UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number: 001-39946

AGRIFY CORPORATION

(Exact name of registrant as specified in its charter)

Nevada		30-0943453
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

76 Treble Cove Rd.

Building 3

Billerica, MA 01862

(Address of principal executive offices, including zip code)

(617) 896-5243

(Registrant’s phone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.001 per share		AGFY		NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐ NO ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of August 10, 2021
Common Stock, $0.001 par value		20,558,433

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION	1

ITEM 1.	FINANCIAL STATEMENTS	1

	Condensed Consolidated Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020	1

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021(unaudited) and 2020 (unaudited)	2

	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and six months ended June 30, 2021 (unaudited) and 2020 (unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021(unaudited) and 2020 (unaudited)	4

	Notes to Condensed Consolidated Financial Statements	5

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	28

ITEM 4.	CONTROLS AND PROCEDURES	28

PART II	OTHER INFORMATION	29

ITEM 1.	LEGAL PROCEEDINGS	29

ITEM 1A.	RISK FACTORS	29

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	29

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	29

ITEM 4.	MINE SAFETY DISCLOSURES	29

ITEM 5.	OTHER INFORMATION	29

ITEM 6	EXHIBITS	30

SIGNATURES		31

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

AGRIFY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	June 30, 2021			December 31, 2020
	(Unaudited)
Assets:
Cash and cash equivalents	$	79,841		$	8,111
Marketable securities		35,930			—
Accounts receivable, net of allowance for doubtful accounts of $55 and $54, as of June 30, 2021 and December 31, 2020, respectively.		15,135			4,014
Inventory		9,358			5,170
Deferred IPO costs		—			981
Prepaid expenses and other receivables		3,074			364
Total current assets		143,338			18,640

Non-current marketable securities		14,360			—
Loan Receivable		886			—
Property Plant and Equipment, net		1,836			873
Operating lease right-of-use assets		828			—
Goodwill		632			632
Intangible assets acquired through business combination, net		1,510			1,603
Capitalized website costs, net		70			91
Total Assets	$	163,460		$	21,839

Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities:
Accounts payable	$	862		$	693
Accrued expenses and other current liabilities		18,824			6,550
Notes payable, net of debt discount of $0 and $4,777 as of June 30, 2021 and December 31, 2020, respectively		—			12,493
Derivative liabilities		—			7,141
Deferred revenue		209			152
Total current liabilities		19,895			27,029

Other non-current liabilities		356			435
Operating lease liabilities—long term		548			—
Long-term debt		833			829
Total Liabilities	$	21,632		$	28,293

Commitments and contingencies (Note 16)

Stockholders’ Equity (Deficit)
Common stock, 50,000,000 shares, $0.001 par value authorized as of June 30, 2021 and December 31, 2020, respectively; 20,373,699 and 4,211,677 shares issued at June 30, 2021 and December 31, 2020, respectively		19			4
Preferred stock 2,895,000 shares, $0.001 par value authorized as of June 30, 2021 and December 31, 2020, respectively; 0 shares issued as of June 30, 2021 and December 31, 2020		—			—
Preferred A stock 105,000 shares, $0.001 par value authorized as of June 30, 2021 and December 31, 2020, respectively; 0 and 100,000 shares issued at June 30, 2021 and December 31, 2020, respectively		—			—
Additional paid in capital		177,373			19,827
Accumulated deficit		(35,956	)		(26,510	)
Total Stockholders’ Equity (Deficit)		141,436			(6,679	)
Non-controlling Interests		392			225
Total Liabilities and Stockholders’ Equity (Deficit)	$	163,460		$	21,839

The accompanying notes are an integral part of these condensed consolidated financial statements.

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for number of shares and per share amounts)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
(In thousands)	2021			2020			2021			2020
Revenue, net	$	11,825		$	3,908		$	18,833		$	4,921

Cost of goods sold		11,298			2,890			18,846			3,862

Gross (loss) profit		527			1,018			(13	)		1,059

OPERATING EXPENSES
Research and development		774			743			1,656			1,943
Selling, general and administrative expenses		5,181			2,713			10,255			5,003
Total operating expenses		5,955			3,456			11,911			6,946

Operating loss		(5,428	)		(2,438	)		(11,924	)		(5,887	)
OTHER (EXPENSE) INCOME, NET
Interest (expense) income, net		55			(41	)		23			(36	)
Other expenses		(63	)		—			(63	)		—
Gain on extinguishment of notes payable		—			—			2,685			—
Other (expense) income, net		(8	)		(41	)		2,645			(36	)
Net loss before non-controlling interest		(5,436	)		(2,479	)		(9,279	)		(5,923	)
Income (loss) attributable to non-controlling interest		200			(35	)		167			(66	)
Net loss attributable to Agrify Corporation.	$	(5,636	)	$	(2,444	)	$	(9,446	)	$	(5,857	)
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

The accompanying notes are an integral part of these condensed consolidated financial statements.

