Agrify Corporation (AGFY) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon, and welcome to Agrify's Second Quarter 2021 Earnings Call. With us on today's call are Raymond Chang, Chief Executive Officer; David Kessler, Chief Science Officer; and Niv Krikov, Chief Financial Officer. Today, management will review the highlights and financial results for the second quarter as well as recent developments and provide a business and operational update. Following management's prepared remarks, there will be a question-and-answer session. A reminder that today's conference is being recorded. Before we begin, we would like to remind everyone that prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control that could cause to 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 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 statements or other statements herein, whether as a result of new information, future events or otherwise. Now at this time, it is my pleasure to turn the call over to Raymond Chang, Agrify's CEO. Please go ahead, Raymond.
Raymond Chang: Thank you, operator. Before we get started today, I would like to thank everyone for joining us on the call. On our call today, I will provide an update on the continued successful execution of our growth strategy and highlight some of the most recent company developments. My Chief Science Officer, David, will share more about our recent customer successes and the continuous improvement in our technology as well as our horticultural success. Our CFO, Niv Krikov, will follow with a detailed review of our financial performance. To start, I want to remind everyone that at the beginning of this year, we set out to achieve $40 million in top line revenue, secure a partnership with a major MSO and launch our latest technology version 3.6 of our proprietary vertical farming units or VFU. I am proud to report that today, we have not only achieved but have exceeded every single one of these goals. We're pleased to share that the second quarter 2021 was yet another record quarter. We saw revenue continue to grow to $11.8 million, our best quarter to date, up 203% year-over-year and a 69% sequential growth from quarter 1 of 2021. Earlier this year, we launched the Agrify Total Turn-Key solution, TTK solution. This is indeed a revolutionary offering, industry's first total turnkey solution, and we signed our first partner, Bud & Mary's, in the second quarter. The TTK solution allows qualified strategic partners, such as Bud & Mary's, to gain access to capital, best-in-kind cultivation equipment and world-class expertise and support they need to quickly establish cutting-edge indoor cultivation facility. The partnership with Bud & Mary's represents over a potential of $280 million of revenue over the course of the next 10 years. We also launched our latest VFU version 3.6 and are now beginning to install the state-of-the-art Vertical Farming Units in multiple customer sites. VFU 3.6 introduces a number of key enhancements that have led to improved overall performance and significant advancements in micro climate control, airflow and future serviceability. Our decision to invest in our customers' success has clearly begun to pay off as we have expanded our engagement with every single one of our existing customers, leading to an enfold increase in the expected lifetime value of those relationships. The hardware and software solutions are proving even more valuable to major players in the indoor app space as focused on consistency and quality becomes increasingly critical to maintaining and growing market share. This quarter, we were very proud to be able to link our first MSO partnership with the industry-leading operator, Curaleaf. We firmly believe that the initial R&D partnership is only the beginning of many exciting and more expanded projects to come. Financially, besides registering a record quarter of $11.8 million in revenue, I am pleased to report that our bookings for Q2 of 2021 were $30.7 million, and our backlog at the end of the quarter ended with $101 million, up 23% from the previously reported $82 million. The continued improvement in our financial results is primarily driven by the ongoing successes and improvements we are seeing from our customers' facilities, which has provided Agrify with healthy and growing partnerships as well as a robust pipeline of new business opportunities. We were extremely pleased to announce yesterday that we have inked our second TTK partnership with True House Cannabis based here in Haverhill, Massachusetts, located just 30 miles north of Boston. The terms of our deal will include 160 VFUs - approximately 160 VFUs to be installed in True House's 22,000 square foot facility. This partnership is expected to contribute approximately $45 million of revenue over the next 10 years. The scope of the partnership includes a fixed recurring SaaS revenue of approximately $0.5 million per year, production-based revenue of approximately $3 million and the brands and licensing fees of roughly about $0.75 million per year, again, $45 million of revenue opportunity over the course of next 10 years. True House plans to operate 2 dispensaries in Haverhill and Methuen. True House is also a qualified economic empower applicants, and we are extremely pleased to have an opportunity to partner and help promote social equity in the cannabis industry. We are even more thrilled to see that upon signing the TTK partnership with Agrify, True House received an investment from Welike Global, a successful family office based in Asia currently with more than RMB 1 billion of assets under management. I would now like to turn the line over to my Chief Science Officer, David Kessler, who will share new details on recent improvements in consistency and yields across our customer base and will provide an update on our R&D activities. David?
