Agrify Corporation (AGFY) Q4 2021 Earnings Call Transcript

Agrify Corporation (AGFY 3.26%)
Q4 2021 Earnings Call
Mar 23, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and thank you for standing by. Welcome to the Agrify fourth quarter 2021 earnings conference call. At this time, all participants are in a listen only mode. After the speakers presentation, there will be a question-and-answer session.

[Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anna Kate Heller, investor relations. Please go ahead.

Anna Kate Heller -- Senior Vice President, Investor Relations

Good morning and welcome to Agrify's fourth quarter fiscal year 2021 earnings call. With us on today's call are Raymond Chang, chief executive officer; and Timothy Oakes, chief financial officer. Today, management will review the highlights and financial results for the fourth quarter and provide a business and operational update. Following management's remarks, there will be a question-and-answer session.

A reminder that today's conference call is being recorded and a replay will be available on the Investor Relations website at ir.agrify.com. Please note that we will be referring to information that's contained within our press release and slides, which can be accessed on the website as well. Before we begin, we would like to remind everyone that management's remarks contain forward-looking statements. And management may make additional forward-looking statements in response to your questions.

Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control that could cause future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by any such forward-looking statements. Important factors that could cause or contribute to such differences include the risks detailed in our public filings 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. I will now turn it over to Raymond.

Raymond Chang -- Chief Executive Officer

Thanks, Anna Kate, and thank you, everyone, for joining us on the call today. We are looking forward to providing you with an update on our business as there are many accomplishments and opportunities we would like to bring to your attention. I will begin by highlighting our 2021 performance and some recent company developments, and Tim will review our financial results, and we will also give you the outlook for 2022. During 2021, we drove explosive year-over-year growth.

We launched our total turnkey solution for cannabis cultivators. We created a significant backlog of future high margin recurring revenues. We drove tremendous pipeline velocity. We implemented innovative technological advancements to our vertical farming unit, VFUs, and we are established our self as the leader in premium extraction solution through a series of well-executed acquisitions.

Let's first discuss our growth. I'm pleased to report that in fiscal year 2021, our annual revenue grew from 395% to $59.9 million. This is up from $12.1 million in 2020. It's important to note in the fourth quarter of 2021, our quarterly revenue was $25.3 million.

This represents a $481 year-over-year increase when compared to $4.4 million in Q4 2020. In 2021, Agrify generated over 377 million in new bookings. This is an increase of 919% from 37 million of new bookings in 2020, a tenfold increase. In addition, we are pleased to make you aware that we currently have a total qualified pipeline of over $570 million.

It's important to note when it comes to our bookings and pipeline numbers, Agrify only includes the first three years of the expected revenue for the TTK deals and from the total value of extraction product sales. Even though our TTK arrangements have a 10-year term, from a bookings and pipeline perspective, once again that we only include the facility construction costs and the first two years of the SaaS and estimated production success fees. I would like to now discuss our total turnkey solution, TTK. The Agrify TTK program is the only solution of its kind in the cannabis industry, whereby Agrify forges long-term partnerships with qualified customers and provides them with ingredients needed to launch and operate world-class cultivation and extraction facilities.

This includes design and built-out of their cultivation and extraction facility, the installation and implementation of our state-of-the-art cultivation extraction products, process design training, grow recipes, product formulations, data analytics, and consumer branding. Let me assure you that this program addresses some of the biggest pain points in the industry. Since launching our solution only 10 months ago, we have secured six customers. These customers include successful entrepreneurs, who are very passionate about the cannabis industry, a social equity applicants, a minority female entrepreneur, and proven serial cannabis executives, who have successfully built and exited a billion dollar cannabis enterprise.

The strongest validation to this TTK is that we currently have 3,729 VFUs under contract from our six TTK and non-TTK VFU customers. We believe each VFU deployed will conservatively produce 35 pound per year of production. Once all 3,729 VFUs are commissioned, we expect our customers to cumulatively produce approximately 130,000 pounds of dry flour on an annual basis, which well in return create $76 million of high margin recurring revenue annually for Agrify. Again, that's $76 million of high recurring SaaS and production revenues to Agrify on an annual basis.

Over the life of all of these engagements, the estimated total cumulative revenue to be generated by Agrify will be approximately 837 million, of which we project 750 million will be from very high margin productions success fees, SaaS fees, and interest fees, all providing a significant return on investment for our value shareholders. Our current TTK engagements are at different stages of development, but I'm pleased to report that we expect to start generating high margin recurring SaaS and production fees in the third quarter of this fiscal year. I would like to now shift to our extraction division. Cannabis represents a potential clinicopia of medicinal and pharmaceutical advancements.

