Greetings and welcome to the Agrify Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host Anna Kate Heller. Please go ahead.

Good morning and welcome to Agrify's third quarter 2022 earnings call. With us on today's call are Raymond Chang, Chief Executive Officer; and Timothy Oakes, Chief Financial Officer. Today, management will review the highlights and financial results for the third quarter and provide a business and operational update. Following management's remarks, there will be a question-and-answer session. A reminder that today's conference call is being recorded and a replay will be available on Agrify's Investor Relations website at ir.agrify.com. Please note that we will be referring to information that's contained within our earnings press release, which can be accessed on the Investor Relations website as well. Before we begin, we would like to remind everyone that management's remarks contain forward-looking statements and management may make additional forward-looking statements in response to your question. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control that could cause its future results, performance, or achievements to differ significantly from the results, performance, or achievements expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include the risks detailed in our public filings with the Securities and Exchange Commission and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events, or otherwise. I will now turn it over to Raymond.

Thanks, Anna Kate, and thank you everyone for joining us on the call today. I'm going to begin by providing an overview of our performance in Q3 as well as some recent updates on our business and then our Chief Financial Officer, Tim Oakes, is going to discuss our Q3 financial results in greater detail. After that I will go over – I'll look for the remainder of 2022 and then we will open up the call for questions. For the third quarter, we ended up with $7 million in revenue. It is very important that I explained the shortfall in our Q3 revenue in more detail. As we have disclosed publicly our customer Bud & Mary's defaulted on its construction loan facility and we serve them with a default notice on September 15th. In Bud & Mary's filed a baseless lawsuit in attempt to avoid having to repay the credit facility. The lawsuit is entirely without merit and we are taking all necessary steps to pursue repayment from Bud & Mary's. As a result of the pending lawsuits and based on the ASC 606 revenue recognition standard, we elected not to recognize $5.3 million of design and build revenue related to Bud & Mary's project in Q3. I want to reiterate that we are confident that we are – we have the legal rights and means necessary to recover the deferred revenue once the legal process runs its course. Bud & Mary's construction loan is guaranteed by Bud & Mary's Holding and David Morgan, Founder and CEO of Bud & Mary's personally. You can be assured that Agrify will continue to take every step necessary to pursue repayment from Bud & Mary's and protect all our shareholders' interests. On top line Q3 revenue number was also obviously impacted as…

Thank you, Raymond. Good morning everyone and thank you for once again joining us on today's earnings call. As we've done in prior quarters, I'll take some time to speak to our third quarter 2022 financial results and then I'll pass the call back to Raymond for closing remarks. Like last quarter, there’s a lot to digest with respect to our third quarter financial performance. So it is going to take some time or some extra time to go through everything. Starting with revenue. Revenue in the third quarter of 2022 totaled $7 million compared to revenue of $15.8 million in the third quarter of 2021. This represents an $8.8 million or 55.4% year-over-year decrease in comparative quarterly revenue. The decrease in third quarter 2022 revenue is solely related to a comparative year-over-year decline in our lower margin design and build revenue. Design and build revenue declined by $11.7 million in the comparative quarterly periods from $13 million in the third quarter of 2021 to $1.3 million in the third quarter of 2022. It is important to note that third quarter 2022 design and build revenue excludes approximately $5.3 million of revenue associated with our TTK solution project with Bud & Mary’s. This revenue has been deferred as a direct result of Bud & Mary’s lawsuit, which challenges our ability to recognize the revenue on the work perform during the quarter as collectability of the amounts becomes uncertain. And as Raymond mentioned in his script earlier, despite the accounting position taken by the company during the current quarter, the company tends to vigorously defend itself against the claims made by Bud & Mary’s in its lawsuit and believes that it has the documented support to prevail in this matter and the legal recourse necessary to recover the outstanding amounts due…

Thank you, Tim. I would now like to turn to our guidance for the remainder of fiscal year 2022. Since we are deferring the $5.3 million of Bud & Mary’s revenue for the reasons stated above, we are reducing our guidance down to $65 million to $70 million versus the original guidance of $70 million to $75 million. In other words, if it wasn’t for the 5.3 deferred revenue, we would have been on track to deliver our previously guided forecasts. I would now like to open up the call to questions. Operator, please go ahead.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Aaron Grey of Alliance Global Partners. Please go ahead.