David Kessler: Thank you, Raymond. This past quarter was marked with progress and multiple successes. Through key partnerships and internal initiatives, we are now pleased to report we have R&D centers operating in both Georgia and Massachusetts. Additionally, we have recently launched Agrify University, an immersive online hands-on project-based learning experience that empowers Agrify customers by arming them with the knowledge and best practices to succeed. Agrify University utilizes our vast cannabis research data sets and technological innovations to provide a curriculum that we believe will support the long-term growth of the industry and foster our clients' success. Additionally, Agrify clients continue to see improvements in both consistency and yield using Agrify VFUs. To date, all of the top 10 largest VFU yield by a client have been achieved since March of 2021. Of these 10 largest yields, it includes 9 different strains, demonstrating the efficacy of Agrify's technology on a wide variety of cannabis cultivars. Lastly, I'm very pleased to report that the greatest VFU yield in a single harvest was recently achieved, pushing the past record by 15% to a considerable 71 grams per square foot. As our customers continue to grow and succeed, Agrify is steadfast in our support of their successes. And with that, I will now turn the call back to you.
Raymond Chang: Thank you, David. As we continue to improve and enhance the performance of our VFUs, we remain confident in our ability to deliver on our core mission of providing the highest yield, the highest consistency, the highest quality at the lowest possible cost. The mission is as integral to our success as it is to the success of our customers. Now I'll pass the call to Niv Krikov, my CFO, who will review our financial results.
Niv Krikov: Thank you, Raymond, and good afternoon, everyone. Today, I'll provide you with an overview of our second quarter 2021 financial results. For the quarter ended June 30, 2021, total revenue increased by 203% to $11.8 million compared to $3.9 million for the same period in 2020. Our second quarter revenue consisted of facility build-out revenue as well as hardware revenue from the delivery of new VFUs to our customers. This revenue mix is consistent with our expectation for 2021 as this year has deliberately been about kicking off new projects and ensuring that our existing customers are successful with their expansion and growth needs. This has led to a higher concentration of facility buildout revenue in the short term, but we fully anticipate this will shift more towards hardware, SaaS and other recurring revenue as more and more facilities come online. Gross profit for the second quarter of 2021 was $527,000 compared to a gross profit of $1 million for the same period in 2020, resulting in a gross profit margin of 4.5% for second quarter 2021 compared to a gross profit margin of 26% in the same quarter of 2020. Margins continue to be impacted from the revenue mix of our strategic decision to accelerate the migration of VFU production to match molding in order to meet increasing demand and to move forward with the superior version 3.6 VFU. Margins were also impacted by our decision to further invest in customer success and reengagement with our legacy customers to accelerate margin improvement for 2022. In 2021, we remain focused on building our installed base, and we expect to see a greater proportion of high-margin recurring revenue streams coming gradually as we roll out TTK project and increase our installed base, resulting in margin improvements. SG&A for the second quarter of 2021 was $5.2 million, up from $2.7 million for the same period in 2020. The higher figure was primarily due to the acceleration of hiring of additional senior executives and staff to meet demand and increase in stock-based compensation expenses as well as additional legal expenses required for standardization of our TTK contract package to include a security and pledge agreement, loan agreement and SaaS production and lease agreements. Research and development costs were $774,000 for second quarter, up from $743,000 in the same period of 2020. Total operating expenses for the quarter were $6 million compared to $3.5 million for the same period in 2020. Net loss attributable to Agrify for Q2 2021 was $5.6 million compared with $2.4 million in Q2 2020. Adjusted EBITDA loss for Q2 2021 was $4.5 million compared to adjusted EBITDA loss of $1.8 million in the same period of 2020. This concludes my remarks on financials. I'll return the call back to Raymond for closing remarks.
