AGRIFY CORPORATION The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSecurities and Exchange Commission onApril 2, 2021 (the "Form 10-K") and presumes that readers have access to, and will have read, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Form 10-Q. The following discussion contains certain statements that may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, "Management's Discussion and Analysis of Financial Condition and Results of Operations." These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Form 10-K in the section entitled "Risk Factors" for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited financial statements and notes thereto that appear elsewhere in this report.
Except as otherwise indicated herein or as the context otherwise requires,
references in this quarterly report to "we," "us," "our," "Company," and
"Agrify" refer to
As described elsewhere in this report, all share and per share amounts set forth below have been presented on a retroactive basis to reflect a 1-for-1.581804 reverse stock split of our outstanding common stock implemented on January
12, 2021. Overview We are a developer of highly advanced and proprietary precision hardware and software grow solutions for the indoor agriculture marketplace. We believe we are the only company with an automated and fully integrated grow solution in the industry. We believe ourAgrify "Precision Elevated™" cultivation solution is vastly differentiated from anything else on the market in that it combines our seamlessly integrated hardware and software offerings with a wide range of associated services such as consulting, engineering, and construction to form what we believe is the most complete solution available from a single provider. The totality of our product mix and service capabilities form an unrivaled ecosystem in what has historically been an extremely fragmented market. As a result, we believe we are well situated to create a dominant market position in the indoor agriculture sector. We have five wholly-owned subsidiaries,AGM Service Corp LLC (formerlyAGM Service Corp Inc. ),TriGrow Systems, LLC ("TriGrow", which acted as our exclusive distributor and which was acquired inJanuary 2020 asTriGrow Systems, Inc. and converted toTriGrow Systems, LLC inMay 2020 ),Harbor Mountain Holdings, LLC ("HMH", which assembled and produced many of our products and which was acquired inJuly 2020 ),Ariafy Finance, LLC andAgxion, LLC . We also own 50% ofTeejan Podponics International LLC ("TPI") sinceDecember 2018 ; 60% ofAgrify-Valiant, LLC , formed inDecember 2019 ; and 75% ofAgrify Brands, LLC (formerlyTriGrow Brands, LLC , which was acquired as part of theJanuary 2020 acquisition of TriGrow). For further details about theJanuary 2020 andJuly 2020 acquisitions please refer to our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theU.S. Securities and Exchange Commission ("SEC") onApril 2, 2021 . Public Offerings Initial Public Offering OnFebruary 1, 2021 , we completed an initial public offering ("IPO") for the sale of 5,400,000 shares of our common stock at a price of$10.00 per share. We also granted the underwriters: (a) a 45-day option to purchase up to 810,000 additional shares of common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the IPO, and (b) warrants to purchase 162,000 shares of common stock (equal to 3% of the aggregate number of shares of common stock issued in the IPO) at an exercise price of$12.50 per share (which is equal to 125% of the IPO price). Subsequently, the underwriters exercised the over-allotment option, and onFebruary 4, 2021 , we closed on the sale of an additional 810,000 shares of common stock for a price of$10.00 per share and granted to the underwriters warrants to purchase 24,300 additional shares of common stock (equal to 3% of the amount of shares issued as part of the exercise of the over-allotment option) at an exercise price of$12.50 per share. The exercise of the over-allotment option brought the total number of shares of common stock sold by us in connection with the IPO to 6,210,000 shares and the total net proceeds received in connection with the IPO to approximately$57 million , after deducting underwriting discounts and estimated offering expenses. 19 Subsequent Public Offering OnFebruary 19, 2021 , we consummated a secondary public offering (the "February Offering") for the sale of 5,555,555 shares of our common stock for a price of$13.50 per share. We also granted the underwriters: (a) a 45-day option to purchase up to 833,333 additional shares of common stock on the same terms and conditions for the purpose of covering any over-allotments in connection with the February Offering, and (b) warrants to purchase 166,667 shares of common stock (equal to 3% of the aggregate number of shares of common stock issued in the February Offering) at an exercise price of$16.875 per share (which is equal to 125% of the February Offering). Subsequently, the underwriters exercised the over-allotment option, and onMarch 22, 2021 , we closed on the sale of an additional 833,333 shares of common stock for a price of$13.50 per share and granted to the underwriters warrants to purchase 25,000 additional shares of common stock (equal to 3% of the amount of shares issued as part of the exercised of the over-allotment option) at an exercise price of$16.875 per share. The exercise of the over-allotment option brought the total number of shares of common stock sold by us in connection with the February Offering to 6,388,888 shares and the total net proceeds received in connection with the February Offering to approximately$80 million , after deducting underwriting discounts and estimated offering expenses.
