Business Context and Reporting Period
The provided filing is an unaudited Form 10-Q for Agrify Corporation, not RYTHM, Inc., for the quarter and six months ended June 30, 2021. Agrify develops integrated hardware, software, cultivation solutions, and facility build-out services for indoor agriculture. The company’s common stock trades on Nasdaq under AGFY. The filing was signed August 12, 2021.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $11.825 million | $3.908 million | $18.833 million | $4.921 million |
| Gross profit (loss) | $0.527 million | $1.018 million | $(0.013) million | $1.059 million |
| Gross margin | 4.5% | 26.0% | Less than (1)% | 21.5% |
| Operating loss | $(5.428) million | $(2.438) million | $(11.924) million | $(5.887) million |
| Net loss attributable to Agrify | $(5.636) million | $(2.444) million | $(9.446) million | $(5.857) million |
| Basic and diluted loss per share | $(0.28) | $(0.60) | $(0.57) | $(1.46) |
| Net cash used in operating activities | $(6.558) million | $(3.978) million | $(13.837) million | $(7.898) million |
At June 30, 2021, cash and cash equivalents were $79.841 million, current marketable securities were $35.930 million, and non-current marketable securities were $14.360 million. Total assets were $163.460 million, compared with $21.839 million at December 31, 2020. Total liabilities were $21.632 million, including $0.833 million of long-term debt, $0.842 million of operating lease liabilities, and $0.510 million of finance lease liabilities. Stockholders’ equity was $141.436 million, compared with a deficit of $6.679 million at year-end 2020.
Six-month investing cash outflows were $51.865 million, including $50.280 million invested in held-to-maturity securities, $1.102 million of capital expenditures, and $0.483 million advanced under a customer loan. Financing cash inflows were $137.432 million, primarily from approximately $57 million of net IPO proceeds and approximately $80 million from a subsequent public offering.
Material Changes Versus Prior Comparable Period
- Revenue increased 202% in the second quarter and 283% for the first six months, largely because facility build-out revenue increased to $10.701 million for the quarter and $17.472 million year to date.
- Revenue mix shifted away from cultivation solutions. The company sold 18 AVFUs in the quarter and 22 year to date, compared with 129 and 179, respectively, in the prior-year periods.
- Gross margin declined materially because facility build-outs generated lower margins, HMH production costs increased, and the company recorded a $0.113 million inventory obsolescence reserve related to an AVFU design transition.
- Operating expenses increased to $5.955 million for the quarter and $11.911 million year to date, driven primarily by higher selling, general and administrative costs, insurance, payroll, and stock-based compensation.
- Shares outstanding increased substantially following the IPO, the February offering, conversion of convertible notes and Series A preferred stock, and option and warrant exercises. The company reported 20.373699 million common shares outstanding at June 30, 2021 and 20.558433 million as of August 10, 2021.
- The company recognized a $2.685 million gain on extinguishment of notes payable during the first six months of 2021. The $13.100 million principal balance of convertible notes converted into 1.697075 million common shares upon the IPO.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that most second-half 2021 revenue was expected to continue coming from facility build-outs and believed cash resources, together with operating cash flows, would support planned operations for at least the next 12 months. No quantified revenue or earnings guidance was provided.
- The company increased its purchase order with Mack Molding to approximately $11.5 million for AVFU production during 2021 and 2022 under a five-year supply agreement.
- One customer represented 92.1% of second-quarter revenue and 86.8% of six-month revenue. Two customers represented 88.2% of accounts receivable at June 30, 2021, creating significant concentration and collection risk.
- A customer-related construction loan had a recorded balance of $0.955 million, net of a $0.069 million allowance, and two Agrify employees owned 36.6% of that customer. The customer was determined to be a VIE, but Agrify concluded it was not the primary beneficiary.
- COVID-19-related supply-chain disruption, demand uncertainty, execution of facility build-outs, inventory management, and the ability to scale AVFU production remain important risks.
- The company had not applied for forgiveness of approximately $0.823 million of PPP loans. If forgiveness is not obtained, principal and accrued interest would be repayable.
- Former employees filed litigation alleging compensation, employment, fiduciary, contract, and securities-related claims. On July 27, 2021, some claims were dismissed while others were allowed to proceed. Agrify stated that it believes the claims lack merit and intends to defend them. Agrify also initiated arbitration and sought indemnification from former TriGrow shareholders.
- Management concluded that disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2021 and stated that remediation measures were being implemented.
- Stock-based compensation expense was $3.066 million for the first six months, including $1.502 million from accelerated vesting related to the IPO. An additional $10.125 million of unrecognized compensation cost remained at June 30, 2021.
Important Facts for Investors to Verify
- Verify the issuer identity: the supplied metadata names RYTHM, Inc., while the filing identifies Agrify Corporation and ticker AGFY.
- Assess whether the sharp revenue increase is repeatable, given the dependence on one customer and the concentration in facility build-outs.
- Review gross-margin sustainability, construction-cost accruals, inventory obsolescence, and the economics of the Mack supply agreement.
- Reconcile cash and securities balances with ongoing operating cash burn and planned capital expenditures.
- Evaluate dilution from outstanding options and warrants, including 3.970 million options and 0.966 million warrants excluded from loss-per-share calculations.
- Monitor the former-employee litigation, related arbitration, indemnification claim, PPP loan forgiveness, and the remediation of material internal-control weaknesses.