Raymond Chang: Thank you, Niv. During the second quarter of 2021, we achieved several significant milestones as our growth strategy continues to take shape, building on the strong momentum that began in quarter 1. Moving to the second half of the year, we remain extremely confident that we will hit or even exceed the upper range of our revised $48 million to $50 million revenue target. The momentum around our business is stronger than ever. In addition to the previously announced Curaleaf partnership, we are actively engaging with a number of other MSOs and other potential TTK partners. Since July, we have actually started to charge $15,000 upfront engagement fee. And even with that, we're actively engaging with 10-plus TTK candidates across 8 states, amounting to several hundred million dollars of potential opportunities, which we expect to substantially convert to new business in due course. In addition to our organic growth, we are in advanced stages of negotiation and due diligence with several potential synergistic and accretive acquisition targets, which will further enhance our overall offerings, bringing even more comprehensive solutions to all of our existing and future customers. In conclusion, we remain super focused on improving customer solutions through our product enhancement and comprehensive partnership offerings. With our strong balance sheet and a growing pipeline of opportunities, we believe that our momentum and market traction will accelerate through the rest of the 2021 and beyond. We look forward to updating you and reporting our continued positive progress during the upcoming quarter 3 calls. This concludes my remarks. Now operator, I would like to open this up for questions. Please go ahead.
Operator: . Your first question comes from the line of Eric Des Lauriers with Craig-Hallum Capital.
Eric Des Lauriers: Great. Congrats on the very strong momentum in the business here. I guess just off the bat, so great to see record bookings here. Maybe a bit of an elementary question, but could you help us understand the difference between your backlog and bookings here?
Raymond Chang: Yes. Backlog is booking, Eric. So basically, we essentially received further order of up to $30-plus million in quarter 3 of 2021 - call it Q2 of 2021. Sorry, I'm something jumping ahead already. So basically, the total backlog increased from $82 million at the end of quarter 1 to now over $100-plus million. And so we're very excited about the progress that we're making on that front.
Eric Des Lauriers: Okay. Great. That's helpful here. So I'd like to drill into your - the pipeline of 10-plus TTK candidates, 8 states, you said several hundred million dollars in opportunity. We've seen, on one hand, with Bud & Mary's up to - I think you guys mentioned $28 million in annual recurring revenue, and then this newer customer, about $3 million to $4 million in annual recurring revenue, if we kind of think of those as benchmarks, the high to low end, could you give us some sense of the size of these TTK candidates that you're looking at here? And maybe any comment on your expected time frame to be able to announce those customers.
Raymond Chang: Yes. So Eric, so the True House Cannabis is probably the smallest that we would entertain. The reason why we signed up to this partnership, first of all, because True House is literally 20 minutes from our headquarter. And so that we could actually be very, very intimately involved in the overall operations of True House. Obviously, we cannot be planned touching, but we will be intimately working with the True House team to help them to ensure success. In addition to that, one of the reasons why that Jumio this partnership is just to support an economic empowerment applicant and also be participating in social equity in the cannabis industry, which I believe is just super important. But again, it's a great facility that is 25 minutes - literally 20 minutes, 25 minutes away from our office. And given the proximity, we are going to be intimately involved with that. The opportunities - the other 10 opportunities, they're in Arizona, California, Florida, Massachusetts, Michigan, New Jersey, Nevada and Oklahoma. The size of those partnership ranges from on average 300 to as many as 700, 800 VFUs per facility. And I would say that Bud & Mary's is probably on the larger side, but True House is definitely small. I would say that on average, the TTK opportunities that we're looking at right now would probably be somewhere in the 500 to 700 VFUs per facility. And as I mentioned, there are 10 opportunities that we have qualified, and we are in advanced stage of negotiation. I do not believe that we will entertain all 10, but these are opportunities that we have qualified, and we will be moving forward in the further negotiations.
