Q4 2021 Agrify Corp Earnings Call
Yeah.
Good morning, and thank you for standing by and welcome to the Agri five fourth quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone please.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today indicate Heller Investor Relations. Please go ahead.
Good morning, and welcome to AGA five fourth quarter of fiscal year 2021 earnings call with US on today's call are Raymond Chang, Chief Executive Officer, and Timothy Oakes, <unk> Chief Financial Officer.
Today management will review the highlights and financial results for the fourth quarter and provide a business and operational update following management's remarks there'll be a question and answer session. I'll remind you that today's conference call is being recorded and a replay will be available on <unk> Investor Relations website at IR Dot Agra five dot com. Please note that we will.
Are you referring to information that's contained within our press release and slides, which can be accessed on the website as well.
Before we begin we'd like to remind everyone that managements 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 imply.
By any such forward looking statements.
Important factors that could cause or contribute to such differences include the rest of the child 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 Ray.
And.
Thanks Kate.
And thank you everyone.
Joining us on the call today.
We are looking forward to providing you with an update on our business.
There are many accomplishments and opportunities we would like to bring to your attention.
I will begin by highlighting our 2021 performance.
And some recent company developments.
And Tim will review our financial results.
And we will also give you the outlook for 2022.
During 2021.
We drove explosive year over year growth.
We launched our total turnkey solution for cannabis cultivators.
We created a significant backlog.
Our future high margin recurring revenues.
We drove tremendous pipeline velocity.
We implemented innovative technological advancements to our vertical farming you that's the fu's.
And we have establish ourselves as the leader in premium extraction solution.
With a series of well executed acquisitions.
Yeah.
Let's first discuss outgrowth.
I am pleased to report that in fiscal year 2021.
Our annual revenue grew from 395%.
$59 9 million.
This is up from $12 1 million in 2020.
It's important to note in the fourth quarter of 2021.
Our quarterly revenue was $25 3 million.
This represents a 481 year over year increase when compared to $4 4 million in Q4 2020.
Yeah.
In 2021, <unk> generated over 377 million in new bookings.
This is an increase of 919%.
From $37 million of new bookings in 2020.
A tenfold increase.
In addition.
We are pleased to make you aware that we currently have a total qualified pipeline of over $570 million.
It is important to note when it comes to our bookings and pipeline numbers.
Agra fly only includes the first of three years.
We expect the revenue for the T T K deals.
From the total value of extraction product sales.
Even though our ttk arrangements have a 10 year term.
From a bookings and pipeline perspective.
Once again that we only include the facility construction costs.
And the first two years.
But the SaaS and estimated production success fees.
Okay.
I would like to now discuss our total turnkey solution T T K.
The <unk> T T. K program is the only solution of its kind in the cannabis industry.
Whereby acura five forges long term partnerships with qualified customers.
It provides them.
With ingredients needed to launch and operate well.
World class cultivation and extraction facilities.
This includes designed and built out.
But their cultivation and extraction facility.
The installation and implementation of our state of the art cultivation and extraction products.
Process design training.
Grow recipes.
Product formulations.
Data analytics and consumer branding.
Let me assure you that this program addresses some of the biggest pinpoints in the industry.
Since launching our T T K solution only 10 months ago.
We have secured six customers.
These customers include successful entrepreneurs.
Who are very passionate about the cannabis industry.
Our social equity applicants.
And minority female entrepreneurialism.
And proven cereal candidates executives, who have successfully built and exited 1 billion cannabis enterprise.
The strongest validation to this T K.
Is that we currently have three.
<unk> 3720 and ideas to use under contract.
From our sixth ttk non ttk via a few customers.
We believe each V S you deployed.
We'll conservatively produce 35 pounds per year.
Our production.
Once all 3720 <unk> DSP is our commission.
We expect our customers to.
So cumulatively produced approximately 130000 pounds of.
Dry flower on the annual basis.
Which when you return create $76 million.
Of high margin recurring revenue annually for <unk>.
Again, that's $76 million of high recurring.
SaaS and production revenues to aggregate on an annual basis.
Over the life of all of these engagements.
The total cumulative revenue to be generated by <unk> will be approximately $837 million.
Of which we project $750 million will be from very high margin production success fees.
<unk> fees and interest.
All providing a significant return on investment for our value shareholders.
Our current Teekay engagements are at different stages of development.
I am pleased to report that we expect to start generating high margin recurring SaaS and production fees in the third quarter.