Series A Convertible Preferred Stock
Beginning in the first quarter of 2020, we issued an aggregate of 60,000 shares of our Series A Convertible Preferred Stock, or Series A Preferred Stock, for an aggregate purchase price of$6,000,000 . InMay 2020 , we completed our offering of Series A Preferred with the issuance of an additional 40,000 shares of Series A Preferred for an aggregate purchase price of$4,000,000 . All outstanding shares of Series A Preferred Stock automatically converted immediately prior to the closing of our IPO into 1,373,038 shares of common stock at a conversion price of$7.72 per share.
Impact of Coronavirus ("COVID-19") Pandemic
The coronavirus ("COVID-19") was first identified in people in late 2019.
COVID-19 spread rapidly throughout the world and, in March 2020 , the World
Health Organization characterized COVID-19 as a pandemic. COVID-19 is a pandemic
of respiratory disease spreading from person-to-person that poses a serious
public health risk. It has significantly disrupted supply chains and businesses
around the world. The extent and duration of the COVID-19 impact, on our
operations and financial position and on the global economy, is uncertain.
Uncertainty remains regarding the length of time it will take for the COVID-19
pandemic to subside, including the time it will take for vaccines to be broadly
distributed and accepted in the United States and the rest of the world, and the
effectiveness of such vaccines in slowing or stopping the spread of COVID-19 and
mitigating the economic effects of the pandemic. We continue to service our
customers amid uncertainty and disruption linked to COVID-19 and are actively
managing our business to respond to the impact.
Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include assumptions about collection of accounts and notes receivable,
the valuation and recognition of stock- based compensation expense, valuation
allowance for deferred tax assets and useful life of fixed assets and intangible
assets.
20
Financial Overview
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial position and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America , or GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate estimate, which include estimates related to accruals, stock-based compensation expense, and reported amounts of revenues and expenses during the reported period. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions. Revenue Recognition
In accordance with Topic 606, we account for a customer contract when both parties have approved the contract and are committed to perform their respective obligations, each party's rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable that we will collect substantially all of the consideration to which we are entitled. Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer.
We generate revenue from the following sources: (1) equipment sales, (2) services sales and (3) construction contracts.
We sell our equipment and services to customers under a combination of a contract and purchase order. Equipment revenue includes sales from proprietary products designed and engineered by us such as vertical farming units, container farms, integrated grow racks, and LED grow lights, and non-proprietary products designed, engineered, and manufactured by third parties such as air cleaning systems and pesticide-free surface protection. Construction contracts normally provide for payment upon completion of specified work or units of work as identified in the contract. Although there is considerable variation in the terms of these contracts, they are primarily structured as fixed-price contracts, under which the Company agrees to do the entire project for a fixed amount. The Company also enters time-and-materials contracts under which the Company is paid for labor and equipment at negotiated hourly billing rates and for other expenses, including materials, as incurred at rates agreed to in the contract. The Company uses two main sub-contractors to execute the construction contracts. We generally provide a one-year warranty on its products for materials and workmanship but may provide multiple year warranties as negotiated, and will pass on the warranties from its vendors, if any, which generally covers this one-year period. In accordance with ASC 450-20-25, we accrue for product warranties when the loss is probable and can be reasonably estimated. AtJune 30, 2021 , we had no product warranty accrual our de minimis historical financial warranty experience.
Accounting for Stock-Based Compensation
We follow the provisions of ASC Topic 718, "Compensation - Stock Compensation." ASC Topic 718 establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC Topic 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as options issued under our Stock Option Plans. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option life and expected volatility in the market value of the underlying common stock. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options and warrants have characteristics different from those of its traded stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the expected term. The expected dividend yield is based upon our history of having never issued a dividend and management's current expectation of future action surrounding dividends. We calculate the expected volatility of the stock price based on the corresponding volatility of our peer group stock price for a period consistent with the underlying instrument's expected term. The expected lives for such grants were based on the simplified method for employees and directors. In arriving at stock-based compensation expense, we estimate the number of stock-based awards that will be forfeited due to employee turnover. Our forfeiture assumption is based primarily on its turn-over historical experience. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in our financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized in our financial statements. The expense we recognize in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period.