Hi, good morning. This is Remy Smith on for Aaron Grey. Thank you for the questions. You touched on this kind of a little bit in your opening remarks, but is there any kind of more market share, retail sales data in the markets where partners are selling products cultivated within VFUs in those legacy states? I just want to get a little bit more color on that for the data points to demonstrate the flowing to retail sales. Thank you.

Yes, so our customers in Nevada, WhiteCloud has continued to sell through their dispensaries. They had to do a restart because of the some licensing issue, but they're basically coming back on track. And so far the flowers that they have been able to sell through the retail have been deemed as very high quality and they continue to produce – the yield continue to go up and we expect that once the resorts come to fruition, they will be able to again sell at a very high premium in the Nevada market.

Great. And then my second question regarding the extraction business, you have a strong line of sight in terms of the pipeline, particularly as we were seeing a number of operators pull back on CapEx. And are there any other factors think about outside the macro might be impacting the extraction business such as competing products and pricing?

We still continue to see very strong pipeline as well as momentum behind our extraction business. As mentioned earlier the pipeline for our extraction business stands at over $40 plus million. And we're seeing a very, very strong rebound in the fourth quarter in our extraction division. And as mentioned also in Q3 unfortunately because of the tight cash covenant and also some customer what do you call it delays on the completion of the facility construction roughly about $3 million of business was kind of pushed into Q4, which we expect to ship this quarter. So yes, so we're continuing to see very strong momentum behind – positive momentum behind our extraction division, definitely a rebound from quarter three. And as also mentioned earlier we continue to innovate with new products at the launch of the PX10, it's one, and we will be also introducing additional new products in the upcoming MJBiz as well.

Great, thank you.

Our next question is from Eric Des Lauriers of Craig-Hallum. Please go ahead.

Great. Thank you for taking my questions. I was wondering if you could comment a bit on the extraction businesses the overall sort of demand that you're seeing for those products and then if the sort of – taking those extraction products and really implementing the control and visibility into those and essentially creating a similar like TTK type offering for extraction. Just wondering if that is still on the sort of near-term strategy list here and just overall comments about the extraction business would be great. Thank you.

Yes, Eric, we're definitely seeing a rebound of the momentum like I said for quarter four. I think what's happening now is yes obviously due to the macro market condition in quarter three there were some holdback on the spending, but I think we're seeing a reversal of that trend even starting from October timeframe. And like I said, I think this quarter we're seeing a very, very positive reversal of that trend. What is also actually very encouraging for us is that our parts and – parts sales and also e-commerce are recording probably some of the strongest numbers that we have seen. I think what's happening now is probably some people are just kind of – instead of maybe making new purchases we're trying to basically retrofit some of their existing products. And so we're seeing a very, very strong parts and e-commerce sales out of our extraction division. And we're also seeing adoption of our new technology. As I mentioned, we launched PX10 the latest technology innovation on the hydrocarbon side and already we have three customers using this solution. And we're also seeing very, very strong interests towards some of the other new product innovations that we're introducing into the market. As to basically the consistency and quality issue that you mentioned absolutely that is something that we continue to work on. And in fact the RDP program that we are rolling out as of today actually gives customers the option to basically buy an equivalent solution beyond just cultivation. So they could actually buy complementary extraction total turnkey solution that, for example, if they purchase 56 VFUs, then we would basically do some calculation with them. And depending on the type of products that they want to produce, we would then design an extraction lab that provides them with a complete solution, so that they could actually offer more products into the market. And I think that combination of cultivation and extraction are becoming extremely, extremely attractive. And in fact a lot of the RDP programs, the customers are actually adopting or subscribing to this additional optional upgrade to take on both the extraction as well as the cultivation solutions. We are not yet ready to basically launch TTK around extraction yet. Most of the RDP programs that we're selling right now is still basically based on basically just upfront cash sales. We still need to do a bit of work to be able to turn the existing extraction equipment to be able to control remotely through cloud. And once that is completed, then we would be able to offer the TTK program because as you know very much similar to kind of the VFUs. We want to be able to remotely control as well as monitor the performance of the extraction equipment before we offer the TTK program, and that's something that we continue to work on.