Of this fiscal year.
Yeah.
I would like to now shifts to our extraction.
<unk>.
Candidates represents a potential clinic, copia medic medicinal and pharmaceutical events.
Kenneth this products produces over 550 different phytochemicals.
Over 120 of which are cannabinoids like <unk> C and CBD, which are well known.
But other cannabinoid variants like <unk> T. H C V C B and C. B D D.
Less well known.
But potentially could offer just as much if not more significant value.
As we continue to learn more about complex chemical compositions of candidates.
The need for quality extraction distillation of solution is clear.
Distillation enables the identification isolation and certain separation of valuable candidates metabolites.
The ability to take cannabis compounds distilled into their pure forms and then it would be combined them into specific purposeful and products for both medicinal recreational means it's super exciting.
Having extraction and post processing capability presented a great opportunity for <unk> to become far more vertically integrated with our customers.
While increasing our wallet share of each.
Given this opportunity.
<unk> decided to strategically expand its reach by establishing itself as the.
Leader in the cannabis extraction industry.
In the last six months.
We have acquired four of the top brands in the industry.
Precision extraction.
Cascade Sciences.
Pure pressure.
And last society.
Combined these four acquisitions provides <unk> with <unk>.
One.
The most comprehensive extraction solution from a single provider.
Second.
The best product brand names in the extraction industry.
Highly complementary solutions.
Third the most innovative and high quality products.
Fourth.
Over 7000 customers, including the majority of Msos.
And lastly.
The addition of some of the best and brightest candidates mines in the industry.
The extraction market is currently one of the fastest growing segments in cannabis.
And in 2022.
We expect our extraction division to be accretive.
And produce annual revenues of $62 million to $65 million.
With gross profit margin of 30% or greater.
We also look forward to launching our new extraction Ttk program.
And we hope to announce our first extraction ttk engagement shortly.
At this point I would like to turn the call over to <unk> CFO Tim Oakes.
Thank you Robin and good morning, everyone and thank you for joining us on today's earnings call.
I will speak to our financial results for the fourth quarter and full year 2021 than Raymond will provide guidance and closing remarks, and then we'll open up the call for analyst questions.
Overall, it's been a very active and exciting 12 months for the company in the fourth quarter, certainly no different our fourth quarter and full year results are reflective of the strategic investments and the changes we have made to our business model.
Specifically, our fourth quarter financial performance as positive been positively influenced by our total turnkey solution, which I'll refer to as T. K a T K arrangement and the positive effects of our recent acquisition activity, which we successfully leveraged to expand our top line revenue and improve our gross margin and other operating metrics.
Moving on to specific commentary on our financial results revenue in the fourth quarter of 2021 was $25 3 million compared to revenue of $4 4 million in the fourth quarter of 2020.
This represents a 481% year over year increase in quarterly revenue.
On a full year basis revenue for fiscal 2021 totaled $59 9 million compared to full year 2020 revenue of $12 1 million, representing a year over year increase of 395%.
The primary drivers of revenue of the revenue increase in both the fourth quarter and full year periods of 2021 are related to an increase in the construction related revenues as well as the incremental revenue contribution associated with the company's October one 2021 acquisition of precision extraction solutions and Cascade Sciences.
Which contributed $12 3 million of extraction related equipment revenue in the fourth quarter of 2021.
Bookings in the fourth quarter of 2021 were in excess of $250 million. The $250 million bookings includes ttk related bookings as well as our equipment related bookings, which includes both cultivation and extraction equipment revenues.
We ended the first quarter of fiscal 'twenty, two with approximately $837 million in backlog compared to $59 million in backlog entering fiscal 2021.
As stated earlier by Raymond it's important to note that for the ttk arrangements portion of both our reported bookings in backlog amounts. We only include the first three years of expected future revenue, which is typically the construction in the first two years of staff and estimated production fee revenues, even though these are five to 10 year partnerships that could offer as much as.
Three and a half to four times more revenue potential.
Total gross margin for the fourth quarter of 2021 was $5 6 million or 22% of total revenue compared to a negative gross margin of 290000 or 7% of total revenue in the year ago quarter.
For full year fiscal 2021, the company is reporting gross margin of $5 2 million or approximately 9% of total revenue compared to gross margin of 570000 or 5% of total revenue in fiscal year 2020.