It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed above.
21
Fair Value of Common Stock
Historically, for all periods prior to our IPO, the fair values of the shares of
common stock underlying our share-based awards were determined on each grant
date by our board of directors. Given the absence of a public trading market for
our common stock, our board of directors exercised reasonable judgment and
considered a number of objective and subjective factors to determine the best
estimate of the fair value of our common stock, including our stage of
development; the rights, preferences and privileges of our convertible preferred
stock relative to those of our common stock; our financial condition and
operating results, including our levels of available capital resources; equity
market conditions affecting comparable public companies; general U.S. market
conditions; and the lack of marketability of our common stock. Valuations of our
common stock were prepared by an unrelated third-party valuation firm in
accordance with the guidance provided by the American Institute of Certified
Public Accountants Practice Guide , Valuation of Privately-Held-Company Equity
Securities Issued as Compensation.
For our valuation performed on March 20, 2020 and September 14, 2020 , we used
the income and market methods to estimate our enterprise value under various
financing scenarios based on the discounted cash flow approach and a market
approach of comparable peer public companies. The estimated enterprise value
under each method was then allocated to the common stock, discount for lack of
marketability was applied, and the resulting value of common stock was
probability-weighted across the various financing scenarios to determine the
fair value of common stock.
The assumptions underlying these valuations represented management's best estimate, which involved inherent uncertainties and the application of management's judgment. As a result, if we had used different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.
Results of Operations
Comparison of the Three and Six Months Ended
The following table summarizes our results of operations for the three and six months endedJune 30, 2021 as compared to the three and six months endedJune 30, 2020 : Three months ended Six months ended June 30, June 30, 2021 2020 2021 2020 Revenue, net$ 11,825,000 $ 3,908,000 $ 18,833,000 $ 4,921,000 Cost of goods sold 11,298,000 2,890,000 18,846,000 3,862,000 Gross (loss) profit 527,000 1,018,000 (13,000 ) 1,059,000 OPERATING EXPENSES
Research and development 774,000 743,000 1,656,000 1,943,000 Selling, general and administrative expenses 5,181,000 2,713,000 10,255,000 5,003,000 Total operating expenses 5,955,000 3,456,000
11,911,000 6,946,000
Operating loss (5,428,000 ) (2,438,000 ) (11,924,000 ) (5,887,000 ) OTHER (EXPENSE) INCOME, NET Interest expense (income), net 55,000 (41,000 ) 23,000 (36,000 ) Other expenses (63,000 ) - (63,000 ) - Gain on extinguishment of notes payable - - 2,685,000 - Other (expense) income, net (8,000 ) (41,000 ) 2,645,000 (36,000 ) Net loss before non-controlling interest (5,436,000 ) (2,479,000 ) (9,279,000 ) (5,923,000 ) Gain (loss) attributable to non-controlling interest 200,000 (35,000 ) 167,000 (66,000 ) Net loss attributable to Agrify Corporation.$ (5,636,000 ) $ (2,444,000 ) $ (9,446,000 ) $ (5,857,000 ) Net loss per share attributable to common stockholders - basic and diluted$ (0.28 ) $ (0.60 ) $ (0.57 ) $ (1.46 ) Weighted average common shares outstanding - basic and diluted 20,344,278 4,211,677
16,661,948 4,139,691
22
Revenues
Our goal is to provide our customers with a variety of products to address their entire indoor agriculture needs. Our core product offering includes ourAgrify Vertical Farming Units (or AVFUs) and Agrify Integrated Grow Racks with our Agrify Insights™ software, which in 2020 and 2021 are supplemented with environmental control products, grow lights, and facility build-out services. During the first quarter of 2020 and in parallel with the outbreak of the COVID-19 virus, we experienced a disruption in the supply chain that delay the delivery of several components necessary to the manufacturing of our AVFUs and, as a result, delivery of several AVFUs was delayed toApril 2020 . We generate revenue from sales of cultivation solutions, including ancillary products and services, Agrify Insights™ software and facility build-outs. We believe that our product mix form an integrated ecosystem which allows us to be engaged with our potential customers from early stages of the grow cycle - first during the facility build-out, to the choice of cultivation solutions and then running the grow business with our Agrify Insights software. We believe that delivery of each solution in the grow cycle will generate sales of additional solutions and services.
