Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 — Overview, Basis of Presentation and Significant Accounting Policies
Description
of Business
Agrify Corporation (“Agrify” or the
“Company”) is one of the most innovative providers of advanced cultivation and extraction solutions for the cannabis industry,
bringing data, science, and technology to the forefront of the market. The Company’s proprietary micro-environment-controlled Agrify
Vertical Farming Units (or “VFUs”) enable cultivators to produce the highest quality products with what it believes to be
an unmatched consistency, yield, and Return on Investment at scale. The Company’s comprehensive extraction product line, which includes
hydrocarbon, ethanol, solventless, post-processing, and lab equipment, empowers producers to maximize the quantity and quality of extract
required for premium concentrates.
The Company believes it is the only company with
an automated and fully integrated grow solution in the industry. The Company’s cultivation and extraction solutions seamlessly combines
its integrated hardware and software offerings with a broad range of associated services including consulting, engineering, and construction
and is designed to deliver the most complete commercial indoor farming solution available from a single provider. The totality of its
product offerings and service capabilities forms an unrivaled ecosystem in what has historically been a highly fragmented market. As a
result, the Company believes it is well situated to create a dominant market position in the indoor agriculture sector.
The
Company was formed in the State of Nevada on June 6, 2016 as Agrinamics, Inc., and subsequently changed its name to Agrify Corporation.
The Company is sometimes referred to herein by the words “we,” “us,” “our,” and similar terminology.
The
Company has nine wholly-owned subsidiaries, which are collectively referred to as the “Subsidiaries”:
|
● |
AGM
Service Corp LLC (formerly AGM Service Corp Inc.); |
|
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TriGrow
Systems, LLC (“TriGrow”, which acted as the Company’s exclusive distributor and which was acquired in January 2020
as TriGrow Systems, Inc. and converted to TriGrow Systems, LLC in May 2020); |
|
● |
Harbor
Mountain Holdings, LLC (“HMH”) (acquired in July 2020); |
|
● |
Cascade
Sciences, LLC (“Cascade”) (which was acquired by the Company on October 1, 2021); |
|
● |
Precision
Extraction NewCo, LLC (“Precision”) (which was a newly formed subsidiary in connection with the October 1, 2021 acquisition
of Mass2Media, LLC, d/b/a PX2 Holdings, LLC, d/b/a Precision Extraction Solutions and Cascade); and |
|
● |
PurePressure,
LLC (“PurePressure”) (which was acquired by the Company on December 31, 2021); and |
|
● |
Lab
Society NewCo, LLC (“Lab Society”) (which was a newly formed subsidiary in connection with the February 1, 2022 acquisition
of LS Holdings Corp). |
The
Company also has ownership interests in the following companies:
|
● |
Teejan
Podoponics International LLC (“TPI”) (the Company has owned 50% of TPI since December 2018); |
|
● |
Agrify-Valiant,
LLC (“Agrify-Valiant”) (the Company is 60% majority owner and Valiant-America, LLC owns 40%, which was formed in December
2019. Subsequent to September 30, 2022, On October 27, 2022, the Company provided notice to Valiant-America, LLC of our intention to
begin winding up of Agrify-Valiant); and |
|
● |
Agrify
Brands, LLC (“Agrify Brands”) (formerly TriGrow Brands, LLC) (the Company owns 75% of Agrify Brands, which ownership
position was created as part of the January 2020 acquisition of TriGrow). |
Reverse
Stock Split
On
January 12, 2021, the Company effected a 1-for-1.581804 reverse stock split of its Common Stock, $0.001 par value per share (“Common
Stock”). All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all
periods presented unless otherwise indicated.
On October 18, 2022, the Company effected a 1-for-10
reverse stock split of its Common Stock. All share and per share information has been retroactively adjusted to give effect to the reverse
stock split for all periods presented unless otherwise indicated.
No fractional shares of Common Stock were issued
as a result of these reverse stock splits. Any fractional shares in connection with these reverse stock splits were rounded up to the
nearest whole share and no stockholders received cash in lieu of fractional shares. The reverse stock splits had no impact on the number
of shares of Common Stock that the Company is authorized to issue pursuant to its articles of incorporation or on the par value per share
of the Common Stock. Proportional adjustments were made to the number of shares of Common Stock
issuable upon exercise or conversion of the Company's outstanding stock options and warrants,
the exercise price or conversion price (as applicable) of the Company’s outstanding stock options and warrants, and the number of
shares reserved for issuance under the Company’s equity incentive plan. All share and per share information included in this
Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the impact of these reverse stock splits.
Initial
Public Offering and Secondary Public Offering
On February 1, 2021, the Company closed its initial
public offering, or (“IPO”), of 621,000 shares of its Common Stock (inclusive of 81,000 shares of Common Stock from the full
exercise of the over-allotment option of shares granted to the underwriters). The offer and sale of all of the shares in the IPO were
registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File Nos. 333- 251616 and 333-252490),
which was declared effective by the Securities Exchange Commission (“SEC”) on January 27, 2021. In the IPO, Maxim Group LLC
and Roth Capital Partners acted as the underwriters. The IPO price for shares of Common Stock was $100.00 per share. The total gross proceeds
from the IPO were $62.1 million.
After deducting underwriting discounts and commissions of $4 million and
offering expenses paid or payable by us of approximately $1 million, the net proceeds from the IPO were approximately $57 million. The
Company used the net proceeds from the IPO for its current working capital needs, to support revenue growth, increase inventory to meet
customer demand forecasts, and support operational growth.
On
February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) of 555,556 shares of its
Common Stock for a price of $135.00 per share, less certain underwriting discounts, and commissions. On March 22, 2021, the Company closed
on the sale of an additional 83,333 shares of Common Stock on the same terms and conditions pursuant to the exercise of the underwriters’
over-allotment option. The exercise of the over-allotment option brought the total number of shares of Common Stock sold by the Company
in connection with the February Offering to 638,889 shares and the total net proceeds received in connection with the February Offering
to approximately $80 million, after deducting underwriting discounts and estimated offering expenses. The Company used the net proceeds
from the IPO for its current working capital needs, to support revenue growth, increase inventory, meet customer demand forecasts, and
support operational growth.
Coronavirus
(“COVID-19”) Pandemic Impact and Uncertainties
The
COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility that may
negatively affect its business operations and financial results. As a result, if the pandemic or its effects persist or worsen, its accounting
estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably
possible such changes could be significant (although the potential effects cannot be estimated at this time). The Company has experienced
minimal business interruption as a result of the COVID-19 pandemic. The COVID-19 pandemic to date has resulted in supply chain delays
of its inventory, higher operating costs and increased shipping costs, among other impacts. As events surrounding the COVID-19 pandemic
can change rapidly, the Company cannot predict how it may disrupt its operations or the full extent of the disruption.
The
Paycheck Protection Program
In
May 2020, the Company received an unsecured Paycheck Protection Program Loan (“PPP Loan”) from the Bank of America pursuant
to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”), administered by the U.S. Small Business Administration (the “SBA”). The Company received total loan proceeds
of approximately $779 thousand from the PPP Loan. The SBA denied the Company’s application for the forgiveness of the outstanding
balance of the PPP Loan. On June 23, 2022, the Company received a letter from Bank of America agreeing to extend the maturity date
to May 7, 2025 and bears interest at a rate of 1.00% per year. The PPP loan is payable in 34 equal combined monthly principal and interest
payments of approximately $24 thousand that commenced on August 7, 2022.
Preparation
of Condensed Consolidated Financial Statements
The
condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”), and on the same basis as the audited consolidated financial statements included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and filed with the SEC (“Form 10-K”),
except for the recently adopted accounting pronouncements described below.
The
condensed consolidated financial statements included herein reflect all normal and recurring adjustments which, in the opinion of management,
are necessary for a fair presentation of the Company’s condensed consolidated statements of operations for the three and nine months
ended September 30, 2022 and 2021, condensed consolidated statements of stockholders’ equity for the three and nine months
ended September 30, 2022 and 2021, and the condensed consolidated cash flows for the nine months ended September 30, 2022 and
2021.
The
condensed consolidated balance sheet as of December 31, 2021 is derived from the audited consolidated financial statements presented
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Certain information and disclosures normally
included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the
condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete
set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 31, 2022. The results
for interim periods are not necessarily indicative of a full year’s results.
Basis
of Presentation and Principles of Consolidation
Accounting
for Wholly-Owned Subsidiaries
The
accompanying consolidated financial statements have been prepared in accordance with GAAP and include the accounts of Agrify Corporation
and its wholly-owned subsidiaries, as described above in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies,
in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”). The Company includes results of operations of acquired companies from the date
of acquisition. All significant intercompany transactions and balances are eliminated.
Accounting
for Less Than Wholly-Owned Subsidiaries
For the Company’s less than wholly-owned
subsidiaries, which include TPI, Agrify-Valiant, and Agrify Brands, the Company first analyzes whether these entities are a variable interest
entity (a “VIE”) in accordance with ASC Topic 810 Consolidation (“ASC810”), and if so, whether the Company
is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its
activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling
financial interest. The financial results of a VIE are consolidated by the primary beneficiary, which is the entity that has both the
power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses
or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are
contractual, ownership or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets.
The Company continuously re-assesses (i) whether the joint-venture is a VIE, and (ii) if the Company is the primary beneficiary of the
VIE. If it is determined that the joint-venture qualifies as a VIE and the Company is the primary beneficiary, the Company’s financial
interest in the VIE is consolidated.
Based on the Company’s analysis of these
entities, the Company has determined that Agrify-Valiant and Agrify Brands are each a VIE, and that the Company is the primary beneficiary.
While the Company owns 60% of Agrify-Valiant’s equity interests and 75% of Agrify Brand’s equity interests, the remaining
equity interests in Agrify-Valiant and Agrify Brands are owned by unrelated third parties, and the agreement with these third parties
provides the Company with greater voting rights. Accordingly, the Company consolidates its interest in the financial statements of Agrify-Valiant
and Agrify Brands under the VIE rules and reflects the third parties’ interests in the consolidated financial statements as a non-controlling
interest. The Company records this non-controlling interest at its initial fair value, adjusting the basis prospectively for the third
parties’ share of the respective consolidated investments’ net income or loss or equity contributions and distributions. These
non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are
allocated to the non-controlling interest holders based on its economic ownership percentage. The investment in 50% of the shares of TPI
is treated as an equity investment as the Company cannot exercise significant influence.
Going
Concern
In accordance with the FASB Accounting Standards
Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern”, the Company’s management
evaluated whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within
one year after the financial statements’ issuance date. The following matters raise substantial doubt about the Company’s
ability to continue as a going concern within one year after the date the financial statements are issued.
The Company has incurred operating losses since
its inception and has negative cash flows from operations. The Company also has an accumulated deficit of $207.5 million as of September
30, 2022. The Company's primary sources of liquidity are its cash and cash equivalents and marketable securities, with additional liquidity
accessible, subject to market conditions and other factors, including limitations that may apply to the Company under applicable SEC regulations,
from the capital markets, including under its at-the-market continuous equity offering (“ATM” or ATM Program”).
As of September 30, 2022, the Company had $12.5
million of cash, cash equivalents, marketable securities and restricted cash. The Company’s restricted cash is associated with its
new senior secured note (the “Exchange Note”) was $10.0 million as of September 30, 2022. Current liabilities were $41.5 million
as of September 30, 2022. Additional information regarding the Company’s Exchange Note may be found in Note 9 – Debt, included
elsewhere in the notes to the consolidated financial statements.
Subsequent to the end of the third quarter of
2022, the Company entered into an agreement for the ATM Program with Canaccord Genuity LLC (the “Agent”), pursuant to
which the Company may issue and sell, from time to time, shares of its Common Stock having an aggregate offering price of up to $50 million,
depending on market demand, with the Agent acting as an agent for sales. The ATM allows for quick and agile sales of Common Stock to interested
investors and provides an opportunity to raise additional capital for working capital requirements or to fund strategic opportunities
that may present themselves from time to time. The Company has used, and intends to continue to use, the $15.1 million in net proceeds
generated from the ATM Program as of November 7, 2022 for working capital and general corporate purposes, including repayment of indebtedness,
funding the Company’s transformation initiatives and product category expansion efforts and capital expenditures. As of November
7, 2022, the Company had $34.4 million of remaining availability for future issuances of Common Stock under the ATM Program.
Additional information regarding the Company’s
ATM Program and proceeds received subsequent to September 30, 2022, may be found in Note 19 – Subsequent Events, included elsewhere
in the notes to the consolidated financial statements.
These financial statements have been prepared
on a going concern basis, which implies the Company believes these conditions raise substantial doubt about its ability to continue
as a going concern within the next twelve months from the date these financial statements are available to be issued. The Company’s
continuation as a going concern is dependent upon its ability to obtain the necessary debt or equity financing to continue operations
until the Company begins generating sufficient cash flows from operations to meet its obligations.
There is no assurance that the Company will ever
be profitable. The financial statements do not include any adjustments to reflect the potential future effects on the recoverability and
classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as
a going concern.
Use of Estimates
The preparation of the Company’s consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and
the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial
statements include, but are not limited to, the accrual of expenses. The Company bases its estimates on historical experience, known trends
and other market-specific, other relevant factors that it believes to be reasonable under the circumstances and management’s judgement.
On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates
are recorded in the period in which they become known. Actual financial results could differ from those estimates.
Fiscal
Year
For
the Company and its Subsidiaries, the fiscal year ends on December 31, each year.
Emerging
Growth Company
The
Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, (“JOBS
Act”). As a result, the Company is permitted to, and intends to, rely on exemptions from certain disclosure requirements that are
applicable to companies that are not emerging growth companies.
In
addition, the JOBS Act provides that an “emerging growth company” can use the extended transition period for complying with
new or revised accounting standards.
The
Company will remain an “emerging growth company” until the earliest to occur of:
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reporting
$1.0 billion or more in annual gross revenues; |
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● |
the
issuance, in a three-year period, of more than $1.0 billion in non-convertible debt; |
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● |
the
end of the fiscal year in which the market value of Common Stock held by non-affiliates exceeds $700 million on the last business
day of our second fiscal quarter; or |
As
of June 30, 2022, the market value of Common Stock held by non-affiliates did not exceed $700 million.
Reclassifications
Certain amounts in the Company’s prior period financial statements
have been reclassified to conform to the presentation of the current period financial statements. In this Form 10-Q, the Company has reclassified
selling, general and administrative expenses to two separate line items in the accompanying consolidated statements of operations as general
and administrative expenses and selling and marketing expenses for the three and nine months ended September 30, 2022 and 2021.
In addition, the Company effected a 1-for-10 reverse stock split of its Common Stock on October 18, 2022. All
share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented unless
otherwise indicated. The shares of Common Stock retained a par
value of $0.001 per share. Accordingly, the stockholders’ deficit reflects the reverse stock split by reclassifying from “Common
Stock” to “additional paid-in capital” an amount equal to the par value of the decreased shares resulting from the reverse
stock split.
Cash,
Cash Equivalents, and Restricted Cash
Cash
and cash equivalents consist principally of cash and deposits with maturities of three months or less as of September 30, 2022 and December
31, 2021. All cash equivalents are carried at cost, which approximates fair value. Restricted cash represents cash required to be held
as collateral for the Company’s Exchange Note. Accordingly, these balances contain restrictions as to their availability and usage
and are classified as restricted cash in the consolidated balance sheets. Additional information relating to the Company’s Exchange
Note may be found in Note 9 – Debt, included elsewhere in the notes to the consolidated financial
statements.
Marketable
Securities
The Company’s marketable security investments primarily include
investments held in mutual funds, municipal bonds, and corporate bonds. The mutual funds are recorded at fair value in the accompanying
consolidated balance sheets as part of cash and cash equivalents. The municipal and corporate bonds are considered to be held-to-maturity
securities and are recorded at amortized cost in the accompanying consolidated balance sheets. The fair value of these investments was
estimated using recently executed transactions and market price quotations. The Company considers current assets to be those investments
that will mature within the next 12 months, including interest receivable on long-term bonds.
Accounts
Receivable, Net
Accounts
receivable, net, primarily consists of amounts for goods and services that are billed and currently due from customers. Accounts receivable
balances are presented net of an allowance for credit losses, which is an estimate of billed amounts that may not be collectible. In
determining the amount of the allowance at each reporting date, management makes judgments about general economic conditions, historical
write-off experience, and any specific risks identified in customer collection matters, including the aging of unpaid accounts receivable
and changes in customer financial conditions. Accounts receivable balances are written off after all means of collection are exhausted
and the potential for non-recovery is determined to be probable. Adjustments to the allowance for credit losses are recorded as general
and administrative expenses in the consolidated statements of operations.
Concentration
of Credit Risk and Significant Customer
Financial
instruments that potentially subject the Company to a concentration of credit risk primarily consist of cash, cash equivalents, restricted
cash, and accounts receivable. Cash equivalents primarily consist of money market funds with original
maturities of three months or less, which are invested primarily with U.S. financial institutions. Cash deposits with financial institutions,
including restricted cash, generally exceed federally insured limits. Management believes minimal credit risk exists with respect to
these financial institutions and the Company has not experienced any losses on such amounts.
