Agrify Corporation Common Stock (AGFY) Q4 2020 Earnings Call Transcript

Agrify Corporation Common Stock (AGFY 2.76%)
Q4 2020 Earnings Call
Apr 01, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Agrify fourth-quarter and year-end 2020 earnings call. With us on today's call are Raymond Chang, chief executive officer; and Niv Krikov, chief financial officer. Today, management will review the highlights and financial results for the fourth quarter and year-end, as well as recent developments, and provide a business and operational update. Following man -- management's prepared remarks, there will be a Q&A session.

A reminder that today's conference is being recorded. Before we begin, we would like to remind everyone that prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control that could cause its future results, performance, or achievement to differ significantly from the results, performance, or achievement expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include risks detailed in our public filing with the Securities and Exchange Commission and those mentioned in the earnings release.

Except as required by law, we undertake no obligation to update any forward-looking or other statements herein whether as a result of new information, future events, or otherwise. Now at this time, it is my pleasure to turn the call over to Raymond Chang, Agrify's CEO. Please go ahead, Raymond.

Raymond Chang -- Chief Executive Officer

Thank you, Operator. Before we get started, I would like to thank everyone for joining us on the call today. As this is our first call as a public company, I will begin with a short overview of our business, followed by a discussion on company progress and performance during 2020, and then provide an update on the continued successful ex -- execution of our growth strategy and recent company developments. And finally, I will turn this over to Niv, my CFO, for a review of our financial results in more detail.

Agrify is a developer of industry-leading and fully integrated indoor grow solutions. We provide customers with what we believe to be the -- the industry's first comprehensive end-to-end solution, enabling our customers to consistently cultivate high-quality products at a lower cost of production. Our model is unique to the market as our systems provide a tightly controlled and replicable microclimate-controlled environment, uti -- utilizing our proprietary vertical farming units, or VFUs, driven by our proprietary Agrify's Insights software platform. This integrated solution helps solve many challenges that indoor growth -- growers encounter such as poor climate control, poor ventilation circulation, disease and pest mitigation, and underutilized vertical space.

Our stackable VFUs allow the customers to maximize yield, quality, and consistency at the lowest possible production cost. 2020 was a turning point for our company. We completed the development and started pre-take -- taking preorders for the next generation of Agrify VFUs. The ge -- new generation of VFU offers greater light outputs, improved light efficiency, and a wider range of environmental control, furthering our mission to deliver high quality and consistency to the much needed in the industry.

We also optimized our operations with the acquisition of TriGrow, the formal exclusive distributor of Agrify's indoor grow solutions, as well as Harbor Mountain, the company responsible for the manufacture and installation of many of Agrify's products. The integration of these companies has enabled us to optimize our operations and has positioned the company for accelerated growth and profitability. Additionally, with VFUs being utilized in a growing number of customer locations, we also begin to realize high margin, SaaS revenues for our software platform, which we expect to continue to grow as we increase the number of VFUs deployed. Let me again remind that our business model, it's all about building the largest possible install user base.

This positive momentum drove an improved financial performance for the year, and I am extremely pleased to report that we achieved record annual company revenue for 2020. Our annual revenue nearly tripled to $12.1 million in 2020, compared to $4.1 million in 2019, and our record Q4 revenue of $4.35 million was a 262% year-on-year sequential growth and puts us at a $17.4 million annual run rate. Our success in 2020 has positioned us to take -- to have a good start in 2021, and we are executing on a number of key initiatives to accelerate our growth further. During the first month of the year, we successfully completed an initial public offering and commenced our trading under the NASDAQ symbol of AGFY.

Through this initial offering and secondary offering in February, we raised approximately $147 million in total net proceeds, including the two over-allotments, providing a strong balance sheet to accelerate our growth strategy through several avenues. We have continued to bolster our software solution and we integrated our Agrify Insights platform with metric and regulatory compliance tracking and management solution used by 15 states and the District of Columbia to track cannabis from seed to sell. This integration further strengthened the software's capabilities by adding regulatory tracking and compliance functionality and providing real-time monitoring, control, and management of our customer operations while delivering actionable insights into product -- production optimization. We also established a partnership with Confident Cannabis, the only cannabis B2B wholesale platform powered by verified -- verified lab data.