Thank you.

Our next question is from Anthony Vendetti of Maxim Group. Please go ahead.

Thanks. I just wanted to go over a couple of the numbers. So the qualify – did you say the qualified pipeline has about $31.1 million in cultivation and $45.9 million in extraction?

That's correct, $31.1 million and $45.9 million.

Okay. And usually, or sometimes you give a backlog number I'm sure the signed contracts, what was the backlog number at the end of the third quarter?

Tim, can you – you have the most accurate number. Kim, can you provide that please?

Yes, yes. Yes, Anthony, we actually did, I gave that number as part of my script. So the backlog number as reported in my script was 646,000 as of the end of the third quarter. Obviously, the majority of that being SaaS related fees and production base fees, and that amount of that backlog number that represents about 90% of the total backlog number.

646,000…

646 million, yes, my bad. Sorry. I apologize, yes.

Yes. Yes, yes. Oh, okay. Yes. And typically just remind us, Tim, that's over a 10 year period typically how that gets recognized.

Yes. The SaaS and production fees are predominantly over a 10 year period based upon the initial TTK engagements. As we look at things like Raymond talked about the RDP program while those are point in time equipment sale, they also do come with some limited period SaaS and production fee revenue. So that would be on a shorter string or a shorter timeline, but the majority of that SaaS and production is spread over 10 years.

Okay. And then with the Bud & Mary's lawsuit, can you talk about where that's currently at? And I know you probably don't have an exact timeline of how this is expected to roll out. These things could take sometimes years. But have you had any settlement talks with them? Maybe just give us an update on where you are with Bud & Mary's.

Anthony, as much as I would love to, I don't think we are allowed to basically get into the details while the legal is underway. But what I can tell you is that we are very, very confident that we will be able to recover 100% of basically everything that we invested into this project. And we have both the resources as well as the legal means to go after this. And as I mentioned earlier, also that the project does come with both the corporate as well as personal guarantee from David Morgan, the Founder and CEO of Bud & Mary’s. And the – while – unfortunately, while the depending lawsuit is still ongoing, I basically was advised that we’re not allowed to discuss too much of it, but it is moving in the right direction, and we have all the resources as well as the legal means to recover.

Okay. So, David Morgan, the Founder of Bud & Mary’s, so it’s not just the commercial assets, but his personal assets that were part of the agreement and you have the right in the contract to recover lost revenue or revenue that is due under that contract through Bud & Mary’s as well as his personal assets?

That is correct. So the corporate guarantees we have both the corporate as well as personal guarantees. On the corporate side, they own the dispensary license. They have a home delivery license as well as two multiple cultivation licenses and product manufacturing license. And as I mentioned earlier, this is actually guaranteed by not only corporate, but David Morgan, the Founder, CEO personally.

Okay. In terms of new business in terms of building a pipeline, how has this lawsuit impacted future business? Does this take – is it taking a little bit longer to close new business as maybe customers are wondering what the issues are or have you seen a change at this point?

So, Anthony, I think as we have kind of emphasized given that kind of change in the market condition we have decided to not invest further into the TTK project or future TTK projects at this moment. Obviously, the ones that we are committed to every single one of them, we have the resources to basically bring them to fruition, right? And that’s basically the three that I talked about earlier. We have resources dedicated for Bud & Mary’s and also we have other TTK projects such as Gold Leaf that we have allocated VFU equipment towards. So all those projects we will – we are fully committed to basically bringing to a fruition. Now, simultaneously, what is really picking up steam is the rapid deployment program, right? In the past, TTK, as you know, it’s a basically a large – long-term investment that requires substantial capital outlay from the company up front. And given kind of the market condition today, I don’t believe that the market no longer has that sort of appetite. The RDP program is really what is selling out there. People can get started with $2 million to $3 million investment, and in fact, if they could get – started with even less capital, they could just basically purchase eight of our VFUs and then they would have sufficient biomass to maybe support one dispensary. So it really kind of gives the customers the flexibility to be able to scale over time, and also not having to wait 12 months, 15 months, large capital outlay to get projects going. So this rapid deployment program is really what’s picking up steam. And unlike the TTK program where it requires Agrify to put in all the capital up front and invests at our risk. We are basically selling, right, all the hardware with margin plus, there’s also recurring stats and production fees attached to it. And I think this new model is really what’s resonating. And even with very little marketing, we actually, in fact, initially did not plan to really kind of sell this or market this until MJBiz, but as I mentioned earlier, we’re already seeing tremendous traction and with MJBiz coming up. I think, it’s just going to pick up even more steam. So it’s a pivot of our business model, which I think is the right thing to do given, the current market condition. And people see that as completely different from the old TTK model that basically what was – what we kind of focused on last year and first half of this year.