Eric Des Lauriers: Okay. That's very helpful color. I appreciate that, and exciting to see that average VFU size of 500 to 700 here. So 2 more questions from me. I guess kind of sticking with this theme here. So I, too, certainly I'm a believer in the necessity and importance of social equity in the industry here. And obviously, you're seeing in basically every state that legalizes, they're setting aside a material amount of licenses specifically for social equity applicants here. I think New York at about 50% of the licenses are dedicated for social equity here. So is this a specific area that you guys will look to continue going after? I mean just from my perspective, it seems like pretty ideal TTK candidates here. So just would love your assessment on kind of that outlook for the TTK solution specifically.
Raymond Chang: Yes, it is definitely one of the criteria that's on our scorecard. Obviously, it's not the only thing that we consider. But I do believe that being in the cannabis industry, especially kind of given the historical context, we do really pay a lot of attention to just making sure that we provide the job opportunities to the communities as well as just being a socially responsible partner in the industry. So I'm very, very proud to announce this partnership with True House and very excited. They're getting a lot of resources from the town of Haverhill and Methuen. And also, another thing I wanted to just also emphasize, it's the fact - and then actually, we're seeing more and more of this. A lot of the TTK opportunities, in fact, once they receive a term sheet from us, it actually further accelerates their capital raising activities. So in the case of True House Cannabis, immediately after we signed, they actually got funded. And in fact, some of the 10 candidates that we're talking to right now, they can't wait for us to actually give them a term sheet. And in fact, we have been on diligence calls with a lot of their investors. And I think what is very exciting for people who are actually interested in investing in our partners is the fact that, unlike in the past, where they have almost 0 transparency as to what is going on inside of that facility post their investments, by working with us, we actually allow them to have full transparency. Secondly, with our support, if there's something - is about to go wrong, we're there. And in fact, we will detect those problems early on to make sure that it doesn't happen. So the chance of success is much, much higher versus in the traditional investment where, frankly speaking, they have 0 control of anything that is going on inside of that facility. So we're very excited about this and looking forward to cementing more TTK opportunities in a very near future.
Eric Des Lauriers: Yes, absolutely here. Certainly makes sense and very exciting from my perspective. Last one for me. So you mentioned you won't entertain all 10. Can you just sort of expand on that? Is that sort of a capacity issue? And if so, could you kind of help us understand where are the bottlenecks, what kind of capacity do you guys have? Or maybe it's just that you're waiting for maybe bigger or better partners there. So can you just help us understand why you won't entertain all 10 or what the limiting factor is there and just sort of how we should think about the pace of the growth in TTK customers?
Raymond Chang: So Eric, first of all, so far, we have set aside $50 million to the TTK projects. And obviously, we're seeing much, much higher demand. And so we're actually also trying to think of creative ways to finance future TTK projects. Just to kind of give you one example, we have actually been reached by multiple REITs. And the reason why they're interested in partnering with us is in the old days, again, where they actually just providing construction loans and basically buildings, they're probably making returns in the teens. And again, have 0 control of what's going on inside of that facility. It's almost kind of like a blowing bet. And if something goes wrong, frankly speaking, a lot of these leads probably don't have the expertise to actually help to correct them. By working with us, right, they get full transparency. And on top of that, it would also maybe potentially - giving them an opportunity to participate on the back end, and all of a sudden, their returns on investment probably just went from mid-teens to the 20s and 30s, right? And this has been really a great partnership because frankly speaking, I would rather basically develop the majority, if not all of our capital resources on the VFU fronts. If somebody else wants to come in and basically provide that construction loan, more than happy for them to take it, right? So we're basically talking - in fact, a lot of the 10 opportunities that we're currently contemplating, some of them were brought to us by other REITs, and others, we have actually hooked them up with some of these REITs. And I believe that we will probably be cementing a deal with a large REIT in the very near future on this exciting TTK opportunities. So again, we're trying to basically find ways to access more capital, to have more partners and to create a win-win proposition not only with our cultivator partners but also with other industry players as well.
