2021 (unaudited)   3
         
    Condensed Consolidated Statements of Cash Flows for the nine months ended September 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   49
         
ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk   70
       
ITEM 4.   Controls and Procedures   70
         
PART II   OTHER INFORMATION   71
       
ITEM 1.   Legal Proceedings   71
         
ITEM 1A.   Risk Factors   71
         
ITEM 2.   Unregistered Sales of Equity Securities and Use of Proceeds   72
         
ITEM 3.   Defaults Upon Senior Securities   72
         
ITEM 4.   Mine Safety Disclosures   72
         
ITEM 5.   Other Information   72
         
ITEM 6.   Exhibits   73
         
SIGNATURES   74

 

i

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

AGRIFY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

   September 30,
2022
   December 31,
2021
 
   (Unaudited)     
Assets        
Current assets:        
Cash and cash equivalents  $2,151   $12,014 
Restricted cash   10,000    
 
Marketable securities   381    44,550 
Accounts receivable, net of allowance for doubtful accounts of $3,125 and $1,415 at September 30, 2022 and December 31, 2021, respectively   4,559    7,222 
Inventory, net of reserves of $1,909 and $942 at September 30, 2022 and December 31, 2021, respectively   41,791    20,498 
Prepaid and refundable taxes   204    
 
Prepaid expenses and other current assets   4,296    2,452 
Total current assets   63,382    86,736 
Loan receivable, net of allowance for doubtful accounts of $21,770 and $0 at September 30, 2022 and December 31, 2021, respectively   29,232    22,255 
Property and equipment, net   13,208    6,232 
Right-of-use, net   2,470    1,479 
Goodwill   
    50,090 
Intangible assets, net   
    14,072 
Other non-current assets   1,899    1,184 
Total assets  $110,191   $182,048 
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $9,558   $9,151 
Accrued expenses and other current liabilities   20,505    28,764 
Operating lease liabilities, current   822    814 
Long-term debt, current   492    1,089 
Deferred revenue   10,136    3,772 
Total current liabilities   41,513    43,590 
Other non-current liabilities   187    318 
Warrant liabilities   971    
 
Operating lease liabilities, non-current   1,744    704 
Long-term debt   30,380    12 
Total liabilities   74,795    44,624 
Commitments and contingencies (Note 17)   
 
    
 
 
Stockholders’ equity:          
Common Stock, $0.001 par value per share, 100,000,000 and 50,000,000 shares authorized at September 30, 2022 and December 31, 2021, respectively, 2,691,008 and 2,220,710 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively (1)   3    2 
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 (1)   242,549    196,032 
Accumulated deficit   (207,526)   (58,975)
Total stockholders’ equity   35,026    137,059 
Non-controlling interests   370    365 
Total liabilities and stockholders’ equity  $110,191   $182,048 

 

(1) Periods presented have been adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021 and the 1-for-10 reverse stock split on October 18, 2022. Additional information regarding the reverse stock splits may be found in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to the condensed consolidated financial statements.

 

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

 

1

 

 

AGRIFY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Operations

(In thousands, except share and per share data)

(Unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
Revenue (including $0, $5,215, $2,411 and $21,570 from related parties, respectively)  $7,019   $15,751   $52,369   $34,584 
Cost of goods sold   11,135    16,131    50,703    34,977 
Gross (loss) profit   (4,116)   (380)   1,666    (393)
                     
General and administrative   24,126    7,705    53,263    16,562 
Selling and marketing   2,160    890    6,582    2,288 
Research and development   1,747    827    6,269    2,483 
Change in contingent consideration   (602)   
    (1,509)   
 
Impairment of goodwill and intangible assets   
    
    69,904    
 
Total operating expenses   27,431    9,422    134,509    21,333 
Loss from operations   (31,547)   (9,802)   (132,843)   (21,726)
Interest (expense) income, net   (3,979)   45    (5,224)   68 
Other income (expense)   1,506    (15)   1,506    (78)
Change in fair value of warrant liability   5,686    
    5,686    
 
(Loss) gain on extinguishment of notes payable   (17,933)   
    (17,933)   2,685 
Other (expense) income, net   (14,720)   30    (15,965)   2,675 
Net loss before income taxes   (46,267)   (9,772)   (148,808)   (19,051)
Income tax benefit   
    
    (262)   
 
Net loss   (46,267)   (9,772)   (148,546)   (19,051)
Income (loss) attributable to non-controlling interests   1    (14)   5    153 
Net loss attributable to Agrify Corporation  $(46,268)  $(9,758)  $(148,551)  $(19,204)
Net loss per share attributable to Common Stockholders – basic and diluted (1)  $(17.33)  $(4.68)  $(57.21)  $(10.66)
Weighted-average common shares outstanding – basic and diluted (1)   2,670,501    2,083,439    2,596,649    1,806,874 

 

(1) Periods presented have been adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021 and the 1-for-10 reverse stock split on October 18, 2022. Additional information regarding the reverse stock splits may be found in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to the condensed consolidated financial statements.