Okay. And then last question is Tim, you mentioned about some severance and – cost reductions, cash flow using the quarter from operating activities was $8.5 million. With the cash – with the cost reductions that are in place now, what is the new expected cash flow use? Tim, have you modeled what that would be or what you expect it to be range for the fourth quarter?

Yes, that’s a good question, but I’m going to – we don’t give cash flow guidance, right? We’re not going to guide cash flow. We’re happy and pleased that cash flow from ops is only $8.5 million relative to what the historical track record in Q1 and Q2 were. But I will tell you, you have to think about the question you asked as it relates to, or in conjunction with the restructured debt agreement. The terms of that debt agreement states that the company is limited from a net cash spend point of view of $4 million in net cash flow spend per month and $8 million per quarter in aggregate. So that is sort of the guide rails that we have to operate on or under as we move forward through Q4 into 2023. So given that, I just think relationally to where we are right now and what the parameters are of that restructured debt agreement you would expect that cash flow from ops number to be either consistent where it was in Q3 or lower as we move through Q4.

Okay, thanks. I’ll hop back on the queue. Appreciate it.

Our next question is from Scott Fortune of ROTH Capital Partners. Please go ahead.

Hey, good morning. This is Nick on for Scott. Just looking for some color on your recent harvest metrics with the RDP set to roll out here. Just wondering if you’ve seen any improvements you want to call out on the yield or the potency side and just kind of how you’re looking at further improving the VFU product moving forward here in this environment? Thank you.

Yes, so and Nick, so basically the RDP program as I mentioned, we are just now taking orders. So they have actually not been shipped. We are expecting to ship some of the existing orders in the coming quarter. So we don’t not – we do not yet have the operating metrics for those RDP program just yet, but they’re using our traditional 3.6 VFUs. So I would say that you can expect to pretty much get the same sort of results from the 3.6. [ph] As I’ve also mentioned earlier the new 3.7 VFU development is now complete and we can actually begin to ship the 3.7 [ph] units in first quarter of next year. And we believe that you could expect to have even better yield and results from the new 3.7 VFUs, which we will also be featuring and showcasing at the upcoming MJBiz.

Okay. Thank you for that caller. And then just looking for an update on the status of your supply chain and whether or not you’ve seen those headwinds kind of begin to abate here. Just if you could unpack the changes you’ve seen within your supply chain and this environment, that would be helpful too. Thank you.

Yes, I think on the cultivation side, we have sufficient inventory to basically fulfill, our most immediate customer orders. So from that perspective, I think, supply chain is not going to necessarily affect our ability to ship these units. I think construction delays are still maybe happening, but we’re seeing that pressure subside or basically reducing. So, we do expect that on the cultivation front, supply chain is probably not going to be too big of an issue. On the extraction front, yes, we do still kind of work with our vendor suppliers. Obviously, in Q3 probably not so much of the supply chain issue, but obviously because of the cash spent covenant. we weren’t able to fulfill some of that orders. But I think that is something that we still have to qualify during quarter four. But I think it seems like both internally and externally supply chain pressure is probably getting resolved. But it’s not completely, but we definitely see some improvements around that.

Great. That’s it for me. I appreciate the color.

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Raymond Chang for any closing comments. Please go ahead, sir.

Thank you everyone for joining the call today and look forward to speaking in our next quarter call. Again, appreciate and look forward to having – giving everybody an update as we continue to focus on our execution and delivery results. Thank you.

That concludes today’s conference. Thank you for joining us. You may now disconnect your lines.