Cannabis products produces over 550 different phytochemicals, over 120 of which are cannabinoids like THC and CBD, which are well known. But other cannabinoid variants like CBTV, THCV, CBN, CVTV are less well known, but potentially could offer just as much, if not more, significant value. As we continue to learn more about complex chemical compositions of cannabis, the need for quality extraction and distillation solution is clear. Distillation enables the identification, isolation, and certain separation of valuable cannabis metabolites.

The ability to take cannabis compounds distilled into their pure forms, and then we combine them into specific purposeful end products for both medicinal and recreational means is super exciting. Having extraction and post-processing capability presented a great opportunity for Agrify to become far more vertically integrated with our customers while increasing our wallet share of each. Given this opportunity, Agrify decided to strategically expand its reach by establishing itself as the leader in the cannabis extraction industry. In the last six months, we have acquired four of the top brands in the industry, Precision Extraction, Cascade Sciences, Pure Pressure, and Lab Society.

Combined, these four acquisitions provide Agrify with, one, most comprehensive extraction solution from a single provider; second, the best product brand names in the extraction industry with highly complementary solutions; third, the most innovative and high quality products; fourth, over 7, 000 customers, including the majority of MSOs; and lastly, the addition of some of the best and brightest cannabis lines in the industry. The extraction market is currently one of the fastest growing segments in cannabis. And in 2022, we expect our extraction division to be accretive. And produce annual revenues of 62 million to 65 million with gross profit margin of 30% or greater.

We will also look forward to launching our new extraction TTK program. And we hope to announce our first extraction TTK engagement shortly. At this point, I would like to turn the call over to Agrify's CFO, Tim Oakes.

Timothy Oakes -- Chief Financial Officer

Thank you, Randy. Good morning, everyone, and thank you for joining us on today's earnings call. I'll speak to our financial results for the fourth quarter and full year 2021. Then Raymond will provide guidance and closing remarks, and then we'll open up the call for analyst questions.

Overall, it's been a very active and exciting 12 months for the company. And the fourth quarter, certainly no different. Our fourth quarter and full year results are reflective of the strategic investments and the changes we have made to our business model. Specifically, our fourth quarter financial performance is positive -- been positively influenced by our total turnkey solution, which I will refer to as TTK -- a TTK arrangement and the positive effects of our recent acquisition activity, which we successfully leverage to expand our top line revenue and improve our gross margin and other operating metrics.

Moving on to specific commentary on our financial results. Revenue in the fourth quarter of 2021 was $25.3 million, compared to revenue of $4.4 million in the fourth quarter of 2020. This represents a 481% year-over-year increase in quarterly revenue. On a full year basis, revenue for fiscal 2021 totaled $59.9 million, compared to full year 2020 revenue of $12.1 million, representing a year-over-year increase of 395%.

The primary drivers of the revenue increase in both the fourth quarter and full year periods of 2021 are related to an increase in the construction-related revenues, as well as the incremental revenue contribution associated with the company's October 1, 2021 acquisition of Precision Extraction Solutions and Cascade Sciences, which contributed $12.3 million of extraction-related equipment revenue in the fourth quarter of 2021. Bookings in the fourth quarter of 2021 were in excess of 250 million. The 250 million bookings includes TTK-related bookings as well as our equipment-related bookings, which includes both cultivation and extraction equipment revenues. We enter the first quarter of fiscal '22 with approximately $837 million in backlog, compared to $59 million in backlog entering fiscal 2021.

As stated earlier by Raymond, it's important to note that for the TTK arrangements portion of both our reported bookings and backlog amounts, we only include the first three years of expected future revenue, which is typically the construction and the first two years of SaaS and estimated production fee revenues even though these are five to 10-year partnerships that could offer as much as three and a half to four times more revenue potential. Total gross margin for the fourth quarter of 2021 was $5.6 million or 22% of total revenue, compared to a negative gross margin of $290,000 or 7% of total revenue in the year-ago quarter. For full year fiscal 2021, the company is reporting gross margin of $5.2 million or approximately 9% of total revenue, compared to gross margin of $570,000 or 5% of total revenue in fiscal year 2020. Gross margin improvements in the comparative year-over-year quarterly and fiscal year periods is primarily the result of two specific fourth quarter of 2021 activities.

