Q1 2022 Agrify Corp Earnings Call
[music].
Good day, and thank you for standing by and welcome to the <unk> first quarter 2022 earnings Conference call.
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I'd now like to hand, the conference over to Anarchy, Taylor with Investor Relations.
Good morning, and welcome to AGA five first quarter 2022 earnings call with US on today's call are Raymond Chang, Chief Executive Officer, and Timothy Oakes, <unk>, Chief Financial Officer Today management.
I'll review, the highlights and financial results for the first quarter and provide a business and operational update following management's remarks, there'll be a question and answer session.
Today's conference call is being recorded and a replay will be available unoccupied investor relations website at IR diagonal five dot com.
Note that we will be 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 a teacher results performance or achievements to differ significantly from the results performance or achievements expressed or implied by such forward looking statements.
Important factors that could cause or contribute to such differences include the risks detailed in our public filings with the Securities and Exchange Commission and those mentioned in the earnings release, except as required by law. We undertake no obligation to update any forward looking or other statements herein, whether as a result of new information future events or otherwise I will now turn it over to Raymond.
Thanks Kate.
Just wanted to thank you all for joining us on the call today.
I'm going to begin by highlighting our overall performance in Q1.
And providing some recent updates on our business.
And then our Chief Financial Officer, Tim Bulks is going to discuss our Q1 financial results in greater detail.
After that I will go over our outlook for 2022, and then we will open up for questions.
We are pleased to report our revenue for the first quarter of 2022 was slightly higher than our guidance of $25 5 million.
Revenues for the quarter was 26 million.
An increase of 271% from the prior period.
We generated over 43 million in new bookings during the quarter.
Which our extraction division.
Record quarterly bookings of 20 million.
We currently have a total pipeline of over $375 million.
As a reminder, when it comes to our bookings and pipeline numbers.
<unk> reports the total value of our extraction solutions.
And non cheeky K cash base via a few purchases.
Before Teekay engagement. We only include the first three years the expected revenue.
Even though the partnership is typically 10 years.
Bookings and pipeline perspective.
We only include the upfront facility construction costs and the first two years, because the SaaS and estimated production success fees, which.
Which is based on the assumption that each of our <unk> will produce 35 pounds of dry flower per year.
I would like to first share with you the significant progress, we're making with our extraction division.
In the last seven months, we are strategically propelled ourselves to the top of the rapidly growing cannabis extraction industry.
Becoming the formidable leader in this space through the intentional acquisition of the four leading extraction brands.
We have successfully integrated finance legal HR.
In marketing.
We have consolidated the sales team and established territories with targeted accounts.
We have 19 employees the part of our extraction divisions sales too.
The team is focused on Upselling and cross selling all of our high quality extraction solution as.
As well as our services related to lap design.
Installation and training.
In addition, we're seeing our customers buying extraction solutions.
Our extraction customer wanting to learn more about <unk>.
As mentioned in our prior call once integrated we plan to extend our ttk program into the extraction site.
Okay.
Last week.
Our extraction division announced the launch of the PX five.
The most advanced and scalable passive hydrocarbon extractor and industry.
T X five unique passive recovery design offers immediate economic benefits candidate as operators of any size.
By increasing the daily production up to 33%.
Savings of up to 40% annually and energy costs, and increasing hourly extracted production by over 200%.
Yesterday, our extraction division announced a multimillion dollar sale to Boone labs that will all fit our new production facility.
With a complete range of <unk> offerings.
Including.
72 about vertical farming units the issues.
Solving this extraction.
Hydrocarbon extraction and ice water solution.
This is our cultivation and extraction coming together.
A complete <unk> sales to a single customer.
As mentioned.
Earlier, our extraction division had a record quarterly new bookings in Q1 of $20 million.
We continue to expect our extraction division to be accretive.
And produce revenue.
Between 60 to 65 million for fiscal year 2022.
With gross profit margin of 30% or greater.
Now I will turn to the cultivation side of our business.
And of course, our total turnkey solution.
In April we announced our first new Jersey Ttk without wellness.
Lal wellness is one of the only 18 licensed cultivation and manufacturing operators in New Jersey.
This 500 Vips partnership is expected to generate approximately $118 million of high margin production success in SaaS fees over the next 10 years.
We estimate the commissioning of the <unk> for this project to be in Q2 of 2023 with the first harvest happening in Q3 of 2022.
On the MSL fronts.
We also were very excited to announce our second agreement with a prominent multistate operator.
At this time with Greenlight candidates.
Green light is a rapidly growing MSL in the United States with 28 locations across five states.
