SEC Form 10-Q Summary
Filing identity: The supplied filing is for Agrify Corporation (NASDAQ: AGFY), not RYTHM, Inc. Investors should verify the company and filing metadata before relying on this summary. The report covers the unaudited quarter and six months ended June 30, 2023; it was signed December 11, 2023.
Business context and reporting period
Agrify provides cultivation, extraction, post-processing, testing, construction, equipment, and software solutions for the cannabis and hemp industries, including Agrify Vertical Farming Units and Agrify Insights software. It is a smaller reporting company and emerging growth company.
The company completed a 1-for-20 reverse stock split on July 5, 2023. Share and per-share amounts in the filing have been retroactively adjusted.
Financial performance and position
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Revenue | $5.1 million | $19.3 million | $10.9 million | $45.4 million |
| Gross profit | $0.6 million | $1.6 million | $1.6 million | $5.8 million |
| Gross margin | 11.8% | 8.3% | 14.6% | 12.7% |
| Loss from operations | $(5.3) million | $(91.5) million | $(12.9) million | $(101.3) million |
| Net loss attributable to Agrify | $(6.8) million | $(74.6) million | $(17.1) million | $(72.8) million |
| Basic and diluted loss per share | $(4.39) | $(561.31) | $(13.05) | $(569.13) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(11.6) million | $(50.5) million |
Revenue fell 74% year over year in the second quarter and 76% for the six-month period. Six-month revenue consisted primarily of extraction solutions revenue of $9.4 million, facility build-outs of $0.9 million, cultivation solutions of $0.5 million, and Agrify Insights software of $0.1 million.
At June 30, 2023, cash and cash equivalents were $0.3 million, marketable securities were $4 thousand, total assets were $45.4 million, current liabilities were $39.8 million, total liabilities were $65.1 million, and stockholders’ deficit attributable to Agrify was $19.9 million. Net debt, based on reported debt of $20.6 million less cash and marketable securities, was approximately $20.3 million.
Debt included an Exchange Note, PPP loan, and other notes. Debt net of discount totaled $20.6 million, including $1.4 million classified as current and $19.2 million as long-term. The Exchange Note bears 9% annual interest and is secured; the PPP loan bears 1% interest and matures in 2025.
Material changes versus the prior comparable period
- Revenue declined by $14.3 million in the quarter and $34.5 million for the six months, primarily because of reduced facility build-outs under TTK Solutions and lower extraction sales.
- Gross margin improved to 11.8% in the quarter and 14.6% year to date, although gross profit dollars declined because of the substantial revenue contraction.
- Operating expenses declined materially as the prior-year comparison included a $69.9 million impairment of goodwill and intangible assets. No such impairment was recorded in 2023.
- General and administrative expense declined 60% for the six months, partly due to lower bad-debt expense, payroll, acquisition-related costs, stock-based compensation, and depreciation.
- The company prepaid approximately $10.3 million of debt and exchanged $10.0 million of remaining debt for a senior secured convertible note in March 2023. It recorded a $4.6 million loss on extinguishment.
- The company issued shares through its ATM program and other debt conversions. Common shares outstanding increased from 1.04 million at December 31, 2022 to 1.62 million at June 30, 2023, on a post-reverse-split basis.
- Operating cash use improved from $50.5 million to $11.6 million, but cash and cash equivalents declined from $10.5 million at year-end to $0.3 million at June 30, 2023.
Outlook, liquidity, risks, and unusual items
Management states that operating losses, negative operating cash flows, a working-capital deficiency, an accumulated deficit of $264.3 million, and only approximately $0.3 million of cash plus marketable securities at June 30, 2023 raise substantial doubt about the company’s ability to continue as a going concern. Management indicates that additional financing may be required and warns that failure to obtain financing could force the company to cease operations. No quantitative revenue or earnings guidance is provided.
- Nasdaq compliance: The company received notices for late SEC filings and a Staff Delisting Determination. It requested a hearing before the Nasdaq Hearings Panel; the filing states that the panel hearing was scheduled for January 11, 2024. The company states that there is no assurance it will regain or maintain compliance.
- Reporting delays and controls: The filing acknowledges prior warrant-accounting errors, delayed filings, and material weaknesses in internal control over financial reporting. Management concluded that disclosure controls were not effective as of June 30, 2023.
- Litigation: Bud & Mary’s litigation relates to a $14.7 million loan receivable that was fully reserved. Bowdoin Construction alleges approximately $6.3 million in unpaid contract amounts. TRC Electronics seeks approximately $565 thousand plus fees and interest. The company also reports litigation involving Sinclair Scientific.
- Inventory and supplier exposure: Inventory was $18.7 million net of $32.4 million of reserves. The company owed Mack Molding approximately $8.4 million for slow-moving VFU inventory as of June 30, 2023. A subsequent settlement required cash payments, minimum VFU purchases, storage fees, and issuance of a warrant.
- Loan recoverability: Net loans receivable were $11.3 million after allowances of $19.2 million. The Greenstone loan was written off against an existing reserve during the quarter, and the Bud & Mary’s balance remains subject to litigation and collection uncertainty.
- Subsequent financing: After quarter-end, entities affiliated with CEO Raymond Chang provided or committed to provide financing, and an affiliated entity purchased the Exchange Note and Convertible Note. These transactions involve related parties and should be reviewed for terms, conflicts, security interests, and dilution.
- Warrants and dilution: Approximately 1.5 million warrants were outstanding at June 30, 2023, and warrant liabilities were valued at $4.4 million. The company also reduced the exercise price of certain December 2022 warrants from approximately $13.00 to approximately $3.40 per share.
Most important facts for investors to verify
- Confirm that this Agrify filing, rather than a RYTHM, Inc. filing, is the intended source document.
- Review the going-concern disclosure, cash runway, minimum-cash covenants, and the company’s ability to raise additional capital.
- Verify the status and outcome of the Nasdaq delisting process and all delinquent SEC filings.
- Examine the March 2023 debt exchange, subsequent related-party debt transactions, maturities, interest rates, collateral, and potential default provisions.
- Assess dilution from the 1.5 million outstanding warrants, convertible debt, subsequent warrants, stock issuances, and reverse stock splits.
- Review litigation exposure, including Bud & Mary’s, Bowdoin, TRC, and Sinclair, and compare recorded reserves with potential claims.
- Evaluate the collectability of loans receivable, the large inventory reserve, Mack Molding obligations, and future VFU purchase commitments.
- Review the material weaknesses and the effectiveness of remediation efforts before relying on reported financial information.