First, the company recorded a VFU sale of older VFU models, which resulted in a gross margin well above the company's historical gross margin on stand-alone VFU equipment sales. Second was the positive lifting gross margin associated with our extraction equipment revenue, which is expected to generate gross margin of approximately 30%, which is also well above the company's historical gross margin performance. While we are certainly pleased with our gross profit margin performance in the fourth quarter of 2021, we would like to highlight that, that performance isn't necessarily reflective of our expected near-term quarterly gross margin performance. Until such time as we are able to report meaningful SaaS software and production fee revenues, which we currently expect to begin in the late third or early fourth quarter of 2022, we anticipate that our quarterly gross margin performance, aided by our extraction-related equipment sales to be in roughly a mid-teens range.

Moving on to SG&A expense. This is going to be a bit complicated, so I'm going to ask you to bear with me for a minute. I think SG&A in the fourth quarter requires a little deeper dive compared to some of our other financial statement line items. SG&A expense in the fourth quarter 2021, which excludes charges associated with changes in the fair value of contingent consideration, which is associated with our October 1, 2021 acquisition of Precision and Cascade, totaled $16.1 million, compared to $2.9 million in the fourth quarter of 2020.

As it relates to the increase in SG&A in the fourth quarter of 2021, the company has significantly increased in scale during 2021, and that's in terms of headcount, professional fees, public company fees, etc., compared to 2020 and has also added incremental SG&A expense in connection with both certain one time charges, which we'll discuss in a minute, and the 2021 acquisition of Precision and Cascade. Maybe a more meaningful review of fourth quarter 2021 SG&A expenses would be to compare them on a sequential basis to the third quarter of 2021. Fourth quarter 2021 SG&A expenses, again, which totaled $16.1 million, increased by $7.5 million, compared to SGA expenses of $8.6 million in the third quarter of 2021. Breaking down the $7.5 million increase in sequential quarterly G&A expense, we note that fourth quarter 2021  SG&A expense includes in order of magnitude the following: acquisition-related expenses, which are associated with both Precision, Cascade and Pure Pressure acquisitions, an incremental increase in expenses related to the operations of Precision and Cascade, which began in October 1, 2021, and did not impact the third quarter of 2021, expenses related to the establishment of reserves against our outstanding accounts receivable balances, an increase in depreciation and amortization, which is essentially related to the amortization now being recorded against the identified intangible assets associated with our acquisitions, and an increase in stock-based compensation.

On a full year basis, fiscal 2021 SG&A expense totaled $35 million, compared to SG&A expense of $9.8 million in the year-ago full year period. The primary drivers of the year-over-year increase in full year SG&A expense are essentially reflective of the previously described fourth quarter items, which are driven in large part by the company's February 2021 initial public offering, growth in the scale of business, and our fourth quarter acquisitions. Moving on to research and development, fourth quarter 2021 research and development expenses totaled $1.4 million, compared to $1 million in the fourth quarter of 2020. On a full year basis, fiscal 2021 research and development expenses totaled 3.9 million, compared to $3.4 million in the full year fiscal 2020 period.

In both periods, the overall increase in research and development expense is attributable to the company's investments in the continued development of both its vertical farming units, as well as the continued development enhancement of our SaaS-based software, Agrify Insights. A stand-alone operating expense that we carved out of expense this quarter relates to $1.4 million in expense involved to a change in our originally estimated fair value of contingent consideration to be earned by the former members of Precision and Cascade. From an accounting perspective, ASC 805, which specifically relates to accounting for business combinations, requires the company to determine an initial estimate as the amount of potential contingent consideration to be earned as part of an acquisition as of the date of the acquisition. The former members of Precision and Cascade could have earned up to a capped amount of $15 million in additional consideration based upon the achievement of certain revenue thresholds ending December 31, 2021.

Based on their fourth quarter revenue performance, the former members of Precision and Cascade earned additional contingent consideration of $5.4 million during the quarter. This amount exceeded the company's initial estimate at the time of the acquisition by approximately $1.4 million. As per the guidelines of ASC 805, the company is required to record this increase as an operating expense in the period incurred and not as an increase to goodwill. The company's December 31, 2021 acquisition of Pure Pressure contains two consecutive 12-month earnouts.

The potential additional consideration that can be earned under each of the two earnout periods is capped at $1.5 million per year. The company has made an initial estimate with respect to the probability of achievement of the additional consideration and recorded it as part of our initial purchase price accounting. We will continue to evaluate Pure Pressure's future performance against our initial estimates on a quarterly basis. Any identified changes to our original assumptions that generate a change in our estimates will result in either an increase or a reduction in our future periodic operating expenses.