Gross margin improvements in the comparative year over year quarterly and fiscal year periods is primarily the result of two specific fourth quarter of 2021 activities.
First the company recorded a <unk> sale of older. The new models, which resulted in a gross margin well above the company's historical gross margin on Standalone <unk> equipment sales.
Second was the positive lift in gross margin associated with our extraction equipment revenue, which is expected to generate gross margin of approximately 30%, which is also well above the companys historical gross margin performance.
While we are certainly pleased with our gross profit margin performance in the fourth quarter of 2021, we would like to highlight that that performance isn't necessarily reflective of our expected near term quarterly gross margin performance until such time as we are able to report meaningful SaaS software and production fee revenues, which we currently expect to begin in the late <unk>.
Third or early fourth quarter of 2022, we anticipate that our quarterly gross margin performance aided by our extraction related equipment sales to be in roughly a mid teens range.
Moving on to SG&A expense.
This is going to be a bit complicated so I'm going to ask you to bear with me for a minute I think SG&A in the fourth quarter requires a little deeper dive compared to some of our other financial statement line items.
SG&A expense in the fourth quarter, 2021, which excludes charges associated with changes in the fair value of contingent consideration, which is associated with our October one 2021 acquisition of precision and Cascade totaled $16 1 million compared to $2 9 million in the fourth quarter of 2020.
As it relates to the increase in SG&A in the fourth quarter of 2021. The company has significantly increased and scale during 2021 and that's in terms of head count and professional fees public company fees et cetera.
<unk> 2020, and has also added incremental SG&A expense in connection with boat with both certain one time charges, which we'll discuss in a minute in the 2021 acquisition of precision and Cascade.
Maybe a more meaningful review of fourth quarter 2021, SG&A expenses would be to compare them on a sequential basis to the third quarter of 2021.
Fourth quarter, 2021, SG&A expenses, again, which totaled $16 1 million increased by $7 5 million compared to SG&A expenses of $8 6 million in the third quarter of 2021.
Breaking down the $7 5 million increase in sequential quarterly G&A expense. We note that fourth quarter 2021, SG&A expense includes an order of magnitude. The following acquisition related expenses, which are associated with both the precision cascade and peer pressure acquisitions and incremental.
It'll increase in SG&A expenses related to the operations of precision and Cascade, which began on October one 2021 and did not impact the third quarter of 2021.
Expenses related to the establishment of reserves against our outstanding accounts receivable balances and.
An increase in depreciation and amortization, which is essentially related to the amortization now being recorded against the identified intangible assets associated with our acquisitions and an increase in stock based compensation.
On a full year basis fiscal 2021, SG&A expense totaled $35 million compared to SG&A expense of $9 8 million in the year ago full year period.
The primary drivers of the year over year increase in full year SG&A expense are essentially reflective of the previously described fourth quarter items, which are driven in large part by the company's February 2021 initial public offering.
Growth in the scale of business and our fourth quarter acquisitions.
Moving on to research and development fourth quarter, 2021 research and development.
Expenses totaled $1 4 million compared to $1 million in the fourth quarter of 2020.
On a full year basis fiscal 2021 research and development expenses totaled $3 9 million compared to $3 4 million in the full year fiscal 2020 period.
In both periods. The overall increase in research and development expenses attributable to the company's investments and the continued development of both its vertical farming units as well as the continued development enhancement of our SaaS based software <unk> insights.
Our standalone.
Operating expense that we carved out of SG&A expense this quarter relates to $1 4 million in expense involved to change it to a change in our originally estimated fair value of contingent consideration to be earned by the former members of precision Cascade.
From an accounting perspective.
<unk> hundred five which specifically relates to accounting for business combinations requires the company to determine an initial estimate as the amount of potential contingent consideration to be earned as part of an acquisition as of the date of the acquisition.
Our former members of precision and Cascade could have earned up to a cap the amount of $15 million in additional consideration based upon the achievement of certain revenue thresholds ending December 31 2021.
Based on their fourth quarter revenue performance. The former members of precision Cascade earned additional contingent consideration of $5 4 million during the quarter.
This amount exceeded the company's initial estimate at the time of the acquisition by approximately $1 4 million.
As per the guidelines of ASC 805, the company is required to record this increases in operating expense in the period incurred and not as an increase to goodwill.
The company's December 31, 2021 acquisition of pure pressure contains two consecutive 12 month earn outs.
The potential additional consideration that can be earned under each of the two earn out periods is capped at one 5 million per year.