 

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

 

2

 

 

AGRIFY CORPORATION AND SUBSIDIARIES

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
   Non-
Controlling
   Total
Stockholders’
 
   Shares (1)   Amount (1)   Shares   Amount   Capital (1)   Deficit   to Agrify   Interests   Equity 
Balance at January 1, 2021   421,168   $    100,000   $   $19,831   $(26,510)  $(6,679)  $225   $(6,454)
Stock-based compensation                   3,066        3,066        3,066 
Beneficial conversion feature associated with amended Convertible Promissory Notes                   3,869        3,869        3,869 
Conversion of Convertible Notes   169,707                13,100        13,100        13,100 
Issuance of Common Stock – Initial Public Offering (“IPO”), net of fees   621,000    1            56,960        56,961        56,961 
Issuance of Common Stock – Secondary public offering, net of fees   638,889    1            79,838        79,839         79,839 
Conversion of Preferred A Stock   137,304        (100,000)                        
Exercise of options   25,279                721        721        721 
Exercise of warrants   24,023                5        5        5 
Net loss                       (9,446)   (9,446)   167    (9,279)
Balance at June 30, 2021   2,037,370   $2       $   $177,390   $(35,956)  $141,436   $392   $141,828 
Stock-based compensation                   941        941        941 
Issuance of common shares in connection with acquisition   800                176        176        176 
Exercise of options   36,581                1,499        1,499        1,499 
Exercise of warrants   51,387                3        3        3 
Net loss                       (9,758)   (9,758)   (14)   (9,772)
Balance at September 30, 2021   2,126,138   $2       $   $180,009   $(45,714)  $134,297   $378   $134,675 

 

   Common Stock   Preferred A Stock   Additional
Paid-In-
   Accumulated   Total
Stockholders’
Equity
attributable
   Non-
Controlling
   Total
Stockholders’
 
   Shares (1)   Amount (1)   Shares   Amount   Capital (1)   Deficit   to Agrify   Interests   Equity 
Balance at January 1, 2022   2,220,710   $2       $
   $196,032   $(58,975)  $137,059   $365   $137,424 
Stock-based compensation       
        
    1,893    
    1,893    
    1,893 
Issuance of Common Stock and warrants in private placement   245,035    
        
    25,797    
    25,797    
    25,797 
Issuance of debt and warrants in private placement       
        
    13,230    
    13,230    
    13,230 
Acquisition of Lab Society   29,793    
        
    1,903    
    1,903    
    1,903 
Exercise of options   851    
        
    20    
    20    
    20 
Exercise of warrants   162,754            
    2    
    2    
    2 
Net loss       
        
    
    (102,283)   (102,283)   4    (102,279)
Balance at June 30, 2022   2,659,143   $2       $
   $238,877   $(161,258)  $77,621   $369   $77,990 
Stock-based compensation       
        
    1,645    
    1,645    
    1,645 
Issuance of common shares in connection with acquisition   8,704            
    2,220    
    2,220    
    2,220 
Reclass of warrant liability       
        
    (194)   
    (194)   
    (194)
Exercise of warrants   3,161    1        
    1    
    2    
    2 
Issuance of restricted stock units   20,000                                 
Net loss       
        
    
    (46,268)   (46,268)   1    (46,267)
Balance at September 30, 2022   2,691,008   $3       $
   $242,549   $(207,526)  $35,026   $370   $35,396 

 

(1) Periods presented have been adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021 and the 1-for-10 reverse stock split on October 18, 2022. Additional information regarding the reverse stock splits may be found in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to the condensed consolidated financial statements.