With our Confident Cannabis partnership, users of both platforms can see how their cultivation inputs such as humidity, lighting, temperature, environmental control correlate with the final chemotypic expression of their crops. This is extremely powerful data as the industry increasingly places higher value on plants with certain compounds over others. We believe the ability to attain this knowledge will help our customers better understand how certain growing conditions and processes influence the final chemical expression, thereby allowing them to produce plants of greater value. In addition to our recent software development enhancements, we've also entered into a binding Letter of Intent for partnership with Atlantis Hydroponics to build out a research and development facility in Georgia focused on the hemp market.

The facility will conduct research on increasing concentration of certain phyto and metabolites such as CBG, CBD, CBN, and other terpenes and flavonoids via the manipulation and control of different elements in the growing environments such as temperature, humidity, light spectrum, and intensity. Agrify and Atlantis believe this research will lead to further stabilization and control over the chemo expression, and ultimately, to safer and more consistent phyto-derived medicines and products. And as I mentioned previously, we anticipate having more control of chemo expression of the plant would be a key factor in producing higher market value products as the industry evolves and custo -- customers demand more CBG-like quality for recreational and medical consumption. In February, we boasted the strength of our board of directors with the appointment of industry veteran, Stuart Wilcox, the former Curaleaf chief operating officer, as an independent director.

We are thrilled to have welcomed him to the board and we believe his wealth of cannabis industry knowledge and experience will be invaluable to us as we continue to scale up our organization to take on these significant growth opportunities ahead of us. We also established an advisory board by tapping industry experts such as Rosie Mattio of Mattio Communications and Matt Kressy of MIT IDM, the founding director, to help us to further enhance our product development and industry network and reach. Turning to look at our customer achievements since the start of the year. I am pleased to report that we recently expanded our relationship with Hannah Industry for its facility built out and installation of their previously purchased 179 VFUs.

Hannah is a leading Tier 2 producer and distributor of cannabis in the Washington state, currently with over 200 retail distribution points. We signed a binding Letter of Intent with them for an additional $3 million and annual SaaS revenue of approximately $285,000. Lastly, I want to discuss our most notable advancement to date in 2021. In Mar -- in mid-March, we announced to the market, we have launched our significantly enhanced comprehensive customer offering, the Agrify Total Turn-Key Solution, otherwise known as Agrify TTK.

With this first of kind solution, qualified strategic partners will have access to capital, hands-on support, resources, and know-how they need to quickly establish a cutting-edge -- cutting-edge indoor cultivation facility. Customers will be able to work with a single provider from facility design and built out through the turnkey end-to-end fully integrated and optimized precision growing. We believe the Agrify TTK Solution addresses many challenges that new cultivators face. And with this program, we are able to enter a long term 10-year partnership with customers that provide them with a prompt access to funding, facility design, construction services, cultivation equipment and software, standard operating procedures, extensive training through Agrify University, data and insights, and ongoing maintenance support, as well as equipment updates throughout the entire 10 years of partnership.

Again, the Agrify TTK is indeed the industry's first true end-to-end solution. We have already identified up to $50 million of the TTK opportunities and are in events discussion with several potential customers. We anticipate this program will allow us to secure opportunities earlier in the customer journey, increase adoption of our core technology, accelerate the recognition of our yield-based and recurring SaaS revenue, and most importantly, achieve an overall higher return on investments. Agrify is targeting an internal rate of return of 40% to 50% for this program through the 10-year revenue streams.

In addition to our fixed monthly SaaS revenue, we will also receive higher and more attractive production-based revenue streams. Repayment of construction loan with start upon pro -- project completion and we have priority payback commencing from the first commercial harvest and over 18 to 24 months period. Our initial target customers will be the ones that are located in states with favorable and attractive market and regulatory conditions. 2020 was an exceptional year for our company as we saw the benefits of our optimization and growth strategy efforts with a robust pipeline of opportunities and record financial results.