Under the agreement with Green light, we will be installing via fees that were a naval green light to increase its growth canopy.
In order to achieve rapid business growth and geographic expansion under one standard.
Internationally, we are pleased that in April we consummated our first <unk> agreement with a European customer.
Well, Ken pharmaceutical, which is based in Portugal will be deploying 190 <unk>.
It's 25000 square feet state of the art cultivation facilities.
The engagement with <unk> will help <unk> begin to pave the path for success on a global scale.
As we continue to put in place the ability to manufacture our look our <unk> locally.
And provide quality via a few installation and support for future European based customers.
As of today <unk>.
<unk> has contractual commitments.
4569, do you have to use.
That will be powered by the <unk> insight cultivation and production software.
3783 of these psus were committed to as part of the GTK program.
Which required customers to pay both production and SaaS fees for up to 10 year.
And you also typically include <unk>, providing a variety of other value added services.
The remaining 786 Skus were sold to customers through one time equipment sales.
But still required these customers to pay monthly SaaS fees on a per via a few basis.
Assuming 35 pounds of production per year per <unk>.
Cumulatively.
Or does the VSP is under <unk> T T K solutions or just SaaS agreements.
We'll produce an estimated 923 million in total revenue over the course of the next 10 years.
Of which 674 million.
As anticipated high margin production success fees.
$129 million.
Anticipated high margin SaaS.
And approximately $95 million in construction related things.
It is important to reiterate once more.
That our TK business.
It assumes that each <unk> produces 35 pounds of candidates flowers per year.
Or on average.
Seven pounds per harvests with five harvest per year.
We are extremely pleased to share with you.
Wonder if our view a few customers in Nevada.
Has consistently produced over nine pounds per harvest over the last two months.
With certain strains getting as high as 11 plus pounds.
And with THC concentration as high as 34%.
And the productivity rate of five two turns per year.
This customer is on track to produce close to 50 pounds.
Try flowers purpose, if you on an annual basis.
This is a strong validation of the robust capabilities.
Performance of our Vips.
I would also like to update you on our progress with various customer facilities.
As this is tied to win or anticipate a high margin recurring revenue from our ttk customers and non TDK via a few customers will begin to formalize.
And the state of Nevada.
We will begin to charge, our non ttk via a few customer white cloud SaaS.
SaaS fees this quarter.
Next week.
We will begin Vse convention with our Las Vegas based ttk customer our treehouse.
And we will begin charging both SaaS and production success fees next quarter.
In Washington, and Colorado, We expect to go live with Hana and greenstone in early July .
And we'll begin to charge SaaS fees in the third quarter.
With anticipated production success fees coming in in the fourth quarter of this year.
Furthermore, we expect to begin commissioning our <unk> for the Massachusetts space Ttk partner button berries before the end of 2022.
And charging SaaS and production fees in the first quarter of 2023.
We have also moved ahead with the N E and several plants with a Florida ttk customer gold leaf.
Our Arizona partner.
I'm also pleased to inform you that El Mirage officially.
See if their license due to social equity lottery on April eight under the name of Woodstock one.
El Mirage is our Arizona GTK partner.
As you can see.
We are making excellent headway.
With our customer deployment schedules and.
And we expect to start generating high margin recurring SaaS and production piece sooner than initially planned.
Now, let's spend a minute to talk about our future ttk financing.
We plan to finance, our future cultivation facility construction requirements with debt based investment partners, which include among.
Come on other types of investors.
We expect our debt based investment partners to finance and averaged 60% to 80% of the construction, while <unk> contributed the remaining capital.
Today, we are pleased to announce that we have recently entered into a term sheet with our first debt based construction financing partner.
And we expect to finalize that partnership along with a new TK project in the near future.
The combination of our current balance sheet and this leverage financing structure.
Should give <unk> the ability to scale significantly.
While maximizing shareholders' value.
In summary, we are very pleased with the accomplishments achieved for the first four months of the year and we look forward to generating high margin recurring revenues in the second half of 2022.
Now I would like to turn the call over to Tim to talk about the results from the quarter.
Thank you Ramon and good morning, everyone and thank you for joining us on today's earnings call.
Similar to our last earnings call I'll speak to our first quarter 2022 financial results and then I'll pass the call back to Raymond for closing remarks.
Overall, our first quarter 'twenty to financial performance is in line with our expectations.
Revenue in the first quarter of 2022 was $26 million compared to revenue of $7 million in the first quarter of 2021.
This represents a 271% year over year increase in comparative quarterly revenue.