Lightly touching upon other income and expenses, the company is reporting total other income of $98,000 for the fourth quarter of 2021, compared to total other expense of $8.9 million in the fourth quarter of 2020. For the full year fiscal 2021 period, the company is reporting total other income of $2.8 million, compared to total other expense of $9 million in the full year fiscal 2020 period. In all periods, the changes in other income and expense are directly directly related to the convertible promissory note entered into between the company and certain investors in fiscal 2020, which were subsequently amended by the company's board of directors in January 2021. During the fourth quarter of 2020 in the full year fiscal 2020, the company recognized an aggregate loss on extinguishment of convertible private promissory notes in the amount of $5.6 million, which represented the difference between the net carrying amount of the notes and the reacquisition price of the notes.

During the year ended December 31, 2021, the company recognized a gain on extinguishment of $2.7 million in connection with the de-recognition of the net carrying amount of the extinguished debt. Also, during the fourth quarter of 2020, the company recognized other expense of $2.9 million in connection with a change in fair value of derivative liabilities associated with the fair value of the variable share settlement features. The company did not have any derivative liabilities during the portion of fiscal 2021 as a result of the extinguishment of the original convertible promissory notes. As it relates to income taxes, the company is reporting a provision of income taxes of $25,000 during the fourth quarter and full year fiscal 2021 periods.

No provision for income taxes was recorded by the company in the comparative 2020 quarterly fiscal year periods. The company has historically generated losses from operations and is currently in a cumulative loss position. Accordingly, the company has established a full valuation allowance against the carrying value of its deferred tax assets. We recognize net income and/or net loss attributable to controlling interest in our financial statements.

We consolidate the results of operations of two less than wholly owned entities into our consolidated results of operations Agrify-Valiant LLC, a joint venture limited liability company in which we are 60% majority owner and Valiant America LLC, which owns 40% of Agrify-Valiant LLC. The reported net income or loss in each of the presented quarterly and fiscal year period ended December 31, 2021 and 2020 represents the portion of the periodic income or loss attributable to the non-controlling parties. Finally, the net result of the previously discussed changes in revenue, gross margin, operating expenses resulted in a net loss during the fourth quarter of 2021 of $13.3 million or $0.60 per diluted share. Net loss during the fourth quarter of 2020 was $13.1 million or $2.23 per diluted share.

Similarly, the previously described changes in our operating -- operations resulted in a net loss of $32.5 million or $1.69 per share in fiscal 2021, compared to a net loss of $21.6 million or $5.32 per share in fiscal year 2020. Adjusted EBITDA amounted to a loss of $5.5 million during the fourth quarter of 2021, compared to an adjusted EBITDA loss of $2.8 million in the year-ago quarter. For the full year fiscal 2021 period, adjusted EBITDA was a loss of $20 million, compared to an adjusted EBITDA loss of $8.4 million in the full year fiscal 2020 period. Additional information regarding our use of non-GAAP measures includes a -- including a reconciliation to the most comparable GAAP measures can be found in the press release we issued earlier this morning, which is also available in the Investor Relations section of our website at www.agrify.com.

Finally, I want to provide some color on our combined cash and marketable securities balances as we exit 2021. As of December 31, 2021, the company is reporting a combined cash and marketable securities balance of $56.6 million. This represents a decrease of $56.7 million from a combined balance of $113.3 million as of September 30, 2021. The biggest drivers of the change in our periodic balances are primarily associated with our two 2021 acquisitions, of which we paid aggregate upfront considered cash consideration and other expenses of approximately $42 million, our inventory build related to the production of VFU units to be deployed under our TTK arrangements, as well as funding our operating expenses like payroll and other such operating types.

Obviously, given the upfront investment nature of our TTK arrangements, which require significant investment by the company in both construction and VFU equipment costs, near-term access to capital is critical to the company. In the first quarter of 2022, we announced two separate capital raising activities. In January, we announced the closing of a $27.3 million private placement. And additionally, last week we announced the finalization of a debt facility, which will enable the company, subject to certain performance requirements, to access up to $135 million in additional debt financing.

Both of these transactions have served to strengthen our balance sheet and enable us to continue to execute our goal of driving top-line growth in generating sustainable long-term shareholder value. With that, I'd now like to turn the call back to Raymond to provide 2020 guidance in his final comments.

Raymond Chang -- Chief Executive Officer

Thank you, Tim. Now that we have covered our accomplishments and financial results for 2021, I would like to share our revenue guidance for Q1 2022 and for the fiscal year of 2022. In Q1, we expect our revenue to be $25.5 million. This will be an increase of approximately 264% from the $7 million we generated in Q1 of 2021.