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited)

	Three and Six months ended June 30, 2020
	Common Stock				Preferred A Stock				Additional Paid-In		Subscription			Accumulated			Total Stockholders’ Equity attributable to			Non- controlling			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Receivable			Deficit			Agrify			Interests			Equity
Balance, January 1, 2020		3,616,125	$	4		—	$	—	$	4,124	$	(40	)	$	(4,893	)	$	(805	)	$	—		$	(805	)
Stock based compensation		—		—		—		—		61		—			—			61			—			61
Stock subscription		—		—		—		—		—		40			—			40			—			40
Issuance of Preferred A Stock		—		—		60,000		—		6,000		—			—			6,000			—			6,000
Investment in Agrify Valiant		—		—		—		—		—		—			—			—			40			40
Acquisition of TriGrow Systems		595,552		—		—		—		1,356		—			—			1,356			207			1,563
Net loss		—		—		—		—		—		—			(3,413	)		(3,413	)		(31	)		(3,444	)
Balance March 31, 2020		4,211,677	$	4		60,000	$	—	$	11,541	$	—		$	(8,306	)	$	3,239		$	216		$	3,455
Stock based compensation										542								542						542
Issuance of Preferred A Stock						40,000				4,000								4,000						4,000
Net loss															(2,444	)		(2,444	)		(35	)		(2,479	)
Balance, June 30, 2020		4,211,677	$	4		100,000	$	—	$	16,083	$	—		$	(10,750	)	$	5,337		$	181		$	5,518

	Three and Six months ended June 30, 2021
	Common Stock				Preferred A Stock					Additional Paid-In			Subscription		Accumulated			Total Stockholders’ Equity attributable to			Non- controlling			Total Stockholders’
	Shares		Amount		Shares			Amount		Capital			Receivable		Deficit			Agrify			Interests			Equity
Balance, January 1, 2021		4,211,677	$	4		100,000		$	—	$	19,827		$	—	$	(26,510	)	$	(6,679	)	$	225		$	(6,454	)
Stock based compensation		—		—		—			—		2,135			—		—			2,135			—			2,135
Beneficial conversion feature associated with amended Convertible Promissory Notes		—		—		—			—		3,869			—		—			3,869			—			3,869
Conversion of Convertible Notes		1,697,075		2		—			—		13,098			—		—			13,100			—			13,100
Issuance of common stock – Initial Public Offering (“IPO”), net of fees		6,210,000		6		—			—		56,955			—		—			56,961			—			56,961
Issuance of common stock – Secondary public offering, net of fees		6,388,888		6		—			—		79,833			—		—			79,839						79,839
Conversion of Preferred A Stock		1,373,038		1		(100,000	)		—		(1	)		—		—			—			—			—
Exercise of options		174,223		—		—			—		439			—		—			439			—			439
Exercise of warrants		240,233		—		—			—		5			—		—			5			—			5
Net loss		—		—		—			—		—			—		(3,810	)		(3,810	)		(33	)		(3,843	)
Balance March 31, 2021		20,295,134	$	19		—		$	—	$	176,160		$	—	$	(30,320	)	$	145,859		$	192		$	146,051
Stock based compensation											931								931						931
Exercise of options		78,565									282								282						282
Net loss																(5,636	)		(5,636	)		200			(5,436	)
Balance, June 30, 2021		20,373,699	$	19		—		$	—	$	177,373		$	—	$	(35,956	)	$	141,436		$	392		$	141,828

The accompanying notes are an integral part of these condensed consolidated financial statements.