The comparative increase in our first quarter 2022 revenue is attributable to incremental revenue from our extraction division of approximately $12 4 million.
Bind with an increase in Teekay related design and Billboard.
Organically, excluding the extraction revenue contribution, which was not part of our revenue mix in the first quarter of 2021 first quarter cultivation related revenue increased by 94%.
Non cannabis in related party revenues declined from $5 5 million or 79% of total revenue in the year ago first quarter period to $1 3 million or four 9% of total revenue in the first quarter of 2022.
Bookings in the first quarter of 2022 were approximately $43 million.
Of which as Ramon mentioned 20 billion was related to extraction products.
The bookings amount includes teekay related bookings, which consist of construction and recurring SaaS and production success fees as well as product bookings, including both cultivation and extraction equipment amounts.
We entered the second quarter of fiscal 2022, with approximately 923 billion in backlog compared to $82 million in backlog entering the second quarter of fiscal 2021.
A significant portion of our reported backlog amount is derived from the future TDK related recurring revenue streams associated with both our SaaS and production success fees.
Total gross profit and the associated growth gross profit margin in the first quarter of 2022 with $4 2 million or 16% of total revenue.
Compared to a negative gross margin of 540000 or 8% of total revenue in the year ago quarter.
Gross profit and gross margin improvements in the comparative year over year quarterly periods.
Solely related to the incremental profit and margin contribution provided by the company's extraction product sales.
Extraction related revenues achieved a gross margin of approximately 33% in the first quarter of 2022 with cultivation associated revenue, including Teekay related revenues.
Which in the current quarter consisted primarily of design and build revenue contributing a gross margin of approximately 1%.
Moving on to operating expenses.
First quarter, 2022 general and administrative expenses increased by $5 3 million or 118% to $9 8 million compared to $4 5 million in the year ago quarter.
The comparative increase in G&A expense in 2022 is related to overall growth in the scale of the business, including incremental G&A assumed in connection with our recent acquisitions plus increases in depreciation amortization.
Amortization expense associated with the intangible assets and one time charges related to the direct acquisition costs investment banker termination fees and restructuring charges.
These increases were offset by a decrease in stock based compensation expense.
The company recorded a significant amount of stock based compensation during the first quarter 2021 in connection with its initial public offering which triggered the accelerated vesting of outstanding Unvested stock options granted to employees.
Sales and marketing expenses totaled $2 1 billion in the first quarter of 2022 compared to 600000 in the first quarter of 2021.
The comparative increase is also related to the company increasing the scale of its business and strategically focusing on investments in sales and marketing activities, such as head count Tradeshows marketing programs et cetera necessary to drive our rapid growth.
Research and development expense in the first quarter of 2022 totaled $2 1 million compared to 900000 in the year ago quarter.
The increase in research and development expense is essentially reflective of the company's need to improve and upgrade the <unk> insight SaaS software as well as the hardware features and functionality of its vertical farming units.
The company as of March 31, 2022 is currently monitoring two separate contingent earn out consideration arrangements associated with the acquisition of pure pressure and lab Society.
Each of the arrangement contains two consecutive 12 month earn out periods.
The potential additional consideration that can be earned under each of the two earn outs is capped at one 5 million per year under the peer pressure earn out arrangement and $175 million per year under the lab society earn out arrangement.
The company has made initial estimates with respect to the probability of achievement of the additional consideration and recorded as part of our initial purchase price accounting associated with each acquisition.
We will continue to evaluate on a routine periodic basis, Keith your performance against our initial assumptions and estimates on a quarterly basis.
Any identified changes to our original assumptions that generate a change to our initial fair value estimate of the probable earn out achievement will result in either an increase to or a reduction to our future periodic operating expenses.
Lightly touching upon other income and expenses. The company is reporting total other income of 662000 for the first quarter of 2020 compared to total other expense of 32000 in the first quarter of 2021.
The increase in other income is directly related to the interest accrued on the outstanding loan receivable balances associated with our ttk related construction advances.
During the first quarter of 2021, the company recognized the gain on the extinguishment of the convertible promissory notes in the amount of $2 7 million in connection with the Derecognize share of the net carrying amount of the extinguish debt.
As it relates to our reported income tax benefit the benefit from income taxes in the first quarter 'twenty. Two was primarily due to a discrete income tax benefit of 200000 attributable to a nonrecurring partial release of the company's U S valuation allowance as a result of the lab Society acquisition.
No provision or benefit for income taxes was reported in the first quarter of 2021.
We consolidate the results of operations up less and wholly owned entities in our consolidated results of operations, specifically Agra five Valeant LLC, which is a joint venture limited liability company in which we are 60% majority owner and Valeant America LLC owns the remaining 40%.