The
tables below show customers who account for 10% or more of the Company’s total revenues and 10% or more of the Company’s
accounts receivable for the periods presented:
Revenue
For
the three months ended September 30, 2022 and 2021, the Company’s customers that accounted for 10% or more of the total revenue
were as follows:
| |
Three Months Ended September 30, 2022 | | |
Three Months Ended September 30, 2021 | |
(In thousands) | |
Amount | | |
% of Total Revenue | | |
Amount | | |
% of Total Revenue | |
New England Innovation Academy (“NEIA”) – Related Party | |
| * | | |
| * | | |
$ | 3,217 | | |
| 20.4 | % |
Greenstone Holdings (“Greenstone”) – Related Party | |
| * | | |
| * | | |
$ | 1,998 | | |
| 12.7 | % |
Company Customer Number – 71 | |
| * | | |
| * | | |
$ | 3,174 | | |
| 20.2 | % |
Company Customer Number – 136 | |
$ | 908 | | |
| 12.9 | % | |
$ | 2,480 | | |
| 15.7 | % |
Company Customer Number – 139 | |
| * | | |
| * | | |
$ | 4,006 | | |
| 25.4 | % |
* | Customer revenue, as a percentage of total revenue, was less than 10% |
For
the nine months ended September 30, 2022 and 2021, the Company’s customers that accounted for 10% or more of the total revenue
were as follows:
| |
Nine Months Ended September 30, 2022 | | |
Nine Months Ended September 30, 2021 | |
(In thousands) | |
Amount | | |
% of Total Revenue | | |
Amount | | |
% of Total Revenue | |
NEIA – Related Party | |
| * | | |
| * | | |
$ | 19,572 | | |
| 56.6 | % |
Company Customer Number – 71 | |
| * | | |
| * | | |
$ | 3,520 | | |
| 10.2 | % |
Company Customer Number – 136 | |
$ | 7,054 | | |
| 13.5 | % | |
| * | | |
| * | |
Company Customer Number – 139 | |
$ | 8,590 | | |
| 16.4 | % | |
$ | 4,006 | | |
| 11.6 | % |
* | Customer revenue, as a percentage of total revenue, was less than 10% |
Accounts
Receivable, Net
As
of September 30, 2022 and December 31, 2021, the Company’s customers that accounted for 10% or more of the total accounts receivable,
net, were as follows:
| |
As of September 30, 2022 | | |
As of December 31, 2021 | |
(In thousands) | |
Amount | | |
% of Total Accounts Receivable | | |
Amount | | |
% of Total Accounts Receivable | |
NEIA – Related Party | |
| * | | |
| * | | |
$ | 3,498 | | |
| 48.4 | % |
Company Customer Number - 126 | |
$ | 1,541 | | |
| 33.8 | % | |
$ | 1,541 | | |
| 21.3 | % |
Company Customer Number - 15989 | |
$ | 600 | | |
| 13.2 | % | |
| * | | |
| * | |
Company Customer Number - 16540 | |
$ | 573 | | |
| 12.6 | % | |
| * | | |
| * | |
Company Customer Number - 185 | |
$ | 526 | | |
| 11.5 | % | |
| * | | |
| * | |
Company Customer Number - 12237 | |
$ | 510 | | |
| 11.2 | % | |
| * | | |
| * | |
* | Customer accounts receivable balance, as a percentage of total accounts receivable balance, was less than 10% |
Inventories
The
Company values all of its inventories, which consist primarily of significant raw material hardware components, at the lower of cost
or net realizable value, with cost principally determined by the weighted-average cost method on a First-In, First-Out basis. Write-offs
of potentially slow-moving or damaged inventory are recorded through specific identification of obsolete or damaged material. The company
takes physical inventory at least once annually at all inventory locations.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are recognized
using the straight-line method over the estimated useful life of each asset, as follows:
| |
Estimated Useful
Life (Years) | |
Computer and office equipment | |
| 2 to 3 | |
Furniture and fixtures | |
| 2 | |
Software | |
| 3 | |
Vehicles | |
| 5 | |
Research and development of laboratory equipment | |
| 5 | |
Machinery and equipment | |
| 3 to 5 | |
Leased equipment at customer | |
| 5 to 13 | |
Trade show assets | |
| 3 to 5 | |
Leasehold improvements | |
| Lower of estimated useful life or remaining lease term | |
The estimated useful lives of the Company’s property and equipment
are periodically assessed to determine if changes are appropriate. The Company charges maintenance and repairs to expenses as incurred.
When the Company retires or disposes of assets, the carrying cost of these assets and related accumulated depreciation or amortization
are eliminated from the consolidated balance sheet and any resulting gain or loss are included in the consolidated statements of operations
in the period of retirement or disposal. Costs for capital assets not yet placed into service are capitalized as construction-in-progress
and depreciated once placed into service.
Goodwill
Goodwill
is defined as the excess of cost over the fair value of assets acquired and liabilities assumed in a business combination. Goodwill is
tested for impairment annually, and more frequently if events and circumstances indicate that the asset might be impaired. The Company
has determined that it is a single reporting unit for the purpose of conducting the goodwill impairment assessment. A goodwill impairment
charge is recorded if the amount by which the Company’s carrying value exceeds its fair value, not to exceed the carrying amount
of goodwill. Factors that could lead to a future impairment include material uncertainties such as a significant reduction in projected
revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and/or a decline in the Company’s
market value as a result of a significant decline in the Company’s stock price.
During the three-month period ended June 30,
2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price
and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors,
the Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing
as of June 30, 2022.
Based on its interim testing, the Company noted that the carrying value
of equity exceeded the calculated fair value by an amount greater than the aggregate value of our goodwill and intangible assets. Accordingly,
the Company concluded that the entire carrying value of its goodwill and intangible assets should be impaired, resulting in a second-quarter
impairment charge of $69.9 million. Additional information regarding the Company’s interim testing on goodwill may be found in Note
7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.
Intangible
Assets
The
Company initially records intangible assets at their estimated fair values and reviews these assets periodically for impairment. Identifiable
intangible assets, which consist principally of acquired customer-related acquired assets, acquired and/or developed technology, non-compete
agreements, and trade names, are reported net of accumulated amortization, and are being amortized over their estimated useful lives
at amortization rates that are proportional to each asset’s estimated economic benefit. The Company’s intangible assets are
amortized on a straight-line basis over the estimated useful lives of the assets. The Company reviews the carrying value of these intangible
assets annually, or more frequently if indicators of impairment are present.
The
finite-lived useful lives are as follows:
Trade names | |
5 to 7 years |
Acquired developed technology | |
5 to 8 years |
Non-compete agreements | |
5 years |
Customer relationships | |
5 to 8 years |
Capitalized website costs | |
3 to 5 years |
In
performing the review of the recoverability of intangible assets, the Company considers several factors, including whether there have
been significant changes in legal factors or the overall business climate that could affect the underlying value of an asset. The Company
also considers whether there is an expectation that the asset will be sold or disposed of before the end of its remaining estimated useful
life. If, as the result of examining any of these factors, the Company concludes that the carrying value of the intangible asset exceeds
its estimated fair value, the Company recognizes an impairment charge and reduces the carrying value of the asset to its estimated fair
value.
During the three-month period ended June 30,
2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price
and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors,
the Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing
as of June 30, 2022.
Based on its interim testing, the Company noted that the carrying value
of equity exceeded the calculated fair value by an amount greater than the aggregate value of our goodwill and intangible assets. Accordingly,
the Company concluded that the entire carrying value of its goodwill and intangible assets should be impaired, resulting in a second-quarter
impairment charge of $69.9 million. Additional information regarding the Company’s interim testing on intangible assets may be found
in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.
Convertible
Notes Payable
The
Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative
financial instruments to be separately accounted for in accordance with ASC Topic 815 Derivatives and Hedging (“ASC815”).
The accounting treatment of derivative financial instruments requires that the Company identify and record certain embedded conversion
options (“ECOs”), certain variable-share settlement features, and any related freestanding instruments at their fair values
as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded
as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification
of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the
contract is reclassified as of the date of the event that caused the reclassification. Bifurcated embedded conversion options, variable-share
settlement features and any related freestanding instruments are recorded as a discount to the host instrument which is amortized to
interest expense over the life of the respective note using the effective interest method.
If
the Company determines that an instrument is not a derivative liability, it then evaluates whether there is a beneficial conversion feature
(“BCF”), by comparing the commitment date fair value to the effective current conversion price of the instrument. The Company
records a BCF as a debt discount which is amortized to interest expense over the life of the respective note using the effective interest
method. BCFs that are contingent upon the occurrence of a future event are recognized when the contingency is resolved.
Warrant Liabilities
The Company does not use derivative instruments to hedge exposures
to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued private placement
stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant
to ASC Topic 480, Distinguishing Liabilities from Equity (“ASC480”) and ASC815. The Company accounts for warrants as either
equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative
guidance in ASC480 and ASC815. Management’s assessment considers whether the warrants are freestanding financial instruments pursuant
to ASC480, whether they meet the definition of a liability pursuant to ASC480, and whether the warrants meet all of the requirements for
equity classification under ASC815, including whether the warrants are indexed to the Company’s own Common Stock among other conditions
for equity classification.
For issued or modified
warrants that meet all of the criteria for equity classification, they are recorded as a component of additional paid-in capital at the
time of issuance. For issued or modified warrants that are precluded from equity classification, they are recorded as a liability at their
initial fair value on the date of issuance and subject to remeasurement on each balance sheet date with changes in the estimated fair
value of the warrants to be recognized as an unrealized gain or loss in the condensed consolidated statements of operations.
On August 18, 2022, the
Company reached an agreement with its institutional lender to amend its existing Securities Purchase
Agreement and entered into a Securities Exchange Agreement (the “Exchange Agreement”). Pursuant to the Exchange Agreement,
the Company issued a new warrant to purchase 1,422,764 shares of Common Stock (the “Note Exchange Warrant”) and modified an
existing warrant (the “SPA Warrant”) to purchase up to an aggregate of 688,111 shares of Common Stock. The Company exchanged
the SPA Warrant for a new warrant for the same number of underlying shares but with a reduced exercise price (the “Modified Warrants”
and, collectively with the Note Exchange Warrant, the “Warrant Liabilities”). As of September 30, 2022, the Company had outstanding
liability-classified Warrant Liabilities that allows the accredited investor (the “Investor”) to purchase 2,110,875 shares
of the Company’s Common Stock. Additional information regarding the Exchange Agreement and Warrant Liabilities may be found in Note
4 – Fair Value Measures and Note 9 – Debt, included elsewhere in the notes to the condensed
consolidated financial statements.
Debt
Issue Costs and Debt Discount
The Company may record debt issuance costs and/or debt discounts in
connection with issuing of debt. The Company may cover these costs by paying cash or issuing warrants. These costs are amortized to interest
expense over the expected life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts
is immediately expensed.
Original
Issue Discount
For
certain convertible debt issued by the Company, it may provide the debt holder with an original issue discount. The Company would
record the original issue discount to debt discount, reducing the face amount of the note, and is then amortized to interest expense
over the life of the debt.
Leases
The
Company determines at the inception of a right-of-use asset contract if such arrangement is or contains a lease. A contract is or contains
a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
The Company classifies leases at the lease commencement date as operating or finance leases and records a right-of-use asset and a lease
liability on its consolidated balance sheet for all leases with an initial lease term of greater than 12 months. A lease with an initial
term of 12 months or less is not recorded on the balance sheet, but related payments are recognized as an expense on a straight-line
basis over the lease term.
The
Company’s right-of-use asset contracts may contain both lease and non-lease components. Non-lease components may include maintenance,
utilities, and other operating costs. The Company combines the lease and non-lease components of fixed costs in its lease arrangements
as a single lease component. Variable costs, such as utilities or maintenance costs, are not included in the measurement of right-of-use
assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs.
Lease
liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected
lease term. The Company determines the present value of future lease payments by using its estimated secured incremental borrowing rate
for that lease term as the interest rate implicit in the lease is not readily determinable. The Company estimates its secured incremental
borrowing rate for each lease based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease
payments on a collateralized basis over a similar term.
Certain
of the Company’s right-of-use asset leases include options to extend or terminate the lease. The amounts determined for the Company’s
right-of-use assets and lease liabilities generally do not assume that renewal options or early-termination provisions, if any, are exercised
unless it is reasonably certain that the Company will exercise such options.
Deferred
Revenue
Deferred
revenue includes amounts collected or billed in excess of revenue that it can recognize. The Company recognizes deferred revenue
as revenue as the related performance obligation is satisfied. The Company records deferred revenue that will be recognized
during the succeeding twelve-month period as a current liability on the consolidated balance sheet.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses. The estimated fair
value of the accounts receivable and accounts payable approximates their carrying value due to the short-term nature of these instruments.
Stock-Based
Compensation
The
Company measures all stock options and other stock-based awards granted to employees and directors based on the fair value on the date
of the grant and recognizes compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which
is generally the vesting period of the respective award. Historically, the Company has issued stock options to employees, directors and
consultants with only service-based vesting conditions and records the expense for these awards using the straight-line method.
The
Company classifies stock-based compensation expense in its consolidated statements of operations in the same manner in which the award
recipient’s payroll costs are classified.
The Company estimates the fair value of each stock option grant on
the date of the grant using the Black-Scholes option-pricing model. Before the IPO, the Company was a private company and therefore lacks
company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical
volatility of similar publicly-traded companies and expects to continue to do so until such time as it has adequate historical data regarding
the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the
“simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined
by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the
expected term of the award. The expected dividend yield is based on the fact that the Company has never paid cash dividends and does not
expect to pay any cash dividends in the foreseeable future.
Business
Combinations
The Company accounts for business acquisitions using the purchase method
of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition
date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities
assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of
the assets acquired and liabilities assumed.
The
Company’s management exercises significant judgments in determining the fair value of assets acquired and liabilities assumed,
as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors,
estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values. These
judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed,
as well as the Company’s current and future operating results. Actual results may vary from these estimates which may result in
adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination
of asset and liability fair values, whichever occurs first. Adjustments to the fair value of assets and liabilities made after the
end of the measurement period are recorded within the Company’s operating results.
For contingent consideration arrangements, the Company recognizes a
liability at fair value as of the acquisition date with subsequent fair value adjustments recorded in the consolidated statements of operations.
Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value Measures,
included elsewhere in the notes to the consolidated financial statements.
Revenue
Recognition
Overview
The
Company generates revenue from the following sources: (1) equipment sales, (2) providing services and (3) construction
contracts.
In
accordance with ASC 606 “Revenue Recognition”, the Company recognizes revenue from contracts with customers using a five-step
model, which is described below:
|
● |
identify
the customer contract; |
|
● |
identify
performance obligations that are distinct; |
|
● |
determine
the transaction price; |
|
● |
allocate
the transaction price to the distinct performance obligations; and |
|
● |
recognize
revenue as the performance obligations are satisfied. |
Identify
the customer contract
A
customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have
been identified, payment terms are identified, the contract has commercial substance and collectability, and consideration is probable.
Specifically, the Company obtains written/electronic signatures on contracts and a purchase order, if said purchase orders are issued
in the normal course of business by the customer.
Identify
performance obligations that are distinct
A
performance obligation is a promise by the Company to provide a distinct good or service or a series of distinct goods or services. A
good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or
together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service
to the customer is separately identifiable from other promises in the contract.
Determine
the transaction price
The
transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services
to a customer, excluding sales taxes that are collected on behalf of government agencies.
Allocate
the transaction price to distinct performance obligations
The
transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of
the goods or services being provided to the customer. The Company’s contracts typically contain multiple performance obligations,
for which the Company accounts for individual performance obligations separately, if they are distinct. The standalone selling price
reflects the price the Company would charge for a specific piece of equipment or service if it was sold separately in similar circumstances
and to similar customers.
Recognize
revenue as the performance obligations are satisfied
Revenue
is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer.
Significant
Judgments
The
Company enters into contracts that may include various combinations of equipment, services and construction, which are generally capable
of being distinct and accounted for as separate performance obligations. Contracts with customers often include promises to transfer
multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations
that should be accounted for separately versus together may require significant judgment. Once the Company determines the performance
obligations, it determines the transaction price, which includes estimating the amount of variable consideration to be included in the
transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on the
SSP. The corresponding revenue is recognized as the related performance obligations are satisfied.
Judgment
is required to determine the SSP for each distinct performance obligation. The Company determines SSP based on the price at which the
performance obligation is sold separately and the methods of estimating SSP under the guidance of ASC 606-10-32-33. If the SSP is not
observable through past transactions, the Company estimates the SSP, taking into account available information such as market conditions,
expected margins, and internally approved pricing guidelines related to the performance obligations. The Company licenses its software
as a SaaS type subscription license, whereby the customer only has a right to access the software over a specified time period. The full
value of the contract is recognized ratably over the contractual term of the SaaS subscription, adjusted monthly if tiered pricing is
relevant. The Company typically satisfies its performance obligations for equipment sales when equipment is made available for shipment
to the customer; for services sales as services are rendered to the customer and for construction contracts both as services are rendered
and when contract is completed.