Company has made an initial estimate with respect to the probability of achievement of the additional consideration and recorded as part of our initial purchase price accounting.
We will continue to evaluate pure prices future performance against our initial estimates on a quarterly basis any identified changes to our original assumptions that generate a change in our estimates will result in either an increase or reduction in our future periodic operating expenses.
Let me touching upon other income and expenses the Companys reporting total other income of 98000 for the fourth quarter of 2021 compared to total other expense of $8 9 million in the fourth quarter of 2020.
For the full year fiscal 2021 period. The company is reporting total other income of $2 8 million compared to total other expense of $9 million in the full year fiscal 2020 period in all periods. The changes in other income and expense are direct relate directly related to the convertible promissory notes entered into between the company.
And certain investors in fiscal 2020, which were subsequently amended by the company's board of directors in January 2021.
During the fourth quarter of 2020 in the full year fiscal 2020, the company recognized an aggregate loss on the extinguishment of convertible promissory notes in the amount of $5 6 million, which represented the difference between the net carrying amount of the notes and the re acquisition price of the notes.
During the year ended December 31, 2021, the company recognized a gain on extinguishment of $2 7 billion in connection with the Derecognize of the net carrying amount of the extinguished debt.
Also during the fourth quarter of 2020, the company recognized other expense of $2 9 million in connection with the change in fair value of derivative liabilities associated with the fair value of the variable share settlement features with.
The company did not have any derivative liabilities during the portion of fiscal 2021 as a result of the extinguishment of the original convertible promissory notes.
As it relates to income taxes. The company is reporting a provision of income taxes of 25000 during the fourth quarter and full year fiscal 2021 periods no provision for income taxes was recorded by the company in the comparative 2020 quarterly fiscal year periods. The.
The company has historically generated losses from operations and is currently in a cumulative loss position. Accordingly. The company has established a full valuation allowance against the carrying value of its deferred tax assets.
We recognize net income <unk> net loss attributable to controlling interest in our financial statements.
We consolidate the results of operations of two less than wholly owned entities into our consolidated results of operations <unk> Valeant LLC, a joint venture limited liability company in which we are 60% majority owner and Valeant America, LLC, which owns 40% of <unk> Valeant LLC.
Reported net income or loss in each each of the presented quarterly and fiscal year periods ended December 31, and 22021 in 2020 represents the portion of the periodic income or loss attributable to the Noncontrolling parties.
Finally, the net result of the previously discussed changes in revenue gross margin operating expenses resulted in a net loss during the fourth quarter of 2021 of $13 3 million or <unk> 60 per diluted share.
Net loss during the fourth quarter of 2020 was $13 1 million or $2 23 per diluted share.
Similarly, the previously described changes in our operating operations resulted in a net loss of $32 5 million or $1 69 per share in fiscal 2021 compared to a net loss of 21 6 million or $5 32 per share in fiscal year 2020.
Adjusted EBITDA amounted to a loss of $5 $5 million during the fourth quarter of 2021 compared to an adjusted EBITDA loss of $2 8 million in the year ago quarter.
For the full year fiscal 2021 period, adjusted EBITDA was a loss of $20 million compared to an adjusted EBITDA loss of $8 4 million in the full year fiscal 2020 period.
Additional information regarding our use of non-GAAP measures includes a reconciliation, including a reconciliation to the most comparable GAAP measures can be found in the press release, we issued earlier. This morning, which is also available on the Investor Relations section of our website at Www Dot <unk> Dot com.
Finally, I want to provide some color on our combined cash and marketable securities balances as we exit 2021 as of December 31, 2021. The company is reporting a combined cash and marketable securities balance of $56 6 million. This represents a decrease of $56 7 million from a combined balance of 130.
$14 3 million as of September 32021.
The biggest drivers of the change in our periodic balances are primarily associated with our two 2021 acquisitions of which we paid aggregate upfront considered cash consideration and other expenses of approximately $42 million.
Our inventory build related to the projection of <unk> units to be deployed under our ttk arrangements as well as funding our operating expenses like payroll and other such operating types.
Obviously, given the upfront investment nature of our TK arrangements, which requires significant investment by the company in both construction and <unk> equipment costs near term access to capital is critical to the company.
In the first quarter of 2022, we announced two separate capital raising activities in January we announced the closing of a $27 3 million private placement and Additionally, last week, we announced the finalization of the debt facility, which will enable the company subject to certain performance requirements to access up to $135 million in additional debt financing.