 

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

 

3

 

 

AGRIFY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Cash Flows

(In thousands)

(Unaudited)

 

   Nine Months Ended
September 30,
 
   2022   2021 
Cash flows from operating activities        
Net loss attributable to Agrify Corporation  $(148,551)  $(19,204)
Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities:          
Depreciation and amortization   2,602    508 
Impairment on goodwill and intangible assets   69,904    
 
Loss (gain) on extinguishment of notes payable, net   14,933    (2,685)
Change in fair value of warrant liability   (5,686)   
 
Amortization of premium on investment securities   606    522 
Amortization of debt discount   1,990    
 
Interest on investment securities   (759)   (574)
Provision for doubtful accounts   23,708    
 
Provision for slow-moving inventory   967    
 
Debt issuance costs paid   (665)   
 
Debt issuance costs amortized   

389

     
Deferred income taxes   (262)   
 
Compensation in connection with the issuance of stock options   3,538    4,007 
Issuance of common shares in connection with acquisition   
    176 
Non-cash interest (income) expense   (1,522)   50 
Loss from disposal of fixed assets   6    25 
Change in fair value of contingent consideration   (1,509)   
 
Income attributable to non-controlling interests   5    153 
Changes in operating assets and liabilities, net of acquisitions:          
Accounts receivable   1,217    (7,861)
Inventory   (20,129)   (5,227)
Prepaid expenses and other current assets   (2,760)   (3,523)
Prepaid and refundable taxes   (10)   
 
Right-of-use assets, net   55    62 
Other non-current assets   (1,275)   
 
Accounts payable   378    7,906 
Accrued expenses and other current liabilities   (8,128)   7,367 
Deferred revenue, net   4,843    741 
Net cash used in operating activities   (66,115)   (17,557)
           
Cash flows from investing activities          
Purchases of property and equipment   (8,002)   (3,536)
Purchase of securities   (283,271)   (68,461)
Proceeds from the sale of securities   317,593    
 
Issuance of loan receivables   (26,942)   (12,686)
Cash paid for business combination, net of cash acquired   (3,513)   
 
Net cash used in investing activities   (4,135)   (84,683)
           
Cash flows from financing activities          
Proceeds from issuance of debt 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    2,220 
Proceeds from exercise of warrants   2    9 
Proceeds from short-term loan payable   2,522    
 
Repayment of debt and warrants in private placement   

(30,000

)   
 
Repayments of notes payable, other   (2,685)    
Payments of financing leases   (241)   (154)
         Net cash provided by financing activities   60,387    138,875 
Net increase in cash and cash equivalents   (9,863)   36,635 
Cash and cash equivalents at the beginning of period   12,014    8,111 
Cash and cash equivalents at the end of period  $2,151   $44,746 
Cash, cash equivalents, and restricted cash at end of period          
Cash and cash equivalents  $2,151   $44,746 
Restricted cash   10,000    
 
Total cash, cash equivalents, and restricted cash at the end of period  $12,151   $44,746 
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 AND SUBSIDIARIES

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 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 is 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 is 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 is 60% majority owner and Valiant-America, LLC owns 40%, which was formed in December 2019. Subsequent to September 30, 2022, On October 27, 2022, the Company provided notice to Valiant-America, LLC of our intention to begin winding up of Agrify-Valiant); 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 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.

 

On October 18, 2022, the Company effected a 1-for-10 reverse stock split of its 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.

 

No fractional shares of Common Stock were issued as a result of these reverse stock splits. Any fractional shares in connection with these reverse stock splits were rounded up to the nearest whole share and no stockholders received cash in lieu of fractional shares. The reverse stock splits had no impact on the number of shares of Common Stock that the Company is authorized to issue pursuant to its articles of incorporation or on the par value per share of the Common Stock. Proportional adjustments were made to the number of shares of Common Stock issuable upon exercise or conversion of the Company's outstanding stock options and warrants, the exercise price or conversion price (as applicable) of the Company’s outstanding stock options and warrants, and the number of shares reserved for issuance under the Company’s equity incentive plan. All share and per share information included in this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the impact of these reverse stock splits.

 

Initial Public Offering and Secondary Public Offering

 

On February 1, 2021, the Company closed its initial public offering, or (“IPO”), of 621,000 shares of its Common Stock (inclusive of 81,000 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 Securities Exchange Commission (“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 $100.00 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, increase inventory to meet customer demand forecasts, and support operational growth.

 

On February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) of 555,556 shares of its Common Stock for a price of $135.00 per share, less certain underwriting discounts, and commissions. On March 22, 2021, the Company closed on the sale of an additional 83,333 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 638,889 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, increase inventory, meet customer demand forecasts, and 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 SBA denied the Company’s application for the forgiveness of the outstanding balance of the PPP Loan. 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 that commenced on 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 nine months ended September 30, 2022 and 2021, condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, and the condensed consolidated cash flows for the nine months ended September 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 (“ASC810”), 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.