And in the beginning of 2021, we immediately began to execute on our growth strategy with the completion of our public offering and continued focus on improve -- improving customer solutions to our software enhancement and comprehensive partnership offering. We are immensely proud of our team for the work they have done in the last year and the growth we have seen in both our revenue and our business development pipeline. We will continue to execute on this strategy, and we are confident that in 2021, we will continue to deliver on the positive momentum we have seen in our earnings and revenue growth over the last 12 months. With key growth drivers in place and the right team to execute to attract the opportunities for accelerated growth, we believe 2021 will be a strong year for Agrify and I look forward to updating -- updating you on a positive progress in our upcoming Q1 call.

Now, I'd like to turn this over to Niv who will review the financial results and provide financial guidance for 2021. Niv.

Niv Krikov -- Chief Financial Officer

Thank you, Raymond, and good morning, everyone. Today, I'll provide you with an overview of our year-end 2020 financial results. For the year ended this December 31, 2020, total revenue increased by nearly 3x to $12.1 million, compared to $4.1 million for the same period in 2019. Our 2020 revenue combined of hardware revenue from the delivery of new VFUs to customers, as well as the addition of facility build-out revenue, which we be -- began to generate in the second quarter of 2020, gross profit for the year ended December 31, 2020 was $570,000, compared to a gross profit loss of $245,000 for the same period in 2019, improving gross profit margin to 4.7% for 2020, compared to a gross profit margin loss of 6% in 2019.

SG&A for the full-year 2020 was $9.8 million, up from $2.7 million for the full-year 2019. Research and development costs increased to $3.4 million for 2020 from $109,000 for 2019. Total operating expenses for the year were $13.2 million, compared to $2.8 million for the same period in 2019. Net loss attributable to Agrify for the full year ended 2020 was $21.6 million, compared to a $3 million in 2019.

It is important to note that our 2020 financial results included a noncash $9 million expense related to our convertible promissory notes. These notes were converted to equity upon the completion of our IPO. As a result of our improved performance in 2020, the growth drivers and upcoming catalyst Raymond discussed, Agrify anticipates to again achieve more than 3x year-over-year growth in 2021. This concludes our remarks.

Now, I'd like to open the call for questions. Operator, please go ahead.

Questions & Answers:

Operator

[Operator instructions] Your first question is from Scott Fortune with ROTH Capital Partner.

Scott Fortune -- ROTH Capital Partners -- Analyst

Good morning and congratulations on -- on the progress and -- and initiatives you are making going forward. Can you, you know, now that you have some flagship projects in place here and -- and then receiving some pretty good data from those and from your lab, can you provide a little more color on -- on the momentum of the business backlog in the pipeline going forward and -- and the momentum with other commercial growers going forward here?

Raymond Chang -- Chief Executive Officer

Thank you, Scott. I would definitely cover more of that in our Q1 call. However, what I want to say, as you know, they're really kind of two buckets of customers that we are pursuing simultaneously. One, obviously, are the large multi-state operators, the MSOs.

And I can say that we are making very good progress on that front. And obviously, with the larger MSOs, it will take a little bit of time. It will be a longer sell cycle. But I believe with one to two cycles of production results, they will be fully impressed and we'll be looking forward to implementing our solutions throughout multiple of their facilities.

Now, in addition to that, we are also targeting the regional operators. Now, the -- the regional operator, we're seeing a tremendous interests toward our VFUs and either through a strict purchasing, as well as our TTK model. I want to emphasize that, you know, obviously, the TTK model provides them with a more immediate access to capital. But what is really resonating with our customers is the fact that we are going to be in this partnership for 10 years.

Essentially, we are handholding them to success. It's -- it's helping them to basically design their facility correctly, doing the whole construction, providing them with the state-of-the-art equipment and solutions, and also coaching them throughout the entire cultivation process, se -- setting up the SLPs, the compliance, you know, etc., etc. So they see that as a tremendous value add and something that, you know, will help them to get off the ground very quickly and have a higher chance of success. And it basically is a complete interest alignment, and we're seeing a strong resonation with the TTK model, and we believe that we will be seeing quite a bit of pickup in the very near term.