The following table provides a breakdown of our revenue for the three and six
months ended
Three months ended Six months ended
June 30, June 30,
2021 2020 2021 2020
Cultivation solutions, including
ancillary products and services $ 1,037,000 $ 3,486,000 $ 1,266,000 $ 4,495,000 Agrify Insights software - - 8,000 - Facility build-outs 10,701,000 422,000 17,472,000 422,000 Services 87,000 - 87,000 4,000$ 11,825,000 $ 3,908,000 $ 18,833,000 $ 4,921,000 Revenue for the three months endedJune 30, 2021 and 2020 was generated mainly from facility build outs and cultivation solutions, respectively. For the three months endedJune 30, 2021 and 2020, we sold 18 and 129 AVFUs, respectively. Revenue for the six months endedJune 30, 2021 and 2020 was generated mainly from facility build outs and cultivation solutions, respectively. For the six months endedJune 30, 2021 and 2020, we sold 22 and 179 AVFUs, respectively. We believe that the addition of the facility build-outs to our products and services offering will enhance our customer relationship and will increase the productivity of our AVFUs which will benefit our customers. We expect that during the second half of 2021 the majority of our revenue will continue to be generated from facility build-outs. 23 Cost of Revenues
Cost of goods sold include direct cost of parts and outsourced assembly and installation services that are necessary for delivery of our products.
The following table provides a breakdown of our cost of revenue for the three
and six months ended
Three months ended Six months ended
June 30, June 30,
2021 2020 2021 2020
Cultivation solutions, including
ancillary products and services $ 1,117,000 $ 2,468,000 $ 1,886,000 $ 3,440,000 Facility build-outs 10,181,000 422,000 16,960,000 422,000$ 11,298,000 $ 2,890,000 $ 18,846,000 $ 3,862,000
During the first six months of 2020, we outsourced the manufacturing of our AVFUs to HMH, which we acquired inJuly 2020 . Although the primary reason we acquired HMH was to expand our research, development and testing capabilities, the acquisition will also provide us with internal capabilities to manufacture small quantities of AVFUs and to reduce our cost of manufacturing. In addition, inDecember 2020 , we entered into a five year supply agreement withMack Molding Co. ("Mack") pursuant to which Mack will become a key supplier of our AVFUs. InFebruary 2021 , we placed a purchase order with Mack amounting to approximately$5,200,000 towards initial production of AVFUs during 2021. InJune 2021 , the Company increased the purchase order with Mack to approximately$11,500,000 towards production of AVFUs during 2021 and 2022. We believe the supply agreement with Mack will provide us with increased scaling capabilities and the ability to meet the potential future demand of our customers more efficiently. The supply agreement contemplates that, following an introductory period, we will negotiate a minimum percentage of our AVFU requirements that we will purchase from Mack each year based on the agreed upon pricing formula. The introductory period is not time-based but rather refers to the production of an initial number of units after which the parties have rights to adjust pricing and negotiate a certain minimum requirements percentage. We believe this approach will result in both parties making a more informed decision with respect to the pricing and other terms of the supply agreement with Mack. Gross Profit Our gross profit (loss) represents total revenue less the cost of goods sold, and gross margin percentage is gross profit (loss) expressed as a percentage of total revenue. For the three months endedJune 30, 2021 , our gross profit was$527,000 compared to a gross profit of$1,018,000 for the three months endedJune 30, 2020 . For the six months endedJune 30, 2021 , our gross loss was$13,000 compared to a gross profit of$1,059,000 for the six months endedJune 30, 2020 . Our gross profit (loss) margin percentage decreased to 4.5% for the three months endedJune 30, 2021 compared to 26.0% in the same period in 2020. The decrease in gross profit was primarily related to (i) employee-related expenses, including salaries, benefits, and stock-based compensation of$300,000 related to production and assembling operation in HMH which was acquired in the third quarter of 2020, and (ii) revenue mix that included higher revenue from facility build-outs, which contributes lower gross profit margin compared to sale of
our AVFUs. Our gross profit (loss) margin percentage decreased to less than (1%) for the six months endedJune 30, 2021 compared to 21.5% in the same period in 2020. The decrease (increase) in gross profit (loss) was primarily related to (i) inventory obsolescence reserve during the six months endedJune 30, 2021 in the amount of$113,000 due to change in design as we transition to our more advanced AVFUs model, (ii) employee-related expenses, including salaries, benefits, and stock-based compensation of$644,000 related to production and assembling operation in HMH which was acquired in the third quarter of 2020, and (ii) revenue mix that included higher revenue from facility build-outs, which contributes lower gross profit margin compared to sale of our AVFUs.