Both of these transactions have served to strengthen our balance sheet and enable us to continue to execute our goal of driving top line growth in generating sustainable long term shareholder value.
With that I'd now like to turn the call back to Raymond to provide 2020 guidance in his final comments.
Thank you Tim.
Now that we have covered our accomplishments and financial results for 2021.
I would like to share of revenue guidance for Q1 2022.
And for the fiscal year of 2022.
In Q1, we.
We expect our revenue to be $25 5 million.
This will be an increase of approximately 264%.
From the 7 million, we generated in Q1 of 2021.
For the full year of 2022.
We expect revenue to be $140 million to $142 million.
Reflecting an increase of approximately 134%.
When compared to $59 9 million, we generated in 2021.
In the second half of fiscal 2022.
We anticipate our revenue mix will move towards more favorable high margin extraction, SaaS and production success fees.
Lastly.
We want to reiterate to our valued shareholders.
Yes, <unk> demand.
Has never been stronger.
Currently.
We have over $570 million of qualified pipeline opportunities.
And that number continues to grow at a rapid rate.
We believe it is prudent to.
To respond to our current high demand and seize the opportunity to gain additional market share to further separate <unk> from any potential competitors.
With the recent equity financing and debt facility in place.
<unk> is in a position to drive continue it accelerated growth.
In addition.
We are exploring partnerships.
With large rights for construction financing.
And equipment financing companies for <unk>.
These types of financing structure will provide <unk> with significant scale.
While maximizing shareholder values.
At this point I would like to open up the call to questions from our audience.
Operator, Please go ahead.
Thank you as a reminder to ask a question you need to press star one on your telephone to withdraw.
While your question press the pound key our first question comes from Aaron Grey with Alliance Global Partners. Your line is open.
Hi, good morning, and thank you for the questions and for the commentary there guys.
So first question for me Raymond just on the guide you gave for <unk> $25 5 million.
Just could you offer some commentary in terms of how that relates to kind of <unk>, specifically because of some added acquisitions within there so roughly flat up slightly a little bit. So was there some seasonality in there because I know the legacy extraction.
It's kind of more onetime purchases, so not sure whether or not there was some buying habits.
And that creates some seasonality or just some color there in terms of the sequential quarterly looking forward. Thank you.
Yes, there is slightly.
Ah seasonality effects.
And the extraction side of the business.
But in addition to that actually we have a couple of large bookings.
For our <unk> units.
Cash deals.
State of Illinois.
But unfortunately as you know theres been kind of a social equity legal lawsuits.
Involving does some of the licensees.
License applicant sorry.
And so it's actually pushed back our shipment of <unk> by one to two quarters.
We booked.
These deals in fourth quarter and.
And we were originally expecting to ship in the fourth quarter in Q1, but the legal loss just dragging out a little bit.
And but as soon as we get the clarification of that would you expect to ship those units.
Very shortly they have they are actually already but.
Finish up production.
So we're a little bit of seasonality and I do believe that the.
Business will pick up in Q2.
And as I mentioned earlier, we're not seeing any slowdown in the momentum.
And we will continue to execute.
Alright, great. Thanks, so much for that detail.
And then obviously you've had a number of acquisitions for in terms of the extraction side. Those have historically been more kind of one time per se. As you guys are looking to add in some more reoccurring sales through the ttk that you alluded to earlier in the call. So just wanted to know in terms of how you are looking to bring on that reoccurring model.
To those legacy more onetime purchase business, both FERC for legacy customers, who already have that extraction equipment as well as for newer ones, who might be buying the equipment and we're entering that CDK programs. Thank you.
Yes so.
As I mentioned earlier Erin.
We are expecting to start.
Receiving recurring revenues on the cultivation side.
In fact in Q3 towards the end of Q3 this.
This year and business, obviously super exciting because thats really.
The biggest sort of.
Potential for the company and obviously the number will be.
Ramping up there'll be small initially but.
Different can flow will start coming in public by Q2 Q3 of 2020, so as we bring on more facilities.
On the extraction side as you know.
Up to this point, it's been more of a one time.
Transactional type of sales, we just sell the hardware.
Very very little recurring.
Aspect of it.
We are very very close to signing our first extraction ttk deals.
And our team is also working very hard to basically put <unk>.
Control software on top.
I believe we will begin to recognize recurring extraction revenue in 2022 as well.