Eric Des Lauriers: Very exciting. Clearly, lots of growth levers on this, yes, very exciting solution here. Congrats again, guys.
Raymond Chang: Thank you, Eric.
Operator: Your next question is from Scott Fortune with ROTH Capital Partners.
Scott Fortune: Real quickly, can you provide a little color on the pipeline? And I believe that's not including the TTK and any guidance there, but also provide color on the construction projects and if there's any delays or kind of - there's obviously a pickup in construction costs and such in that side of material. How does that recognition of potential construction delays reflect in kind of your project builds or the pipeline? Just kind of a little bit of color on that.
Raymond Chang: Scott, you're absolutely correct. We are definitely seeing a huge sort of competition around construction. Right now, actually, we have expanded our not only A&E partners, architectural and engineering partners, but we have also started talking to other general contractors so that it would give us basically bigger coverage. And yes, so essentially, we are expanding our construction partners, architectural and engineering partners so that we can actually cover more deals nationwide. Right now, we're still seeing the projects sort of pretty much on schedule, and we will continue to manage that very tightly. One of the key hires, for example, this quarter is basically bringing on more project managers. We're essentially hiring ahead to make sure that we can take on more projects and also just to make sure that we have enough customer success resources because obviously, after the facility is built, it's even more important to make sure that our horticulture team is in the facility working with our partners to make exciting things happen, right? The other big thing, as Niv has mentioned earlier, this year, we took the key initiative of basically moving our production to a contract manufacturer, Mack Molding. And I'm very pleased to say that, that process is going well, and we're expecting new VFUs to be rolling out of their production lines very shortly. So the launch of the 3.6, especially with the contract manufacturer working with externally, we should have plenty of capacity to scale. So those are some of the things that we have worked on, not only in quarter 2 but continue in this quarter as well.
Scott Fortune: So just real quick, just a follow-up on that. So your backlog in the construction projects there kind of finalizing in the second half are still on time, it sounds like, going forward here?
Raymond Chang: Yes. We're very confident that we will, again, like I said, meet and even potentially exceeding our revised $48 million to $50 million guidance. So we believe that we will have no problems in achieving that. So everything so far is still pretty much on track.
Scott Fortune: Perfect. And then second question is - congrats on the R&D agreement with Curaleaf. Kind of validates your technology. Can you provide color of timing of that being installed, the potential for them, the testing, getting data from that and the potential opportunities as Curaleaf looks to expand? They've said publicly a lot more indoor grow in the East Coast and also growth that we've done in the West Coast. Kind of talk about kind of the Curaleaf opportunity potentially.
Raymond Chang: Yes. So they have a very exciting research and development facility here in Newton, Mass. And obviously, our VFUs is one of the big initiatives within that R&D facility. And we believe that the completion of the construction will probably be done by the end of this year, and we're going to production. And at that point, they will look at 1, 2 cycles of the results. And - but we're very confident that we will be able to - especially with the version 3.6 of our VFUs, they will see an immediate boost in yield consistency and quality because the performance of our VFUs 3.6, honestly, it's just stunning. And we will - I'm very confident that we can deliver results immediate.
Scott Fortune: Great. And then just kind of additional MSOs similar kind of test, getting the equipment in the MSOs' hands to test the C4 full cultivation production opportunities down the road? Is that kind of the discussions you're having? Or some of them are looking for actually larger facility builds to add capacity?
Raymond Chang: Yes. I mean some of these conversations are actually like maybe even skipping the R&D concept. Obviously, we're - I don't want to jump ahead and say that we're going to - we see PO tomorrow. But in fact, some of these other MSOs are not actually talking to us about R&D projects. You're actually talking about implementing the VFUs in their new and expanded facilities. So we're obviously in - still in those discussions. And as soon as we have a mint, we will definitely let you know. But very exciting to be engaging with a number of the MSOs.
Scott Fortune: Congrats on the application.
Operator: Your next question is from Aaron Grey with Alliance Global Partners.