Scott Fortune -- ROTH Capital Partners -- Analyst

OK. Thank you. Can -- can I follow up on that, you know, providing a little bit of the -- the timing for -- for the TTK here? You said near term. Is this a 2021? I know you've targeted a couple of potential customers there.

And then as far as going forward, you, you know, you've allocated a $50 million potentially for this program, kind of step us through the longer-term opportunity for this program as you look at it with the success of it potentially co -- coming on board here?

Raymond Chang -- Chief Executive Officer

Sure, Scott. Yes, the TTK rollout will happen in 2021. We are seeing like I said very strong enthusiasm and we believe that we will have partnerships in place in a very, very near term. The -- we have allocated approximately $50 million into the TTK program.

And just to kind of give -- give an idea, with approximately, you know, $50 million of contribution from Agrify, we will be able to actually do in excess of 1,400 to 1,500 of our VFUs. And just to kind of give you a sense of that -- the scale of that, that rollout will probably equate to approximately 25% to 30% of the entire output from at the state of Massachusetts. So again, you know, with $50 million of contributions, built-outs, and using our state-of-the-art Agrify solutions, we would actually get up to 25% to 30% of the entire production output for the state of Massachusetts. That is very, very significant.

So we are initially targeting states with favorable regulatory environment, as well as market conditions. Obviously, places like Massachusetts, you know, has the highest wholesale selling price of 4,000 and 5,000. And we see New York, New Jersey coming up, as well as places like Illinois. So we're basically targeting states that are, again, with a very favorable regulatory environment, as well as market conditions to immediately capture those opportunities.

Scott Fortune -- ROTH Capital Partners -- Analyst

Great. And then the last question for me is kind of understanding the -- the new construction projects that are coming on board and -- and potential timing of, you know, working with your customers as these construction promise -- projects get fulfilled here. Are we looking for, you know, mid -- mid this year through the end of year a lot of these projects really starting to turn on and come on board from a -- from a revenue standpoint for Agrify here?

Raymond Chang -- Chief Executive Officer

Absolutely. At a minimum, I should say, we're super busy. We're turning on projects. And as I mentioned earlier today, we bring on the customer in the state of Washington.

You know, this was a customer that we sold the VFU to earlier. But, you know, they had some issues with the -- the general contractor that they used in the past and they realized that well, you know, Agrify can actually step in to actually help us to solve their problem. So basically, they expanded the engagement with us, asking us to essentially go back in to help them to finish the construction of the facility, as well as providing with -- them with construction capital and also just to make sure that the facility is going to build right and basically bring them up to speed as soon as possible. The -- the -- the reason why we're -- we're super excited about this opportunity is that, obviously, this is a customer from another state, the city in Washington, but also because Hannah is already, you know, an existing operator, a Tier 2 operator, with distribution points one in 200 distribu -- dis -- distribution points in the state of Washington.

So we believe that with our contribution, we will be able to help them to get this -- the facility up and running quicker. And obviously, ideally, we would also like to see the same level of consistency and quality out of the state in Washington. And if we can actually prove that, you know, we can get the same level of consistency across different states, that's -- that's really a true winner right there. So thank you.

Scott Fortune -- ROTH Capital Partners -- Analyst

I appreciate. Thanks.

Operator

Your next question is from Anthony Vendetti with Maxim Group.

Anthony Vendetti -- Maxim Group -- Analyst

Thanks. Hey, Raymond. Hi, Niv. How are you?

Raymond Chang -- Chief Executive Officer

Good. Thank you, Anthony.

