Agrify (US:AGFY)2022-08-14 16:00PART I – FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents Agrify Corporation's unaudited condensed consolidated financial statements for the periods ended June 30, 2022, and December 31, 2021, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the financial figures and accounting policies, highlighting a significant net loss and impairment charges that raise substantial doubt about its ability to continue as a going concern - Agrify is a provider of advanced cultivation and extraction solutions for the cannabis industry, offering proprietary Vertical Farming Units (VFUs), extraction product lines, and integrated hardware/software solutions449450 - Management has identified substantial doubt about the company's ability to continue as a going concern within one year due to operating losses, negative cash flows, an accumulated deficit of $161.3 million, and default on debt covenants of its $65 million SPA Note468469 - The company completed the acquisition of Lab Society in February 2022, and Precision, Cascade, and PurePressure in 2021, expanding its extraction solutions and contributing to revenue growth451602611621 - A $69.9 million impairment charge was recorded in Q2 2022, fully impairing the carrying value of goodwill and intangible assets, driven by a decline in stock price, market capitalization, and a slowdown in the cannabis industry492497597 Condensed Consolidated Balance Sheets The balance sheets show a decrease in total assets and stockholders' equity, alongside a significant increase in total liabilities, reflecting the company's financial challenges - Total Assets decreased from $182.05 million at December 31, 2021, to $171.21 million at June 30, 2022436 - Total Liabilities increased significantly from $44.62 million at December 31, 2021, to $93.22 million at June 30, 2022436 - Total Stockholders' Equity decreased from $137.06 million at December 31, 2021, to $77.62 million at June 30, 2022436 Key Balance Sheet Changes (June 30, 2022 vs. December 31, 2021) | Metric | Dec 31, 2021 (in thousands) | Jun 30, 2022 (in thousands) | Change (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Cash and cash equivalents | $12,014 | $18,608 | $6,594 | | Restricted cash | $— | $30,000 | $30,000 | | Marketable securities | $44,550 | $11,323 | $(33,227) | | Inventory, net | $20,498 | $41,871 | $21,373 | | Goodwill | $50,090 | $— | $(50,090) | | Intangible assets, net | $14,072 | $— | $(14,072) | | Long-term debt | $12 | $45,014 | $45,002 | | Accumulated deficit | $(58,975) | $(161,258) | $(102,283) | Condensed Consolidated Statements of Operations The statements of operations reveal a substantial increase in revenue for the six months ended June 30, 2022, but also a significantly higher net loss, primarily driven by impairment charges - Revenue for the six months ended June 30, 2022, increased by 141% to $45.35 million from $18.83 million in the same period of 2021438 - Net Loss for the six months ended June 30, 2022, increased significantly to $(102.28) million from $(9.28) million in the same period of 2021438 - Net Loss Per Share for the six months ended June 30, 2022, increased to $(4.00) from $(0.57) in the same period of 2021438 Key Operating Results (Three Months Ended June 30, 2022 vs. 2021) | Metric (in thousands) | 2022 | 2021 | Change | % Change | | :-------------------------------- | :---------- | :---------- | :---------- | :------- | | Revenue | $19,329 | $11,825 | $7,504 | 64% | | Cost of goods sold | $17,717 | $11,298 | $6,419 | 57% | | Gross profit (loss) | $1,612 | $527 | $1,085 | 206% | | General and administrative | $19,378 | $4,399 | $14,979 | 341% | | Selling and marketing | $2,332 | $782 | $1,550 | 198% | | Research and development | $2,438 | $774 | $1,664 | 215% | | Impairment of goodwill and intangible assets | $69,904 | $— | $69,904 | 100% | | Net loss attributable to Agrify Corporation | $(93,401) | $(5,636) | $(87,765) | 1557% | Condensed Consolidated Statements of Stockholders' Equity The statements of stockholders' equity reflect a substantial decrease in total equity, primarily due to accumulated net losses, despite an increase in common stock issued - Total Stockholders' Equity (attributable to Agrify) decreased from $137.06 million at January 1, 2022, to $77.62 million at June 30, 2022443444 - Accumulated Deficit increased from $(58.98) million at January 1, 2022, to $(161.26) million at June 30, 2022, primarily due to net losses443444 - Common Stock issued and outstanding increased from 22,207,103 shares at December 31, 2021, to 26,591,430 shares at June 30, 2022436 Condensed Consolidated Statements of Cash Flows The cash flow statements indicate a significant increase in cash used in operating activities and a decrease in net cash provided by financing activities, leading to a reduced net increase in cash and cash equivalents - Net Cash Used in Operating Activities increased from $(13.84) million for the six months ended June 30, 2021, to $(57.58) million for the same period in 2022446831 - Net Cash Used in Investing Activities decreased from $(51.87) million in 2021 to $(26.94) million in 2022446831 - Net Cash Provided by