Research and Development Expenses
Research and development expenses consisted primarily of costs incurred for the development of our Agrify Insights software and next generation AVFUs, which includes: ? employee-related expenses, including salaries, benefits, and travel;
? expenses incurred by subcontractor under agreements to provide engineering
work related to the development of our next generation AVFUs;
? expenses related to our facilities, depreciation, and other expenses, which
include direct and allocated expenses for rent and maintenance of facilities,
insurance and other supplies.
24
For the three months endedJune 30, 2021 and 2020, research and development expenses were$774,000 and$743,000 , respectively. The increase of$31,000 is primarily attributable to increase in employee-related expenses, including salaries, benefits, and stock-based compensation of$151,000 , and increase in other costs amounting to$143,000 . The increase in expenses was offset by decrease in consulting fees of$111,000 and a decrease in expenses attributable to halted development of hardware solution for deployment of rapid grow solution of$151,000 in the second quarter of fiscal 2020. For the six months endedJune 30, 2021 and 2020, research and development expenses were$1,656,000 and$1,943,000 , respectively. The decrease of$287,000 is primarily attributable to halted development of hardware solution for deployment of rapid grow solution of$813,000 in the first quarter of fiscal 2020 and decrease in consulting fees of$245,000 . The decrease in expenses was offset by an increase in payroll and related expenses in the amount of approximately$374,000 , increase in other costs amounting to$197,000 and an increase in stock-based compensation in the amount of$201,000 , including a non-recurring expense of$176,000 related to vesting acceleration of options upon the consummation of our IPO. As a percentage of net revenue, research and development expenses were 6.5% and 19%, respectively, from total revenue for the three months endedJune 30, 2021 and 2020 (or 6.5% and 15% when excluding the one-time halted cost). As a percentage of net revenue, research and development expenses were 8.8% and 39%, respectively, from total revenue for the six months endedJune 30, 2021 and 2020 (or 8.8% and 23% when excluding the one-time halted cost). We expect to continue to invest in future developments of our AVFUs and Agrify Insights™ software. In the coming years, we believe that research and development expenses measured as percentage of revenue will decrease due to an increase in our total revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses, in selling, executive and other administrative functions. Other general and administrative expenses include professional fees for legal, consulting and accounting services as well as facility related costs.
For the three months endedJune 30, 2021 and 2020, general and administrative expenses were$5,181,000 and$2,713,000 , respectively. The increase is attributable mainly to payroll and related expenses of approximately$884,000 , stock-based compensation in the amount of$411,000 , insurance expenses of approximately$663,000 and depreciation and amortization expenses of approximately$115,000 . The increase in expenses was offset by a decrease of$232,000 in professional fees. For the six months endedJune 30, 2021 and 2020, general and administrative expenses were$10,255,000 and$5,003,000 , respectively. The increase is attributable mainly to payroll and related expenses of approximately$1,244,000 , stock-based compensation in the amount of$2,143,000 , insurance expenses of approximately$1,108,000 , legal expenses of approximately$133,000 and depreciation and amortization expenses of approximately$244,000 . To support our long-term growth plan and our initial public offering, we have granted stock options to officers, directors and employees with several vesting conditions, including an event-based vesting acceleration (defined as a change in control, including an initial public offering). As a result of the consummation of our IPO, our selling, general and administrative expenses included a non-recurring expense of$1,248,000 .
Other (Income) Expense, Net
Interest income was$55,000 for the three months endedJune 30, 2021 , compared to interest expense of$41,000 for the three months endedJune 30, 2020 , reflecting a change of$96,000 . Interest income was$23,000 for the six months endedJune 30, 2021 , compared to interest expense of$36,000 for the six months endedJune 30, 2020 , reflecting a change of$59,000 . The increase in interest income is attributable mainly to interest from held to maturity securities.