For the full year of 2022, we expect revenue to be $140 million to $142 million, reflecting an increase of approximately 134% when compared to $59.9 million we generated in 2021. In the second half of fiscal 2022, we anticipate our revenue mix will move toward more favorable high margin extraction, SaaS, and production success fees. Lastly, we want to reiterate to our value shareholders that Agrify demand has never been stronger. Currently, we have over $570 million of qualified pipeline opportunities, and that number continues to grow at a rapid rate.

We believe it is prudent to respond to our current high demand and seize the opportunity to gain additional market share to further separate Agrify from any potential competitors. With the recent equity financing and debt facility in place, Agrify is in a position to drive a continued accelerated growth. In addition, we are exploring partnerships with large fleets for construction financing and equipment financing companies for VFU. This type of financing structure will provide aggregate with significant scale while maximizing shareholder value.

At this point, I would like to open up the call to questions from our audience. Operator, please go ahead.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Aaron Grey with Alliance Global Partners. Your line is open.

Aaron Grey -- Alliance Global Partners -- Analyst

Hi. Good morning and thank you for the questions and for the commentary there, guys. So first question for me, Raymond, just on on the guide you gave for 1Q, $25.5 million, just could you offer some commentary in terms of how that relates to kind of 4Q, specifically because its added acquisitions, what's in there. So, roughly flat up slightly a little bit.

So was there some seasonality in there? Because I know the legacy extraction, it's kind of more onetime purchases. So not sure whether or not there were some buying habits that create some seasonality or just some color there in terms of the sequential growth you're looking for. Thank you.

Raymond Chang -- Chief Executive Officer

Yes, there is slightly a seasonality effect in the extraction side of the business. But in addition to that, actually, we have couple of large bookings for our VFU units, cash deals in the state of Illinois. But unfortunately, as you know, there's been kind of a social equity legal lawsuits involving some of the licensees -- license applicants, sorry. And so it's actually pushed back our shipment of the VFUs by one, two quarters.

We booked the -- these deals in fourth quarter and we were originally expecting to ship in fourth quarter in Q1 but the legal lawsuit is dragging out a little bit. And -- but as soon as we get the clarification of that, we do expect to ship those units very shortly. They have -- they are actually already -- finished the production. So we're a little bit of seasonality and I do believe that the business will pick up in Q2.

And as I mentioned earlier, we're not seeing any slowdown in the momentum and we will continue to execute.

Aaron Grey -- Alliance Global Partners -- Analyst

Great. Thanks so much for that detail. And then obviously you've had a number of acquisitions for in terms of the extraction side. Those had historically been more, kind of onetime purchases.

You guys are looking to add in some more reoccurring sales to the TTK that you alluded to earlier in the call. So I just want to know in terms of how you're looking to to bring on that reoccurring model to those legacy more onetime purchase business, both for legacy customers, who already have that extraction equipment, as well as for newer ones who might be buying the equipment or entering the TTK programs. Thank you.

Raymond Chang -- Chief Executive Officer

Yeah. So as I mentioned earlier, Aaron, we are expecting to start receiving recurring revenues on the cultivation side. In fact, in Q3 -- toward the end of Q3 of this year and this is obviously super exciting because that's really the biggest sort of potential for the company. And obviously the number will be ramping up.

It will be small initially, but the significant flow will start coming in probably by Q2, Q3 of 2023 as we bring on more facilities. On the extraction side, as you know, and up to this point, it's been more of a one time, transactional type of sales. We just sell the hardware and there's very, very little recurring aspect of it. We are very, very close to signing our first extraction TTK deals and our team is also working very hard to basically put the control software on top.

I believe we will begin to recognize recurring extraction revenue in 2022 as well. And we remain confident that we will have extraction-based TTK deals announced shortly. And you will be able to see recurring -- nice recurring revenues out of the extraction division in 2022 as well.

Aaron Grey -- Alliance Global Partners -- Analyst

All right. Thank you very much. I'm jumping back in the queue and good luck in 2022.

Raymond Chang -- Chief Executive Officer

Thank you, Aaron.

Operator

Thank you. Our next question comes from Eric Des Lauriers with Craig-Hallum Capital. Your line is open.

Eric Des Lauriers -- Craig-Hallum Capital Group -- Analyst

Great. Thank you for taking my question. So regarding the recurring revenues coming in Q3, that was one quarter ahead of what we were looking for. Assuming that's coming from Bud & Mary's, I was just wondering if you could kind of give us an update on where that project is right now and then sort of what other regulatory approvals are required there and sort of what you guys are expecting from Massachusetts regulators.

I know they have kind of been notoriously slow for approvals. So just wondering, what kind of sort of sensitivity you baked into that or just how to think about the remaining steps required for Bud & Mary's until these revenues start coming in. Thank you.