The
Company utilizes the cost-plus margin method to determine the SSP for equipment and build-out services. This method is based on the cost
of the services from third parties, plus a reasonable markup that the Company believes is reflective of a market-based reseller margin.
The
Company determines the SSP for services in time and materials contracts by observable prices in standalone services arrangements.
The
Company estimates variable consideration in the form of royalties, revenue share, monthly fees, and service credits at contract inception
and updated at the end of each reporting period if additional information becomes available. Variable consideration is typically not
subject to constraint. Changes to variable consideration were not material for the periods presented.
If
a contract has payment terms that differ from the timing of revenue recognition, the Company will assess whether the transaction price
for those contracts include a significant financing component. The Company has elected the practical expedient that permits an entity
to not adjust for the effects of a significant financing component if the Company expects that at the contract inception, the period
between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service, will
be one year or less. For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative
estimate of the financing component and its relative significance, requires judgment. Accordingly, the Company imputes interest on such
contracts at an agreed-upon interest rate and will present the financing components separately as financial income. For the three months
and nine months ended September 30, 2022 and 2021, the Company did not have any such financial income.
Payment
terms with customers typically require payment 30 days from the invoice date. The Company’s agreements with its customers do not
provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where
customers raise concern over delivered products or services, the Company has endeavored to remedy the concern and all costs related
to such matters have been insignificant in all periods presented.
The
Company has elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and
not as a promised good or service. Accordingly, the Company will accrue all fulfillment costs related to the shipping and handling of
consumer goods at the time of shipment. The Company has payment terms with its customers of one year or less and has elected the practical
expedient applicable to such contracts not to consider the time value of money. Sales, value add, and other taxes the Company collects
concurrent with revenue-producing activities are excluded from revenue.
The
Company receives payment from customers based on specified terms that are generally less than 30 days from the satisfaction of performance
obligations. There are no contract assets related to performance under the contract. The difference in the opening and closing balances
of the Company’s deferred revenue primarily results from the timing difference between the Company’s performance and the
customer’s payment. The Company fulfills obligations under a contract with a customer by transferring products and services in
exchange for consideration from the customer. Accounts receivables are recorded when the customer has been billed or the right to consideration
is unconditional. The Company recognizes deferred revenue when consideration has been received or an amount of consideration is due from
the customer, and the Company has a future obligation to transfer certain proprietary products.
In
accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end
of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable.
The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A,
including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the
right to invoice practical expedient.
The
Company generally provides a one-year warranty on its products for materials and workmanship but may provide multiple-year warranties
as negotiated, and will pass on the warranties from its vendors, if any, which generally covers this one-year period. In accordance with
ASC 450-20-25, the Company accrues for product warranties when the loss is probable and can be reasonably estimated. The reserve for
warranty returns is included in accrued expenses and other current liabilities in the Company’s consolidated balance sheets.
Research
and Development Costs
The
Company expenses research and development costs as incurred. Research and development expenses include payroll, employee benefits and
other expenses associated with product development. The Company incurs research and development costs associated with the development
and enhancement of both hardware and software products associated with its cultivation and extraction equipment, as well as its SaaS-based
software offering, Agrify Insights™ cultivation software.
Capitalization
of Internal Software Development Costs
The
Company capitalizes certain software engineering efforts related to the continued development of Agrify Insights™ cultivation software
under ASC 985-20. Costs incurred during the application development phase are only capitalized once technical feasibility
has been established and the work performed will result in new or additional functionality. The types of costs capitalized during
the application development phase include employee compensation, as well as consulting fees for third-party software developers working
on these projects. Costs related to the research and development are expensed as incurred until technical feasibility is established
as well as post-implementation activities. Internal-use software is amortized on a straight-line basis over the estimated useful life
of the asset, which ranges from two to five years.
Shipping
and Handling Charges
The
Company incurs costs related to shipping and handling of its manufactured products. These costs are expensed as incurred as a component
of cost of goods sold. Shipping and handling charges related to the receipt of raw materials are also incurred, which are recorded as
a cost of the related inventory.
Equity
Method Investments
Investments
in affiliates that are 50% or less owned by the Company for which the Company exercises significant influence but does not have
control are accounted for on the equity method. The Company has investments in equity investments without readily determinable fair values,
which represents investments in entities where the Company does not have the ability to significantly influence the operations of the
entities.
An
assessment of whether or not the Company (as a holder of 50% of TPI) has the power to direct activities that most significantly impact
TPI’s economic performance and to identify the party that obtains the majority of the benefits of the investment was performed
as of September 30, 2022 and December 31, 2021 and will be performed as of each subsequent reporting date. After each of these assessments,
the Company concluded that the activities that most significantly impact TPI’s economic performance are the growth, marketing,
sale, and distribution of products using TPI’s technology and IP, each of which is solely directed by TPI. Based on the consideration
of these assessments, the Company concluded that the Company’s investment in TPI should be accounted for under the equity method.
The
carrying value of the Company’s investment in TPI was $0 as of September 30, 2022 and December 31, 2021. The Company did not recognize
revenue from TPI for the three and nine months ended September 30, 2022 and September 30, 2021.
Income
Taxes
The
Company accounts for income taxes pursuant to the provisions of ASC Topic 740, “Income Taxes,” which requires, among other
things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management
believes it is more likely than not that the net deferred asset will not be realized.
The
Company follows the provisions of ASC 740-10-25-5, “Basic Recognition Threshold.” When tax returns are filed, it is highly
certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty
about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance
of ASC 740-10-25-6, the benefit of a tax position is recognized in the consolidated financial statements in the period during which,
based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more
than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax
benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities
upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company
has not recorded a liability for unrecognized tax benefits. As of September 30, 2022, tax years 2017 through 2021 remain open for IRS
audit. The Company has received no notice of audit from the IRS for any of the open tax years.
The
Company recognizes the benefit of a tax position when it is effectively settled. ASC 740-10-25-10, “Basic Recognition Threshold”
provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. ASC 740-10-25-10 clarifies that a tax position can be effectively settled upon the completion of an examination
by a taxing authority. For tax positions considered effectively settled, the Company recognizes the full amount of the tax benefit.
Net
Loss Per Share
The
Company presents basic and diluted net loss per share attributable to Common Stockholders in conformity with the two-class method required
for participating securities. The Company computes basic loss per share by dividing net loss available to Common Stockholders by the
weighted-average number of common shares outstanding. Net loss available to Common Stockholders represents net loss attributable to Common
Stockholders reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities
as the holders of the participating securities do not have a contractual obligation to share in any losses. Diluted loss per share adjusts
basic loss per share for the potentially dilutive impact of stock options and warrants. As the Company has reported losses for all periods
presented, all potentially dilutive securities including stock options and warrants, are anti-dilutive, and accordingly, basic net loss
per share equals diluted net loss per share.
Net loss per share calculations for all periods have been adjusted
to reflect the reverse stock splits effected on January 12, 2021 and October 18, 2022. Net loss per share was calculated based on the
weighted-average number of Common Stock outstanding.
Recently
Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, Debt
- Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own
Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments
in ASU No. 2020-06 simplify the complexity associated with applying GAAP for certain financial instruments with characteristics
of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exceptions
for contracts in an entity’s own equity. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including
interim periods within those fiscal years. The adoption of this new accounting guidance had no impact
on the Company’s consolidated financial position.
Pending
Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which introduces a new methodology
for accounting for credit losses on financial instruments, including available-for-sale debt securities and accounts receivable. The
guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial
instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than
reductions in the amortized cost of available-for-sale debt securities. ASU 2016-13 is effective in the first quarter
of fiscal 2024. The Company is currently evaluating the potential impact of this adoption on its consolidated financial statements and
related disclosures.
In October 2021, the FASB issued ASU No. 2021-08, Business
Combinations (Topic 606): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that
an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as
if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets
and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree
prepared financial statements in accordance with GAAP. The amendment in this update is effective for fiscal years beginning after December
15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
The guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendment in this
update. The Company is currently evaluating the potential impact of this adoption on its consolidated financial statements and related
disclosures.
Other recent accounting pronouncements
issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial
statements.
Note
2 — Revenue and Deferred Revenue
Revenue
During
the three and nine months ended September 30, 2022 and 2021, the Company generated revenue from the following sources: (1) equipment
sales, (2) services sales and (3) construction contracts.
The
Company sells its equipment and services to customers under a combination of a contract and purchase order. Equipment revenue includes
sales from proprietary products designed and engineered by the Company such as Agrify Vertical Farming Units (“VFUs”), container
farms, integrated grow racks, and LED grow lights, and non-proprietary products designed, engineered, and manufactured by third parties
such as air cleaning systems and pesticide-free surface protection.
Construction
contracts normally provide for payment upon completion of specified work or units of work as identified in the contract. Although there
is considerable variation in the terms of these contracts, they are primarily structured as time-and-material contracts. The Company
enters into time-and-materials contracts under which the Company is paid for labor and equipment at negotiated hourly billing rates and
other expenses, including materials, as incurred at rates agreed to in the contract. The Company uses three main sub-contractors to execute
the construction contracts.
The
following table provides the Company’s revenue disaggregated by the timing of revenue recognition:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
(In thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Transferred at a point in time | |
$ | 5,657 | | |
$ | 2,757 | | |
$ | 28,675 | | |
$ | 4,110 | |
Transferred over time | |
| 1,362 | | |
| 12,994 | | |
| 23,694 | | |
| 30,474 | |
Total revenue | |
$ | 7,019 | | |
$ | 15,751 | | |
$ | 52,369 | | |
$ | 34,584 | |
In
accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end
of the current reporting period. Due to the nature of the Company’s contracts, these reporting requirements are not applicable,
because the majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A,
including (i) performance obligation is part of a contract that has an original expected duration of one year or less and (ii) the
right to invoice practical expedient.
The Company generally provides a one-year warranty on its products
for materials and workmanship but may provide multiple year warranties as negotiated, and generally transfers to its customers the warranties
it receives from its vendors, if any, which generally cover this one-year period. In accordance with ASC 450-20-25, the Company accrues
for product warranties when the loss is probable and can be reasonably estimated. The Company maintains a reserve for warranty returns
of $540 thousand and $398 thousand for September 30, 2022 and December 31, 2021, respectively. The Company’s reserve for warranty
returns is included in accrued expenses and other current liabilities in its consolidated balance sheets. Additional information regarding
the Company’s warranty reserve may be found in Note 3 – Supplemental Consolidated Balance
Sheet Information, included elsewhere in the notes to the consolidated financial statements.
Deferred
Revenue
Changes
in the Company’s current deferred revenue balance for the nine months ended September 30, 2022 and the year ended
December 31, 2021 were as follows:
(In thousands) | |
Nine Months Ended September 30, 2022 | | |
Year
Ended December 31, 2021 | |
Deferred revenue – beginning of period | |
$ | 3,772 | | |
$ | 152 | |
Additions | |
| 18,167 | | |
| 3,758 | |
Interest income on deferred revenue | |
| — | | |
| 4 | |
Recognized | |
| (11,803 | ) | |
| (142 | ) |
Deferred revenue – end of period | |
$ | 10,136 | | |
$ | 3,772 | |
Deferred
revenue balances primarily consist of customer deposits on its cultivation and extraction solutions equipment. As of September 30, 2022
and December 31, 2021, all of the Company’s deferred revenue balances were reported as current liabilities in the accompanying
consolidated balance sheets.
Note
3 — Supplemental Consolidated Balance Sheet Information
Accounts
Receivable
Accounts
receivable consisted of the following as of September 30, 2022 and December 31, 2021:
(In thousands) | |
September 30, 2022 | | |
December 31, 2021 | |
Accounts receivable, gross | |
$ | 7,684 | | |
$ | 8,637 | |
Less allowance for doubtful accounts | |
| (3,125 | ) | |
| (1,415 | ) |
Accounts receivable, net | |
$ | 4,559 | | |
$ | 7,222 | |
NEIA, a related party, accounted for $0 and $3.5 million of the Company’s
accounts receivable, net as of September 30, 2022 and December 31, 2021, respectively.
The
changes in the allowance for doubtful accounts consisted of the following:
(In thousands) | |
Nine Months Ended September 30, 2022 | | |
Year
Ended December 31, 2021 | |
Allowance for doubtful accounts - beginning of period | |
$ | 1,415 | | |
$ | 54 | |
Provision for doubtful accounts | |
| 1,938 | | |
| 1,187 | |
Other adjustments | |
| (228 | ) | |
| 174 | |
Allowance for doubtful accounts - end of period | |
$ | 3,125 | | |
$ | 1,415 | |
Bad debt expense was $385 thousand and $0 for the three months ended
September 30, 2022 and 2021, respectively, and $1.9 million and $0 for the nine months ended September 30, 2022 and 2021, respectively.
Prepaid
Expenses and Other Current Receivables
Prepaid
expenses and other current receivables consisted of the following as of September 30, 2022 and December 31, 2021:
(In thousands) |
|
September 30,
2022 |
|
|
December 31,
2021 |
|
Deferred costs |
|
$ |
1,108 |
|
|
$ |
353 |
|
Prepaid insurance |
|
|
931 |
|
|
|
492 |
|
Other receivables, other |
|
|
603 |
|
|
|
86 |
|
Other note receivables (1) |
|
|
584 |
|
|
|
807 |
|
Prepaid expenses, other |
|
|
430 |
|
|
|
541 |
|
Prepaid materials |
|
|
261 |
|
|
|
— |
|
Prepaid software |
|
|
188 |
|
|
|
173 |
|
Deferred issuance costs, net |
|
|
191 |
|
|
|
— |
|
Total prepaid expenses and other current assets |
|
$ |
4,296 |
|
|
$ |
2,452 |
|
(1) |
Other note receivables relate to the current portion
of one of its loan receivable balances related to the total turn-key solution (“TTK Solution”) program. |
Property
and Equipment, Net
Property
and equipment, net consisted of the following as of September 30, 2022 and December 31, 2021:
(In thousands) |
|
September 30,
2022 |
|
|
December 31,
2021 |
|
Leasehold improvements |
|
$ |
1,048 |
|
|
$ |
841 |
|
Machinery and equipment |
|
|
1,048 |
|
|
|
898 |
|
Computer and office equipment |
|
|
624 |
|
|
|
473 |
|
Leased equipment at customer |
|
|
602 |
|
|
|
619 |
|
Furniture and fixtures |
|
|
504 |
|
|
|
385 |
|
Software |
|
|
300 |
|
|
|
174 |
|
Research and development of laboratory equipment |
|
|
260 |
|
|
|
163 |
|
Vehicles |
|
|
143 |
|
|
|
143 |
|
Trade show assets |
|
|
79 |
|
|
|
80 |
|
Total property and equipment, gross |
|
|
4,608 |
|
|
|
3,776 |
|
Accumulated depreciation |
|
|
(1,930 |
) |
|
|
(780 |
) |
Construction in progress |
|
|
10,530 |
|
|
|
3,236 |
|
Total property and equipment, net |
|
$ |
13,208 |
|
|
$ |
6,232 |
|
Depreciation expense for the three months ended September 30, 2022
and 2021 was $409 thousand and $139 thousand, respectively, and $1.2 million and $337 thousand for the nine months ended September 30,
2022 and 2021, respectively.