Aaron Grey: I'll echo my congrats on the quarter. So I want to take a little bit different route here, right? So obviously, with all the VFUs and different operators you're working with, you guys - one thing that's kind of key to me with you guys is all the data collection that you guys get, seen a different way to grow different strains and otherwise. So would love to get additional commentary from you as you aggregate this data, the power that can come with that and how you can utilize that for future initiatives within the company.
Raymond Chang: Sure. David, would you like to maybe take a crack at this? And I can also jump in as well.
David Kessler: I'd be happy to. Essentially, with the larger amounts of data that we're able to collect, we're going to better be able to define the growth plans or recipes which will lead to the cultivation success of our clients. But that said, these larger data sets aren't just about how to grow more wow. They are about how to maximize cannabinoid production, terpene production, specific metabolites that might be valuable in the extraction process. Additionally, through environmental manipulation and collection of these data points, we are able to provide client operators essentially a giant leap forward in their operational success by giving them recipes proven for success. So not only are they able to start the rate halfway down the track, they're able to collate their data more quickly, choose the end product formulation and growth plans or recipes that are going to support them in that success and really deliver on a cumulative data set that can then be parsed as we learn more and more about this valuable agronomic crop. The challenge is, unfortunately, we do not have data on cannabis going back 100 years because of the olipic nature. So with the ability to aggregate data more quickly, we're going to bring the future of cannabis to the present. And as we do so, our clients will reap the benefit.
Raymond Chang: Yes. And in terms of monetization, right, so Aaron, obviously, we're - the data is culmed by us and also our customers, right? And so for example, if I have a particular operator, a single-state operator that has perfected, for example, a particular grow recipe for a particular strength, we would basically work with them to potentially license that grow recipe to a noncompeting operator in another state. And the reason why they would be willing to do so is because it wouldn't actually necessarily tarnish your brands because they know that it's grow out of the VFU under the same grow recipe that most likely, you'll have the same consistent results. Obviously, this is just one of the ideas that we can actually potentially to monetize that data, and they're actually a lot more. But basically, this is something that we will very much be willing to work with our customers to think about ways to monetize those valuable data.
Aaron Grey: Okay. That's really helpful. And then a second question for me, just as you look at additional partnerships, any color you could potentially provide in terms of the mix between those who might buy the VFUs versus where you take on more of the CapEx and you have more of the rev share of the 10, how those looking? And how do you look to potentially have a mix between the 2 as you continue to roll out more of the VFUs especially if you might have some limitation given the contract manufacturing and otherwise?
Raymond Chang: Yes, yes. Aaron, I mean essentially, the way I kind of see it, there are really kind of 3 buckets, right? The first bucket, these are the largest MSOs with balance sheets are so strong that, frankly speaking, they would be interested just to buy our VFUs and not take on any kind of financing burdens, right? And those are - and that's basically kind of what gives us the scale and volume. And obviously, as I mentioned earlier, we're having multiple of those discussions with the larger MSOs. And then there's the other stream, which are the smaller single-state operators that were essentially offering this Total Turn-Key solution and basically getting equity-like return on the upside, on the production revenues, on the SaaS revenue, and there's the 10-year long-term partnerships. We're actually very pleased to see that there's actually kind of a middle ground, smaller MSOs that, frankly speaking, have access to some of the capitals. And what they basically said, "Look, we can take on our own constructions or we can actually find one of the REITs to actually come in and basically do the constructions. And we're basically work with you on the VFU points." And honestly, I would be very happy to do that because it would allow us to basically deploy our capital even more effectively, building the installed user base, right? So we're really kind of seeing a 3-bucket situation whereby - especially with the middle buckets, there are other ways - for example, there are people that basically said, "We were more than happy to come in as your financing partners," right? But by working with us, first of all, they get complete transparency to what's going on inside of our facility. They have a partner that could actually help them to go in and solve the problems if something goes wrong. And thirdly is that they could potentially participate in that equity-like upside, right? So we're basically more than happy to share because at the end of the day, our business model is all about building the largest possible installed user base, right? And that's basically how we're looking at this industry and how we're actually going to grow in the future.