 

7

 

 

Based on the Company’s analysis of these entities, the Company has determined that Agrify-Valiant and Agrify Brands are each a VIE, and that the Company is the primary beneficiary. While the Company owns 60% of Agrify-Valiant’s equity interests and 75% of Agrify Brand’s equity interests, the remaining equity interests in Agrify-Valiant and Agrify Brands 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 and Agrify Brands 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 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 $207.5 million as of September 30, 2022. The Company's primary sources of liquidity are its cash and cash equivalents and marketable securities, with additional liquidity accessible, subject to market conditions and other factors, including limitations that may apply to the Company under applicable SEC regulations, from the capital markets, including under its at-the-market continuous equity offering (“ATM” or ATM Program”).

 

As of September 30, 2022, the Company had $12.5 million of cash, cash equivalents, marketable securities and restricted cash. The Company’s restricted cash is associated with its new senior secured note (the “Exchange Note”) was $10.0 million as of September 30, 2022. Current liabilities were $41.5 million as of September 30, 2022. Additional information regarding the Company’s Exchange Note may be found in Note 9 – Debt, included elsewhere in the notes to the consolidated financial statements.

 

Subsequent to the end of the third quarter of 2022, the Company entered into an agreement for the ATM Program with Canaccord Genuity LLC (the “Agent”), pursuant to which the Company may issue and sell, from time to time, shares of its Common Stock having an aggregate offering price of up to $50 million, depending on market demand, with the Agent acting as an agent for sales. The ATM allows for quick and agile sales of Common Stock to interested investors and provides an opportunity to raise additional capital for working capital requirements or to fund strategic opportunities that may present themselves from time to time. The Company has used, and intends to continue to use, the $15.1 million in net proceeds generated from the ATM Program as of November 7, 2022 for working capital and general corporate purposes, including repayment of indebtedness, funding the Company’s transformation initiatives and product category expansion efforts and capital expenditures. As of November 7, 2022, the Company had $34.4 million of remaining availability for future issuances of Common Stock under the ATM Program.

 

Additional information regarding the Company’s ATM Program and proceeds received subsequent to September 30, 2022, may be found in Note 19 – Subsequent Events, included elsewhere in the notes to the consolidated financial statements.

 

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 the 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 potential 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.

 

8

 

 

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, (“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 statements of operations as general and administrative expenses and selling and marketing expenses for the three and nine months ended September 30, 2022 and 2021.

 

In addition, the Company effected a 1-for-10 reverse stock split of its Common Stock on October 18, 2022. 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. The shares of Common Stock retained a par value of $0.001 per share. Accordingly, the stockholders’ deficit reflects the reverse stock split by reclassifying from “Common Stock” to “additional paid-in capital” an amount equal to the par value of the decreased shares resulting from the reverse stock split.

 

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 September 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 Exchange 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 Exchange 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 that will mature within the next 12 months, including interest receivable on 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.

 

9

 

 

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

 

   Three Months Ended
September 30, 2022
   Three Months Ended
September 30, 2021
 
(In thousands)  Amount   % of Total
Revenue
   Amount   % of Total
Revenue
 
New England Innovation Academy (“NEIA”) – Related Party   *    *   $3,217    20.4%
Greenstone Holdings (“Greenstone”) – Related Party   *    *   $1,998    12.7%
Company Customer Number – 71   *    *   $3,174    20.2%
Company Customer Number – 136  $908    12.9%  $2,480    15.7%
Company Customer Number – 139   *    *   $4,006    25.4%

 

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

 

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

 

   Nine Months Ended
September 30, 2022
   Nine Months Ended
September 30, 2021
 
(In thousands)  Amount   % of Total
Revenue
   Amount   % of Total
Revenue
 
NEIA – Related Party   *    *   $19,572    56.6%
Company Customer Number – 71   *    *   $3,520    10.2%
Company Customer Number – 136  $7,054    13.5%   *    * 
Company Customer Number – 139  $8,590    16.4%  $4,006    11.6%

 

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

  

Accounts Receivable, Net

 

As of September 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
September 30, 2022
   As of
December 31, 2021
 
(In thousands)  Amount   % of Total
Accounts
Receivable
   Amount   % of Total
Accounts
Receivable
 
NEIA – Related Party   *    *   $3,498    48.4%
Company Customer Number - 126  $1,541    33.8%  $1,541    21.3%
Company Customer Number - 15989  $600    13.2%   *    * 
Company Customer Number - 16540  $573    12.6%   *    * 
Company Customer Number - 185  $526    11.5%   *    * 
Company Customer Number - 12237  $510    11.2%   *    * 

 

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

 

10

 

 

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 statements 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 an 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 was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing 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 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

 

11

 

 

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 an 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 was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing 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 – Goodwill and Intangible Assets, Net, 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.