The reported net income or loss in each of the presented quarterly periods ended March 31, 2022, and 2021 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 and operating expenses resulted in a net loss of $8 9 million or <unk> 36 cents per diluted share during the first quarter of 2022 compared to a loss of $3 8 million or <unk> 33 per diluted share.
In the first quarter of 2021.
Adjusted EBITDA amounted to a loss of $6 1 million during the first quarter of 2022 compared to an adjusted EBITDA loss of $4 2 million in the year ago quarter.
Additional information regarding our use of non-GAAP measures, 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 IR Dot <unk> Dot com.
Finally, providing an update on our cash restricted cash and marketable security balances. We entered the second quarter of 2022 with a combined amount of cash restricted cash and marketable securities of $93 4 million compared to a balance of $56 5 million as of December 31 2021.
The net increase in our cash related balances was largely due to the two capital raising activities completed by the company during the first quarter of 2022.
As discussed during our fourth quarter full year 2021 earnings call. We noted that in January 22, we announced the closing of a $27 3 million private placement and Additionally in March 2022, we announced the Finalization of a debt facility arrangement, which enabled the company subject to certain performance requirements to.
Access up to approximately $135 million in debt financing.
In closing the company made an initial draw of $65 million against the debt facility.
Offsetting the increases in cash provided from our two first quarter transactions were outflows of cash associated with our current quarter loss from operations approximately $16 4 million in inventory build approx.
$12 5 million in Teekay related construction payments $3 7 million in purchases of property and equipment $3 5 million in purchase price consideration paid in connection with the lab Society acquisition, and approximately $2 7 million and debt issuance costs associated with the debt facility.
With that I'd now like to turn the call turn the call back to Raymond for final comments.
Thank you Tim.
I would like to turn to our guidance for fiscal year 2022.
Given our strong performance to date, we are reiterating our revenue expectation of between $140 million.
And $142 million for 2022.
Reflecting an increase of approximately 134% when compared to the $59 $9 million generated in fiscal year of 2021.
To give you a little more color on cadence for the year.
We expect that more than 60% of our projected revenue for the year will be achieved in the second half.
In summary, we are thrilled to carry our strong momentum into 2022.
We have continued to make tremendous progress on the successful execution of our business and growth strategies in a number of ways.
We have expanded our customer base across our cultivation and extraction divisions we.
We have entered new markets with rvs use including Europe , New Jersey.
And we continue to sign agreements with prominent msos across both our cultivation and extraction divisions.
We also continue to push forward on all of our ttk projects.
And further innovate and improve our product offerings.
We are especially excited to have new customer facilities coming online this quarter.
The more in the second half of 2022 and.
In first half of 2023.
Which will be a crucial inflection point.
Our business model is more and more of our high margin recurring revenue streams begin to flow it.
I look forward to providing you with further exciting updates on our progress over the next several quarters.
I would like to now open up the call to questions from our audience.
Operator, Please go ahead.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound key.
Our first question comes from Aaron Grey with Alliance Global partners.
Yeah.
Hi, good morning, and thank you for the questions.
Good morning first question. Good morning. So first question for me just one.
I think a little bit longer term with the ttk program and the performance based fees.
More specifically just on the floor pricing I know you guys have announced for some of them the $500 just.
Terms of certain markets, where you might see more pricing pressure over time, particularly because Massachusetts is obviously a key market for you guys for Teekay programs.
I mean, how do you think about potentially.
Adjusting that over the long term, obviously, it's mostly margin for you guys. So so not too big of an impact just less revenue, maybe dropping down but just to make sure your partners able to succeed over the long term and maybe you could provide some color in terms of what youre doing at some of the more mature markets like Colorado and Washington.
Provide some minor effect in terms of how that could trend over time and in other markets. Thank you.
Sure Eric Great question.
Obviously, we understand very clearly that our success hinges on our customers' success.
Yes.
So.
I think it's very.
We always encourage our customers to basically go beyond just <unk>.
Propound fee.
They really need to look at basically the overall return on investment out of that.
Facilities that they operate.
And the <unk> solution.
We have.
The ability to help them to basically you have the maximum yield.
And more importantly.
Is to have the lowest cost of production.
And also be able to produce premium flowers. So they can basically sell it.
With premium pricing in any market that the operator.
Alright, and which in return they will get the highest return on investments right. So with that in mind first of all.
Do you get much better higher yields if you actually triple stack that you get as much as.
90 to 100 grams per square foot.