Other
Non-Current Assets
Other
non-current assets consisted of the following as of September 30, 2022 and December 31, 2021:
(In thousands) |
|
September 30,
2022 |
|
|
December 31,
2021 |
|
Long-term deferred commissions expense |
|
$ |
1,293 |
|
|
$ |
1,101 |
|
Deferred debt issuance costs, non-current, net |
|
|
454 |
|
|
|
— |
|
Security deposits |
|
|
152 |
|
|
|
83 |
|
Total other non-current assets |
|
$ |
1,899 |
|
|
$ |
1,184 |
|
Accrued
Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consisted of the following as of September 30, 2022 and December 31, 2021:
(In thousands) | |
September 30, 2022 | | |
December 31, 2021 | |
Sales tax payable (1) | |
$ | 5,756 | | |
$ | 5,290 | |
Accrued construction costs | |
| 5,661 | | |
| 8,803 | |
Accrued acquisition liability (2) | |
| 4,145 | | |
| 9,198 | |
Compensation related fees | |
| 3,141 | | |
| 3,491 | |
Accrued warranty costs | |
| 540 | | |
| 398 | |
Accrued professional fees | |
| 448 | | |
| 1,104 | |
Accrued interest expense | |
| 263 | | |
| — | |
Accrued inventory purchases | |
| 243 | | |
| 201 | |
Financing lease liabilities | |
| 153 | | |
| 156 | |
Accrued consulting fees | |
| 90 | | |
| 75 | |
Accrued non-income taxes | |
| — | | |
| 48 | |
Other current liabilities | |
| 65 | | |
| — | |
Total accrued expenses and other current liabilities | |
$ | 20,505 | | |
$ | 28,764 | |
(1) |
Sales tax payable primarily represents identified sales and use tax liabilities arising from the acquisition of Precision and Cascade. These amounts are included as part of the initial purchase price allocations and are the subject matter of an indemnification claim under the Precision and Cascade acquisition agreement. |
(2) |
Accrued acquisition liabilities include both the contingent consideration and the value of held-back Common Stock
associated with the 2022 acquisition of Lab Society and the 2021 acquisition of PurePressure. |
Warranty
Accrual
The
following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs:
(In thousands) | |
Nine Months
Ended September 30, 2022 | | |
Year
Ended December 31, 2021 | |
Warranty accrual – beginning of period | |
$ | 398 | | |
$ | — | |
Liabilities
accrued for warranties issued during period | |
| 142 | | |
| 398 | |
Warranty accrual – end of period | |
$ | 540 | | |
$ | 398 | |
Note 4
— Fair Value Measures
Fair
Values of Assets and Liabilities
In
accordance with ASC Topic 820 “Fair Value Measurement”, the Company measures fair value at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In
determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on
a tiered fair value hierarchy consisting of three levels, as follows:
|
Level 1: |
Observable inputs such as quoted prices for identical
assets or liabilities in active markets. |
|
|
|
|
Level 2: |
Other inputs that are observable directly or indirectly,
such as quoted prices for similar instruments in active markets or for similar markets that are not active. |
|
|
|
|
Level 3: |
Unobservable inputs for which there is little or no
market data which require the Company to develop its own assumptions about how market participants would price the asset or liability. |
Valuation
techniques for assets and liabilities include methodologies such as the market approach, the income approach, or the cost approach, and
may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable
inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.
At
September 30, 2022 and December 31, 2021, the Company’s assets and liabilities measured at fair value on a recurring basis
were as follows:
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
Fair Value Measurements Using Input
Types | | |
Fair Value Measurements Using Input
Types | |
(In thousands) | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Assets | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Mutual funds (included in cash and cash equivalents) | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 178 | | |
$ | — | | |
$ | — | | |
$ | 178 | |
Municipal bonds | |
| — | | |
| — | | |
| — | | |
| — | | |
| 9,961 | | |
| — | | |
| — | | |
| 9,961 | |
Corporate bonds | |
| 381 | | |
| — | | |
| — | | |
| 381 | | |
| 34,589 | | |
| — | | |
| — | | |
| 34,589 | |
Total assets | |
$ | 381 | | |
$ | — | | |
$ | — | | |
$ | 381 | | |
$ | 44,728 | | |
$ | — | | |
$ | — | | |
$ | 44,728 | |
Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Contingent consideration | |
$ | — | | |
$ | — | | |
$ | 643 | | |
$ | 643 | | |
$ | — | | |
$ | — | | |
$ | 6,137 | | |
$ | 6,137 | |
Warrant liabilities | |
| — | | |
| — | | |
| 971 | | |
| 971 | | |
| — | | |
| — | | |
| — | | |
| — | |
Total liabilities | |
$ | — | | |
$ | — | | |
$ | 1,614 | | |
$ | 1,614 | | |
$ | — | | |
$ | — | | |
$ | 6,137 | | |
$ | 6,137 | |
Fair
Value of Financial Instruments
The Company has certain financial instruments which consist of cash
and cash equivalents, marketable securities, warrant liabilities, and contingent consideration. Fair value information for each of these
instruments is as follows:
|
● |
Cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and deferred revenue liabilities approximate their fair values based on the short-term nature of these instruments. |
|
● |
Marketable securities classified as current held-to-maturity
securities are recorded at amortized cost, which at September 30, 2022, approximated fair value. |
|
● |
The Company’s deferred consideration was recorded
in connection with acquisitions during the first quarter of 2022 and fiscal 2021 using an estimated fair value discount at the time
of the transaction. As of September 30, 2022 and December 31, 2021, the carrying value of the deferred consideration approximated
fair value, respectively. |
|
● |
The Company’s Warrant Liabilities are
marked-to-market each reporting period with the changes in fair value of warrant liability are recorded to other income (expense), net
in the accompanying consolidated statements of operations until the warrants are exercised. The fair value of the warrant liability is
estimated using a Black-Scholes option-pricing model. |
Marketable
Securities
As of September 30, 2022, the Company held investments in mutual funds,
municipal bonds and corporate bonds. The Company records mutual funds at fair value in the accompanying consolidated balance sheet as
part of cash and cash equivalents. The municipal and corporate bonds are considered held-to-maturity securities and are recorded at amortized
cost in the accompanying consolidated balance sheet. The fair values of these investments were estimated using recently executed transactions
and market price quotations. The Company considers current assets as those investments which will mature within the next 12 months including,
interest receivable on long-term bonds.
The
composition of the Company’s marketable securities are as follows:
(In thousands) |
|
September 30,
2022 |
|
|
December 31,
2021 |
|
Current marketable securities |
|
|
|
|
|
|
Municipal bonds |
|
$ |
— |
|
|
$ |
9,961 |
|
Corporate bonds |
|
|
381 |
|
|
|
34,589 |
|
|
|
$ |
381 |
|
|
$ |
44,550 |
|
At September 30, 2022, marketable securities consisted
of the following:
(In thousands) | |
Amortized cost | | |
Unrealized loss | | |
Estimated
fair value | |
Current marketable securities (due within 1 year) | |
| | | |
| | | |
| | |
Corporate bonds | |
$ | 381 | | |
$ | (10 | ) | |
$ | 371 | |
| |
$ | 381 | | |
$ | (10 | ) | |
$ | 371 | |
At December 31, 2021, marketable securities consisted
of the following:
(In thousands) | |
Amortized cost | | |
Unrealized loss | | |
Estimated fair value | |
Current marketable securities (due within 1 year) | |
| | |
| | |
| |
Municipal bonds | |
$ | 9,961 | | |
$ | (9 | ) | |
$ | 9,952 | |
Corporate bonds | |
| 34,589 | | |
| (72 | ) | |
| 34,517 | |
| |
$ | 44,550 | | |
$ | (81 | ) | |
$ | 44,469 | |
Contingent
Consideration
The
Company has classified its net liability for contingent earn-out considerations to the sellers relating to one acquisition completed
during the first quarter of 2022 and two acquisitions completed during fiscal 2021. The fair value for the contingent consideration associated
with these acquisitions is within Level 3 of the fair value hierarchy because the associated fair value is determined using significant
unobservable inputs, which included the key assumptions to model future revenue, costs of goods sold and operating expense projections.
A description of the Company’s acquisitions completed during the first quarter of 2022 and fiscal 2021 are included within Note
8 – Business Combinations, included elsewhere in the notes to the consolidated financial statements.
(In thousands) | |
Nine Months Ended September 30, 2022 | | |
Year
Ended December 31, 2021 | |
Contingent consideration – beginning of period | |
$ | 6,137 | | |
$ | — | |
Accrued contingent consideration | |
| 1,420 | | |
| 4,725 | |
Accretion of contingent consideration | |
| 145 | | |
| — | |
Payments made on contingent liabilities | |
| (5,550 | ) | |
| — | |
Change in estimated fair value | |
| (1,509 | ) | |
| 1,412 | |
Contingent consideration – end of period | |
$ | 643 | | |
$ | 6,137 | |
The
Company included contingent consideration within accrued expenses and other current liabilities in its consolidated balance sheets as
of September 30, 2022 and December 31, 2021, respectively.
See
below for additional information related to each acquisition’s contingent consideration.
Contingent Consideration – PurePressure
The Company, in its review of
actual revenue performance as compared to its originally projected revenue estimates, noted that PurePressure’s revenue trend is
materially below the originally estimated revenue trends incorporated into the Company’s original fair value estimates at the time
of the acquisition. As a result, the Company has reduced its fair value estimate of achievement for PurePressure’s first earn-out
period. During the third quarter ended September 30, 2022, the Company reduced the estimated fair value of the contingent consideration
liability associated with PurePressure’s first earn-out period by approximately $602 thousand. As required by ASC Topic 805 Business
Combination (“ASC805”), the change in contingent consideration was recorded as a reduction in operating expenses during the
third quarter of 2022.
Contingent Consideration – Lab Society
The Company, in its review of
actual revenue performance as compared to its originally projected revenue estimates, noted that Lab Society’s revenue trend is
materially below the originally estimated revenue trends incorporated into the Company’s original fair value estimates at the time
of the acquisition. As a result, the Company has reduced its fair value estimate of achievement for Lab Society’s first earn-out
period. During the second quarter ended June 30, 2022, the Company reduced the estimated fair value of the contingent consideration liability
associated with Lab Society’s first earn-out period by approximately $1.0 million. As required by ASC805, the change in contingent
consideration was recorded as a reduction in operating expenses during the second quarter of 2022.
Contingent Consideration
– Precision and Cascade
The earn-out period for the potential contingent consideration to be
earned by the former members of Precision and Cascade concluded on December 31, 2021. The
Company, during the second quarter of 2022, increased the amount of the contingent consideration earned by the former members of Precision
and Cascade by approximately $121 thousand, to reflect the final contingent consideration amount due. This amount, as required by ASC805,
was recorded as an increase in operating expenses during the second quarter of 2022. During the three-month period ended September
30, 2022, the Company made the final payment on the contingent consideration of approximately $5.6
million to the members of Precision and Cascade. Additional information regarding the Company’s final payment to Precision and Cascade
may be found in Note 8 – Business Combination, included elsewhere in the notes to the consolidated financial statements.
Warrant liabilities
The estimated fair value of the Warrant Liabilities
on September 30, 2022 is determined using Level 3 inputs. Inherent in a Black-Scholes option-pricing model are assumptions used in
calculating the estimated fair values represent the Company’s best estimate. However, inherent uncertainties are involved. If factors
or assumptions change, the estimated fair values could be materially different.
The following table summarizes the Company’s
assumptions used in the valuation of Warrant Liabilities for the nine months ended September 30, 2022:
Stock price at issuance |
|
$ |
0.44 |
|
Option exercise price |
|
$ |
1.23-$2.15 |
|
Expected term (Years) |
|
|
5.50 |
|
Volatility |
|
|
40.00 |
% |
Discount rate (Treasury yield) |
|
|
0.00%-4.06 |
% |
The following table sets forth a summary of the
changes in the fair value of the Level 3 Warrant Liabilities for the nine months ended September 30, 2022:
(In thousands) | |
Nine Months Ended September 30, 2022 | |
Warrant liabilities – beginning of period | |
$ | — | |
Initial fair value of warrant liabilities | |
| 6,657 | |
Change in estimated fair value | |
| (5,686 | ) |
Warrant liabilities – end of period | |
$ | 971 | |
Note 5 —
Loan Receivable
A
portion of the capital raised from the Company’s IPO has been allocated to launch the Company’s TTK Solution program. The
TTK Solution is the industry’s first-of-its-kind program in which the Company engages with qualified cannabis operators
in the early phases of their business plans and provides critical support, typically over a 10-year period, which includes: access to
capital for construction costs, the design and build-out of their cultivation and extraction facilities, state-of-the-art cultivation
and extraction equipment, subscription to the Company’s Agrify Insights™ cultivation software, process design, training,
implementation, proven grow recipes, product formulations, data analytics, and consumer branding, which will enable the Company’s
customers to go to market faster and better.
The loan agreements entered into with customers
receiving the TTK Solution generally provide for loans with maturity dates of approximately two to three years after the completion of
the construction projects. Typically, the TTK Solution construction loans have interest rates ranging from 12% to 18% per year.
During the quarter ended September 30, 2022, the Company
provided a notice of default under the term loan agreement between the Company and Bud & Mary’s (the “Bud & Mary’s
TTK Agreement”). On October 5, 2022, Bud & Mary’s Cultivation, Inc. (the “Bud & Mary’s”) filed a
complaint in the Superior Court of Massachusetts in Suffolk County naming the Company as defendant. Bud & Mary’s is seeking,
among other relief, monetary damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion
arising from the Bud & Mary’s TTK Agreement. In response, the Company established a reserve of $14.7 million specifically related
to Bud & Mary’s. The Company deemed it necessary to fully reserve the $14.7 outstanding balance due to the current litigation
and the uncertainty of the customer’s ability to repay the outstanding balance. In addition, $5.3 million of the notes receivable
balance for work performed during the third quarter of 2022 has been recorded as an unbilled note receivable and deferred the revenue
to a future period. The Company has recognized the expenses associated with the work completed in the current period due to the uncertainty
of the Company’s ability to recover the funds owed by the customer and its obligations to the vendors that have performed this work.
The Company determined that it will only recognize unbilled notes receivable revenue if cash is collected from the customer in a future
period. The Company believes that Bud & Mary’s claims have no merit and intends to defend itself vigorously. The Company is
taking all necessary steps to pursue repayment from Bud & Mary’s and is taking all actions necessary to protect its shareholders’ interests.
During
the quarter ended June 30, 2022, the Company established a reserve of approximately $7.1 million specifically related to Greenstone.
The Company established the reserve based upon its review of Greenstone’s financial stability, which would impact collectability,
which is primarily the result of unfavorable market conditions within the Colorado market. The Company will continue to monitor the operations
of Greenstone in an effort to collect all outstanding receivables but due to the uncertain nature of Greenstone’s business at this
time the Company has made the decision to place a reserve against the receivables. Greenstone is a related party as of September 30,
2022 and December 31, 2021.
The
breakdown of loans receivable by customer as of September 30, 2022 and December 31, 2021 is as follows:
(In thousands) | |
September 30, 2022 | | |
December 31, 2021 | |
Bud & Mary’s – TTK Solution | |
$ | 14,691 | | |
$ | 5,542 | |
Greenstone – TTK Solution – Related Party | |
| 12,457 | | |
| 11,177 | |
Company Customer Number 136 – TTK Solution | |
| 10,329 | | |
| 2,439 | |
Company Customer Number 125 – TTK Solution | |
| 5,563 | | |
| 1,105 | |
Company Customer Number 71 – Non-TTK Solution (1) | |
| 2,542 | | |
| 1,946 | |
Company Customer Number 140 – TTK Solution | |
| 46 | | |
| 46 | |
Other – Non-TTK Solutions | |
| 5,374 | | |
| — | |
TTK Solution – Allowance for doubtful accounts (2) | |
| (21,770 | ) | |
| — | |
Total loan receivable | |
$ | 29,232 | | |
$ | 22,255 | |
(1) |
The current portion of loan receivable are included
within Note 3 – Supplemental Consolidated Balance Sheet Information, included elsewhere in the notes to the consolidated financial
statements. |
(2) | The Company established an allowance for doubtful accounts of approximately
$14.7 million related to Bud & Mary’s ongoing litigation. The remaining balance of approximately $7.1 million relates to
Greenstone consisting of capital advances, accrued interest and VFUs sales. |
At this time, the Company is not aware of, nor
has it identified any risk or potential performance failure associated with any of its other TTK Solution arrangements with the noted
exception of Bud & Mary’s TTK Solution and Greenstone TTK Solution, as described above.
The Company analyzed whether any of the above
customers are a VIE in accordance with ASC810 and if so, whether the Company is the primary beneficiary requiring consolidation. Based
on the Company’s analysis, the Company has determined that Greenstone is a VIE. As of September 30, 2022, two of the Company’s
employees own approximately 36.6% of the equity of Greenstone, however, since the Company is not the primary beneficiary and does
not hold significant influence over Greenstone business decisions, the Company is not required to consolidate Greenstone.
Note 6
— Inventory
Inventories
are stated at the lower of cost or net realizable value, with cost principally determined by the weighted-average cost method on a First-In,
First-Out basis. Such costs include the acquisition cost for raw materials and operating supplies. The Company’s standard payment
terms with suppliers may require making payments in advance of delivery of the Company’s products. The Company’s prepaid
inventory is a short-term, non-interest-bearing asset that is applied to the purchase of products once they are delivered.
Inventory
consisted of the following as of September 30, 2022 and December 31, 2021:
(In thousands) | |
September 30, 2022 | | |
December 31, 2021 | |
Raw materials | |
$ | 17,130 | | |
$ | 6,393 | |
Prepaid inventory | |
| 4,827 | | |
| 2,237 | |
Finished goods | |
| 21,743 | | |
| 12,810 | |
Inventory, gross | |
| 43,700 | | |
| 21,440 | |
Inventory reserves | |
| (1,909 | ) | |
| (942 | ) |
Total inventory, net | |
$ | 41,791 | | |
$ | 20,498 | |
Inventory
Reserves
The
Company establishes an inventory reserve for obsolete, slow-moving, and defective inventory. The Company calculates inventory reserves
for obsolete, slow-moving, or defective items as the difference between the cost of inventory and its estimated net realizable value.
The reserves are based upon management’s expected method of disposition.