Other expenses of
Gain on extinguishment of notes payable was null and$2,685,000 for the three and six months endedJune 30, 2021 , respectively, compared to null for the three and six months endedJune 30, 2020 . 25
Loss Attributable to Non-Controlling Interest
We consolidate the results of operations of two less than wholly-owned entities into our consolidated results of operations. OnDecember 8, 2019 , we formedAgrify-Valiant, LLC , a joint-venture limited liability company in which we are 60% majority owner andValiant-America, LLC owns 40%.Agrify-Valiant, LLC started its operations during the second quarter of 2020. OnJanuary 22, 2020 , as part of the acquisition of TriGrow, we received TriGrow's 75% interest inAgrify Brands, LLC (formerlyTriGrow Brands, LLC ), a licensor of an established portfolio of consumer brands that utilize our grow technology. The license of these brands is ancillary to the sale of our AVFUs and provides a means to differentiate customers' products in the marketplace. It is not a material aspect of our business and we have not realized any royalty income. Accordingly, we are currently evaluating whether to continue this legacy business from an operational standpoint, as well as from a legal and regulatory perspective.
Loss attributable to non-controlling interest represents the portion of profit (or loss) that are attributable to non-controlling interest calculated as a product of the net income of the entity multiplied by the percentage of ownership held by the non-controlling interest.
Liquidity and Capital Resources
Upon the closing of the February Offering, we had approximately$139 million in cash and cash equivalents. We believe such amount, together with cash flows from operations, will be sufficient to support our planned operations for at least the next 12 months. Our current working capital needs are to support accounts receivable growth, manage inventory to meet demand forecasts and support operational growth. Our long-term financial needs primarily include working capital requirements and capital expenditures. There are many factors that may negatively impact our available sources of funds in the future, including the ability to generate cash from operations, raise debt capital and raise cash from the issuance of our securities. The amount of cash generated from operations is dependent upon factors such as the successful execution of our business strategy and general economic conditions. We may opportunistically raise debt capital, subject to market and other conditions. Additionally, as part of our growth strategies, we may also raise debt capital for strategic alternatives and general corporate purposes. If additional financing is required from outside sources, we may not be able to raise such capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected. Indebtedness
We entered into two Loan Agreements and Promissory Notes (collectively the "PPP Loan") withBank of America pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") administered by theU.S. Small Business Administration . We received total proceeds of$823,410 from the unsecured PPP Loans which are scheduled to mature during 2022 and 2025. Subject to certain conditions, the PPP Loan may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP. We have not yet applied for forgiveness of the PPP Loan and although we believe that we will be eligible for full forgiveness under the PPP, there is no assurance that the full PPP Loan amount will be forgiven and we cannot anticipate the timing of any such forgiveness. If the principal amount is not forgiven in full, we would be obligated to repay any principal amount not forgiven and interest accrued thereon. Cash Flows The following table presents the major components of net cash flows (used in) and provided by operating, investing and financing activities for the three and six months endedJune 30, 2021 , and 2020: Three months ended Six months ended June 30, June 30, 2021 2020 2021 2020 Cash (used in) provided by: Operating Activities$ (6,558,000 ) $ (3,978,000 ) $ (13,837,000 ) $ (7,898,000 ) Investing Activities$ (51,723,000 ) $ (18,000 ) $ (51,865,000 ) $ (1,173,000 ) Financing Activities$ 235,000 $ 4,779,000
$ 137,432,000 $ 10,859,000 26
Cash Flow from Operating Activities
For the three months endedJune 30, 2021 , we incurred a net loss of$5,636,000 , which included non-cash expenses of$166,000 related to depreciation and amortization,$931,000 in connection with the issuance and acceleration of stock options, non-cash interest expenses of$13,000 related to leases, and gain attributed to non-controlling interest in the amount of$200,000 . Net cash was reduced by a$5,904,000 increase in accounts receivable, a$1,147,000 increase in prepaid inventory due to demand forecast and a$568,000 increase in prepaid expenses, partially offset by a$5,481,000 increase in accrued expenses ($5,024,000 related to construction costs). For the six months endedJune 30, 2021 , we incurred a net loss of$9,446,000 , which included non-cash expenses of$313,000 related to depreciation and amortization,$3,066,000 in connection with the issuance