And then on top of it.
Basically the propellant P.
On the operating costs.
Our customers are seeing somewhere in this both to lease versus the industry at $4 to $500 per ounce.
Alright, so its basically.
Vincent.
Working with us they will have the highest return on investment.
Protecting system cells to be able to have the most you're able to compete in.
In any market that they operate in.
That's basically how are they going to win in the long run.
Obviously, we will look at our per pound per pound fee.
On a market by market basis.
Right now the new ttk programs are only being rollout in selective markets, whereas the premium flower pricing is still relatively high.
The Colorado, Washington, and Nevada projects are basically our legacy projects that we converted them over to GTK and they are benefiting by enjoying our lower production fee slightly lower production fees to basically help them to be able to compete in those markets.
But for now.
We are only offering the new ttk programs to selective new markets, where the premium pricing is still high.
But we understand that overall at the end of the day, we need to basically help our customers to be the most competitive cost competitive operator in each of the market. They operate in and also to be able to enjoy the highest revenue because the premium quality of flowers that they produce I mean right now for <unk>.
Example.
The customer that we mentioned in Nevada, White cloud, because theres consistently producing very high THC products, I mean as high as 34%.
<unk>.
Their products are completely sold out.
And still be able to command a premium pricing.
In that market and I think thats basically where the market is going is really bifurcated.
There you go for really really cheap.
Have to basically go for the premium.
Okay. Thanks for that color that was really appreciate it.
So second question for me.
Last month, you guys announced the <unk>.
Rapid deployment pack.
I know, it's still very early days, but just.
Just want to talk about maybe how the conversations are going especially with some of the.
A larger msos, because now there's a little bit less capital intensive for them to try to be a fuse none.
If it changed infrastructure of their own facilities now more of a plug and play if you will so I just wanted to in terms of that initiative and how it kind of spurred maybe more R&D type initiatives some of the larger players. Thank you.
Yes.
We understand that we have to listen to our customers and in.
In the early conversation with the Msos.
Everybody was interested in China will be a fuse because obviously.
Why wouldn't you want to look at a new technology that could help you to improve yield consistency.
We're able to operate at a lower cost, but obviously having to go in and retrofit.
To go through renovation and.
All kinds of bio security risks that was.
A major turn off for a lot of the end of <unk>. So it wasn't the interest wasn't there it was.
Basically people not wanting to bother with all these retrofitting.
Issues. So basically we have to kind of be there at the right time and the only looking at new facilities and even then the question of whether or not you know arguments will perform and et cetera. So.
It was difficult sale.
But we.
We developed this rapid deployment program and I can tell you as a result of that.
The conversations have.
Just basically gone out that we have.
We have so many MSL interests.
And we will be announcing several more additional rapid deployment programs with msos in the very near future.
Our next question comes from Scott Fortune with Roth Capital Partners.
Good morning, guys. Thanks for the question.
Good morning can you provide a little more color on adjusting to build out timings on the ttk facilities in light of.
Seen inflation.
<unk> cost and labor issues and delays in licensing.
It uses and some of the other states states within in the street, but just provide an update on the PTT deals in the pipeline or that you find in the timing to generate cash flow kind of make sure thats still on track here for the second half.
Sure Scott.
So let me start with.
Treehouse in Nevada.
As I mentioned earlier the Treehouse, we are beginning commissioning of RBS used actually as early as next week.
So we can expect both SaaS and production revenues coming out of that facility next quarter.
Our two ttk projects.
Washington, and Kansas, and Colorado, So Hana and greenstone.
We are also well begin commissioning that used before the end of this quarter and we are also expecting both production and SaaS revenue coming out of both of those facilities in Q3.
Button Marys, which is obviously the.
The the the larger.
Ttk project in Massachusetts.
We will begin commissioning.
Of our psus.
Before the end of this year with expected SaaS in production revenues.
In the first quarter of 2023.
And lastly.
The two big ones, El Mirage and Florida.
Gold leaf those two projects, we have kicked off the architectural and engineering.
Design plant with those guys.
And we are expecting that both of these projects.
Publicly will have commissioning of our <unk>, sometimes towards the end of Q2 or beginning of Q3 of 2022, we would expect that production in SaaS fees coming in in Q4 of 2023.
Perfect.
Those projects that you're building out our remaining on track despite some of the challenges going forward.
So important.
Okay.
That is correct.
<unk>.
Based on the timing of the share.
As you can see the production SaaS fees.
It's actually going to start kicking in in Q3 of this year, which is.
Earlier than expected.