 

Warrant Liabilities

 

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued private placement stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity (“ASC480”) and ASC815. The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC480 and ASC815. Management’s assessment considers whether the warrants are freestanding financial instruments pursuant to ASC480, whether they meet the definition of a liability pursuant to ASC480, and whether the warrants meet all of the requirements for equity classification under ASC815, including whether the warrants are indexed to the Company’s own Common Stock among other conditions for equity classification.

 

For issued or modified warrants that meet all of the criteria for equity classification, they are recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that are precluded from equity classification, they are recorded as a liability at their initial fair value on the date of issuance and subject to remeasurement on each balance sheet date with changes in the estimated fair value of the warrants to be recognized as an unrealized gain or loss in the condensed consolidated statements of operations. 

 

12

 

 

On August 18, 2022, the Company reached an agreement with its institutional lender to amend its existing Securities Purchase Agreement and entered into a Securities Exchange Agreement (the “Exchange Agreement”). Pursuant to the Exchange Agreement, the Company issued a new warrant to purchase 1,422,764 shares of Common Stock (the “Note Exchange Warrant”) and modified an existing warrant (the “SPA Warrant”) to purchase up to an aggregate of 688,111 shares of Common Stock. The Company exchanged the SPA Warrant for a new warrant for the same number of underlying shares but with a reduced exercise price (the “Modified Warrants” and, collectively with the Note Exchange Warrant, the “Warrant Liabilities”). As of September 30, 2022, the Company had outstanding liability-classified Warrant Liabilities that allows the accredited investor (the “Investor”) to purchase 2,110,875 shares of the Company’s Common Stock. Additional information regarding the Exchange Agreement and Warrant Liabilities may be found in Note 4 – Fair Value Measures and Note 9 – Debt, included elsewhere in the notes to the condensed consolidated financial statements.

 

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 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.

 

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.

 

13

 

 

The Company estimates the fair value of each stock option grant on the date of the 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 the 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 the consolidated statements of 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.

 

14

 

 

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.

 

15

 

 

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 nine months ended September 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 September 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 is 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 September 30, 2022 and December 31, 2021. The Company did not recognize revenue from TPI for the three and nine months ended September 30, 2022 and September 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 September 30, 2022, tax years 2017 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 splits effected on January 12, 2021 and October 18, 2022. 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 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 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 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.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements. 

 

Note 2 — Revenue and Deferred Revenue

 

Revenue

 

During the three and nine months ended September 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
September 30,
   Nine Months Ended
September 30,
 
(In thousands)  2022   2021   2022   2021 
Transferred at a point in time  $5,657   $2,757   $28,675   $4,110 
Transferred over time   1,362    12,994    23,694    30,474 
Total revenue  $7,019   $15,751   $52,369   $34,584 

  

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 $540 thousand and $398 thousand for September 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 nine months ended September 30, 2022 and the year ended December 31, 2021 were as follows:

  

(In thousands)  Nine Months Ended
September 30,
2022
   Year
Ended
December 31,
2021
 
Deferred revenue – beginning of period  $3,772   $152 
Additions   18,167    3,758 
Interest income on deferred revenue   
    4 
Recognized   (11,803)   (142)
Deferred revenue – end of period  $10,136   $3,772 

  

Deferred revenue balances primarily consist of customer deposits on its cultivation and extraction solutions equipment. As of September 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 September 30, 2022 and December 31, 2021: 

 

(In thousands)  September 30,
2022
   December 31,
2021
 
Accounts receivable, gross  $7,684   $8,637 
Less allowance for doubtful accounts   (3,125)   (1,415)
Accounts receivable, net  $4,559   $7,222 

 

NEIA, a related party, accounted for $0 and $3.5 million of the Company’s accounts receivable, net as of September 30, 2022 and December 31, 2021, respectively.

 

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

 

(In thousands)  Nine Months Ended
September 30,
2022
   Year
Ended
December 31,
2021
 
Allowance for doubtful accounts - beginning of period  $1,415   $54 
Provision for doubtful accounts   1,938    1,187 
Other adjustments   (228)   174 
Allowance for doubtful accounts - end of period  $3,125   $1,415 

 

Bad debt expense was $385 thousand and $0 for the three months ended September 30, 2022 and 2021, respectively, and $1.9 million and $0 for the nine months ended September 30, 2022 and 2021, respectively.