Changes
in the Company’s inventory reserve are as follows:
(In thousands) |
|
Nine Months
Ended
September 30,
2022 |
|
|
Year
Ended
December 31,
2021 |
|
Inventory reserves – beginning of period |
|
$ |
942 |
|
|
$ |
— |
|
Increase in inventory reserves |
|
|
967 |
|
|
|
942 |
|
Inventory reserves – end of period |
|
$ |
1,909 |
|
|
$ |
942 |
|
Note 7 — Goodwill and Intangible Assets, Net
Intangible
assets are initially recorded at fair value and tested periodically for impairment. Goodwill represents the excess of the purchase price
over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination and is
tested at least annually for impairment. The Company performs its goodwill impairment testing annually during the fourth quarter, or
sooner if indicators or if circumstances were to occur that would more likely than not reduce the fair value of the Company’s reporting
unit below its carrying amount. The Company would recognize an impairment charge for the amount by which the carrying amount exceeds
the reporting unit’s fair value, not to exceed the total amount of goodwill.
The Company has concluded that there was an impairment-triggering event
during the three months ended June 30, 2022 that required the Company to perform a detailed analysis of the current carrying value of
its goodwill and intangible assets. For intangible asset and goodwill impairment testing purposes, the Company has one reporting unit.
During the three-month period ended June 30, 2022, the Company’s
market capitalization fell below total net assets. In addition, financial performance continued to weaken during the quarter, which is
contrary to prior experience. Management reassessed business performance expectations, following persistent adverse developments in equity
markets, deterioration in the environment in which the Company operates, lower-than-expected sales, and an increase in operating expenses.
These indicators, in the aggregate, required impairment testing for intangible assets and goodwill.
Based
on the results of this testing, the Company determined that the carrying values of the aggregate value of its goodwill and intangible
assets were not recoverable. The Company recorded impairment charges during the second quarter of 2022, representing a full impairment
of the carrying value of its goodwill and intangible assets. The Company recorded an impairment charge of approximately $69.9 million,
representing the carrying values of intangible assets and goodwill, which totaled $15.2 million and $54.7 million, respectively.
Goodwill
consisted of the following:
(In thousands) | |
Nine
Months
Ended September 30, 2022 | | |
Year
Ended December 31, 2021 | |
Goodwill - beginning of period | |
$ | 50,090 | | |
$ | 632 | |
Goodwill acquired during
period | |
| 4,368 | | |
| 49,458 | |
Goodwill impairment loss | |
| (54,747 | ) | |
| — | |
Goodwill
purchase accounting adjustment | |
| 289 | | |
| — | |
Goodwill - end of period | |
$ | — | | |
$ | 50,090 | |
Intangible
assets, net as of September 30, 2022 was as follows:
| |
Intangible
Assets, Gross | | |
Accumulated
Amortization and Impairment | | |
Intangible
Assets, Net | |
(In thousands) | |
January 1,
2022 | | |
Additions | | |
September 30,
2022 | | |
January 1,
2022 | | |
Expense and Impairments, net | | |
September 30,
2022 | | |
January 1,
2022 | | |
September 30,
2022 | |
Trade
names | |
$ | 2,418 | | |
$ | 317 | | |
$ | 2,735 | | |
$ | (227 | ) | |
$ | (2,508 | ) | |
$ | (2,735 | ) | |
$ | 2,191 | | |
$ | — | |
Customer
relationships | |
| 6,176 | | |
| 713 | | |
| 6,889 | | |
| (302 | ) | |
| (6,587 | ) | |
| (6,889 | ) | |
| 5,874 | | |
| — | |
Acquired
developed technology | |
| 4,911 | | |
| 1,432 | | |
| 6,343 | | |
| (191 | ) | |
| (6,152 | ) | |
| (6,343 | ) | |
| 4,720 | | |
| — | |
Non-compete
agreements | |
| 1,202 | | |
| — | | |
| 1,202 | | |
| (60 | ) | |
| (1,142 | ) | |
| (1,202 | ) | |
| 1,142 | | |
| — | |
Capitalized
website costs | |
| 245 | | |
| — | | |
| 245 | | |
| (100 | ) | |
| (145 | ) | |
| (245 | ) | |
| 145 | | |
| — | |
Total
intangible assets, net | |
$ | 14,952 | | |
$ | 2,462 | | |
$ | 17,414 | | |
$ | (880 | ) | |
$ | (16,534 | ) | |
$ | (17,414 | ) | |
$ | 14,072 | | |
$ | — | |
Intangible
assets, net as of December 31, 2021 was as follows:
| |
Intangible Assets, Gross | | |
Accumulated Amortization | | |
Intangible Assets, Net | |
(In thousands) | |
January 1, 2021 | | |
Additions | | |
December 31, 2021 | | |
January 1, 2021 | | |
Expense | | |
December 31, 2021 | | |
January 1, 2021 | | |
December 31, 2021 | |
Trade names | |
$ | 930 | | |
$ | 1,488 | | |
$ | 2,418 | | |
$ | (88 | ) | |
$ | (139 | ) | |
$ | (227 | ) | |
$ | 842 | | |
$ | 2,191 | |
Customer relationships | |
| 850 | | |
| 5,326 | | |
| 6,176 | | |
| (89 | ) | |
| (213 | ) | |
| (302 | ) | |
| 761 | | |
| 5,874 | |
Acquired developed technology | |
| — | | |
| 4,911 | | |
| 4,911 | | |
| — | | |
| (191 | ) | |
| (191 | ) | |
| — | | |
| 4,720 | |
Non-compete agreements | |
| — | | |
| 1,202 | | |
| 1,202 | | |
| — | | |
| (60 | ) | |
| (60 | ) | |
| — | | |
| 1,142 | |
Capitalized website costs | |
| 139 | | |
| 106 | | |
| 245 | | |
| (48 | ) | |
| (52 | ) | |
| (100 | ) | |
| 91 | | |
| 145 | |
Total intangible assets, net | |
$ | 1,919 | | |
$ | 13,033 | | |
$ | 14,952 | | |
$ | (225 | ) | |
$ | (655 | ) | |
$ | (880 | ) | |
$ | 1,694 | | |
$ | 14,072 | |
Amortization expense recorded in general and administrative in the
consolidated statements of operations were $0 and $57 thousand for the three months ended September 30, 2022 and 2021, respectively, and
$1.4 million and $172 thousand for the nine months ended September 30, 2022 and 2021, respectively.
Note 8
— Business Combination
Acquisition
of Lab Society
On
February 1, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lab Society, a newly-formed
wholly-owned subsidiary of the Company (“Merger Sub”), Michael S. Maibach Jr., as the Owner Representative thereunder, and
each of the shareholders of Lab Society (collectively, the “Owners”), pursuant to which the Company agreed to acquire Lab
Society. Concurrently with the execution of the Merger Agreement, the Company consummated the merger of Lab Society with and into Merger
Sub, with Merger Sub surviving such merger as a wholly-owned subsidiary of the Company (the “Lab Society Acquisition”).
The aggregate consideration for the Lab Society Acquisition consisted
of: $4.0 million in cash, subject to certain adjustments for working capital, cash, and indebtedness of Lab Society at closing; 42,561
shares of Common Stock (the “Buyer Shares”); and the Earn-out Consideration (as defined below), to the extent earned.
The Company withheld 12,768 of the Buyer Shares issuable to the Owners
(the “Holdback Lab Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim
for indemnification or payment of damages to which the Company may be entitled under the Merger Agreement. During the third quarter of
2022, 2,785 of the Holdback Lab Buyer Shares were forfeited after the finalization of the net working capital settlement. The remaining
9,983 Holdback Lab Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance with and subject
to the conditions of the Merger Agreement.
The
Merger Agreement includes customary post-closing adjustments, representations and warranties, and covenants of the parties. The Owners
may become entitled to additional consideration with a value of up to $3.5 million based on the eligible net revenues achieved by the
Lab Society business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 50% will be payable in cash and
the remaining 50% will be payable by issuing shares of Common Stock. Additional information regarding the Company’s contingent
consideration arrangements may be found in Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial
statements.
Transaction and related costs, consisting primarily of professional
fees, related to the acquisition, totaled approximately $0 and $66 thousand for the three months and nine months ended September 30, 2022,
respectively. All transaction and related costs were expensed as incurred and are included in general and administrative expenses.
The
Company has prepared purchase price allocations for the business combination with Lab Society on a preliminary basis. Changes to those
allocations may occur as additional information becomes available during the respective measurement period (up to one year from the acquisition
date).
The
following table sets forth the components and the allocation of the purchase price for the business combination:
(In
thousands) | |
| |
Purchase price consideration | |
| |
Estimated
closing proceeds | |
$ | 4,002 | |
Transaction
expenses | |
| 80 | |
Closing buyer shares | |
| 1,904 | |
Holdback buyer shares | |
| 816 | |
Earn-out
consideration | |
| 1,420 | |
Estimated
working capital adjustment | |
| (255 | ) |
Fair
value of total consideration transferred | |
| 7,967 | |
Total
purchase price, net of cash acquired | |
$ | 7,402 | |
| |
| | |
Fair value allocation of
purchase price | |
| | |
Cash and
cash equivalents | |
$ | 565 | |
Accounts
receivable | |
| 511 | |
Inventory | |
| 2,130 | |
Prepaid
expenses and other current receivables | |
| 55 | |
Right -
of-use assets, net | |
| 304 | |
Property
and equipment, net | |
| 177 | |
Prepaid
and refundable taxes | |
| 194 | |
Accounts
payable, accrued expenses, and other current liabilities | |
| (1,244 | ) |
Deferred
revenue | |
| (963 | ) |
Deferred
tax liability | |
| (237 | ) |
Finance
lease liabilities, current | |
| (36 | ) |
Finance
lease liabilities, non-current | |
| (35 | ) |
Operating
lease liabilities, current | |
| (112 | ) |
Operating
lease liabilities, non-current | |
| (192 | ) |
Acquired
intangible assets | |
| 2,462 | |
Goodwill | |
| 4,388 | |
Total
purchase price | |
$ | 7,967 | |
Identified intangible assets consist of trade
names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives
were made in accordance with ASC805 and are outlined in the table below:
(In
thousands) | |
Asset
Value | | |
Useful Life | |
Identified intangible assets | |
| | |
| |
Trade
names | |
$ | 317 | | |
| 5 years | |
Acquired
developed technology | |
| 1,432 | | |
| 8 years | |
Customer
relationships | |
| 713 | | |
| 6 years | |
Total
identified intangible assets | |
$ | 2,462 | | |
| | |
The
Company’s initial fair value estimates related to the various identified intangible assets of Lab Society were determined under
various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation
methods require management to project revenues, operating expenses, working capital investment, capital spending, and cash flows for
the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate.
During the three-month period ended June 30, 2022,
the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and
associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the
Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as
of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets
should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found
in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.
The amount of revenue of Lab Society included in the consolidated statements
of operations from the acquisition date of February 1, 2022 to September 30, 2022 was $4.0 million.
Acquisition
of Precision and Cascade
On
September 29, 2021 (the “Execution Date”), the Company entered into a Plan of Merger and Equity Purchase Agreement, as amended
by an amendment dated October 1, 2021 (as amended, the “Purchase Agreement”), with Sinclair Scientific, LLC, a Delaware limited
liability company (“Sinclair”), Mass2Media, LLC, Precision, a Michigan limited liability company; and each of the equity
holders of Sinclair named therein (collectively, the “Sinclair Members”). On October 1, 2021, the Company consummated the
transactions contemplated by the Purchase Agreement.
Subject
to the terms and conditions set forth in the Purchase Agreement, (1) Sinclair transferred, to the Company, and the Company purchased
(the “Interest Purchase”) from Sinclair, 100% of the equity interests of Cascade, a Delaware limited liability company,
such that immediately after the consummation of such Interest Purchase, Cascade became a wholly-owned subsidiary of the Company, and
(2) Precision merged (the “Merger”) with and into a newly-formed wholly-owned subsidiary of the Company, Precision Extraction
NewCo, LLC.
The
aggregate consideration for the Interest Purchase and the Merger consisted of: (a) the sum of $30 million in cash, plus consideration
payable to holders of outstanding Sinclair equity awards, subject to certain adjustments for working capital, cash and indebtedness,
payable in connection with the Interest Purchase; (b) the number of shares of Common Stock, subject to adjustment, equal to the quotient
of (i) $20.0 million divided by (ii) the volume weighted-average price per share of Common Stock on The Nasdaq Capital Market for
the 30 consecutive trading days ending on the Execution Date (the “VWAP Price”), issuable in connection with the Merger;
and (c) the True-Up Buyer Shares, if any (as defined below), issuable in connection with the Merger.
The
Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Sinclair
Members may become entitled to additional shares of Common Stock (the “True-Up Buyer Shares”) and cash (together with the
True-Up Buyer Shares, the “Aggregate True-Up Payment) based on the eligible net revenues (as defined in the Purchase Agreement)
achieved by the Cascade and Precision businesses during the fiscal year ending December 31, 2021. However, in no event shall the aggregate
purchase price paid by the Company pursuant to the terms of the Purchase Agreement, taking into account any Aggregate True-Up Payment
in favor of the Sinclair Members, exceed $65.0 million.
On August 10, 2022, the Company entered into a
post-closing adjustment settlement agreement (“Agreement”) with Sinclair. The Agreement was entered into in connection with
the Purchase Agreement. According to the Purchase Agreement, $2.5 million was held by the escrow agent as the Adjustment Escrow Amount,
$4.5 million was held by the escrow agent as the Indemnity Escrow Amount and 11,760 Buyer Shares were held by the Company as the Holdback
Buyer Shares. During the three-month period ended September 30, 2022, the Company made the final
Aggregate True-up Payment of approximately $5.6 million, of which, $3.3 million was paid in cash and 8,704 Holdback Buyer Shares
were released to the Sinclair Members and the Company received $1.4 million from the Adjustment Escrow Amount, and the remaining $1.1
million balance of the Adjustment Escrow Amount became part of the Indemnity Escrow Amount.
Transaction and related costs, consisting primarily of professional
fees, related to the acquisition, totaled approximately $0 and $63 thousand for the three and nine months ended September 30, 2022, respectively.
All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The
following table sets forth the components and the allocation of the purchase price for the business combination:
(In
thousands) | |
| |
Purchase price consideration | |
| |
Cash
paid to Sinclair Members at the close | |
$ | 23,000 | |
Cash contributed
to escrow accounts at the close | |
| 7,000 | |
Cash paid
for excess net working capital | |
| 1,430 | |
Stock issued
at the close | |
| 14,535 | |
Fair
value of contingent consideration to be achieved | |
| 3,953 | |
Fair
value of total consideration transferred | |
| 49,918 | |
Total
purchase price, net of cash acquired | |
$ | 48,630 | |
| |
| | |
Fair value allocation of
purchase price | |
| | |
Cash and
cash equivalents | |
$ | 1,288 | |
Accounts
receivable | |
| 897 | |
Inventory | |
| 6,761 | |
Prepaid
expenses and other current receivables | |
| 1,736 | |
Property
and equipment, net | |
| 970 | |
Right-of-use
assets, net | |
| 730 | |
Capitalized
web costs, net | |
| 2 | |
Accounts
payable and accrued expenses | |
| (9,223 | ) |
Deferred
revenue | |
| (5,419 | ) |
Long-term
debt | |
| (1,961 | ) |
Operating
lease liabilities, current | |
| (392 | ) |
Operating
lease liabilities, non-current | |
| (362 | ) |
Acquired
intangible assets | |
| 9,889 | |
Goodwill | |
| 45,002 | |
Total
purchase price | |
$ | 49,918 | |
Identified intangible assets consist of trade
names, technology, non-compete agreements, and customer relationships. The fair value of intangible assets and the determination of their
respective useful lives were made in accordance with ASC805 and are outlined in the table below:
(In
thousands) | |
Asset
Value | | |
Useful Life | |
Identified intangible assets | |
| | |
| |
Trade
names | |
$ | 1,260 | | |
| 6 to 7 years | |
Acquired
developed technology | |
| 3,818 | | |
| 5 years | |
Non-compete
agreements | |
| 1,202 | | |
| 5 years | |
Customer
relationships | |
| 3,609 | | |
| 7 to 8 years | |
Total
identified intangible assets | |
$ | 9,889 | | |
| | |
The
Company’s initial fair value estimates related to the various identified intangible assets were determined under various valuation
approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require
management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit
over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate.
During the three-month period ended June 30, 2022,
the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and
associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the
Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as
of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets
should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found
in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.
Acquisition
of PurePressure
On
December 31, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Pure Purchase Agreement”) with
PurePressure, LLC, a Colorado Limited liability company (“PurePressure”), and the members of PurePressure (collectively,
the “Members”), Benjamin Britton as the Member Representative thereunder, and each of the Members. Concurrently with the
execution of the Pure Purchase Agreement, the Company consummated the acquisition of all the outstanding equity interests of PurePressure,
such that immediately after the consummation of such purchase, PurePressure became a wholly-owned subsidiary of the Company (the “Acquisition”).
The
aggregate consideration for the Acquisition consisted of: (a) $4.0 million in cash, subject to certain adjustments for working capital,
cash and indebtedness of PurePressure at closing; (b) 32,918 shares of Common Stock (the “Buyer Shares”); and (c) the Earn-out
Consideration (as defined below), to the extent earned.