Aaron Grey: All right. That's great color on the flexibility of the model, and congrats on the quarter.
Operator: Your next question is from Anthony Vendetti with Maxim Group.
Anthony Vendetti: So I just wanted to follow up a little bit more on the - I know we talked about the TTK. But in the Bud & Mary's contract, and I was wondering if in the True House one, is there - I know there's an escalator in the Bud & Mary's one where depending on the yield, it could even be more per year. Can you talk a little bit about that? And is that built into all your TTK contracts? Or is it on a contract-by-contract basis?
Raymond Chang: Yes, in every single one. So basically, the terms with True House is essentially identical to that of Bud & Mary's, right? So we would essentially basically be getting that construction loan interest on that. And that will basically be expected to be paid back over the course of 24 - 18 to 24 months period. And then on top of that, we would get the fixed recurring SaaS revenue and then a per pound-based production revenue. And that's, again, it's also nil-based, so that if it's over 7.5 pounds, we would get $700, and then if it's less, then we will get $600. I mean we want to basically treat every single one of our TTK partners exactly the same, right? And they're also responsible for work raising sufficient capital to support their working capital, and we're very pleased that they were able to secure investments to make that happen. So yes, this is very exciting.
Anthony Vendetti: Okay. Great. And then just as you look at your M&A platform, I know you mentioned - you did mention about a REIT to help with the construction side of it. But just in terms of other potential partnerships or M&A opportunities or - can you provide a little bit more color on what you're looking at, at this point?
Raymond Chang: Sure. So Anthony, I think that what we're looking at is basically how we can actually make our customers' facility even more productive and with higher return on investments end to end. As you know, when you actually walk into any of our facilities today, maybe about 60% of the grow space is dedicated to cultivation. Now I believe that we have the best solution to make that 60% of the square footage with the highest productivity, highest yield, highest return on investments. What I can also tell you is that I see significant potential enhancements on that remaining 40% square footage of pending facility. So we would basically like to work with innovative companies basically to be able to provide an even more comprehensive end-to-end solutions to our customers and, frankly speaking, to gain a bigger portion of the overall wallet size. And that's essentially what we're looking at. In addition to that, we're also looking at the upstream, some type of partnership with companies that are really involved on the generic side. So again, we're looking at not only just from the cultivation perspective, but how can we make our customers' facilities, every square footage, even more productive and actually ultimately help them to increase their return on investments overall.
Anthony Vendetti: Okay. Yes. No, that's great. And then just lastly on the existing customers. Your existing customers, at least from my channel checks, are very happy with the Agrify solution and Agrify insights. Can you talk about the recurrence of business you get from existing customers? How many of your existing customers have already re-upped or have signed up for another Agrify contract?
Raymond Chang: So Anthony, I'm very pleased to say that right now, we have 0 churn, right? And not only do we have 0 churn, we have, as mentioned, actually increased the lifetime value of these customers by as much as eightfold, right? So it's basically not only them actually buying more VFUs. In fact, some of them actually are saying, "Look, maybe we're looking to a quasi-TTK model so that you actually get to share part of that upside." We want to have complete interest alignment, right? So we're very excited that every single one of our customers has repeated their commitment with us and in fact, allowing us to essentially increase the lifetime value, the expect the lifetime value of these customers as much as eightfold.
Operator: . Your next question is from Gerald Pascarelli with Cowen.
Gerald Pascarelli: Raymond, I'd like to get your outlook and thoughts on the federal regulatory reform, specifically interstate commerce, when maybe you would expect this to occur and then ultimately, the impact that this maybe has on the business model. I would assume that there's somewhat of a moat on this business as long as there is a demand for high-quality indoor grown flower. I'm not sure if that's the right way to think about it, but if you could entertain the question and provide some high-level thoughts, I'd appreciate it.