 

20

 

 

Prepaid Expenses and Other Current Receivables

 

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

 

(In thousands)   September 30,
2022
    December 31,
2021
 
Deferred costs   $ 1,108     $ 353  
Prepaid insurance     931       492  
Other receivables, other     603       86  
Other note receivables (1)     584       807  
Prepaid expenses, other     430       541  
Prepaid materials     261        
Prepaid software     188       173  
Deferred issuance costs, net     191        
Total prepaid expenses and other current assets   $ 4,296     $ 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 September 30, 2022 and December 31, 2021:

 

(In thousands)   September 30,
2022
    December 31,
2021
 
Leasehold improvements   $ 1,048     $ 841  
Machinery and equipment     1,048       898  
Computer and office equipment     624       473  
Leased equipment at customer     602       619  
Furniture and fixtures     504       385  
Software     300       174  
Research and development of laboratory equipment     260       163  
Vehicles     143       143  
Trade show assets     79       80  
Total property and equipment, gross     4,608       3,776  
Accumulated depreciation     (1,930 )     (780 )
Construction in progress     10,530       3,236  
Total property and equipment, net   $ 13,208     $ 6,232  

 

Depreciation expense for the three months ended September 30, 2022 and 2021 was $409 thousand and $139 thousand, respectively, and $1.2 million and $337 thousand for the nine months ended September 30, 2022 and 2021, respectively.

 

Other Non-Current Assets

 

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

 

(In thousands)   September 30,
2022
    December 31,
2021
 
Long-term deferred commissions expense   $ 1,293     $ 1,101  
Deferred debt issuance costs, non-current, net     454        
Security deposits     152       83  
Total other non-current assets   $ 1,899     $ 1,184  

 

21

 

 

Accrued Expenses and Other Current Liabilities

 

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

 

(In thousands)  September 30,
2022
   December 31,
2021
 
Sales tax payable (1)  $5,756   $5,290 
Accrued construction costs   5,661    8,803 
Accrued acquisition liability (2)   4,145    9,198 
Compensation related fees   3,141    3,491 
Accrued warranty costs   540    398 
Accrued professional fees   448    1,104 
Accrued interest expense   263     
Accrued inventory purchases   243    201 
Financing lease liabilities   153    156 
Accrued consulting fees   90    75 
Accrued non-income taxes   
    48 
Other current liabilities   65    
 
Total accrued expenses and other current liabilities  $20,505   $28,764 

 

(1) 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.

 

(2) 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 acquisition of PurePressure.

 

Warranty Accrual

 

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

 

(In thousands)  Nine Months
Ended
September 30,
2022
   Year Ended
December 31,
2021
 
Warranty accrual – beginning of period  $       398   $          — 
Liabilities accrued for warranties issued during period   142    398 
Warranty accrual – end of period  $540   $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 September 30, 2022 and December 31, 2021, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:

  

   September 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   
    
    
    
    9,961    
    
    9,961 
Corporate bonds   381    
    
    381    34,589    
    
    34,589 
Total assets  $381   $
   $
   $381   $44,728   $
   $
   $44,728 
Liabilities                                        
Contingent consideration  $
   $
   $643   $643   $
   $
   $6,137   $6,137 
Warrant liabilities   
    
    971    971    
             
   Total liabilities  $
   $
   $1,614   $1,614   $
   $
   $6,137   $6,137 

 

Fair Value of Financial Instruments

 

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

 

  Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and deferred revenue liabilities approximate their fair values based on the short-term nature of these instruments.

 

  Marketable securities classified as current held-to-maturity securities are recorded at amortized cost, which at September 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 September 30, 2022 and December 31, 2021, the carrying value of the deferred consideration approximated fair value, respectively.

  

  The Company’s Warrant Liabilities are marked-to-market each reporting period with the changes in fair value of warrant liability are recorded to other income (expense), net in the accompanying consolidated statements of operations until the warrants are exercised. The fair value of the warrant liability is estimated using a Black-Scholes option-pricing model. 

 

Marketable Securities

 

As of September 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 as those investments which will mature within the next 12 months including, interest receivable on long-term bonds.