The Company withheld 8,888 of the Buyer Shares issuable to certain
Members (the “Holdback Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any
claim for indemnification or payment of damages to which the Company may be entitled under the Pure Purchase Agreement. During the third
quarter of 2022, 1,456 of the Holdback Buyer Shares were forfeited after the finalization of the net working capital settlement. The remaining
7,432 of the Holdback Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance with and
subject to the conditions of the Pure Purchase Agreement.
The
Pure Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The
Members may become entitled to additional consideration with a value of up to $3.0 million based on the eligible net revenues achieved
by the PurePressure business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 40% will be payable in
cash and the remaining 60% will be payable by issuing shares of Common Stock (collectively, the “Earn-out Consideration”).
Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value
Measures, included elsewhere in the notes to the consolidated financial statements.
Subject
to certain customary limitations, (i) the Members will indemnify the Company and its affiliates, officers, directors and other agents
against certain losses related to, among other things, breaches of the Members’ and PurePressure’s representations and warranties,
indebtedness, transaction expenses, pre-closing taxes and the failure to perform covenants or obligations under the Pure Purchase Agreement,
and (ii) the Company will indemnify the Members and their respective affiliates, officers, directors and other agents against certain
losses related to, among other things, breaches of the Company’s representations and warranties and the failure to perform covenants
or obligations under the Pure Purchase Agreement.
Transaction and related costs, consisting primarily of professional
fees, related to the acquisition, totaled approximately $0 and $563 thousand for the three and nine months ended September 30, 2022, respectively.
All transaction and related costs were expensed as incurred and are included in general and administrative expenses.
The
purchase price allocation for the business combination has been prepared on a preliminary basis and changes to those allocations may
occur as additional information becomes available during the respective measurement period (up to one year from the acquisition date).
The
following table sets forth the components and the allocation of the purchase price for the business combination:
(In
thousands) | |
| |
Purchase price consideration | |
| |
Estimated
closing proceeds | |
$ | 3,613 | |
Indebtedness
paid | |
| 320 | |
Transaction
expenses | |
| 115 | |
Closing buyer shares | |
| 2,211 | |
Holdback buyer shares | |
| 654 | |
Earn-out
consideration | |
| 707 | |
Estimated
working capital adjustments | |
| 330 | |
Fair
value of total consideration transferred | |
| 7,950 | |
Total
purchase price, net of cash acquired | |
$ | 7,647 | |
| |
| | |
Fair value allocation of
purchase price | |
| | |
Cash and
cash equivalents | |
$ | 303 | |
Accounts
receivable, net | |
| 48 | |
Inventory | |
| 1,537 | |
Property
and equipment, net | |
| 219 | |
Right-of-use
assets, net | |
| 191 | |
Prepaid
expenses and other current receivables | |
| 61 | |
Other non-current
assets | |
| 16 | |
Accounts
payable and accrued expenses | |
| (765 | ) |
Deferred
revenue | |
| (762 | ) |
Operating
lease liabilities, current | |
| (117 | ) |
Operating
lease liabilities, non-current | |
| (74 | ) |
Finance
lease liabilities, current | |
| (4 | ) |
Finance
lease liabilities, non-current | |
| (10 | ) |
Notes payable,
current | |
| (260 | ) |
Notes payable,
non-current | |
| (12 | ) |
Acquired
intangible assets | |
| 3,037 | |
Goodwill | |
| 4,542 | |
Total
purchase price | |
$ | 7,950 | |
Identified intangible assets consist of trade
names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives
were made in accordance with ASC805 and are outlined in the table below:
(In
thousands) | |
Asset
Value | | |
Useful
Life | |
Identified intangible assets | |
| | |
| |
Trade
name | |
$ | 227 | | |
| 5 years | |
Acquired
developed technology | |
| 1,093 | | |
| 8 years | |
Customer
relationships | |
| 1,717 | | |
| 5 years | |
Total
identified intangible assets | |
$ | 3,037 | | |
| | |
During the three-month period ended June 30, 2022,
the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and
associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the
Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as
of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets
should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found
in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.
Note
9 – Debt
The
Company’s debt consisted of:
(In
thousands) | |
September 30,
2022 | | |
December 31,
2021 | |
Note payable –
Exchange Note | |
$ | 35,000 | | |
$ | — | |
PPP Loan | |
| 726 | | |
| 804 | |
Navitas Loan | |
| 27 | | |
| — | |
Other
notes payable (1) | |
| 218 | | |
| 297 | |
Total debt | |
| 35,971 | | |
| 1,101 | |
Less:
unamortized debt discount | |
| (5,099 | ) | |
| — | |
Total debt,
net of debt discount | |
| 30,872 | | |
| 1,101 | |
Less:
current portion, net of current unamortized debt discount | |
| (492 | ) | |
| (1,089 | ) |
Long-term
debt | |
$ | 30,380 | | |
$ | 12 | |
(1) |
Other notes payable relates
to a one-year insurance premium that was financed over nine months. |
Note
Payable
Securities
Purchase Agreement
On March 14, 2022, the
Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with the Investor, pursuant to
which the Company agreed to issue and sell to the Investor, in a private placement transaction, in exchange for the payment by the Investor
of $65 million, less applicable expenses, as set forth in the Securities Purchase Agreement, a
senior secured promissory note in an aggregate principal amount of $65 million (the “SPA Note”), and a SPA
Warrant to purchase up to an aggregate of 688,111 shares of Common Stock.
Securities
Exchange Agreement
On August 18, 2022, the
Company reached an agreement with its Investor to amend its existing senior SPA Note and entered into the Exchange Agreement. Pursuant
to the Exchange Agreement, the Company partially paid $35.2 million under the SPA Note and exchanged the remaining balance of the SPA
Note for an Exchange Note with an aggregate original principal amount of $35.0 million and a new Note Exchange Warrant to purchase 1,422,764
shares of Common Stock and modified an existing SPA Warrants to purchase up to an aggregate of 688,111 shares of Common Stock. The Company
exchanged the SPA Warrant for a new warrant for the same number of underlying shares but with a reduced exercise price (the “Modified
Warrants” and, collectively with the Note Exchange Warrant, the “Warrant Liabilities”). As of September 30, 2022, the
Company had outstanding liability-classified Warrant Liabilities that allows the Investor to purchase 2,110,875 shares of the Company’s
Common Stock. Additional information regarding the Company’s Warrant Liabilities may be found in Note
1 – Overview, Basis of Presentation and Significant Accounting Policies and Note 4 –
Fair Value Measures, included elsewhere in the notes to the condensed consolidated financial statements.
The
Exchange Note is a senior secured obligation of the Company and ranks senior to all indebtedness of the Company. The Exchange Note will
mature on the three-year anniversary of its issuance (the “Maturity Date”) and contains a 9.0% annualized interest
rate, with interest to be paid monthly, in cash, beginning September 1, 2022. The principal amount of the Exchange Note will be
payable on the Maturity Date, provided that the Investor will be entitled to a cash sweep of 20% of the proceeds received by the Company
in connection with any equity financing, which will reduce the outstanding principal amount under the Exchange Note.
At
any time, the Company may prepay all of the Exchange Note by redemption at a price equal to 102.5% of the then-outstanding principal
amount under the Note plus accrued but unpaid interest. The Investor will also have the option of requiring the Company to redeem the
Exchange Note on the one-year or two-year anniversaries of issuance at a price equal to the then-outstanding principal amount under the
Exchange Note plus accrued but unpaid interest, or if the Company undergoes a fundamental change at a price equal to 102.5% of the then-outstanding
principal amount under the Exchange Note plus accrued but unpaid interest.
The Exchange Note imposes certain customary affirmative and negative
covenants upon the Company, as well as covenants that restrict the Company and its subsidiaries from incurring any additional indebtedness
or suffering any liens, subject to specified exceptions, restrict the ability of the Company and its subsidiaries from making certain
investments, subject to specified exceptions, restrict the declaration of any dividends or other distributions, subject to specified exceptions, require
the Company not to exceed maximum levels of allowable cash spend while the Exchange Note is outstanding, and require the Company
to maintain minimum amounts of cash on hand. If an event of default under the Exchange Note occurs, the Investor can elect to redeem the
Exchange Note for cash equal to 115% of the then-outstanding principal amount of the Note (or such lesser principal amount accelerated
by the Investor), plus accrued and unpaid interest, including default interest, which accrues at a rate per year equal to 15% from the
date of a default or event of default. As of September 30, 2022, the Company is in compliance with the financial debt covenants associated
with its Exchange Note.
Until
the date the Exchange Note is fully repaid, the Investor has, subject to certain exceptions, the right to participate for up to 30% of
any offering of debt, equity (other than an offering of solely Common Stock), or equity-linked securities, including without limitation
any debt, preferred stock or other instrument or security, of the Company or its subsidiaries.
The Modified Warrant
have an exercise price of $21.50 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar
transactions, will be exercisable on and after the six-month anniversary of issuance, have a term of five and one-half years from the
date of issuance and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale
of the shares issuable upon exercise of the Modified Warrant (the “Modified Warrant Shares”) or if shareholder approval for
the full exercise of the Modified Warrant is not received, in which case the Modified Warrant will also be exercisable on a cashless exercise
basis at the Investor’s election.
The Note Exchange Warrant have an exercise price of $12.30 per share,
subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, were exercisable upon issuance,
and have a term of five and one-half years from the date of issuance and will be exercisable on a cash basis, unless there is not an effective
registration statement covering the resale of the shares issuable upon exercise of the Warrant (the “Note Exchange Warrant Shares”
and, together with the Modified Warrant Shares, the “Exchange Warrant Shares”) or if shareholder approval for the full exercise
of the Note Exchange Warrant is not received, in which case the Note Exchange Warrant will also be exercisable on a cashless exercise
basis at the Investor’s election. Until the Company completes a qualified equity financing of at least $15.0 million, which requirement
was satisfied with sales under the ATM Program, the Note Exchange Warrant’s exercise price would have been reduced to the extent
the Company issues securities, subject to certain exceptions, for a lower purchase price. The Note Exchange Warrant also prohibited the
Company, until following the completion of such qualified equity financing, from issuing warrants with more favorable or preferential
terms and/or provisions.
The Warrant Liabilities
will each provide that in no event will the number of shares of Common Stock issued upon exercise of such warrant result in the Investor’s
beneficial ownership exceeding 4.99% of the Company’s shares of Common Stock outstanding at the time of exercise (which percentage
may be decreased or increased by the Investor, but to no greater than 9.99%, and provided that any increase above 4.99% will not be effective
until the sixty-first day after notice of such request by the Investor to increase its beneficial ownership limit has been delivered to
the Company). Additionally, the Warrant Liabilities could be exercised for more than an aggregate of 530,858 shares of Common Stock unless
and until shareholder approval is obtained, which approval was obtained on October 14, 2022.
The
following table summarizes the short-term and long-term portions of the Exchange Note as of September 30, 2022:
(In
thousands) | |
Short-Term | | |
Long-Term | | |
Notes
Payable, Net | |
Direct
issuance costs | |
$ | 191 | | |
$ | 454 | | |
$ | 645 | |
| |
| | | |
| | | |
| | |
Principal | |
$ | — | | |
$ | 35,000 | | |
$ | 35,000 | |
Unamortized
discount | |
| — | | |
| (5,099 | ) | |
| (5,099 | ) |
Net
carrying amount | |
$ | — | | |
$ | 29,901 | | |
$ | 29,901 | |
As
of September 30, 2022, future minimum principal payments were as follows:
Years
ending December 31 (In thousands), | |
| |
| |
| |
Remaining 2022 | |
$ | 269 | |
2023 | |
| 303 | |
2024 | |
| 282 | |
2025 | |
| 35,117 | |
2026
and thereafter | |
| — | |
Total
future payments | |
$ | 35,971 | |
Paycheck
Protection Program Loan
Paycheck
Protection Program Loans under the Coronavirus Aid, Relief, and Economic Security Act
In
May 2020, the Company entered into a PPP Loan with Bank of America pursuant to the PPP under the CARES Act administered by the SBA.
The
Company received total proceeds of approximately $779 thousand from the unsecured PPP Loan, which was originally scheduled to mature
on May 7, 2022. The SBA denied the Company’s submission to have the remaining $779 thousand PPP Loan forgiven. On June 23, 2022,
the Company received a letter from Bank of America agreeing to extend the maturity date to May 7, 2025 and bears interest at a rate of
1.00% per year. The PPP loan is payable in 34 equal combined monthly principal and interest payments of approximately $24 thousand that
commenced on August 7, 2022.
The
breakdown of PPP Loan balances by current and non-current as of September 30, 2022 and December 31, 2021 were as follows:
(In
thousands) | |
Balance Sheet
Location | |
September 30,
2022 | | |
December 31,
2021 | |
PPP Loan, current | |
Long-term debt, current | |
$ | 256 | | |
$ | 792 | |
PPP
Loan, non-current | |
Long-term debt | |
| 470 | | |
| 12 | |
Total
PPP Loan outstanding | |
| |
$ | 726 | | |
$ | 804 | |
PurePressure
SBA Debt
As
part of the acquisition of PurePressure, $159 thousand of debt remained outstanding from a standard SBA loan as of December 31, 2021.
This debt has subsequently been paid as a part of the PurePressure acquisition.
Note
10 — Leases
Leases
The
determination if any arrangement contained a lease at its inception was done based on whether or not the Company has the right to control
the asset during the contract period. The lease term was determined assuming the exercise of options that were reasonably certain to
occur. Leases with a lease term of 12 months or less at inception were not reflected in the Company’s balance sheet and those lease
costs are expensed on a straight-line basis over the respective term. Leases with a term greater than 12 months were reflected as non-current
right-of-use assets and current and non-current lease liabilities in the Company’s consolidated balance sheets.
As the implicit interest rate in its leases was generally not known,
the Company’s used its incremental borrowing rate as the discount rate for purposes of determining the present value of its lease
liabilities. At September 30, 2022 and December 31, 2021, the Company’s weighted-average discount rate utilized for its leases was
7.27% and 7.16%, respectively.
When
a contract contained lease and non-lease elements, both were accounted as a single lease component.
The
Company had several non-cancelable finance leases for machinery and equipment. The Company’s finance leases have remaining lease
terms of one year to five years.
The Company had several non-cancelable operating leases for corporate
offices, warehouses, showrooms, research and development facilities and vehicles. The Company’s leases have remaining lease terms
of one year to five years, some of which include options to extend. Some leases include payment for communal
area maintenance associated with the property.
Additional
information on the Company’s operating and financing lease activity is as follows:
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
(In
thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Operating lease
cost | |
$ | 293 | | |
$ | 100 | | |
$ | 828 | | |
$ | 184 | |
Finance
lease cost: | |
| | | |
| | | |
| | | |
| | |
Amortization
of right-of-use assets | |
| 54 | | |
| 44 | | |
| 148 | | |
| 134 | |
Interest
on lease liabilities | |
| 7 | | |
| 10 | | |
| 26 | | |
| 32 | |
Total
lease cost | |
$ | 354 | | |
$ | 154 | | |
$ | 1,002 | | |
$ | 350 | |
(In
thousands) | |
Balance Sheet
Location | |
September 30,
2022 | | |
December 31,
2021 | |
Assets | |
| |
| | |
| |
Right-of-use
assets, net | |
Right-of-use, net | |
$ | 2,470 | | |
$ | 1,479 | |
Finance
lease assets | |
Property and equipment, net | |
| 304 | | |
| 380 | |
Total
lease assets | |
| |
$ | 2,774 | | |
$ | 1,859 | |
| |
| |
| | | |
| | |
Liabilities | |
| |
| | | |
| | |
Current: | |
| |
| | | |
| | |
Operating | |
Operating lease liabilities, current | |
$ | 822 | | |
$ | 814 | |
Financing | |
Accrued expenses and other current liabilities | |
| 153 | | |
| 156 | |
Non-current: | |
| |
| | | |
| | |
Operating | |
Operating lease liabilities, non-current | |
| 1,744 | | |
| 704 | |
Financing | |
Other non-current liabilities | |
| 187 | | |
| 293 | |
Total
lease liabilities | |
| |
$ | 2,906 | | |
$ | 1,967 | |
Weighted-average
remaining lease term – operating leases | |
| |
| 3.68 years | | |
| 3.11 years | |
Weighted-average
remaining lease term – finance leases | |
| |
| 2.50 years | | |
| 2.36 years | |
Weighted-average
discount rate – operating leases | |
| |
| 6.70 | % | |
| 8.03 | % |
Weighted-average
discount rate – finance leases | |
| |
| 7.84 | % | |
| 6.29 | % |
Maturities
of operating and finance lease liabilities as of September 30, 2022 are as follows:
Years
ending December 31 (In thousands), | |
Operating
Lease | | |
Finance
Lease | |
| |
| | |
| |
Remaining 2022 | |
$ | 227 | | |
$ | 37 | |
2023 | |
| 921 | | |
| 182 | |
2024 | |
| 614 | | |
| 91 | |
2025 | |
| 493 | | |
| 51 | |
2026 | |
| 461 | | |
| 15 | |
Thereafter | |
| 200 | | |
| — | |
Total
minimum lease payments | |
| 2,916 | | |
| 376 | |
Less
imputed interest | |
| (350 | ) | |
| (36 | ) |
Total
lease liabilities | |
$ | 2,566 | | |
$ | 340 | |
Note
11 — Convertible Promissory Notes
On January 11, 2021, the Company’s Board of Directors and shareholders
approved the amendment to the conversion formula of the Convertible Promissory Notes (the “Convertible Notes”) issued by the
Company on dates between August 2020 and November 2020. Pursuant to the amendment, immediately prior to the consummation of a public transaction,
the outstanding principal amount of the Convertible Notes, together with all accrued and unpaid interest, shall convert into a number
of fully paid and non-assessable shares of Common Stock, at a conversion price of $77.20 per share.