Raymond Chang -- Chief Executive Officer

Hey, Eric. So actually, the third quarter recurring revenue is not coming from Bud & Mary's but is coming from some of the legacy customers that we have converted into the TTK programs, such as the facility in Vegas, the facility in Washington, and also the facility in Colorado that we will be bringing to fruition in the next quarter or two. Bud & Mary's is still on schedule to have its completion in fourth quarter, so the the recurring revenue, as I stated in Q3, is actually not coming from Bud & Mary's. Bud & Mary's is still pretty much on schedule for fourth quarter completion and production will start going in Q1 of next year.

And it's really coming in from the -- some of the legacy customers that we were able to accelerate the deployments and we will start seeing those projects come into fruition and recurring revenue used to kick in from those facilities.

Eric Des Lauriers -- Craig-Hallum Capital Group -- Analyst

OK. That's very helpful, and that makes sense. Could you provide any additional color around the either number of VFUs from these legacy customers that be switching to be sort of TTK recurring revenue or just any numbers that might help us frame the expectations for recurring revenue from these legacy customers? Thank you.

Raymond Chang -- Chief Executive Officer

Yeah. So as I stated earlier, the total number of VFUs on the contract is 3,729. And these legacy customers that we're flipping on probably sort of in the 400 aggregates in probably in the 400 VFU range. So those will be the first ones that we bring on board and then obviously, Bud & Mary's will be 592.

And then obviously, we have other larger programs behind that. So the legacy customers, you can roughly estimated to be around 400 units in total.

Eric Des Lauriers -- Craig-Hallum Capital Group -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Scott Fortune with ROTH Capital Partners. Your line is open.

Scott Fortune -- ROTH Capital Partners -- Analyst

Good morning and thanks for the questions. Just a real quick follow up on that, Raymond. As far as the VFUs, you have a number of TTK under contracts. You had some legacy projects, construction projects coming on board that were going to require non-TTK VFUs.

What percent or numbers of that 3,729 VFUs is just coming from one time non-TTK VFUs being added to the pipeline?

Raymond Chang -- Chief Executive Officer

The 3,729 VFUs are primarily all TTKs. And probably around I would say 300 in aggregate is non TTK customers -- cash customers. And as I've mentioned earlier, we actually have other additional cash customers, particularly several from the state of Illinois, from Michigan. But because of the licensing issue, the ship-out date got a little bit delayed.

But we actually just heard very favorable sort of legal decisions for the state of Illinois, so we are hopeful that the units will get shipped very shortly.

Scott Fortune -- ROTH Capital Partners -- Analyst

Got -- no, appreciate that. And then follow up on your demands being strong. You have 570 million qualified pipeline to continue to gain market share here, obviously. Can you unpack that a little bit on kind of number of MSCOs you're looking at talking to kind of one time versus kind of TTK in that qualified pipeline just kind of validates the quality MSOs that are still looking at your technology moving forward here?

Raymond Chang -- Chief Executive Officer

Yes, Scott, we are in addition to obviously currently we are in number of discussions with the MSOs and we are confident that we will probably be announcing at least another partnership very, very shortly. Out of that $571 million pipeline that we've mentioned, approximately $45 million is actually extraction related, $313 million is TTK arrangement, and the rest of it is basically are extraction VFU equipment, non-TTK. So again, the breakdown is $44 million for extraction, about $313 million for TTK, and the rest of it is basically VFU units, but non-TTK arrangements.

Scott Fortune -- ROTH Capital Partners -- Analyst

That's perfect, that color. And if I can fit one more in on that, on the extraction side, can you provide a little more color where the growth is coming from in that business? Is this new MSOs adding capacity? Is this looking at new states that they're going to come on board that will add to the growth? And how do you value the new customers? What's kind of driving the growth on the extraction side as you look kind of that core business there?

Raymond Chang -- Chief Executive Officer

Scott, what's most exciting is that we're seeing growth from pretty much everywhere. We're seeing customers responding to shifting of consumer demands, adding additional extraction equipments. We are seeing basically interest from larger MSOs to large single stay operator to even some of the smaller guys. And obviously with the newer states coming online, there's really a lot of demand for some of these new cultivation facilities as well.

And I think it's primarily driven by kind of a shifting of consumer preferences. Obviously, dried flowers are still commanding 50% or so market share across every single states. But other farm products are -- it's really gaining traction, huge momentum and we expect that trend to continue. So this is something that I believe we'll continue to see kind of a 25%, 30% CAGR on the going forward basis, and we're very excited about that.