Financing Activities decreased from $137.43 million in 2021 to $91.11 million in 2022446831 - Net Increase in Cash and Cash Equivalents decreased significantly from $71.73 million in 2021 to $6.59 million in 2022446831 Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures on Agrify Corporation's accounting policies, financial instrument fair values, debt, leases, equity, and recent business combinations, highlighting the company's going concern risk due to significant losses and debt covenant defaults, along with the impact of recent acquisitions on its financial position and operational results Note 1 — Overview, Basis of Presentation and Significant Accounting Policies This note outlines Agrify's business, corporate structure, key accounting policies, and the significant going concern risk due to operational losses and debt covenant defaults - Agrify provides advanced cultivation and extraction solutions for the cannabis industry, including proprietary VFUs, extraction equipment, and integrated hardware/software (Agrify Insights™)449450 - The company has nine wholly-owned subsidiaries and ownership interests in three other companies (TPI, Agrify-Valiant, Agrify Brands), with Agrify-Valiant and Agrify Brands consolidated as VIEs451453467 - A 1-for-1.581804 reverse stock split was effected on January 12, 2021, retroactively adjusted for all periods454 - The company raised approximately $57 million net from its IPO and $80 million net from a secondary public offering in 2021, used for working capital, revenue growth, and inventory456457 - Experienced minimal business interruption from COVID-19 but faced supply chain delays, higher operating costs, and increased shipping costs458 - Substantial doubt exists about the company's ability to continue as a going concern due to operating losses, negative cash flows, accumulated deficit, and default on the SPA Note covenants469470 - Forgiveness of the $0.78 million PPP Loan was denied; maturity extended to May 7, 2025, with 1.00% annual interest460 - Qualifies as an 'emerging growth company' under the JOBS Act, allowing exemptions from certain disclosure requirements and an extended transition period for new accounting standards475 Note 2 — Revenue and Deferred Revenue This note details Agrify's revenue streams from equipment sales, services, and construction contracts, and its revenue recognition policies under ASC 606 - Revenue is generated from equipment sales (VFUs, grow racks, LED lights, extraction equipment), services, and construction contracts548 - Revenue recognition follows ASC 606's five-step model, with revenue recognized as performance obligations are satisfied513521 Revenue Disaggregation (Six Months Ended June 30) | Category | 2022 (in thousands) | 2021 (in thousands) | | :------------------------ | :------------------ | :------------------ | | Transferred at a point in time | $23,018 | $1,353 | | Transferred over time | $22,332 | $17,480 | | Total Revenue | $45,350 | $18,833 | Deferred Revenue Balances (Six Months Ended June 30, 2022 vs. Year Ended Dec 31, 2021) | Metric (in thousands) | Six Months ended June 30, 2022 | Year ended December 31, 2021 | | :-------------------------------- | :----------------------------- | :--------------------------- | | Deferred revenue – beginning of period | $3,772 | $152 | | Additions | $7,493 | $3,758 | | Recognized | $(7,512) | $(142) | | Deferred revenue – end of period | $3,753 | $3,772 | - A reserve for warranty returns of $0.58 million was maintained at June 30, 2022, up from $0.40 million at December 31, 2021552568 Note 3 – Supplemental Consolidated Balance Sheet Information This note provides additional details on specific balance sheet accounts, including increases in accounts receivable, inventory, and property and equipment, along with changes in liabilities - Accounts receivable, net, increased to $10.47 million at June 30, 2022, from $7.22 million at December 31, 2021556 - Allowance for doubtful accounts increased to $2.74 million at June 30, 2022, from $1.42 million at December 31, 2021, with a provision of $1.55 million for the six months ended June 30, 2022556557 - Prepaid expenses and other current assets increased to $5.93 million at June 30, 2022, from $2.45 million at December 31, 2021, including deferred debt issuance costs of $0.91 million558559 - Property and equipment, net, increased to $11.93 million at June 30, 2022, from $6.23 million at December 31, 2021, with construction in progress significantly rising to $9.01 million560561 - Accrued expenses and other current liabilities decreased to $27.46 million at June 30, 2022, from $28.76 million at December 31, 2021, including $10.58 million for accrued acquisition liability and $5.72 million for sales tax payable565 Note 4 — Fair Value Measures This note describes the company's fair value hierarchy for financial instruments, including marketable securities and contingent consideration, and details changes in their valuations - The company uses a three-level fair value hierarchy, with Level 1 for municipal and corporate bonds and Level 3 for contingent consideration569570572578 Marketable Securities (June 30, 2022 vs. Dec 31, 