And in fact this quarter, we will start to collect SaaS fees from our customer white cloud in Nevada, as you know thats, a non PTK customer, but the SaaS fee well will begin to kick in.
This quarter.
Our next question comes from Eric <unk> with Craig Hallum.
Great. Thanks for taking my question here.
So first question on the REIT or kind of that partnership that you.
Touched on in your prepared remarks, I just wanted to clarify if this was for one or more specific projects or if this is an enterprise level partnership. Thanks.
Hi, Eric.
Good morning so.
You know.
It's very similar to kind of my GTK approach right, we want to make sure we want to make sure that our we sit a nice template.
Of how we.
Want to work with Reits.
And so this first deal that I talked about today, it's only at the enterprise level.
But we wanted to make sure that the terms are reasonable and also that obviously the market would react favorably and it also gives us the maximum leverage to be able to scale that.
Overtime.
However.
We are continuing to have conversations with multiple <unk>.
Beyond just kind of at the enterprise level, but we want to basically kick off with this particular, one just to kind of set the framework and set the expectation.
And just to make sure that we structure everything correctly. So we don't want it basically jumped the gun and we credit over time. So we're doing this very carefully because we know that.
Our shareholders desire is to be able to maximize their values and we wanted to make sure that we bring in the right partner under the right terms.
Okay. So I suppose just to clarify here it sounds like that it is sort of four.
One or more specific projects that first and then.
Kind of proceeding from there.
Yes.
The term sheet that we signed is for projects that you have capacity to go beyond one.
But we want to start with one and then while at the same time, we are also having conversation with bigger reach.
Basically talks about multiple projects.
And but again, we wanted to do it carefully just to make sure we have all the terms and structure of the deal correctly.
Yes, no that makes sense.
A second question here so.
So there's a big inventory investment in the quarter I mean, obviously, there is a supply chain stuff going on so.
You know certainly could be reasonable here could you just kind of flesh that out a bit more.
What kind of inventories were involved there is this kind of extraction or on the <unk> side of things and then overall any kind of indication on how to think of working capital flows for the rest of 'twenty two would be really helpful. And maybe you can remind us how to think of the.
Construction loans and how those impact working capital. Thank you.
Tim would you like to take this please.
Alright, Thank you alright.
Alright, Eric So first question related to inventory inventory the build in inventory of $16. Four is really related to the investment in the <unk> production right as Raymond talked about right. We have a lot of deliveries on the <unk>.
In terms of commissioning, they're going to start to come up in the back half of the year and the early part of 2023, so that investment right now is investment in sort of the longer lead items as you mentioned to.
Defeat supply chain issues.
As well as we've got about $2 5 million in inventory prepayments.
In connection with our trying to bring online two additional contract manufacturers.
In order to offset and give us better leverage not only from a manufacturing capacity point of view, but also from a price point of view.
As opposed to relying on a single source.
So that really accounts for the drive in inventory in.
In terms of addressing the second part of your question I think is really working capital needs.
We have heavily invested at this point in time, obviously in the inventory we have invested heavily in acquisitions and we are also heavily invested in the ttk on the construction piece right that upfront cost in terms of the outlay of the financing.
As we move through the rest of the year a lot of those legacy initial legacy contracts as Ramon mentioned are coming to conclusion that will start to lessen a bit on the construction revenue side on the construction financing side. So you will start to see sort of or would expect to see sort of a reduced outlay of capital on the teekay.
<unk> front until the newer engagements.
We've recently announced start to complete their design build them. There any studies, we will then towards the back half of the year start to recycle on construction.
So the capital needs of the company really are going to be in the inventory production side.
We'll see that manifest in the increase in inventory as we move through time, and then ultimately you will see that inventory slipped into a fixed asset.
Because of the SaaS excuse me because of the lease based model on the used contributed to those ttk arrangements.
So that would you would expect to see that and you would expect to see as we have shown in the recent past quarters continued investment and sort of what we describe on the balance sheet as loans receivable.
In terms of when do the construction start to flip as these.
Construction start to come to completion.
Those outstanding Finance amounts will start to pay down over 12 months to 24 month period, and you would start to see a reduction in the loan receivable amount and an increase in cash.
From the repayments of principal and interest interest on those outstanding finance balances.
Our next question comes from Anthony Vendetti with Maxim Group.
Thanks.
Good morning, David just a couple of questions on the <unk>.
On the backlog, so backlog increased by $77 million.
What's the total backlog now and do you expect most of that backlog will be recognized over over what timeframe.
Tim would you like to take that.
Yes, certainly so Anthony right now as we as we entered the quarter. We're looking at a backlog of about 923 $923 million.