and acceleration of stock options, non-cash interest expenses of$46,000 related to leases, and gain attributed to non-controlling interest in the amount of$167,000 . Net cash was reduced by a$11,122,000 increase in accounts receivable, a$4,477,000 increase in prepaid inventory due to demand forecast and a$2,723,000 increase in prepaid expenses, partially offset by a$12,841,000 increase in accrued expenses ($11,104,000 related to construction costs). For the three months endedJune 30, 2020 , we reported a net loss of$2,444,000 , which included non-cash expenses of$81,000 related to depreciation and amortization, loss from disposal of fixed assets of$111,000 and$542,000 in connection with issuance of stock options. Net cash was reduced by a$130,000 increase in accounts receivable and a$3,036,000 decrease in deferred revenue, partially offset by a$597,000 increase in accrued expenses, a$254,000 increase in accounts payable and a$159,000 decrease in prepaid and other expenses. For the six months endedJune 30, 2020 , we reported a net loss of$5,857,000 , which included non-cash expenses of$147,000 related to depreciation and amortization, loss from disposal of fixed assets of$113,000 and$603,000 in connection with issuance of stock options. Net cash was reduced by a$1,328,000 increase in inventory due to demand forecast and a$2,145,000 decrease in deferred revenue, partially offset by a$505,000 increase in accrued expenses, a$61,000 increase in accounts payable and a$79,000 decrease in prepaid and
other expenses. For the three months endedJune 30, 2021 and 2020, depreciation and amortization expense was$166,000 and$81,000 , respectively. For the six months endedJune 30, 2021 and 2020, depreciation and amortization expense was$313,000 and$147,000 , respectively. The increase in depreciation and amortization expenses mainly related to assets acquired from HMH. We anticipate that our depreciation and amortization expense will increase in fiscal 2021 due to investment in capital expenditures in fiscal 2021 on property and equipment to expand research, development and testing capabilities. For the three months endedJune 30, 2021 and 2020, compensation expenses in connection with issuance of stock options were$931,000 and$542,000 , respectively. For the six months endedJune 30, 2021 and 2020, compensation expenses in connection with issuance of stock options were$3,066,000 (of which$1,502,000 related to the acceleration of stock option vesting due to our IPO) and$603,000 , respectively. As ofJune 30, 2021 , there were$10,125,000 of total unrecognized compensation expenses related to unvested options granted under our options plans, which will be recognized periodically through fiscal 2025.
Cash Flow from Investing Activities
Net cash used in investing activities relates to capital expenditures and purchase of held to maturity securities. The capital expenditures support growth and investment in property and equipment, to expand research, development and testing capabilities and, to a lesser extent, the replacement of existing equipment. For the three months endedJune 30, 2021 , net cash used in investing activities was$960,000 for leased equipment, leasehold improvements, purchasing computer equipment and small machinery, a$483,000 issuance of loan receivable and$50,280,000 purchases of held to maturity securities. For the six months endedJune 30, 2021 , net cash used in investing activities was$1,102,000 for leasehold improvements, purchasing computer equipment and small machinery, a$483,000 issuance of loan receivable and$50,280,000 purchases of held to maturity securities. For the three months endedJune 30, 2020 , net cash used in investing activities was$18,000 , mainly related to purchasing of computer equipment and small machinery. For the six months endedJune 30, 2020 , net cash used in investing activities was$1,173,000 , which included$1,096,000 paid in connection with the acquisition of TriGrow and a$77,000 cash outflow for purchasing computer equipment and small machinery.
Cash Flow from Financing Activities
For the three months endedJune 30, 2021 , net cash provided by financing activities was$282,000 related to proceeds from the exercise of options, which were offset by payments of financing leases in the amount of$47,000 . For the six months endedJune 30, 2021 , net cash provided by financing activities was$137,432,000 , attributable to$57,000,000 proceeds from our initial IPO,$80,000,000 from our secondary public offering, both net of fees, and proceeds from the exercise of options and warrants of$726,000 , offset by$94,000 payments of financing leases. For the three months endedJune 30, 2020 , net cash provided by financing activities was$4,779,000 , consisting of$4,000,000 proceeds from the issuance of our series A Preferred Stock and$779,000 from proceeds from a PPP loan. For the six months endedJune 30, 2020 , net cash provided by financing activities was$10,859,000 , consisting mainly$10,000,000 proceeds from the issuance of our series A Preferred Stock and$779,000 from proceeds from a PPP loan. 27
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