2021) | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :-------------------- | :------------ | :---------------- | | Municipal bonds | $4,683 | $9,961 | | Corporate bonds | $6,640 | $34,589 | | Total | $11,323 | $44,550 | Contingent Consideration Balances (Six Months Ended June 30, 2022 vs. Year Ended Dec 31, 2021) | Metric (in thousands) | Six Months ended June 30, 2022 | Year ended December 31, 2021 | | :-------------------------------- | :----------------------------- | :--------------------------- | | Contingent consideration – beginning of period | $6,137 | $— | | Accrued contingent consideration | $1,420 | $4,725 | | Change in estimated fair value | $(907) | $1,412 | | Contingent consideration – end of period | $6,766 | $6,137 | - The estimated fair value of Lab Society's first earn-out period contingent consideration was reduced by approximately $1.0 million in Q2 2022 due to underperformance581 - The contingent consideration for Precision and Cascade was increased by $0.12 million in Q2 2022 to reflect the final amount due, with payment expected in August 2022582 Note 5 — Loan Receivable This note details the company's loan receivables, primarily from its Total Turn-Key (TTK) Solution program, and highlights a significant reserve for doubtful accounts related to Greenstone Holdings - A portion of IPO capital is allocated to the Total Turn-Key (TTK) Solution program, providing capital, design, build-out, equipment, software, and services to cannabis operators over a 10-year period, with construction loans typically at 12-18% interest583585 - A $7.1 million reserve for doubtful accounts was established specifically for Greenstone Holdings due to unfavorable market conditions in Colorado impacting collectability584 Loan Receivables by Customer (June 30, 2022 vs. Dec 31, 2021) | Customer (in thousands) | June 30, 2022 | December 31, 2021 | | :---------------------------------------------------- | :------------ | :---------------- | | Company Customer Number 139 – TTK Solution | $14,730 | $5,542 | | Greenstone – TTK Solution – Related Party | $12,457 | $11,177 | | Company Customer Number 136 – TTK Solution | $8,691 | $2,439 | | Greenstone – TTK Solution – Related Party – Allowance for doubtful accounts | $(7,079) | $— | | Total loan receivable | $35,090 | $22,255 | - Greenstone is identified as a Variable Interest Entity (VIE), but Agrify is not the primary beneficiary and does not consolidate it589 Note 6 — Inventory This note outlines Agrify's inventory valuation methods and provides a breakdown of inventory composition, highlighting an increase in inventory reserves - Inventory is valued at the lower of cost or net realizable value, using the weighted-average cost method on a First-In, First-Out basis590 Inventory Composition (June 30, 2022 vs. Dec 31, 2021) | Category (in thousands) | June 30, 2022 | December 31, 2021 | | :---------------------- | :------------ | :---------------- | | Raw materials | $16,405 | $6,393 | | Prepaid inventory | $9,429 | $2,237 | | Finished goods | $17,908 | $12,810 | | Inventory, gross | $43,742 | $21,440 | | Inventory reserves | $(1,871) | $(942) | | Total inventory, net | $41,871 | $20,498 | - Inventory reserves increased by $0.93 million for the six months ended June 30, 2022, to $1.87 million, for obsolete, slow-moving, or defective items592593 Note 7 — Intangible Assets, Net and Goodwill This note details the significant impairment charge recorded in Q2 2022, which fully impaired the company's goodwill and intangible assets due to adverse market conditions - An impairment triggering event was identified in Q2 2022 due to a sustained decline in stock price, market capitalization, and a slowdown in the cannabis industry596 - A $69.9 million impairment charge was recorded in Q2 2022, representing a full impairment of goodwill ($54.7 million) and intangible assets ($15.2 million)597 - Goodwill balance was reduced from $50.09 million at January 1, 2022, to $0 at June 30, 2022, after the impairment loss598 - Intangible assets, net, balance was reduced from $14.07 million at January 1, 2022, to $0 at June 30, 2022, after the impairment loss599 - Amortization expense was $1.4 million for the three months ended June 30, 2022, and $0.70 million for the six months ended June 30, 2022601 Note 8 — Business Combination This note provides details on Agrify's recent acquisitions, including Lab Society, Precision, Cascade, and PurePressure, and the subsequent impairment of goodwill and intangible assets related to these transactions - Lab Society was acquired on February 1, 2022, for $4.0 million cash, 425,611 Common Stock shares, and potential earn-out consideration up to $3.5 million603 - Identified intangible assets from Lab Society acquisition include trade names ($0.32 million), acquired developed technology ($1.43 million), and customer relationships ($0.71 million)608 - Revenue from Lab Society from acquisition date to June 30, 2022, was $3.1 million610 - Precision and Cascade were acquired on October 1, 2021, for $30 million cash, Common Stock shares based on $20 million value, and potential earn-out up to $65 million total612 - Identified intangible assets from