Anthony Vendetti -- Maxim Group -- Analyst

I just wanted to talk a little bit about the Agrify Insights and -- and -- and the fact that, you know, that you can do with Agrify Insights something that -- that, you know, a lot of -- of your competitors maybe don't have the ability to do, which is provide that consistency and ability to replicate what you've produced as you've learned through a particular growing season or even during the growing season. Can -- can you talk about how that's -- how that's im -- important for the end customer, right? Because the -- as -- as -- as we -- as we evolve this -- this industry and we've just had numerous approvals. New York just appro -- you know, just signed a law. It doesn't go into effect yet, but legalizing marijuana in New York.

We're seeing an expansion of -- of these end customers. But can you talk about the importance of the consistency of the end product and being able to repeat that and -- and get that consistency on a regular basis?

Raymond Chang -- Chief Executive Officer

Absolutely, Anthony. This industry is definitely moving toward a CBG-like, you know, quality. You need it for both recreational and medicinal consumption. My chief science officer, David, was at a conference in Michigan.

And, you know, one of the questions that was asked to the panelists was, you know, why is it that we get quite a number of repeat customers but very rarely three-peat customers? And the overall conclusion was that, you know, the customers no -- normally try it the first time, they -- they love it. They come back and re -- they repurchase. But 90% of the time, they don't get the same results. And, you know, given how many different new brands are out there, the most likely outcome is they shift to another brand or they shift to another product, right? So achieving that level of consistency, it's just going to be so important for any operators on a going-forward basis.

Now, as we know, for cannabis, you know, 50% of the result is, you know, determined by the genetic. But the other 50% is basically the grow environment. We are the only company that are tracking production on a minute by minute basis. We have the ability to replicate the same exact grow environment in multiple batches of production.

Just to kind of give you an example, Anthony. One of our customers in their last 11, 12 batches of productions, we're seeing less than 0.5% swing in cannabinoid profile and 0.05% swing in terpene. Compare that to the industry which averages around 14%, 15% swing, this is night and day. So having that level of consistency and quality are just so important.

And the only reason that we're able to achieve that, it's basically the combination of our ability to control the hardware, as well as the insights that you get from our software -- proprietary software solutions. And it's really the combination of both that makes this possible. So we're very, very proud of our achievement.

Anthony Vendetti -- Maxim Group -- Analyst

OK. That's very helpful. And then just talk about a little bit more on the -- on the expansion of -- of the -- the pipeline. You've had some significant growth in -- in -- in 2020.

But has -- has that -- has that pipe -- pipeline started to expand even if -- if -- if it's the unqualified, which -- which I believe is two to three times the -- the qualified pipeline? Based on the opportunities that you see and -- and the -- the relaxation of -- of some legislation and approvals in some -- in some states, is -- is that -- is that pipeline expanding on -- on a month-to-month basis or -- and -- and -- and just in general, what do you -- what do you see in -- in 2021?

Raymond Chang -- Chief Executive Officer

Anthony, absolutely. The -- the interest just continues to -- to explode. Just to kind of give you an example, we recently did a campaign of our proprietary lighting fixture. And, you know, with one small campaign, we got several hundred inbound increase.

Obviously, not everyone, you know, is qualified. But nevertheless, that's just kind of gives you a -- a sense of how people are just hungry for a shred of solution. And in fact, what they typically are looking for is, you know, the idea of having a total integrated solution to help them to be able to get up to, you know, up to speed and also be able to be deployed quicker. So yes, we are continuing to build our pipeline.

We are continuing to build our funnel. And it's actually very, very exciting, especially seeing additional new markets opening up in 2021.

Anthony Vendetti -- Maxim Group -- Analyst

OK. Great. And then just two other quick follow-ups. So -- so the -- the growth that you have so far has been mostly -- mostly with these Tier -- Tier 2 customers.

I know you're having discussions with some larger customers like the MSOs that you mentioned. What, you know, sort of as best you could, are -- are -- are those progressing? Are you having more than -- more than one discussion? What -- whatever you can provide in terms of color in terms of -- and -- and -- and then maybe trying to quantify the opportunity there. How large maybe one of these could -- could be in terms of -- in terms of revenues? And then just a quick follow-up on the TTK.