While
the original conversion feature was bifurcated from the host instrument, the Company determined that the amended conversion feature would
not require bifurcation. Since the accounting for the conversion feature changed because of the amendment, the Company applied extinguishment
accounting pursuant to its accounting policy.
Accordingly,
the Company recognized a gain on extinguishment of $2.7 million in connection with the derecognition of the net carrying amount of the
extinguished debt of $19.6 million (inclusive of $13.1 million of principal, $7.1 million of derivative liabilities, less $587 thousand
of debt discount) and the recognition of the $16.9 million fair value of the new convertible notes (including the same principal amount
of $13.1 million plus the $3.8 million fair value of the beneficial conversion feature).
On
February 1, 2021, in conjunction with the closing of the Company’s IPO, the Convertible Notes in the aggregate principal amount
of $13.1 million were converted into 169,707 shares of Common Stock at the election of the Company at a conversion price of $77.20 per
share.
Note
12 — Stockholders’ Equity
On
July 11, 2022, the Company increased its authorized number of shares of Common Stock to 103,000,000, consisting of: 100,000,000 shares
of Common Stock, and 3,000,000 shares of Preferred Stock. On January 9, 2020, the Company designated 100,000 shares of the 3,000,000
authorized shares of Preferred Stock, as Series A Convertible Preferred Stock (“Series A Preferred Stock”).
Series
A Convertible Preferred Stock
Beginning
in the first quarter of 2020, the Company issued an aggregate of 60,000 shares of Series A Preferred Stock, for an aggregate purchase
price of $6.0 million. In May 2020, the Company completed an offering of Series A Preferred Stock with the issuance of an additional
40,000 shares of Series A Preferred Stock for an aggregate purchase price of $4.0 million.
Amendment
of Conversion Formulas
On
January 11, 2021, the Company’s Board of Directors approved the amendment to the conversion formula of the Series A Preferred Stock
and Convertible Notes. After the amendment:
| ● | the Series A Preferred Stock is convertible, at any time after the issuance or immediately prior to the closing of a public transaction, into Common Stock in an amount of shares equal to (i) the product of the Series A Preferred Stock original price plus accrued but unpaid dividends on the shares being converted, multiplied by the number of shares of Series A Preferred Stock being converted, divided by (ii) a conversion price of $77.20 per share (after the reverse split taking effect); and |
|
● |
immediately prior to the consummation of a public transaction, the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest shall convert into a number of fully paid and non-assessable shares of Common Stock equal to the quotient of (i) the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest thereunder immediately prior to such public transaction divided by (ii) a conversion price of $77.20 per share (after the reverse split taking effect). |
On
January 11, 2021, the Company’s shareholders approved the amendment to the Series A Preferred Stock.
Initial
Public Offering
On
February 1, 2021, the Company completed an IPO for the sale of 540,000 shares of Common Stock at a price of $100.00 per share. The Company
also granted the underwriters: (a) a 45-day option to purchase up to 81,000 additional shares of Common Stock on the same terms and conditions
for the purpose of covering any over-allotments in connection with the IPO, and (b) warrants to purchase 16,200 shares of Common Stock
(equal to 3% of the aggregate number of shares of Common Stock issued in the IPO) at an exercise price of $125.00 per share (which is
equal to 125% of the IPO price). Subsequently, the underwriters exercised the over-allotment option, and on February 4, 2021, the Company
closed on the sale of an additional 81,000 shares of Common Stock for a price of $100.00 per share and granted to the underwriters warrants
to purchase 2,430 additional shares of Common Stock (equal to 3% of the amount of shares issued as part of the exercised of the over-allotment
option) at an exercise price of $125.00 per share. The exercise of the over-allotment option brought the total number of shares of Common
Stock sold by the Company in connection with the IPO to 621,000 shares and the total net proceeds received in connection with the IPO
to approximately $57.0 million, after deducting underwriting discounts and estimated offering expenses.
Immediately
prior to the closing of the Company’s IPO, all outstanding shares of Series A Preferred Stock and Convertible Notes were converted
into 137,304 shares of Common Stock and 169,707 shares of Common Stock, respectively, at a conversion price of $77.72 per share.
Subsequent
Public Offering
On
February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) for the sale of 555,556
shares of Common Stock for a price of $135.00 per share. The Company also granted the underwriters: (a) a 45-day option to purchase up
to 83,333 additional shares of Common Stock on the same terms and conditions for the purpose of covering any over-allotments in connection
with the February Offering, and (b) warrants to purchase 16,667 shares of Common Stock (equal to 3% of the aggregate number of shares
of Common Stock issued in the February Offering) at an exercise price of $168.75 per share (which is equal to 125% of the February Offering).
Subsequently, the underwriters exercised the over-allotment option, and on March 22, 2021, the Company closed on the sale of an additional
83,333 shares of Common Stock for a price of $135.00 per share and granted to the underwriters warrants to purchase 2,500 additional
shares of Common Stock (equal to 3% of the amount of shares issued as part of the exercised of the over-allotment option) at an exercise
price of $168.75 per share. The exercise of the over-allotment option brought the total number of shares of Common Stock sold by the
Company in connection with the February Offering to 638,889 shares and the total net proceeds received in connection with the February
Offering to approximately $80.0 million, after deducting underwriting discounts and estimated offering expenses.
Underwriter
Termination
On
September 14, 2021, the Company entered into a letter agreement and waiver (the “Letter Agreement”), to amend the terms of
its underwriting agreement with the representative of the underwriters in the IPO. Pursuant to the Letter Agreement, the representative
agreed to waive the right of first refusal included in the underwriting agreement in consideration of a cash payment to the representative
of $2.4 million and the right to participate as a co-manager with 10% of the economics with respect to the Company’s next public
offering of securities, payable in cash upon the closing of such offering.
Private
Placement
On January 25, 2022, the Company entered into a Securities Purchase
Agreement (the “Securities Agreement”) with an institutional investor and other accredited investors for the sale by the Company
of 245,035 shares (the “SA Shares”) of Common Stock, pre-funded warrants (the “Pre-Funded Warrants”) to purchase
up to an aggregate of 157,064 shares of Common Stock and warrants to purchase up to an aggregate of 301,575 shares of Common Stock (the
“Common Warrants” and, collectively with the Pre-Funded Warrants, the “SA Warrants”), in a private placement offering.
The combined purchase price for one share of Common Stock (or one Pre-Funded Warrant) and the accompanying fraction of a Common Warrant
was $68.00 per share.
Subject
to certain ownership limitations, the SA Warrants are exercisable six months from issuance. Each Pre-Funded Warrant was exercisable into one share
of Common Stock at a price per share of $0.001 (as adjusted from time to time in accordance with the terms thereof). Each Common
Warrant is exercisable into one share of Common Stock at a price per share of $74.80 (as adjusted from time to time in accordance
with the terms thereof) and will expire on the fifth anniversary of the initial exercise date. The institutional investor that received
the Pre-Funded Warrants fully exercised such warrants in March 2022.
Raymond Chang, Chairman and Chief Executive Officer of the Company,
and Stuart Wilcox, who is currently the Chief Operating Officer, and at the time was a member of the Company’s Board of Directors,
participated in the private placement on essentially the same terms as other investors, except for having a combined purchase price of
$69.00 per share.
The
gross proceeds to the Company from the private placement were approximately $27.3 million, before deducting the placement agent’s
fees and other offering expenses, and excluding the proceeds, if any, from the exercise of the SA Warrants.
Issuance
of Common Stock in Connection with Acquisitions
On
October 1, 2021, the Company issued an aggregate of 66,640 shares of its Common Stock to the Precision and Cascade shareholders
in connection with the Company’s acquisition of Precision and Cascade. On August 17, 2022, the Company issued an additional 8,704 shares
of its Common Stock to the Precision and Cascade shareholders in connection with the finalization of the net working capital settlement.
Refer to Note 8 – Business Combinations, included elsewhere in the notes to the consolidated
financial statements.
On
December 31, 2021, the Company issued an aggregate of 24,030 shares of its Common Stock to the PurePressure shareholders in connection
with the Company’s acquisition of PurePressure. Refer to Note 8 – Business Combinations,
included elsewhere in the notes to the consolidated financial statements.
On
February 1, 2022, the Company issued an aggregate of 29,793 shares of its Common Stock to the Lab Society shareholders in connection
with the Company’s acquisition of Lab Society. Refer to Note 8 – Business Combinations,
included elsewhere in the notes to the consolidated financial statements.
Note
13 — Stock-Based Compensation and Employee Benefit Plans
2022
Omnibus Equity Incentive Plan
On
April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the
2022 Omnibus Equity Incentive Plan (the “2022 Plan”), which replaced the 2020 Stock Option Plan (the “2020 Plan”).
The 2022 Plan provides for the grant of stock options, stock appreciation right awards, performance share awards, restricted stock awards,
restricted stock unit awards, other stock-based awards and cash-based awards. The aggregate number of shares of Common Stock that may
be reserved and available for grant and issuance under the 2022 Plan is 529,665 shares, which includes the 200,000 shares authorized
under the 2022 Plan, plus the rollover of 329,665 issued and outstanding awards under the 2020 Plan. Shares will be deemed to have been
issued under the 2022 Plan solely to the extent actually issued and delivered pursuant to an award. If any award granted under the 2020
Plan or the 2022 Plan expires, is canceled, or terminates unexercised or is forfeited, the number of shares subject thereto is again
available for grant under the 2022 Plan. The 2022 Plan shall continue in effect, unless sooner terminated, until the tenth anniversary
of the date on which it is adopted by the Board of Directors.
Stock-based
Compensation
The Company’s stock option
compensation expense was $1.6 million and $941 thousand for the three months ended September 30, 2022 and 2021, respectively, and
$3.5 million and $4.0 million for the nine months ended September 30, 2022 and 2021, respectively. There was $4.3 million
of total unrecognized compensation cost related to unvested options granted under the Company’s options plans as of September 30,
2022. This stock option expense will be recognized through 2025.
The
fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain
assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying Common Stock, expected option
life, and expected volatility in the market value of the underlying Common Stock. No stock options were granted during the nine months
ended September 30, 2022.
The
following table summarizes the Company’s assumptions used in the valuation of options granted during the year ended December 31,
2021:
Volatility | |
| 40 | % |
Risk-free interest rate | |
| 1.10% – 1.63 | % |
Dividend yield | |
| 0.00 | % |
0% Expected life (Years) | |
| 10 | |
Forfeiture rate | |
| 0.00 | % |
The
Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company’s stock options and warrants have characteristics different from those of its traded
stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion
the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. The risk-free interest
rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the expected term. The
expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s current expectation
of future action surrounding dividends. The Company calculates the expected volatility of the stock price based on the corresponding
volatility of the Company’s peer group stock price for a period consistent with the underlying instrument’s expected term.
The expected lives for such grants were based on the simplified method for employees and directors.
In
arriving at stock-based compensation expense, the Company estimates the number of stock-based awards that will be forfeited due to employee
turnover. The Company’s forfeiture assumption is based primarily on its employee turnover historical experience. If the actual
forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate,
which will result in a decrease to the expense recognized in the Company’s financial statements. If the actual forfeiture rate
is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result
in an increase to expense recognized in the Company’s financial statements. The expense the Company recognizes in future periods
will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period.
As
of September 30, 2022, there were 64,688 shares of Common Stock available to be granted under the Company’s 2022 Plan.
Stock
Option Activity
The
following table presents option activity under the Company’s stock option plans for the nine months ended September 30, 2022 and
the year ended December 31, 2021:
(In
thousands, except share and per share data) | |
Number
of Options | | |
Weighted-
Average Exercise Price | | |
Aggregate
Intrinsic Value | |
Options outstanding at December
31, 2020 | |
| 313,311 | | |
$ | 35.10 | | |
$ | — | |
Granted | |
| 152,002 | | |
| 121.30 | | |
| | |
Exercised | |
| (65,763 | ) | |
| 32.30 | | |
| | |
Forfeited | |
| (43,021 | ) | |
| 39.80 | | |
| | |
Canceled | |
| (100 | ) | |
| 44.30 | | |
| | |
Options outstanding at December 31, 2021 | |
| 356,429 | | |
| 71.80 | | |
$ | 12,572 | |
Granted | |
| — | | |
| — | | |
| | |
Exercised | |
| (851 | ) | |
| 22.92 | | |
| | |
Forfeited | |
| (47,013 | ) | |
| 51.11 | | |
| | |
Canceled | |
| (22,890 | ) | |
| 92.93 | | |
| | |
Options outstanding at
September 30, 2022 | |
| 285,675 | | |
$ | 73.66 | | |
$ | — | |
| |
| | | |
| | | |
| | |
Options vested and exercisable
as of September 30, 2022 | |
| 218,172 | | |
$ | 62.87 | | |
| | |
Options
vested and expected to vest as of September 30, 2022 | |
| 272,209 | | |
$ | 71.93 | | |
| | |
Restricted
Stock Units
The following table presents restricted stock unit activity under the
2022 Plan for the nine months ended September 30, 2022:
| |
Number of Shares | | |
Weighted- Average Grant Date Fair Value | |
Unvested at December 31, 2021 | |
| — | | |
$ | — | |
Granted | |
| 188,800 | | |
| 12.62 | |
Vested | |
| (20,000 | ) | |
| 19.20 | |
Forfeited | |
| (9,500 | ) | |
| 15.70 | |
Unvested at September 30, 2022 | |
| 159,300 | | |
$ | 12.46 | |
2022
Employee Stock Purchase Plan
On
April 29, 2022, the Company’s Board of Directors, and on June 8, 2022, the Company’s stockholders, adopted and approved the
2022 Employee Stock Purchase Plan ("ESPP"). The Company has initially reserved 50,000 shares of Common Stock for
issuance under the ESPP. On September 30, 2022, 50,000 shares were available for future issuance.
Under
the ESPP, eligible employees are granted options to purchase shares of Common Stock at the lower of 85% of the fair market value
of the stock at the time of grant or 85% of the fair market value at the time of exercise. Options to purchase shares are granted
twice yearly on or about August 1 and February 1 and are exercisable on or about the succeeding January 31 and July 31, respectively,
of each year. No participant may purchase more than $25 thousand worth of Common Stock annually. No Common Stock was granted under the
2022 ESPP during the nine months ended September 30, 2022.
Employee
Benefit Plan
The
Company maintains an employee’s savings and retirement plan under Section 401(k) of the Internal Revenue Code (the “401k
Plan”). All full-time U.S. employees become eligible to participate in the 401k Plan. The Company’s contribution to the 401k
Plan is discretionary. During the three and nine months ended September 30, 2022 and 2021, the Company did not contribute to the 401k
Plan.
Note
14 — Stock Warrants
The
following table presents all warrant activity of the Company for the nine months ended September 30, 2022 and the year ended December
31, 2021:
| |
Number of Warrants | | |
Weighted- Average Exercise Price | |
Warrants outstanding at December 31, 2020 | |
| 82,817 | | |
$ | 0.20 | |
Granted | |
| 37,797 | | |
| 14.72 | |
Exercised | |
| (93,430 | ) | |
| 6.07 | |
Warrants outstanding at December 31, 2021 | |
| 27,184 | | |
| 0.20 | |
Granted | |
| 2,569,518 | | |
| 21.35 | |
Exercised | |
| (165,915 | ) | |
| 0.01 | |
Warrants outstanding at September 30, 2022 | |
| 2,430,787 | | |
$ | 22.57 | |
The Company received proceeds from the exercise of warrants of less
than $1 thousand and $4 thousand for the three months ended September 30, 2022 and September 30, 2021, respectively,
and $2 thousand and $9 thousand for the nine months ended September 30, 2022 and 2021, respectively.
Note
15 — Income Taxes
The
Company’s effective income tax rate was 0.0% for both the three months ended September 30, 2022 and 2021. The income tax benefit
was $0 for both the three months ended September 30, 2022 and 2021.