 

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

 

(In thousands)   September 30,
2022
    December 31,
2021
 
Current marketable securities            
Municipal bonds   $     $ 9,961  
Corporate bonds     381       34,589  
    $ 381     $ 44,550  

 

23

 

 

At September 30, 2022, marketable securities consisted of the following:

 

(In thousands)  Amortized
cost
 
   Unrealized
loss
 
   Estimated
fair value
 
 
Current marketable securities (due within 1 year)               
Corporate bonds  $381   $(10)  $371 
   $381   $(10)  $371 

 

At December 31, 2021, marketable securities consisted of the following:

 

(In thousands)  Amortized
cost
   Unrealized
loss
   Estimated
fair value
 
Current marketable securities (due within 1 year)            
Municipal bonds  $9,961   $(9)  $9,952 
Corporate bonds   34,589    (72)   34,517 
   $44,550   $(81)  $44,469 

 

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)  Nine Months
Ended
September 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   145    
 
Payments made on contingent liabilities   (5,550)   
 
Change in estimated fair value   (1,509)   1,412 
Contingent consideration – end of period  $643   $6,137 

 

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

 

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

 

Contingent Consideration – PurePressure

 

The Company, in its review of actual revenue performance as compared to its originally projected revenue estimates, noted that PurePressure’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 PurePressure’s first earn-out period. During the third quarter ended September 30, 2022, the Company reduced the estimated fair value of the contingent consideration liability associated with PurePressure’s first earn-out period by approximately $602 thousand. As required by ASC Topic 805 Business Combination (“ASC805”), the change in contingent consideration was recorded as a reduction in operating expenses during the third quarter of 2022.

 

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 ASC805, the change in contingent consideration was recorded as a reduction in operating expenses during the second quarter of 2022.

 

24

 

 

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 ASC805, was recorded as an increase in operating expenses during the second quarter of 2022. During the three-month period ended September 30, 2022, the Company made the final payment on the contingent consideration of approximately $5.6 million to the members of Precision and Cascade. Additional information regarding the Company’s final payment to Precision and Cascade may be found in Note 8 – Business Combination, included elsewhere in the notes to the consolidated financial statements.

 

Warrant liabilities

 

The estimated fair value of the Warrant Liabilities on September 30, 2022 is determined using Level 3 inputs. Inherent in a Black-Scholes option-pricing model are assumptions used in calculating the estimated fair values represent the Company’s best estimate. However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair values could be materially different.

 

The following table summarizes the Company’s assumptions used in the valuation of Warrant Liabilities for the nine months ended September 30, 2022: 

 

Stock price at issuance   $ 0.44  
Option exercise price   $ 1.23-$2.15  
Expected term (Years)     5.50  
Volatility     40.00
Discount rate (Treasury yield)     0.00%-4.06 %

 

The following table sets forth a summary of the changes in the fair value of the Level 3 Warrant Liabilities for the nine months ended September 30, 2022:

 

(In thousands)  Nine Months
Ended
September 30,
2022
 
Warrant liabilities – beginning of period  $
 
Initial fair value of warrant liabilities   6,657 
Change in estimated fair value   (5,686)
Warrant liabilities – end of period  $971 

  

25

 

 

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.

 

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.

 

During the quarter ended September 30, 2022, the Company provided a notice of default under the term loan agreement between the Company and Bud & Mary’s (the “Bud & Mary’s TTK Agreement”). On October 5, 2022, Bud & Mary’s Cultivation, Inc. (the “Bud & Mary’s”) filed a complaint in the Superior Court of Massachusetts in Suffolk County naming the Company as defendant. Bud & Mary’s is seeking, among other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion arising from the Bud & Mary’s TTK Agreement. In response, the Company established a reserve of $14.7 million specifically related to Bud & Mary’s. The Company deemed it necessary to fully reserve the $14.7 outstanding balance due to the current litigation and the uncertainty of the customer’s ability to repay the outstanding balance. In addition, $5.3 million of the notes receivable balance for work performed during the third quarter of 2022 has been recorded as an unbilled note receivable and deferred the revenue to a future period. The Company has recognized the expenses associated with the work completed in the current period due to the uncertainty of the Company’s ability to recover the funds owed by the customer and its obligations to the vendors that have performed this work. The Company determined that it will only recognize unbilled notes receivable revenue if cash is collected from the customer in a future period. The Company believes that Bud & Mary’s claims have no merit and intends to defend itself vigorously. The Company is taking all necessary steps to pursue repayment from Bud & Mary’s and is taking all actions necessary to protect its shareholders’ interests.

 

During the quarter ended June 30, 2022, the Company established a reserve of approximately $7.1 million specifically related to 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 September 30, 2022 and December 31, 2021.