And.
We remain confident that we will have extraction based ttk deals announced shortly and you will be able to see recurring nice recurring revenues out of the extraction division in 2022 as well.
Alright, Thank you very much for jumping back into the queue and good luck in 2022.
Thank you Darren.
Thank you. Our next question comes from Eric salaries with Craig Hallum Capital. Your line is open.
Great. Thank you for taking my question.
So regarding the.
Recurring revenues coming in in Q3 that was one quarter ahead of what we were looking for.
Assuming that is coming from Budd and Marys.
Was just wondering if you could kind of give us an update on where that.
That project is right now and then.
Sort of what other regulatory approvals are required there.
And sort of what you guys are expecting from Massachusetts regulators I know they have kind of been notoriously slow for approval. So just wondering.
What kind of.
Sort of sensitivity have you baked into that or just how to think about the remaining steps required for bud and marys.
<unk> revenue start coming in thank you.
Hi, Eric.
So.
Actually the third quarter recurring revenue.
It's not coming from button berries, but it's coming from some of the legacy customers that we have converted.
Into the ttk programs.
Such as the facility in Vegas.
The facility in Washington.
So the facility in Colorado that we will be bringing.
To fruition in the next.
Quarter of.
Q.
Button Mary's is still on schedule to have its completion in fourth quarter.
So so.
The recurring revenue as I stated in Q3.
Its actually not coming from from button button areas is still pretty much on schedule for fourth quarter completion and production will start going in in Q1 of next year.
And it's really coming in from the some of the legacy customers that we were able to accelerate the deployment and we will start seeing.
Those projects coming to fruition and recurring revenues to kick in from those facilities.
Okay, that's very helpful and that makes sense.
Could you provide any additional color around the either number of the fuse from these legacy customers that'll be switching to sort of GTK recurring revenue or <unk>.
Just any.
Numbers that might help us frame the.
Expectations for recurring revenues from these legacy customers. Thank you.
Yeah.
As I stated earlier the total number.
<unk>.
On the contract is 3700 2009.
And these legacy customers that we're flipping on.
Probably sort of in the 400 aggregates in probably in the 400.
The new range.
So those will be the first ones.
That we bring on board.
And then obviously buttoned berries.
592.
And then obviously, we have other larger programs behind that sell the the legacy customers you can roughly estimate to be around.
400 units in total.
Thank you.
Thank you. Our next question comes from Scott Fortune with Roth Capital Partners. Your line is open.
Good morning, and thanks for the questions.
Just a real quick follow up on that.
Raymond as far as the Psus.
Have a number of ttk under contracts.
You had some legacy projects construction projects coming on board that we're going through required non teekay <unk> what percent or numbers of that $3 729 full via fuse is just coming from one time.
Ttk Psus being added to the pipeline here.
The the three seven to nine.
These are primarily OTT case.
And publicly around.
I would say three hundreds in aggregate, it's non ttk customers cash customers.
And as I've mentioned earlier.
We actually have other additional cash customers, particularly.
Several from the state of Illinois.
From Michigan, but because of the licensing issue.
The.
The ship Atlas date got little bit delayed, but we actually just hired basically very favorable sort of.
Legal decisions for the state of Illinois, and so we are hopeful that the units will get shipped very shortly.
Got it and I appreciate that and then follow up on your your demand being strong you have 570 million qualified pipeline to continue to gain market share here, obviously can you.
Pack that a little bit on <unk>.
Number of MST OS Youre looking at talking to kind of one time versus kind of GTK and that qualified pipeline just kind of validate that.
The quality msos that they're still looking at your technology moving forward here.
Yes, Scott we are in addition to obviously currently we are in a number of discussions with the Msos.
And we are confident that we will probably be announcing.
Another partnership very very shortly.
Out of the $571 million pipeline that we've mentioned.
Proximally $45 million is actually extraction related.
$313 million.
GTK arrangement.
And the rest of it it's basically.
You know our extraction few equipment non ttk. So again, the breakdown is $44 million for extraction.
About $313 million for Teekay and the rest of it it's basically.
<unk> units, but non teekay arrangement.
Perfect that color and if I can fit one more in on that on the extraction side can you provide a little more color where the growth is coming from and that business is this new msos, adding capacity is this looking at new states that theyre going to come on board that will.
I'll add to the growth.
And how do you value the new customers.
Driving the growth on the extraction side as you look at the core business there.