That obviously I think as Raymond went through his comments plays out over time, because the larger chunk of that is related to the future of SaaS.
We're fees as well as the production fees, so that backlog converts to revenue in our world comfortably over a over a six to eight year period.
Six to eight years, okay, Okay, and I know some of it's some of it's over 10 years, but most of it over six months six to eight okay.
Yes.
And it May sorry, let me just help you just need to also consider that some of that front loaded.
Is construction related and as we talked about our legacy contracts. Those legacy construction pieces are starting to come to conclusion. So Raymond highlighted that as we look at towards the end of the second quarter of this year and enter the third and fourth quarter, we will start to recognize the leading edge of that of that ends up backlog related to this.
SaaS fees and the production beat.
Okay, Yeah, so Anthony.
If if if if I may.
About 900 plus billion.
Good 80% plus is really production and SaaS fees.
And most of that will be over 10 year period, right, but as you know we do.
Get involved with the construction side of things and Thats basically kind of booked book and burn over 12 months period, So kind of the six to seven is sort of like what the average if you kind of look at that entire $900 million, but high margin SaaS and production fees typically are 10 years and they all kind of come in on the back.
And of that revenue streams.
Sure sure understood.
And then you.
Rapid via fuse, which which.
Are attracted to the Msos.
You said you are having some conversation I.
I guess multiple conversations with Msos about that can you give us an update an update on <unk> I know that was one that was with sort of.
That signed up for like a test run and just give us.
An update of where that where that project is and what the opportunity is with your at least at this point.
Sure I'm happy to so they have officially submitted to the town of mutant that's where their R&D facility is.
Basically the application for construction. So everything is up we are proceeding forward A&D plan, that's not done and they are moving forward with E D.
The construction.
This is this is one of the reasons why we basically.
<unk> developed the <unk> rapid deployment program because.
What we realized is that.
It is really really.
A hassle.
Basically for them to have to basically go back in and retrofit and apply for construction permits.
All of that stuff right and it wasn't a big lesson learned it took us it did take us a long time to kind of get this up.
They're moving forward. So we're very excited about that but at the same time. It also reminded us that we really do need to have this RTP program. So that basically they can have 10 units. They can have 20 units and it's a plug and play and this will help them to accelerate it and be able to.
Put our equipment to test now one of the other thing that Anthony I Wonder if I really want to reiterate.
Is.
I am most excited.
About the fact that what is happening at our customer sites today.
Alright.
You guys all know.
We estimate 35 pounds of production per via purview, if you on an annual basis.
I just share with you guys. This morning.
White clouds that hitting <unk>.
Somewhere close to 50 pounds.
Production.
That is an extremely exciting development.
It really validates our business.
And we expect that number to continue to grow up and it's not only on the yield side, which obviously people only talk about that but getting as high as 34% T. A C.
So.
This is a very strong validation and I would say probably is one of the more important piece of information I shared today and we expect to continue to see progress on the advantage of our technologies and we're super excited about that.
Our next question comes from Harrison Vivas with Cowen.
Great. Thanks, so much for taking the question just wanted to double back on REIT partnerships. So I understand it's still early days and you're establishing.
Our framework for how you're structuring deals, but what's your view sort of kind of establish repeatable framework does this accelerate your ability to execute against your existing pipeline or does it sort of expand your pipeline.
Discuss the opportunity set once you once you establish a repeatable deal structure.
It's rich.
Yes.
Harrison Thank you and thank you for joining our call today.
Yeah.
Here's the thing.
Yeah.
It's about industry headwind.
People are seeing slow down.
Et cetera et cetera.
But I can tell you that the interests the amount of people want to engage with us.
Just continuously turning the way deals.
We're just way too busy and right now would be super selective as to the partners that we want to.
Keep up with.
And obviously one of the challenges is how are we going to finance all of these GTK projects right. Because obviously, we don't want to do it.
Completely 100% for my own balance sheets.
So sitting here, saying that the right framework for REIT partnership.
Allow us to be able to quit.
Politically scale up that business right, but at the same time, even though we're in multiple engagement in that field.
Basically like term sheets from people, but I want to make sure that we structured this correctly because you only really only allow it once.
One has to do it right and we want to make sure. The first deal is done right. So that is the expectation that fits a template and basically we can be we can scale from there right, but once we can put a partnership in place than I see them.
Tremendous leverage out of our business because it's Harrison right now for every ttk deal that we do.
About 60% of the upfront costs is related to construction.