Precision and Cascade acquisition include trade names ($1.26 million), acquired developed technology ($3.82 million), non-compete agreements ($1.20 million), and customer relationships ($3.61 million)618 - PurePressure was acquired on December 31, 2021, for $4.0 million cash, 329,179 Common Stock shares, and potential earn-out consideration up to $3.0 million622623 - Goodwill and intangible assets from these acquisitions were fully impaired in Q2 2022 due to market conditions609620631 Note 9 – Debt This note details Agrify's debt obligations, including the $65 million Senior Secured Promissory Note (SPA Note), its default on covenants, and the potential financial implications - A $65 million Senior Secured Promissory Note (SPA Note) was issued on March 14, 2022, with a maturity date of March 1, 2026, and a stated interest rate of 6.75% per year633634 - The company defaulted on certain financial debt covenants of the SPA Note as of June 30, 2022639 - In case of default, the lender could call the note, requiring approximately $75.0 million repayment ($65.0 million principal + $9.8 million penalty), which exceeds the company's $59.9 million cash on hand639 - Subsequent to Q2 2022, an agreement in principle was reached to amend the SPA Note and modify certain financial covenants640 - The $0.78 million PPP Loan's forgiveness was denied, and its maturity date was extended to May 7, 2025, with a 1.00% annual interest rate647 Total Debt, Net of Debt Discount (June 30, 2022) | Metric (in thousands) | Amount | | :-------------------------------- | :----- | | Total debt | $66,659 | | Less: unamortized debt discount | $(12,030) | | Total debt, net of debt discount | $54,629 | Future Minimum Principal Payments (as of June 30, 2022, in thousands) | Year | Amount | | :--- | :----- | | Remaining 2022 | $980 | | 2023 | $28,894 | | 2024 | $31,483 | | 2025 | $5,302 | | 2026 and thereafter | $— | | Total | $66,659 | Note 10 — Leases This note outlines Agrify's accounting for leases, including the recognition of right-of-use assets and lease liabilities, and provides a breakdown of lease obligations - Leases with terms greater than 12 months are recognized as non-current right-of-use assets and current/non-current lease liabilities651 - The weighted-average discount rate for leases was 7.35% at June 30, 2022 (7.16% at December 31, 2021)653 Total Lease Liabilities (June 30, 2022 vs. Dec 31, 2021) | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :-------------------- | :------------ | :---------------- | | Operating lease liabilities, current | $1,084 | $814 | | Operating lease liabilities, non-current | $1,908 | $704 | | Financing lease liabilities, current | $166 | $156 | | Financing lease liabilities, non-current | $236 | $293 | | Total lease liabilities | $3,394 | $1,967 | Maturities of Lease Liabilities (as of June 30, 2022, in thousands) | Year | Operating Lease | Finance Lease | | :--- | :-------------- | :------------ | | Remaining 2022 | $649 | $89 | | 2023 | $971 | $199 | | 2024 | $614 | $97 | | 2025 | $493 | $51 | | 2026 | $461 | $11 | | Thereafter | $200 | $— | | Total minimum lease payments | $3,388 | $447 | Note 11 — Convertible Promissory Notes This note details the amendments and conversions of Agrify's Convertible Notes, including a significant gain on extinguishment and conversion into common stock prior to the IPO - The Board and shareholders approved an amendment to the conversion formula of Convertible Notes on January 11, 2021, setting a conversion price of $7.72 per share658 - A $2.7 million gain on extinguishment was recognized due to the derecognition of $19.6 million in extinguished debt and recognition of $16.9 million fair value of new convertible notes659 - Prior to the IPO on February 1, 2021, $13.1 million in Convertible Notes were converted into 1,697,075 shares of Common Stock at $7.72 per share659 Note 12 — Stockholders' Equity This note outlines changes in Agrify's authorized and issued shares, including details on public offerings, private placements, and stock issued for acquisitions - Authorized shares of Common Stock increased to 50,000,000 and Preferred Stock to 3,000,000 on January 9, 2020660 - 100,000 shares of Series A Preferred Stock were issued for $10.0 million in 2020 and subsequently converted to Common Stock at $7.72 per share prior to the IPO660662663666 - The Initial Public Offering (Feb 1, 2021) involved the sale of 6,210,000 shares of Common Stock at $10.00 per share, generating approximately $57.0 million net proceeds665 - A Secondary Public Offering (Feb 19, 2021) sold 6,388,888 shares of Common Stock at $13.50 per share, generating approximately $80.0 million net proceeds668 - A Private Placement on January 25, 2022, issued 2,450,350 Common Stock shares, pre-funded warrants for 1,570,644 shares, and common warrants for 3,015,745 shares, generating approximately $27.3 million gross proceeds669671 - Common Stock shares were issued in connection with acquisitions: 666,403 for Precision/Cascade, 240,301 for PurePressure, and 297,929 for Lab Society672 Note 13 — Stock-Based Compensation and Employee Benefit Plans This note details Agrify's stock-based compensation