Scott, what's what's what's.
Most exciting is that we are seeing growth from pretty.
Pretty much everywhere.
We're seeing customers responding to shifting consumer demands.
Adding additional extraction equipments.
Sin.
Basically.
Interest from.
Large msos to large single state operators.
Even some of the smaller guys.
And obviously with the newer states coming online.
There's really a lot of demands for some of these new cultivation facilities as well and I think it's primarily driven by kind of a shifting of consumer preferences. Obviously dry flowers is still commanding 50% or so market share across every single state but.
Other.
Foam products.
Alright.
Really gaining traction huge momentum and <unk> and we expect that trend continues.
So this is something that I believe will continue to see kind of a 25% to 30% CAGR.
On a going forward basis, and we're very excited about that.
Thanks for the color I will jump back in the queue Congrats.
Thank you. Our next question comes from Anthony Vendetti with Maxim Group. Your line is open.
Sure. Thanks.
Just a couple of quick quick questions.
Brendan.
But in Marys right that those those are.
Those are owned by frozen for that's the holding company.
Is there has there been any.
Expansion.
With frozen for other facility.
In terms of a new contract or Ttk arrangement, and then I have a follow up question.
Yes entity. Thank.
Thank you for that yes, we obviously the partnership with.
Button Mary Mary as you said USD.
A subsidiary of frozen for fully enforced.
The parent company.
Phase one is obviously button Mary.
Sure the update on that and Thats 592.
And we are.
Because we have an LOI.
Execute it with frozen for four phase two expansion, which also will include.
The extraction.
Manufacturing capacity as well.
And that will be added to to kind of a phase one.
It doesn't.
At another location.
In Massachusetts, So we are super excited to expand our relationship with them.
This particular group.
I think in total.
We could see as much as 1200, yes.
We are still doing the.
The concept layouts for phase II expansion.
And there is a possibility that this could be actually be our first triple stack via few facility. So we're super excited about that possibility.
Okay, and then just in general on the Teekay project.
Okay.
I think you have six but that number has changed a little bit let me know but.
In terms of generating recurring revenues from ttk is that still.
Expect it to happen at least for the first one.
By the end of this year, either late <unk> or sometime in <unk> 'twenty two.
Anthony so.
As you know, we actually converted some of the old legacy customers.
Two.
Become a ttk partner as well so actually the.
Generation of SaaS and production revenues.
Yeah.
It's going to happen starting from Q3 of this year. So it's basically accelerated.
To what we had previously forecasted.
So you will start seeing some production in SaaS revenue.
Flowing in in Q3 of 2022, but obviously that number is going to ramp up overtime, and we believe that theres more significant flow.
You beat Q2, and Q3 of 2020 should we as we bring additional facilities online.
The initial.
Generation of SaaS and production is now.
Based.
Basically accelerated to Q3 of 2022.
Okay, Great and then just I know Tim mentioned this.
Gross margin was was.
Much higher I know that's not indicative of.
We're or reflective of where it's going to be in the near term was was that because.
There wasn't as much construction revenue this quarter and is there any kind of.
Guidance you could provide in terms of expectation for gross margin at the beginning of the year should that should that be.
Revert back more towards the.
Single digits in the beginning of the year.
Or how should we look at that.
Yeah, Anthony I'll jump on that one so Q4 Q4's gross margin at 22%. As you said is is I'd say abnormally high based upon where we've been at it is a combination right. We recognized $12 3 million of revenue from the extraction equipment sales that that revenue comes out of 30.
<unk> gross margin so by default right out of the gate that mix at that introduction to that mix of revenue.
Automatically lifts our gross margin. We also had a ttk equipment sale in the quarter of <unk> of which we sold older model <unk> use to a customer of which came resulting in a higher gross margin than as you mentioned the low single digit gross margin that we've historically recorded.
That's what drives us to 22% clearly based upon the singular sale of the <unk> equipment that is not sustainable go forward. So as we look at it the mix of extraction revenue at a 30% gross margin will continue obviously into 2022.
If we normalize the hits that against the historical margin of <unk> you.
You're looking at the potential of our gross margin to be as we said in the call on the script call about 18% ish rate, it's going to be it's going to be mid teens from an expectation point of view because of that beneficial lift from the extraction equipment.
Okay great.
That's helpful excellent I'll jump back in the queue.
Thank you. Our next question comes from Gerald Pascarelli with Cowen Your line is open.