Scott Fortune -- ROTH Capital Partners -- Analyst

Thanks for the color. I will jump back in the queue. Congrats.

Operator

Thank you. Our next question comes from Anthony Vendetti with Maxim Group. Your line is open.

Anthony Vendetti -- Maxim Group -- Analyst

Sure. Thanks. Just a couple quick questions. Raymond, on the Bud & Mary's, those are owned by Frozen 4.

That's the holding company. Has there been any expansion with Frozen 4's other facility in terms of a new contract or TTK arrangement? And then I have a follow up question.

Raymond Chang -- Chief Executive Officer

Yes. Anthony, thank you for that. Yes, we obviously -- the partnership with Bud & Mary's -- Bud & Mary's, as you said, is the subsidiary of Frozen 4. Frozen 4 is the parent company.

Phase 1 is obviously Bud & Mary's, and I've kind of shared the update on that, and that's 592 VFUs. And we are -- basically we have an LOI executed with Frozen 4 for Phase 2 expansion, which also will include the extraction manufacturing capacity as well. And that will be added to kind of a Phase 1 at another location in Massachusetts. So we are super excited to expand our relationship with this particular group.

I think in total, we could see as much as, 1,200 VFUs. We are still doing the concept layouts for Phase 2 expansion. And there's a possibility that this could be actually the -- our first triple stack VFU facility. So we're super excited about that possibility.

Anthony Vendetti -- Maxim Group -- Analyst

OK. And then just in general on the TTK project, I think you have six, but that number has changed a little bit. Let me know, but in terms of generating recurring revenues from TTK, is that still expected to happen, at least for the first one, by the end of this year, either late 3Q or sometime in 4Q '22?

Raymond Chang -- Chief Executive Officer

Anthony. So, as you know, we actually converted some of the old legacy customers to become a TTK partner as well. So actually the generation of SaaS and production revenues, it's going to happen starting from Q3 of this year. So it's basically accelerated to what we had previously forecasted.

So you will start seeing some production and SaaS revenue flowing in Q3 of 2022. But obviously, that number is going to ramp up over time and we believe that is more significant flow will probably be Q2 and Q3 of 2023 as we bring additional facilities online. But the initial generation of SaaS and production is now basically accelerated to Q3 of 2022.

Anthony Vendetti -- Maxim Group -- Analyst

OK. Great. And then just I know to mention this, gross margin was much higher. I know that's not indicative of of wear or reflective of where it's going to be in the near term.

Was that because there wasn't as much construction revenue this quarter? And is there any kind of guidance you could provide in terms of expectation for gross margin at the beginning of the year? Should that should that be -- revert back more toward the single digits in the beginning of the year or how should we look at that?

Timothy Oakes -- Chief Financial Officer

Yeah, it -- I'll jump on that one. So Q4, Q4 gross margin at 22%, as you said, is I'd say, abnormally high based on where we've been. It is a combination, right? We recognize $12.3 million of revenue from the extraction equipment sales. That equipment revenue comes at a 30% gross margin.

So by default, right out of the gate, that mix, that introduction to that mix of revenue automatically lifts our gross margin. We also had a TTK equipment sale in the quarter of we -- of which we sold older model VFU to a customer of which came resulting in a higher gross margin than, as you mentioned, the low single digit gross margin that we've historically recorded. That's what drives us to 22%. Clearly, based upon the singular sale of the VFU equipment, that is not sustainable go-forward.

So as we look at it, the mix of extraction revenue at a 30% gross margin will continue, obviously, into 2022. If we normalize the -- that against the historical margin of Agrify, you're looking at the potential of a gross margin to be, as we said in the call -- on the script call, about 18%-ish, right. It's going to be mid-teens from an expectation point of view because of that beneficial lift from the extraction equipment.

Anthony Vendetti -- Maxim Group -- Analyst

OK. Great. That's helpful. Excellent.

I'll jump back in the queue.

Operator

Thank you. Our next question comes from Gerald Pascarelli with Cowen. Your line is open.

Gerald Pascarelli -- Cowen and Company -- Analyst

Much for taking the questions. So as a follow up to the gross margin question, I guess just sort of a housekeeping item, does your kind of mid-teens target contemplate the 10% reduction in LED lighting costs that are going to be associated with your new VFUs, which I believe were slated to come on like at the end of 1Q '22? If so, and again not looking for guidance, but just from a cadence perspective, is it fair to assume that sequentially your gross margin should improve as we progress throughout the course of 2022? Thanks.