Raymond Chang: Yes. Thank you for joining in our call today. Your first question as to when the federal regulation would happen, I think that's the million-dollar question that we would all love to know. But I think the key here is that we're setting up our business model to essentially not only hedge against that but actually to be better prepared when that thing comes. And let me explain to you why, right? If you look at actual example, the beer industry, what you have are these big brands like the Budweiser, the Heineken of the world and similarly, the big MSOs, right? Down the road, I think what is important is that they need to essentially be able to produce the most consistent and the highest because their entire brands, it's behind it. And our VFUs will that actually allow them to do so. And also in the post-regular environment, they may want to actually consolidate, right, their production facility. So now maybe 20, 25 different locations down to only 2 or 3 or 4, right? And the advantage of our VFU is that they're movable. They're modular, right? So that when they actually decide to consolidate eventually, right, consolidate everything into one facility, literally, we can move these VFUs, plug them back in, and they still have all the data and the same standard operating procedures and just flip it on and often they go, right? So actually, it's a - for the big MSOs, not only we help them to deliver consistency and quality, it's actually a huge hedge, right, against the future when they decided to basically consolidate all of the facility into maybe 1 or 2. Now they are also the smaller guys. And the same thing with the beer industry, like the craft brewers, right? In order for that to compete, right, they would even have to be even more focused on consistency and quality, right? And this is where actually data comes in, right? And this is actually where we can actually help them to stay differentiated, right, to actually have a unique genetic but not only being able to produce them once in a lifetime but actually to be able to repeat the same process every single time so that they can stay, even though smaller, but still attract very high premium for their products, right? So this is actually what I believe would differentiate by working with Agrify is we have the ability to deliver the highest quality, highest consistency, highest yield but also at the lowest possible cost because of our automation and because of the ease of the use of our solutions.
Gerald Pascarelli: That's super helpful color. Just last one for me. I thought the REIT commentary was very interesting. I guess in your conversations with customers or prospective customers, how much of a competitive advantage is offering these construction loans, in particular, given the capital-constrained environment? And do you expect these - these interest rates, I think it was 18% that I read in the press release. Do you expect these strong double-digit rates to hold at least over the near to medium term? Just your high-level thoughts would be much appreciated.
Raymond Chang: Yes. I mean honestly, that number will come down. There's no question about it, right? Obviously, especially with State Banking Act and all that, that construction loan percentage is going to come down over time, right? But again, I think what makes us interesting and what makes us attractive to not only the REITs but the traditional - even the traditional cannabis investors is the fact that with the data that we have much more transparency to what is going on inside of our solution. So unlike, for example, in the old days, where they would know that there's something wrong with their - basically partners only not getting that check. But in our case, for example, if it's not trending correctly, we would not right? If they're not hitting their expected yields, we would know. If there's an environmental issue, right, we can actually go in there and address those problems on a real-time basis, so it doesn't become too late, right? And the other thing is that, look, if you can have the highest yield per square foot - and by the way, David has mentioned earlier, we just basically hit a 0.7, 70 grams per square foot. And don't forget if the facility happens to have actually a very high ceiling, we can actually turn that 1 square foot to as much as 6x because we have the ability to triple-stack our VFUs, right? And since each VFU actually has 2 levels of cannabis growth space. So all of a sudden, you're looking at 6x times 70 grams per square foot. That's a lot, a lot of production. Furthermore, right, we have demonstrated that on a per pound basis, because of all the automation and a lot of the improvements on the standard operating procedures, we have demonstrated that our customers can actually produce at a lowest possible costs, right. So this is actually really revolutionary. - high yield, highest consistency, highest quality at the lowest possible cost.
Operator: And there are no further questions in queue at this time. I'll turn the call back over to you, Raymond, for closing remarks.
Raymond Chang: Again, I want to thank everybody for joining the call today. Obviously, we're very - super excited about the progress that we're making, and we will continue to execute and hope to report even better results in the upcoming call. Thank you, and feel free to reach out if anybody has any questions.
Operator: This does conclude today's conference call. Thank you for participating. You may now disconnect.