So much for taking the questions.
So as a follow up to the gross margin question I guess, just sort of a housekeeping item.
Does your kind of mid teens target contemplate.
The 10% reduction in led lighting costs that are going to be associated with your new be abuse, which I believe were slated to come online at the end of <unk> 'twenty two.
If so and again not looking for guidance, but just from a cadence perspective is it fair to assume that sequentially.
Your gross margin should improve as we progress throughout the course of 2022.
Gerald so.
As you think about the cost reduction initiatives that we've implemented for the B abuse.
As we balance via a few production and revenue based upon what portion is ttk. What portion is standalone VM you equipment right. The use that a part of ttk or on a lease model. So they don't they're not point in time sale. So you don't see them manifest themselves into our revenue stream as an individual equipment sale.
So.
The standalone cash be it to I'll refer to it as a cash be VF <unk> equipment sale that its not under a T. T. K arrangement, yes, we will have or we have modeled than expected.
Lift in that Standalone unit gross margin that has improved from the historical margin. However, given the weight of the revenue and the contribution to revenue of those Standalone <unk> equipment sales.
But it's not going to have a meaningful or result in substantial lift in that gross margin. So again near term gross margin, we expect to be mid teens as we move through Q1 Q2 Q3.
Thinking about gross margin as you asked in the latter part on a full year one for 2022, obviously with the introduction of SaaS based revenue and production fee revenue in.
In I'll call. It the latter part of Q3 and into Q4.
Recurring revenue stream is highly leverage able from a margin contribution point of view anywhere between 80% to 100% of that revenue stream will drop to the gross margin line. However, it is not a significant or meaningful.
Pulling in of the projected revenue for 2022. However, again, you will start to see an incremental lift as that revenue starts to bleed in in the latter part of the year Q4, probably more more of a lift in Q4 than Q3, just due to timing of when we expect to receive it in the middle of the <unk>.
Quarter.
But yes, you should start to see gross margin contribution sequentially lift on a quarterly basis as we move through the year.
Understood. That's super helpful color. Thank you for the explanation.
My second question's just.
On capital allocation.
You've been highly acquisitive with with within extraction.
Just raised $135 million and so as we look out to 2022.
Can you maybe just provide a brief or a high level a level set I guess on your capital allocation priorities do you expect any more M&A and if so in what areas or are the use of your proceeds largely going to be.
Yes.
Used for building out your ttk partnerships and integration costs associated with that.
Color you could provide there would be great. Thank you.
Yeah Charles.
Go ahead go ahead, Tim No no no I mean, that's right good.
Okay.
Gerald in terms of the.
Acquisition.
We're pretty much done.
When it comes to the extraction piece, we're very proud of the four companies that we acquired.
And we believe we have pretty much everything we need.
Yes, they are still.
Additional product developments that we're gonna do internally to further enhance our overall offering but with the acquisition of these four companies.
We pretty much have everything we'd meet.
So in terms of M&A, we will always be looking for strategic and accretive opportunities.
But as of now.
We have not yet identified and so.
We think we're going to be public focusing more on just kind of internal integration.
For now.
That's on the acquisition side.
In terms of how we can deploy the capital yes.
Yes, it will primarily be for the T. G. K projects, because we believe that's the area that is going to give.
You know all.
Oldest shareholders the biggest long term values.
As you know every dollar that we deployed on the via a few sites that you could potentially get as much as 10 X return over the life of that partnership so that is going to be the primary focus.
Our product deployments and.
As mentioned even as of today, we have close to $370 million of that opportunity.
Pipeline and so that's going to be the primary focus.
And the other thing that I do want to mention is that obviously the TK deployment has two components. It has the upfront construction.
And then to the F U hardware.
Lease program that that Tim mentioned.
Our goal is to continue to basically gain leverage.
By talking to Reits and other equipment financing partners.
We will be able to find shareholder friendly instruments to help build leverage on our business.
And so that's kind of what we are focusing on for the moment.
Understood. Thank you very much for the color I will hop back into the queue.
Thank you and I'm showing no further questions I'd like to turn the call back to Raymond James for closing remarks.
I want to thank everybody for attending the call today.
We remained.
Super excited about the prospects prospect.
<unk> short term and long term and we will stay focused to continue to execute our exciting business plan and look forward to updating you guys in our next earnings call. Thank you.
Have a nice day.
Yeah.
Yeah.
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