plans, including the 2022 Omnibus Equity Incentive Plan and the ESPP, along with associated expenses and unrecognized costs - The 2022 Omnibus Equity Incentive Plan replaced the 2020 Plan, reserving 5,296,647 shares for various awards674 - Stock-based compensation expense was $0.94 million for Q2 2022 (vs. $0.93 million in Q2 2021) and $1.9 million for H1 2022 (vs. $3.1 million in H1 2021)675 - Total unrecognized compensation cost related to unvested options was $3.4 million as of June 30, 2022, to be recognized through 2025675 Stock Option Activity (June 30, 2022 vs. Dec 31, 2021) | Metric | Options outstanding at Dec 31, 2021 | Options outstanding at Jun 30, 2022 | | :---------------------- | :---------------------------------- | :---------------------------------- | | Number of Options | 3,564,289 | 3,290,900 | | Weighted-Average Exercise Price | $7.18 | $7.05 | - The 2022 Employee Stock Purchase Plan (ESPP) was adopted with 500,000 shares reserved, allowing eligible employees to purchase stock at 85% of fair market value; no grants were made in H1 2022682 - No contributions were made to the 401k Plan in Q2 or H1 2022/2021684 Note 14 — Stock Warrants This note provides a summary of Agrify's stock warrant activity, including the number of warrants outstanding and their weighted-average exercise price Stock Warrant Activity (June 30, 2022 vs. Dec 31, 2021) | Metric | Warrants outstanding at Dec 31, 2021 | Warrants outstanding at Jun 30, 2022 | | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Number of Warrants | 271,844 | 10,111,798 | | Weighted-Average Exercise Price | $0.02 | $6.82 | - 11.47 million warrants were granted in H1 2022 with a weighted-average exercise price of $6.02686 - Proceeds from warrant exercises were less than $1 thousand for Q2 2022 and $2 thousand for H1 2022686 Note 15 — Income Taxes This note details Agrify's effective income tax rates and benefits, primarily influenced by a valuation allowance against deferred tax assets and specific impairment-related reversals - The effective income tax rate was 0.1% for Q2 2022 (vs. 0.0% in Q2 2021) and 0.3% for H1 2022 (vs. 0.0% in H1 2021)687688 - The income tax benefit was $(0.06) million for Q2 2022 (vs. $0 in Q2 2021) and $(0.26) million for H1 2022 (vs. $0 in H1 2021)687688 - The low effective tax rate is primarily due to a valuation allowance recorded against certain deferred tax assets687688 - The Q2 2022 benefit was due to a goodwill impairment charge, resulting in a $(0.06) million benefit from the reversal of deferred tax liability on indefinite-lived assets687 - The H1 2022 benefit included a discrete income tax benefit of $(0.20) million from a non-recurring partial release of the U.S. valuation allowance due to the Lab Society acquisition688 Note 16 — Net Loss Per Share This note explains that basic and diluted net loss per share are equal due to anti-dilutive securities, and provides a summary of the net loss per share calculation - Basic net loss per share equals diluted net loss per share because all potentially dilutive securities were anti-dilutive due to reported losses690691 Net Loss Per Share (H1 2022 vs. H1 2021) | Metric | H1 2022 | H1 2021 | | :------------------------------------------ | :---------- | :---------- | | Net loss attributable to Agrify Corporation | $(102,283) | $(9,446) | | Net loss per share (basic and diluted) | $(4.00) | $(0.57) | | Weighted-average common shares outstanding | 25,591,114 | 16,661,948 | - 13,402,698 potential common shares equivalents (3,290,900 options and 10,111,798 warrants) were excluded from diluted EPS calculation at June 30, 2022692 Note 17 — Commitments and Contingencies This note outlines Agrify's various commitments and contingencies, including legal settlements, product seizures, supply agreements, and related-party transactions - The company tentatively agreed to settle claims with former employees (Cooper and Weinstein) for approximately $0.80 million, accrued as a liability as of June 30, 2022696 - 123 cartons of horticulture grow lights, valued at $0.62 million, were seized by United States Customs and Border Protection (CBP) due to alleged importation law violations; the company intends to dispute the seizure697 - A five-year supply agreement with Mack Molding Co. for VFUs includes purchase orders totaling approximately $11.5 million for 2021-2022 production698 - Greenstone, a related party, purchased 239 VFUs in December 2021, terminating a prior lease agreement700 - An agreement was entered into with Ora Pharm, a related party, for the purchase of approximately $1.6 million in equipment701 Note 18 — Related Parties This note details Agrify's transactions and balances with related parties, including sales, purchases, and loan receivables, highlighting the allowance for doubtful accounts related to Greenstone Net Purchasing (Sales) Activity with Related Parties (Six Months Ended June 30, 2022) | Related Party | Amount (in thousands) | | :------------------------ | :-------------------- | | NEIA (sales) | $(1,763) | | Greenstone (purchases) | $180 | | Valiant Americas, LLC (purchases) | $9,805 | Net Related Party Receivable (Payable) (June 30, 2022) | Related