 

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

  

(In thousands)  September 30,
2022
   December 31,
2021
 
Bud & Mary’s – TTK Solution  $14,691   $5,542 
Greenstone – TTK Solution – Related Party   12,457    11,177 
Company Customer Number 136 – TTK Solution   10,329    2,439 
Company Customer Number 125 – TTK Solution   5,563    1,105 
Company Customer Number 71 – Non-TTK Solution (1)   2,542    1,946 
Company Customer Number 140 – TTK Solution   46    46 
Other – Non-TTK Solutions   5,374    
 
TTK Solution – Allowance for doubtful accounts (2)   (21,770)   
 
Total loan receivable  $29,232   $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 Company established an allowance for doubtful accounts of approximately $14.7 million related to Bud & Mary’s ongoing litigation. The remaining balance of approximately $7.1 million relates to Greenstone consisting of capital advances, accrued interest and VFUs sales.

 

26

 

 

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 Bud & Mary’s TTK Solution and Greenstone TTK Solution, as described above.

 

The Company analyzed whether any of the above customers are a VIE in accordance with ASC810 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 September 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 September 30, 2022 and December 31, 2021:

 

(In thousands)  September 30,
2022
   December 31,
2021
 
Raw materials  $17,130   $6,393 
Prepaid inventory   4,827    2,237 
Finished goods   21,743    12,810 
Inventory, gross   43,700    21,440 
Inventory reserves   (1,909)   (942)
Total inventory, net  $41,791   $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)   Nine Months
Ended
September 30,
2022
    Year
Ended
December 31,
2021
 
Inventory reserves – beginning of period   $     942     $        —  
Increase in inventory reserves     967       942  
Inventory reserves – end of period   $ 1,909     $ 942  

 

Note 7 — Goodwill and Intangible Assets, Net

 

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.

 

27

 

 

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)  Nine Months
Ended
September 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 September 30, 2022 was as follows:

 

   Intangible Assets, Gross   Accumulated Amortization and Impairment   Intangible Assets, Net 
(In thousands)  January 1,
2022
    Additions   September 30,
2022
   January 1,
2022
   Expense and
Impairments, net
   September 30,
2022
   January 1,
2022
   September 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   $ 

 

28

 

 

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   December 31,
2021
   January 1,
2021
   Expense   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 $0 and $57 thousand for the three months ended September 30, 2022 and 2021, respectively, and $1.4 million and $172 thousand for the nine months ended September 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: $4.0 million in cash, subject to certain adjustments for working capital, cash, and indebtedness of Lab Society at closing; 42,561 shares of Common Stock (the “Buyer Shares”); and the Earn-out Consideration (as defined below), to the extent earned.

 

The Company withheld 12,768 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. During the third quarter of 2022, 2,785 of the Holdback Lab Buyer Shares were forfeited after the finalization of the net working capital settlement. The remaining 9,983 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. 

 

29

 

 

Transaction and related costs, consisting primarily of professional fees, related to the acquisition, totaled approximately $0 and $66 thousand for the three months and nine months ended September 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  $7,402 
      
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 ASC805 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.

 

30

 

 

During the three-month period ended June 30, 2022, the Company identified an 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 was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing 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 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

 

The amount of revenue of Lab Society included in the consolidated statements of operations from the acquisition date of February 1, 2022 to September 30, 2022 was $4.0 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 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.

 

On August 10, 2022, the Company entered into a post-closing adjustment settlement agreement (“Agreement”) with Sinclair. The Agreement was entered into in connection with the Purchase Agreement. According to the Purchase Agreement, $2.5 million was held by the escrow agent as the Adjustment Escrow Amount, $4.5 million was held by the escrow agent as the Indemnity Escrow Amount and 11,760 Buyer Shares were held by the Company as the Holdback Buyer Shares. During the three-month period ended September 30, 2022, the Company made the final Aggregate True-up Payment of approximately $5.6 million, of which, $3.3 million was paid in cash and 8,704 Holdback Buyer Shares were released to the Sinclair Members and the Company received $1.4 million from the Adjustment Escrow Amount, and the remaining $1.1 million balance of the Adjustment Escrow Amount became part of the Indemnity Escrow Amount.

 

Transaction and related costs, consisting primarily of professional fees, related to the acquisition, totaled approximately $0 and $63 thousand for the three and nine months ended September 30, 2022, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.

 

31

 

 

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 ASC805 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      

 

32

 

 

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 an 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 was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing 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 – Goodwill and Intangible Assets, Net, 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) 32,918 shares of Common Stock (the “Buyer Shares”); and (c) the Earn-out Consideration (as defined below), to the extent earned.

 

The Company withheld 8,888 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. During the third quarter of 2022, 1,456 of the Holdback Buyer Shares were forfeited after the finalization of the net working capital settlement. The remaining 7,432 of 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, related to the acquisition, totaled approximately $0 and $563 thousand for the three and nine months ended September 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).

 

33

 

 

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