Timothy Oakes -- Chief Financial Officer

Gerald, so as you think about the cost reduction initiatives that we've implemented for the VFUs, as we balance VFU production and revenue based on what portion is TTK, what portion is stand-alone VFU equipment, right, the VFUs that a part of TTK are on a lease model so they don't -- they're not a point-in-time sale. So you don't see them manifest themselves into our revenue stream as an individual equipment sale. So the stand-alone cash base, I'll refer to it as a cash-based VFU equipment sale that is not under a TTK arrangement, yes, we will have or we have modeled and expected a lift in that stand-alone unit gross margin that is improved from the historical margin. However, given the weight of the revenue and the contribution to revenue of those stand-alone VFU equipment sales, that's not -- it's not going to have a meaningful or results any substantial lift in that gross margin.

So again, near-term gross margin, we expect to be mid-teens as we move through Q1, Q2, Q3. Thinking about gross margin, as you asked in the latter part, on a full year one for 2022, obviously with the introduction of SaaS-based revenue and production fee revenue in the latter part of Q3 and into Q4, that recurring revenue stream is highly leverageable from a margin contribution point of view. Anywhere between 80% to 100% of that revenue stream will drop to the gross margin line. However, it is not a significant or meaningful component of the projected revenue for 2022.

However, again, you will start to see an incremental lift as that revenue starts to bleed in, in the latter part of the year. Q4 probably more more of a lift in Q4 than Q3 just due to timing of when we expect to receive it in the middle of the quarter. But yeah, you should start to see gross margin contribution sequentially lift on a quarterly basis as we move through the year.

Gerald Pascarelli -- Cowen and Company -- Analyst

Understood. That's super helpful color. Thank you for the explanation. My second question is just on capital allocation.

You've been highly acquisitive within extraction. Just raised $135 million. And so as we look out to 2022, can you maybe just provide a brief or a high level set, I guess, on your capital allocation priorities? Do you expect any more M&A? And if so, in what area? Or are the use of your proceeds largely going to be used for building out your TTK partnerships and integration costs associated with that? Any color you could provide there would be great. Thank you.

Raymond Chang -- Chief Executive Officer

Yeah, Gerald. Go ahead, Tim.

Timothy Oakes -- Chief Financial Officer

No, no, no. [Inaudible]

Raymond Chang -- Chief Executive Officer

OK. Gerald, in terms of the acquisition, we're pretty much done when it comes to the extraction piece. We're very proud of the four companies that we acquired and we believe we have pretty much everything we need. Yes, there are still additional product developments that we're going to do internally to further enhance our overall offering.

But with the acquisition of these four companies, we pretty much have everything we need. And so in terms of M&A, we will always be looking for strategic and accretive opportunities. But as of now, we have not yet identified. And so and we think we're going to be probably focusing more on just kind of internal integration for now.

That's on the acquisition side. In terms of how we're going to deploy the capital, yes, it will primarily be for the TTK projects because we believe that's the area that is going to give all the shareholders the biggest long-term values. As you know, every dollar that we deploy on the value side, you could potentially get as much as 10x return over the life of that partnership. So that's going to be the primary focus of our deployment.

And as I mentioned, even as of today, we have close to $370 million of that opportunity in our pipeline. And so that's going to be the primary focus. And the other thing that I do want to mention is that obviously the TTK deployment has two components, right? It has the upfront construction. And then to the you hardware these program that Tim mentioned.

Our goal is to continue to basically gain leverage by talking to REITs and other equipment financing partners. We will be able to find shareholder friendly instruments to help build leverage on our business. And so that's kind of what we are focusing on for the moment.

Gerald Pascarelli -- Cowen and Company -- Analyst

Understood. Thank you very much for the color. I will hop back into the queue.

Operator

Thank you. And I am showing no further questions. I'd like to turn the call back to Raymond Chang for closing remarks.

Raymond Chang -- Chief Executive Officer

I want to thank everybody for attending the call today. We remained super excited about the prospects of Agrify, short term and long term. And we will stay focused to continue to execute our exciting business plan and look forward to updating you guys in our next earnings call. Thank you.

Have a nice day.

Duration: 59 minutes

Call participants:

Anna Kate Heller -- Senior Vice President, Investor Relations

Raymond Chang -- Chief Executive Officer

Timothy Oakes -- Chief Financial Officer

Aaron Grey -- Alliance Global Partners -- Analyst

Eric Des Lauriers -- Craig-Hallum Capital Group -- Analyst

Scott Fortune -- ROTH Capital Partners -- Analyst

Anthony Vendetti -- Maxim Group -- Analyst

Gerald Pascarelli -- Cowen and Company -- Analyst

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