Party | Amount (in thousands) | | :------------------------ | :-------------------- | | Greenstone (net of allowance) | $5,378 | | NEIA | $2,415 | | Valiant Americas, LLC | $98 | - The Greenstone loan receivable balance is net of a $7.08 million allowance for doubtful accounts at June 30, 2022707 Note 19 — Subsequent Events This note reports on significant events occurring after the reporting period, including executive appointments, an increase in authorized common stock, and amendments to debt agreements - Stuart Wilcox was appointed Chief Operating Officer (COO) on July 14, 2022, succeeding Thomas Massie, who resigned; Chris Benyo was promoted to Chief Revenue Officer (CRO)710712 - Max Holtzman was appointed as an independent Board Director on July 14, 2022711 - The Articles of Incorporation were amended on July 11, 2022, increasing authorized Common Stock from 50,000,000 to 100,000,000 shares713 - An agreement in principle was reached with the institutional lender to amend the SPA Note and modify financial covenants, providing operational flexibility714 - A post-closing adjustment settlement agreement was reached with Sinclair on August 10, 2022, for the Precision and Cascade acquisition, totaling $5.6 million in contingent consideration (cash and stock), with $1.4 million returned from escrow to the company715 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Agrify's financial performance and condition for the three and six months ended June 30, 2022, compared to 2021, discussing revenue growth driven by acquisitions, increased operating expenses due to impairment charges and allowances, and the company's liquidity challenges, including a default on debt covenants - Agrify provides advanced cultivation and extraction solutions for the cannabis industry, including VFUs, Agrify Insights™ software, and extraction equipment, aiming for an integrated ecosystem719720 - Total revenue increased by 64% for Q2 2022 and 141% for H1 2022, primarily driven by extraction solutions sales from recent acquisitions (Lab Society, Precision, Cascade, PurePressure)789790 - Net loss attributable to Agrify Corporation increased substantially to $(93.4) million for Q2 2022 and $(102.3) million for H1 2022, largely due to a $69.9 million impairment charge786 - A $69.9 million impairment charge was recorded in Q2 2022 due to a decline in stock price, market capitalization, and a slowdown in the cannabis industry807808 - General and administrative expenses rose significantly due to increased trade and loan receivable allowances ($8.6 million in Q2 2022, including $7.1 million for Greenstone), acquisition-related expenses, and payroll799801802 - As of June 30, 2022, cash and equivalents ($29.9 million) plus restricted cash ($30 million) totaled $59.9 million, which is insufficient to cover a potential $75.0 million debt repayment obligation (principal + penalty) if the SPA Note lender calls the debt due to covenant default818821 - Management expresses substantial doubt about the company's ability to continue as a going concern within the next twelve months without additional debt or equity financing819 - An agreement in principle was reached with the institutional lender to amend the SPA Note and modify financial covenants, aiming to provide operational flexibility819 Overview Agrify provides advanced cultivation and extraction solutions for the cannabis industry, leveraging data, science, and technology to offer integrated hardware, software, and services - Agrify provides advanced cultivation and extraction solutions for the cannabis industry, focusing on data, science, and technology719 - Offers micro-environment-controlled Agrify Vertical Farming Units (VFUs) for consistent, high-quality yields, and a comprehensive extraction product line719 - Believes it's the only company with an automated, fully integrated grow solution combining hardware, software (Agrify Insights™), and services720 Reverse Stock Split This section notes the 1-for-1.581804 reverse stock split effected on January 12, 2021, and its retroactive adjustment to all share and per share information - A 1-for-1.581804 reverse stock split of Common Stock was effected on January 12, 2021723 - All share and per share information has been retroactively adjusted to give effect to the reverse stock split723 Recent Business Developments This section highlights key business developments, including a private placement, the acquisition of Lab Society, and the issuance and subsequent covenant default of a $65 million senior secured promissory note - A private placement on January 25, 2022, involved the issuance of 2,450,350 Common Stock shares, pre-funded warrants for 1,570,644 shares, and common warrants for 3,015,745 shares, generating approximately $27.3 million gross proceeds724726 - The acquisition of Lab Society on February 1, 2022, included $4.0 million cash, 425,611 Common Stock shares, and potential earn-out consideration up to $3.5 million728 - The estimated fair value of Lab Society's first earn-out period contingent consideration was reduced by $1.0 million in Q2 2022 due to underperformance731 - A Securities Purchase Agreement on March 14, 2022, resulted