Raymond Chang -- Chief Executive Officer

Sure, absolutely. They are all progressing -- progressing very, very well. And yes, we are having multiple discussions. And, Anthony, just, you know, for the -- for the MSOs, right? Obviously, much, much bigger opportunities.

In fact, you know, one of the MSOs that we spoke to, in one of their newer states, one facility alone, you're probably looking at 500-plus VFUs. So $10 million-plus million dollars of, you know, hardware equipment just right off the gate, right, with the ongoing recurring SaaS revenue thereafter. However, I do want to caution that, you know, with the MSOs, you know, our approach is that we will start at a smaller scale, basically proving out the thesis. So for 2020, it's all about helping them to make sure that they have one or two successful harvest cycles to prove out the consistency, the quality, the higher efficiency that you can get out of our VFUs.

And if we can actually successfully demonstrate that, then 2021 -- then 2022 and onwards, then we'll always see a tremendous adoptions among the -- the MSOs. Now, turning over to the TTK side, again, I think we are really, really -- that the program is really designed to solve the problems that the industry is facing today: access to capital; inability to build the facility correctly, on time, and not over budget; and in a -- the ability to basically have an easy to use solutions fully integrated to help them to make sure that they have a smooth operation and, at the end result, the highest consistent good quality products to sell, right? The Total Turn-Key Solution is really resonating with customers because it's not only helping them to have access to the capital, it's the entire, you know, full suite of solutions that Agrify is providing that really, really excites them. Like, for example, every single one of the operator will pay close to a minimum three -- three months of Agrify University training programs, right? And on top of that, you know, we help them to -- to -- to recruit. We help them to make sure that they work with the right architect, with the -- with the right engineers and stop wasting time in basically having to rebuild facilities, you know, and because, you know, they make mistakes.

So it's really, really that total integrated solution that I think the customers are hungry for and we're very excited to be able to be the -- the only shop in the industry to be able to provide a full total -- Total Turn-Key Solution.

Anthony Vendetti -- Maxim Group -- Analyst

That's great. And then -- and then that based on -- on how you structure that, you -- you can actually get a return of 40% to 50% in terms of an internal rate of return because you're going to have that recurring revenue for -- for at least 10 years, right? Is that typical -- or is that the typical contract?

Raymond Chang -- Chief Executive Officer

That is correct, Anthony. So there are several components, you know, with the TTK program. You know, first of all, the construction loan, we're basically charging, you know, in -- in line with what the industry calls for today. And that loan will get paid back with a preferential payback period 18 to 24 months post first harvest.

So -- and then obviously, we would get the lien of the facility, as well as, you know, the license, the whole thing as a collateral. But in addition to that, right, we would get our SaaS revenue and that would be on a number of VFU counts. But on top of that, we would also get a production-based revenue stream and that's over an entire 10-year period. And again, customers love that because, you know, it's -- that the bulk of the -- the revenue stream is based on production.

So they win, we win. It's a complete interest alignment. And this is actually, you know, really resonating with our customers, and we're very excited about the rollout of our TTK program and expect to have a good announcement very shortly.

Anthony Vendetti -- Maxim Group -- Analyst

OK, great. Very helpful color. Thanks, Raymond. Appreciate it.

Raymond Chang -- Chief Executive Officer

Thank you.

Operator

I will now turn the call back over to Raymond Chang for closing remarks.

Raymond Chang -- Chief Executive Officer

Again, we're thank -- want to thank everybody on the call today for joining us on our first earning call. We had a very successful 2020 turnaround. Like I said, it was a pivotal year for the company, and we are even more excited about what's to come in 2021 and look forward to, again, joining all of you, you know, upcoming Q1 2021 call. If you have any questions, please feel free to -- to reach out.

Thank you again for joining the call.

Operator

[Operator signoff]

Duration: 41 minutes

Call participants:

Raymond Chang -- Chief Executive Officer

Niv Krikov -- Chief Financial Officer

Scott Fortune -- ROTH Capital Partners -- Analyst

Anthony Vendetti -- Maxim Group -- Analyst

All earnings call transcripts