AGRIFY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended June 30,
(In thousands)	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss attributable to Agrify Corporation	$	(9,446	)	$	(5,857	)
Adjustments to reconcile net loss attributable to Agrify Corporation to net cash used in operating activities:
Depreciation and amortization		313			147
Amortization of premium on investments		63			—
Interest on held to maturity bonds		(73	)		—
Compensation in connection with the issuance of stock options		3,066			603
Non-cash interest expense		46			1
Gain on extinguishment of notes payable, net		(2,685	)		—
Loss from disposal of fixed assets		25			113
Loss attributable to non-controlling interests		167			(66	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(11,122	)		(11	)
Prepaid inventory		(4,477	)		(1,328	)
Prepaid expenses and other receivables		(2,723	)		79
Right of use assets, net		72			—
Accounts payable		86			61
Accrued expenses		12,841			505
Operating lease liabilities		(47	)		—
Deferred revenue		57			(2,145	)
Net cash used in operating activities		(13,837	)		(7,898	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,102	)		(77	)
Purchase of held to maturity securities		(50,280	)		—
Issuance of loan receivable		(483	)		—
Cash paid for business combination, net of cash acquired		—			(1,096	)
Net cash used in investing activities		(51,865	)		(1,173	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Preferred A Stock		—			10,000
Proceeds from IPO, net of fees		56,961			—
Proceeds from Secondary public offering, net of fees		79,839			—
Proceeds from exercise of options		721			—
Proceeds from exercise of warrants		5			—
Payments of financing leases		(94	)		—
Minority interest in Valiant		—			40
Proceeds from PPP Loan		—			779
Proceeds from issuance of common stock		—			40
Net cash provided by financing activities		137,432			10,859

Net increase in cash		71,730			1,788

Cash – Beginning of period		8,111			206

Cash – End of period	$	79,841		$	1,994
Supplemental disclosures of non-cash investing activities:
Equipment sold for loan receivable to customer	$	289		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

AGRIFY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

(Unaudited)

Note 1 — Nature of Business and Basis of Presentation

Description of Business

Agrify Corporation (“Agrify” or the “Company”) is a developer of highly advanced and proprietary precision hardware and software grow solutions for the indoor agriculture marketplace. The Company was formed in the State of Nevada on June 6, 2016 as Agrinamics, Inc., and subsequently changed its name to Agrify Corporation. The Company is sometimes referred to herein by the words “we,” “us,” “our” and similar terminology.

The Company has five wholly-owned subsidiaries, AGM Service Corp LLC (formerly AGM Service Corp Inc.), TriGrow Systems, LLC (“TriGrow”, which acted as our exclusive distributor and which was acquired in January 2020 as TriGrow Systems, Inc. and converted to TriGrow Systems, LLC in May 2020), Harbor Mountain Holdings, LLC (“HMH”, which assembled and produced many of our products and which was acquired in July 2020), Ariafy Finance, LLC and Agxion, LLC. The Company also owns 50% of Teejan Podponics International LLC (“TPI”) since December 2018; 60% of Agrify-Valiant, LLC, formed in December 2019; and 75% of Agrify Brands, LLC (formerly TriGrow Brands, LLC, which was part of the January 2020 acquisition of TriGrow). For further details about the January 2020 and July 2020 acquisitions, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission (“SEC”) on April 2, 2021.

Reverse Stock Split

On January 12, 2021, the Company effected a 1-for-1.581804 reverse stock split. All share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented, unless otherwise indicated.

Public Offerings

On February 1, 2021, the Company consummated its initial public offering (“IPO”) of 5,400,000 shares of common stock at a price of $10.00 per share, less certain underwriting discounts and commissions. On February 4, 2021, the Company closed on the sale of an additional 810,000 shares of common stock on the same terms and conditions pursuant to the exercise of the underwriters’ over-allotment option.

On February 19, 2021, the Company consummated a secondary public offering (the “February Offering”) of 5,555,555 shares of common stock for a price of $13.50 per share, less certain underwriting discounts and commissions. On March 22, 2021, the Company closed on the sale of an additional 833,333 shares of common stock on the same terms and conditions pursuant to the exercise of the underwriters’ over-allotment option. See Note 13 — Capital Structure for additional details.

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 the operations and financial position of the Company 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. The Company continues to service its customers amid uncertainty and disruption linked to COVID-19 and is actively managing its business to respond to the impact.