in the issuance of a $65 million senior secured promissory note (SPA Note) and warrants for 6,881,108 Common Stock shares734 - The company defaulted on certain financial debt covenants of the SPA Note as of June 30, 2022, potentially triggering a $75.0 million repayment obligation740 - An agreement in principle was reached subsequent to Q2 2022 to amend the SPA Note and modify financial covenants741 Impact of coronavirus pandemic ("COVID-19") This section discusses the ongoing impact of the COVID-19 pandemic on Agrify's operations, including supply chain delays and increased costs, noting the uncertainty of its full extent - COVID-19 has caused temporary delays in inventory delivery, higher operating costs, and increased shipping costs746 - The full extent of the pandemic's impact on the business, results of operations, and financial condition remains highly uncertain747 Use of Estimates This section highlights that Agrify's financial statements rely on management's estimates and assumptions for various accounts, acknowledging that actual results may differ materially - Financial statements rely on management estimates and assumptions for accounts/notes receivable collection, stock-based compensation, deferred tax assets, and useful lives of fixed and intangible assets748 - Actual results could differ materially from these estimates748 Financial Overview This section outlines Agrify's critical accounting policies and the significant judgments required for financial reporting, including the $69.9 million impairment charge recorded in Q2 2022 - Critical accounting policies include revenue recognition (ASC 606), business combinations (ASC 805), goodwill and intangible assets impairment testing, capitalization of internal software development costs (ASC 985-20), income taxes (ASC 740), and stock-based compensation (ASC 718)749750769772776777780 - Significant judgments are required for determining standalone selling prices, fair values in business combinations, impairment assessments, and stock option valuations758769771774781 - A $69.9 million impairment charge was recorded in Q2 2022, fully impairing goodwill and intangible assets due to market conditions775 Results of Operations This section analyzes Agrify's operating results, highlighting significant revenue growth driven by acquisitions, but also a substantial increase in net loss due to impairment charges and higher operating expenses - The company has incurred recurring losses since inception and expects to require additional capital784 - Revenue increased by $7.5 million (64%) to $19.3 million for Q2 2022, primarily from extraction solutions sales ($10.0 million); Cultivation products and facility build-out revenue decreased789 - Revenue increased by $26.5 million (141%) to $45.4 million for H1 2022, primarily from extraction solutions sales ($22.4 million) and facility build-outs ($4.7 million increase)790 - Cost of goods sold increased by $6.4 million (57%) to $17.7 million for Q2 2022, largely due to extraction-related equipment sales ($7.7 million) and increases in inventory ($0.93 million) and warranty ($0.18 million) reserves794 - Cost of goods sold increased by $20.7 million (110%) to $39.6 million for H1 2022, primarily from extraction equipment sales ($16.0 million) and facility build-outs ($4.8 million)795 - Gross profit increased by $1.1 million (206%) to $1.6 million for Q2 2022, with gross profit margin improving to 8.3% (from 4.5%), driven by higher-margin extraction solutions796 - Gross profit improved from a loss of $(13) thousand to a profit of $5.8 million for H1 2022, with gross profit margin improving to 12.7% (from -0.1%), also driven by extraction solutions796 - General and administrative expenses increased by $15.0 million (341%) to $19.4 million for Q2 2022, mainly due to an $8.6 million increase in trade and loan receivable allowances (including $7.1 million for Greenstone)799 - A $69.9 million impairment charge for goodwill and intangible assets was recorded in Q2 and H1 2022807 - Net loss attributable to Agrify Corporation increased to $(93.4) million for Q2 2022 from $(5.6) million in Q2 2021, and to $(102.3) million for H1 2022 from $(9.4) million in H1 2021786 Liquidity and Capital Resources This section discusses Agrify's liquidity position, highlighting its cash on hand, working capital needs, and the significant going concern risk due to debt covenant defaults and insufficient cash to cover potential repayment obligations - As of June 30, 2022, cash and cash equivalents plus marketable securities totaled $29.9 million, with an additional $30 million in restricted cash, for a total of $59.9 million821 - Current working capital needs include supporting revenue growth, funding construction and equipment financing for TTK Solutions, managing inventory, and supporting operational growth821 - The company defaulted on certain financial debt covenants of the $65 million SPA Note, which could trigger a $75.0 million repayment obligation (principal + penalty), exceeding current cash on hand827 - Management has substantial doubt about the company's ability to continue as a going concern without obtaining necessary