And the 40% is basically related to the additional equipment that we have to put it. So if we if we can actually have a re partnership to take away 60% of the upfront then we only have to worry about financing to 40%.
Alright, and I believe once we start showing these recurring revenues, which we will begin to do starting from next quarter. Then we will be able to find maybe some partners on the equipment financing side for you to use.
Then under that scenario and this model becomes extremely scalable.
So that's kind of what we're putting in place.
That's super helpful.
And then it kind of just.
A clarifier.
In response to an earlier question you talked about prioritizing.
That's where we're premium prices for flower, we're holding in the most can you specify what markets.
You're referencing and kind of how you see your state mix evolving over the next several years.
Yeah. So you know obviously.
So the new ttk markets that we are focusing on are primarily all limited license States East coast. So for example, we've heavily.
And missing here in Massachusetts in our backyard and we have to own our backyard for sure.
Florida, That's also a limited license states.
And the premium pricing still holding up very nicely there.
We're obviously entering into new Jersey.
Obviously, that's a very exciting market predicted to be publicly in New York, New Jersey, the second largest market outside of California.
I know that there's going to be difficult there, but I think initially you said, maybe a supply demand imbalance because people are just trying to figure out how to bring supply into that market, but I think the premium market might still be able to hold nicely. There. So and then there are other smaller states that actually again limit the license.
Primarily for medicinal use.
That we're looking at right now, but we're being very selective and looking only at the.
The high premium pricing market for the moment.
Our next question comes from Pablo <unk> with Cantor Fitzgerald.
Hi, This is Mario maker for Pablo.
Thank you for taking my message.
Hey, good morning, Raymond can you talk about the balance sheet cash burn and your funding needs over the next 12 months.
Kevin Please take that.
Yes, absolutely.
Thank you Matthew so at the end of the quarter, we ended with cash and cash equivalents ballpark $93 million.
We've got $30 million of that restricted as part of the debt agreement. We entered into in later latter part of March So that gives us ballpark $64 million of cash as we as we look at moving through the year right.
Right now where we sit.
As Raymond talked about signing the term sheet with a potential.
Investor or finance or for some of our other ttk arrangements.
We feel that we have enough to get through the rest of this year.
It will be it will be tight getting through the year.
We have done in the past, we will always look to find ways to sort of strengthen the balance sheet as we move through time.
Giving us again continued leverage on that balance sheet to continue to look at the expansion of our investment in the growth of our top line.
Okay. Thanks for the color there.
For our second question from like a value proposition point of view, what's the average cost per pound that your vertical farm units produced compared to the average cost of indoor cultivation.
And then also on how does this compare in terms of potency.
Yeah great.
Great question.
So right now our customer has seen an average around $320.
Opex per pound.
And Thats basically comparison to roughly $4 50 to 500 industry average so as you can see a significantly lower and I believe that number.
In fact, I would go even further down with.
With scale.
The $3 20, a number that I kind of referenced earlier, it's for a 200 plus yes U S.
Facility.
And it actually does have tremendous scalability. So you can expect that number to go even lower with higher volume.
<unk>.
So that's the first question.
In terms of the second question.
As.
As I mentioned earlier today.
Our customers are seen as high as 34% THC.
And one of their strengths.
Alright, 34%.
And it's not just the THC is the other cannabinoids and also Turkey.
And it's also not just the other kind of annoying tripping being higher but it's also the consistency right I mean, the the best.
The thing about our solution is once you figure out the optimal grow recipe.
Do you just continue to use that operate at a curtain down.
Completely control environment, and you have the ability to repeat that same process over and over and over.
And that's really what gives us the maximum vantage is not only being able to push something out ones.
But it's the ability to basically repeat that process over and over.
And that's really what sets us apart.
Okay.
I'm showing no further questions in queue at this time I'd like to turn the call back to Raymond James for closing remarks.
Gentlemen, I really wanted to thank you all for joining the call today.
And one of the other thing is it closing remark I do want to say.
Is that.
But just based on our backlog with 4569. He is currently under contract.
Starting from 2023 and onward.
Once we commissioned all of these b piece.
You would be expecting to generate.
$84 million of high recurring revenue on an annual basis.
That's really the Paula <unk>.
Is this model that we have and we're executing against that and we're very happy to see.
A lot of our facilities coming into fruition.
And the team is 100% focused and we look forward to updating you with more positive developments in the quarters to come again.
Again, thank you for joining the call today and look forward to.
Dating you all in the next quarter. Thank you.
This concludes today's conference call. Thank you for participating.
You may now disconnect.
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Yeah.
Yes.
Sure.
Great.
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Thank you.
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