The Company’s effective income tax rate was 0.2% and 0.0%
for the nine months ended September 30, 2022 and 2021, respectively. The income tax benefit was $262 thousand and $0 for the nine
months ended September 30, 2022 and 2021, respectively. The difference between the Company’s effective tax rates for the 2022 and
2021 periods and the U.S. statutory tax rate of 21% was primarily due to a valuation allowance recorded against the Company’s deferred
tax assets. The change in the income tax benefit for the nine months ended September 30, 2022 compared to the nine months ended September
30, 2021 was primarily due to a discrete income tax benefit of $200 thousand recorded during the first quarter of 2022, which is attributable
to a non-recurring partial release of the Company's U.S. valuation allowance as a result of the Lab Society acquisition. Additionally,
as a result of the goodwill impairment charge recorded during the second quarter of 2022, the Company recognized a small benefit of $62
thousand related to the reversal of its opening deferred tax liability on indefinite-lived assets.
Note
16 — Net Loss Per Share
Net
loss per share calculations for all periods have been adjusted to reflect the Company’s reverse stock splits. Net loss per share
was calculated based on the weighted-average number of its Common Stock then outstanding.
Basic
net loss per share is calculated using the weighted-average number of Common Stock outstanding during the periods. Net loss per share,
assuming dilution, is calculated using the weighted-average number of common shares outstanding and the dilutive effect of all potentially
dilutive securities, including Common Stock equivalents and convertible securities. Net loss per share, assuming dilution, is equal to
basic net loss per share because the effect of dilutive securities outstanding during the periods, including options and warrants computed
using the treasury stock method, is anti-dilutive.
The
components of basic and diluted net loss per share were as follows:
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
(In
thousands, except share and per share data) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Numerator: | |
| | |
| | |
| | |
| |
Net
loss attributable to Agrify Corporation | |
$ | (46,268 | ) | |
$ | (9,758 | ) | |
$ | (148,551 | ) | |
$ | (19,204 | ) |
Accrued
dividend attributable to Preferred A Stockholders | |
| — | | |
| — | | |
| — | | |
| (61 | ) |
Net
loss available for Common Stockholders | |
$ | (46,268 | ) | |
$ | (9,758 | ) | |
$ | (148,551 | ) | |
$ | (19,265 | ) |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted-average
common shares outstanding – basic and diluted (1) | |
| 2,670,501 | | |
| 2,083,439 | | |
| 2,596,649 | | |
| 1,806,874 | |
Net
loss per share attributable to Common Stockholders – basic and diluted (1) | |
$ | (17.33 | ) | |
$ | (4.68 | ) | |
$ | (57.21 | ) | |
$ | (10.66 | ) |
(1) |
Periods presented have been
adjusted to reflect the 1-for-1.581804 reverse stock split on January 12, 2021 and the 1-for-10 reverse stock split on October 18,
2022. Additional information regarding the reverse stock splits may be found in Note 1 –
Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere
in the notes to the condensed consolidated financial statements. |
The
Company’s potential dilutive securities, which include stock options and warrants, have been excluded from the computation of diluted
net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding
used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded
the following potential common shares equivalents presented based on amounts outstanding at each period end, from the computation of
diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive
effect:
| |
September 30, 2022 | | |
December 31, 2021 | |
Shares subject to outstanding Common Stock options | |
| 285,675 | | |
| 356,429 | |
Shares subject to unvested restricted stock units | |
| 159,300 | | |
| — | |
Shares subject to outstanding warrants | |
| 2,430,787 | | |
| 27,184 | |
| |
| 2,875,762 | | |
| 383,613 | |
Note
17 — Commitments and Contingencies
Legal
Matters
Cooper
and Weinstein Matter
On
January 5, 2021, the Company received a demand letter from Nicholas Cooper and Richard Weinstein, (two of the Company’s former
employees), and one of Mr. Cooper’s affiliated entities, asserting that Messrs. Cooper and Weinstein were entitled to compensation
arising out of their employment by the Company, and their partial ownership of TriGrow Systems, LLC which had been acquired by the Company.
The demand letter asserts that Messrs. Cooper and Weinstein are due certain sales commissions under their applicable bonus plan, equity
earn-outs based on certain sales targets, and various equity purchases through the Company’s employee stock ownership plan. The
demand letter also asserts various employment claims, including but not limited to, statutory wage withholding violations, wrongful termination,
breach of contract, breach of the duty of good faith and fair dealing, fraud in the inducement, promissory estoppel, minority shareholder
oppression, breach of fiduciary duty, unjust enrichment, and violations of state and federal securities laws.
On
January 19, 2021, Messrs. Cooper and Weinstein filed a lawsuit against the Company in the United States District Court for the Western
District of Washington, alleging the same claims made in their demand letter based on the facts disclosed above. The plaintiffs are seeking
relief in the form of monetary damages in an amount to be determined. Messrs. Cooper and Weinstein are also seeking relief in the form
of reinstatement and Mr. Weinstein is seeking rescission of his previously executed Release of Claims Agreement. On March 10, 2021, the
Company moved to dismiss all Messrs. Cooper and Weinstein’s claims, asserting that the claims failed to allege legal grounds for
relief. On May 12, 2021, a Magistrate issued a preliminary Report and Recommendation, which recommended dismissal of certain of Messrs.
Cooper and Weinstein’s claims, and recommended others for additional factual discovery. On July 27, 2021, a District Judge entered
an order partially adopting the Report and Recommendation, dismissing one claim with prejudice, dismissing a second claim with leave
to amend, and permitting the remaining claims to proceed.
Additionally,
on July 29, 2021, the Company filed a separate arbitration in Boston, Massachusetts against Messrs. Cooper and Weinstein, in which the
Company alleges that Messrs. Cooper and Weinstein were liable for certain conduct during the time they were TriGrow employees, including
breach of fiduciary duty, unjust enrichment, usurpation of corporate opportunity, conversion, fraudulent concealment, and false representation. Also
on July 29, 2021, the Company submitted a claim for indemnification to certain legacy TriGrow Systems, LLC. shareholders. The claim
for indemnification relates to conduct by Messrs. Cooper and Weinstein during the time they were TriGrow employees. During the third
quarter of 2022, the Company and Messrs. Cooper and Weinstein settled all claims and potential claims between themselves and any affiliated
entities by the Company to Messrs. Cooper and Weinstein, and a related entity for approximately $800 thousand.
United
States Customs Seizure Matter
On
June 28, 2022, the Company was notified by the United States Customs and Border Protection (“CBP”) that they seized 123 cartons
of horticulture grow lights appraised at approximately $623 thousand at the Port of Savannah, Georgia based on CBP’s interpretation
of certain importation laws which prohibit the importation of certain goods that are subject to health and safety legal restrictions,
including a prohibition on the importation of drug paraphernalia, in accordance with 21 U.S.C. § 863(a). The Company is currently
disputing the seizure. The Company does not believe these claims have any merit and intends to vigorously defend its position.
Commitments
Supply
Agreement with Mack Molding Co.
In
December 2020, the Company entered into a five-year supply agreement with Mack Molding Co. (“Mack”) pursuant to which Mack
will become a key supplier of VFUs. In February 2021, the Company placed a purchase order with Mack amounting to approximately $5.2 million
towards the initial production of VFUs during 2021. In September 2021, the Company increased the purchase order with Mack to approximately
$11.5 million towards production of VFUs during 2021 and 2022. The Company believes the supply agreement with Mack will provide the Company
with increased scaling capabilities and the ability to meet the potential future demand of its customers more efficiently. The supply
agreement contemplates that, following an introductory period, the Company will negotiate a minimum percentage of the VFU requirements
that the Company will purchase from Mack each year based on the agreed-upon pricing formula. The introductory period is not time-based
but rather refers to the production of an initial number of units after which the parties have rights to adjust pricing and negotiate
a certain minimum requirements percentage. The Company believes this approach will result in both parties making a more informed decision
with respect to the pricing and other terms of the supply agreement with Mack.
Distribution
Agreements with Related Party
On
September 7, 2019, the Company entered into a distribution agreement with Bluezone Products, Inc. (“Bluezone”) for distribution
rights to the Bluezone products with certain exclusivity rights. The agreement requires minimum purchases amounting to $480 thousand
and $600 thousand for the first and second contract anniversary years. The agreement auto-renews for successive one-year periods unless
earlier terminated. In March 2021, the Company notified Bluezone of the non-renewal of the agreement which means it ended on May 31,
2021. The Company exceeded the minimum purchase amount for the first year and purchased approximately $309 thousand of the committed
$660 thousand second-year purchases through December 31, 2021. Bluezone is a related party to the Company.
Committed
Purchase Agreement with Related Party – Greenstone
On
December 29, 2021, Greenstone purchased 239 VFUs from the Company of which 60 VFUs were already in Greenstone’s possession under
a lease agreement. Under the lease agreement, Greenstone owed the Company a production service fee of $300 per pound of flower produced
and contained an option to purchase the equipment within the lease agreement. The term of this agreement was for ten years, but it was
terminated upon signing the purchase agreement for the 239 VFUs. There is no remaining obligation under the lease agreement. The remaining
179 VFUs were shipped to the Greenstone storage facility on December 30, 2021 and December 31, 2021. Greenstone is a related party to
the Company. Additional information regarding recent developments with Greenstone may be found in Note
5 – Loan Receivable, included elsewhere in the notes to the consolidated financial statements.
Committed
Purchase Agreement with Related Party – Ora Pharm
In
June 2022, the Company entered into an agreement with Ora Pharm (“Ora”) pursuant to which Ora will purchase approximately
$1.6 million in equipment from the Company, and Ora may purchase software services from the Company in the future. Mr. Wilcox is the
Chairman of Ora. Mr. Wilcox has not had an interest in any transaction since the beginning of the Company’s last fiscal year, or
any currently proposed transaction. There are no family relationships among any of the Company’s directors or executive officers
and Mr. Wilcox.
Other
Commitments and Contingencies
The
Company is potentially subject to claims related to various non-income taxes (such as sales, value-added, consumption, and similar taxes)
from various tax authorities, including in jurisdictions in which the Company already collects and remits such taxes. If the relevant
taxing authorities successfully pursue these claims, the Company could be subject to additional tax liabilities.
Refer
to Note 9 – Debt, included elsewhere in the notes to the consolidated financial statements for details of the Company’s future
minimum debt payments. Refer to Note 10 – Leases, included elsewhere in the notes to the consolidated financial statements for
details of the Company’s future minimum lease payments under operating and financing lease liabilities. Refer to Note 15 –
Income Taxes, included elsewhere in the notes to the consolidated financial statements for information regarding income tax contingencies.
Note
18 — Related Parties
Some
of the officers and directors of the Company are involved in other business activities and may, in the future, become involved in other
business opportunities that become available.
The
following table describes the net purchasing (sales) activity with entities identified as related parties to the Company:
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
(In
thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Bluezone | |
$ | — | | |
$ | 217 | | |
$ | 5 | | |
$ | 310 | |
4D Bios (1) | |
| — | | |
| 864 | | |
| — | | |
| 1,311 | |
Enzo | |
| — | | |
| 40 | | |
| — | | |
| 40 | |
Cannae Policy Group | |
| — | | |
| — | | |
| 25 | | |
| — | |
Topline Performance Group | |
| 1 | | |
| — | | |
| 71 | | |
| — | |
NEIA | |
| — | | |
| (3,217 | ) | |
| (1,763 | ) | |
| (19,572 | ) |
Greenstone | |
| 212 | | |
| (1,998 | ) | |
| 392 | | |
| (1,998 | ) |
Valiant Americas, LLC | |
| 1,315 | | |
| 606 | | |
| 11,120 | | |
| 2,323 | |
Living Greens Farm | |
| — | | |
| — | | |
| — | | |
| (58 | ) |
| (1) | Purchases from 4D for the nine months ended September 30, 2021 include $384 thousand for a down payment on inventory orders. |
The
following table summarizes net related party receivable (payable) as of September 30, 2022 and December 31, 2021:
(In
thousands) | |
September 30,
2022 | | |
December 31,
2021 | |
Cannae
Policy Group | |
$ | — | | |
$ | (8 | ) |
Cannaquip | |
| — | | |
| (21 | ) |
Greenstone (net of allowance for doubtful accounts of $7,079 and $0 at September 30, 2022 and December 31, 2021, respectively) (1) | |
| 5,308 | | |
| 11,177 | |
Living
Greens Farm (2) | |
| — | | |
| 34 | |
NEIA | |
| — | | |
| 3,500 | |
Valiant
Americas, LLC | |
| (599 | ) | |
| (922 | ) |
Topline
Performance Group | |
| (1 | ) | |
| — | |
| (1) | The
Greenstone allowance for doubtful accounts balance consisted of capital advances, accrued
interest and VFUs sales. Additional information regarding recent developments with Greenstone
may be found in Note 5 – Loan Receivable, included
elsewhere in the notes to the consolidated financial statements. |
| (2) | The
balance was fully reserved at September 30, 2022 due to an ongoing dispute with the customer. |
Note 19 —
Subsequent Events
Bud
& Mary’s Litigation
On September 15, 2022, the Company provided a
notice of default to Bud & Mary’s and certain related parties notifying such parties that Bud & Mary’s was in default
of its obligations under the Bud & Mary TTK Agreement. On October 5, 2022, Bud & Mary’s filed a complaint in the Superior
Court of Massachusetts in Suffolk County naming the Company as defendant. Bud & Mary’s is seeking, among other relief, monetary
damages in connection with alleged unfair or deceptive trade practices, breach of contract and conversion arising from the Agreement.
While the Company believes the claim is without merit and will continue to vigorously defend itself against Bud & Mary’s allegations,
litigation is inherently unpredictable and there can be no assurance that the Company will prevail in this matter.
During the third
quarter of 2022, the Company deemed it necessary to fully reserve for the outstanding $14.7 million note receivable balance outstanding
due to the current litigation and the uncertainty of the customer’s ability to repay the outstanding balance. The $14.7 million
represents the amount of the contingent loss that the Company has determined to be reasonably possible and estimable. The actual cost
of resolving this matter may be higher or lower than the amount the Company has reserved. In addition, $5.3 million of the notes receivable
balance for work performed during the third quarter of 2022 has been recorded as an unbilled note receivable and deferred the revenue
to a future period. The Company has recognized the expenses associated with the work completed in the current period due to the uncertainty
of the Company’s ability to recover the funds owed by the customer and its obligations to the vendors that have performed this
work. The Company determined that it will only recognize unbilled notes receivable revenue if cash is collected from the customer in
a future period.
Approval
of Issuance of Shares Upon Exercise of Warrants
On October 14, 2022, the Company received approval for the issuance
of up to 2,110,875 shares of Common Stock upon the exercise of the SPA Warrant and Note Exchange Warrant in
connection with the issuance of a senior secured note and the exchange of previously issued warrants in August 2022, and the reduction
of the exercise price of certain of those warrants under certain circumstances, was approved. Additional information regarding
the Warrant Liabilities may be found in Note 9 – Debt, included elsewhere in the notes to
the consolidated financial statements.
Reverse
Stock Split
On
October 18, 2022, the Company effected a 1-for-10 reverse stock split of its Common Stock. All owners of record as of October 18, 2022
received one issued and outstanding share of the Company’s Common Stock in exchange for ten outstanding shares of the Company’s
Common Stock. Additional information regarding the reverse stock splits may be found in Note 1
– Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere
in the notes to the consolidated financial statements.
At
The Marketing Offering
In October 2022, the Company entered into the ATM Program with the
Agent. The ATM Program allows the Company to sell shares of Common Stock pursuant to specific parameters defined by the Company as well
as those defined by the SEC and the ATM Program agreement. Subsequent to the quarter ended September 30, 2022, as of November 7, 2022,
the Company sold 6,132,565 shares of Common Stock, under the ATM at an average price of $2.54 per share, resulting in gross proceeds to
the Company of $15.6 million, and net proceeds of $15.1 million after commissions and fees to the Agent totaling $468 thousand. $3.1 million
of the proceeds under the ATM Program were used to repay amounts due to the Investor under the Exchange Note. The ATM allows for quick
and agile sales of Common Stock to interested investors and provides an opportunity to raise additional capital for working capital requirements
or to fund strategic opportunities that may present themselves from time to time. The Company has used, and intends to continue to use,
the net proceeds generated from the ATM Program for working capital and general corporate purposes, including repayment of indebtedness,
funding its transformation initiatives and product category expansion efforts and capital expenditures.
Nasdaq
Deficiency Notice
On
October 4, 2022, the Company received a deficiency letter (the “Notice”) from the Listing Qualifications Department (the
“Staff”) of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business
days, the bid price for the Company’s Common Stock had closed below $1.00 per share, which is the minimum closing price required
to maintain a continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”).
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company had 180 calendar days to regain compliance with the Minimum Bid Requirement.
To regain compliance with the Minimum Bid Requirement, the closing bid price of the Company’s Common Stock must be at least $1.00
per share for a minimum of 10 consecutive trading days during this 180-day compliance period, unless the Staff exercises its
discretion to extend the minimum trading day period pursuant to Nasdaq Listing Rule 5810(c)(3)(G). On October 28, 2022, the Staff notified
the Company that the closing bid price for its Common Stock was more than $1.00 for 10 consecutive trading days, and that the Company
therefore regained compliance with the Minimum Bid Requirement.
Agrify-Valiant
On October 27, 2022, the Company provided notice to Valiant-America,
LLC that the Company intended to begin the winding up of Agrify-Valiant.