debt or equity financing827828 - An agreement in principle was reached subsequent to Q2 2022 to amend the SPA Note and modify financial covenants to provide operational flexibility828 - Net cash used in operating activities was $(57.6) million for H1 2022, a significant increase from $(13.8) million in H1 2021831832 - Net cash used in investing activities was $(27.0) million for H1 2022, including $20.4 million for TTK-related loans and $6.4 million for property and equipment834835 - Net cash provided by financing activities was $91.1 million for H1 2022, primarily from private placements ($65.0 million from Common Stock/warrants, $25.8 million from debt/warrants)836 Off-Balance Sheet Arrangements This section confirms that Agrify did not engage in any off-balance sheet arrangements with unconsolidated entities or financial partnerships during the reported periods - The company did not have any relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements during the periods presented838 Critical Accounting Policies and Estimates This section identifies key accounting policies and estimates that require significant management judgment, such as fair value measurements, goodwill impairment, revenue recognition, and cost of goods sold - Management identifies the fair value of derivative assets and liabilities, goodwill impairment assessment, revenue recognition, and cost of goods sold as subjective estimates requiring complex analysis840 - There have been no significant changes in these accounting policies and estimates for the periods covered in this report841 Recently Issued Accounting Pronouncements Adopted This section notes the adoption of ASU No. 2020-06 (Debt with Conversion and Other Options) and its non-impact on the company's financial position - The company adopted ASU No. 2020-06 (Debt with Conversion and Other Options) effective for fiscal years beginning after December 15, 2021, with no impact on its consolidated financial position543 New Accounting Pronouncements Not Yet Adopted This section lists new accounting pronouncements not yet adopted, including ASU 2016-13 (Credit Losses) and ASU 2021-08 (Business Combinations), and states that their potential impact is being evaluated - ASU 2016-13 (Financial Instruments—Credit Losses), effective Q1 2024, introduces an 'expected loss model' for financial instruments; the potential impact is currently being evaluated544 - ASU 2021-08 (Business Combinations), effective for fiscal years beginning after December 15, 2022, requires recognizing contract assets and liabilities acquired in business combinations per Topic 606; the potential impact is currently being evaluated546 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk As a 'smaller reporting company,' Agrify Corporation is exempt from providing detailed quantitative and qualitative disclosures about market risk - The company is exempt from providing quantitative and qualitative disclosures about market risk as it qualifies as a 'smaller reporting company'844 ITEM 4. Controls and Procedures This section reports on the effectiveness of Agrify's disclosure controls and procedures, concluding they were not effective as of June 30, 2022, due to material weaknesses in internal control over financial reporting, with remediation efforts underway - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2022846 - The ineffectiveness is attributed to material weaknesses in internal control over financial reporting previously identified in the 2021 Annual Report on Form 10-K846 - Remediation efforts include hiring additional qualified personnel, further documentation, and implementation of control monitoring847 PART II – OTHER INFORMATION ITEM 1. Legal Proceedings This section refers to Note 17 for details on legal proceedings and claims arising in the ordinary course of business - Information on legal proceedings is incorporated by reference from Note 17 – Commitments and Contingencies849 ITEM 1A. Risk Factors This section states that there are no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes to risk factors have occurred since the 2021 Annual Report on Form 10-K850 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds are disclosed for the period850 ITEM 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities to report for the period - No defaults upon senior securities are disclosed for the period850 ITEM 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company850 ITEM 5. Other Information This section indicates that there is no other information to report for the period - No other information is disclosed for the period850 ITEM 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including separation and employment agreements, certifications, and XBRL documents - Exhibits include the Separation Agreement of Thomas Massie, Employment Agreement of Stuart Wilcox, Rule 13(a)-14(a)/15(d)-14(a) Certifications, Section 1350 Certifications, and Inline XBRL documents852 SIGNATURES Signatures This section contains the official signatures for the Form 10-Q report - The report was signed by Raymond Chang (Chief Executive Officer) and Timothy Oakes (Chief Financial Officer) on August 15, 2022856