Note 2 — Summary of Significant Accounting Policies

Preparation of Condensed Consolidated Financial Statements

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC, except for the recently adopted accounting pronouncements described below. The condensed consolidated statements of operations, stockholders’ equity, and cash flows for the three and six months ended June 30, 2021 and 2020, and the condensed consolidated balance sheet as of June 30, 2021, are not audited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results for the periods shown. The condensed consolidated balance sheet as of December 31, 2020 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2020. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on April 2, 2021. The results for interim periods are not necessarily indicative of a full year’s results.

Accounting for wholly-owned subsidiaries

The accompanying consolidated financial statements include the accounts of Agrify Corporation and its wholly-owned subsidiaries, AGM Service Corp LLC, TriGrow Systems, Inc., Harbor Mountain Holdings, LLC, Ariafy Finance, LLC, and Agxion, LLC, in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.

Accounting for joint-venture subsidiary

For the Company’s less than wholly owned subsidiaries, Agrify-Valiant, LLC, Agrify Brands, LLC and Teejan Podponics International LLC, the Company first analyzes whether these entities are a variable interest entity (a “VIE”) in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets. The Company continuously re-assesses (i) whether the joint venture is a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If it is determined that the joint venture qualifies as a VIE and the Company is the primary beneficiary, it is consolidated.

Based on the Company’s analysis for these entities, the Company has determined that Agrify-Valiant, LLC and Agrify Brands, LLC are each a VIE and that the Company is the primary beneficiary. While the Company owns 60% of Agrify-Valiant, LLC’s equity interests and 75% of Agrify Brands, LLC’s equity interests, the remaining equity interests in Agrify-Valiant, LLC and Agrify Brands, LLC are owned by unrelated third parties, and the agreement with these third parties provides the Company with greater voting rights. Accordingly, the Company consolidates the financial statements of Agrify-Valiant, LLC and Agrify Brands, LLC under the VIE rules and reflects the third parties’ interests in the consolidated financial statements as a non-controlling interest. The Company records this non-controlling interest at its initial fair value, adjusting the basis prospectively for the third parties’ share of the respective consolidated investments’ net income or loss or equity contributions and distributions. These non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holders based on its economic ownership percentage. The investment in 50% of the shares of TPI is treated as an equity investment as the Company cannot exercise significant influence.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual of expenses. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Fiscal Year

The Company, and its Subsidiaries, fiscal year ends on December 31 of each year.

Cash and Cash Equivalents

Cash and cash equivalents consist principally of cash and deposits with maturities of three months or less as of June 30, 2021 and December 31, 2020.

Concentration of Credit Risk and Significant Customer

Financial instruments that potentially subject the Company to concentration of credit risk primarily consist of cash and accounts receivable. The Company places its cash with financial institutions in the United States. The cash balances are insured by the FDIC up to $250 per depositor with unlimited insurance for funds in noninterest-bearing transaction accounts through June 30, 2021. At times, the amounts in these accounts may exceed the federally insured limits.

The Company has certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represent 10% or more of the Company’s total accounts receivable.

For the three months and six months ended June 30, 2021, one customer accounted for 92.1% and 86.8% of revenue, respectively. For the three months and six months ended June 30, 2020, one customer accounted for 80.5% and 81.3% of revenue, respectively. At June 30, 2021 and 2020, two customers accounted for 88.2% and three different customers accounted for 54.2% of accounts receivable, respectively.

Research and Development Costs

The Company expenses research and development costs as incurred. During the three and six months ended June 30, 2020, the Company expensed $43 and $705, respectively, related to development of hardware solution for deployment of rapid grow solution During the three and six months ended June 30, 2020, the Company expensed additional costs of $107 related to research and development facility.

Shipping and Handling Charges

The Company incurs costs related to shipping and handling of its manufactured products. These costs are expensed as incurred as a component of cost of sales. Shipping and handling charges related to the receipt of raw materials are also incurred, which are recorded as a cost of the related inventory.

Subsequent Events

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements, except as disclosed.

Note 3 — Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments. This new standard requires entities to measure expected credit losses for certain financial assets held at the reporting date using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company’s financial instruments within the scope of this guidance primarily includes accounts receivable, loans, held-to-maturity debt securities, and net investments in leases. In November 2019, the FASB issued ASU No. 2019-10, changing effective dates for the new standards to give implementation relief to certain types of entities. The Company is required to adopt the new standards no later than January 1, 2023 according to ASU 2019-10, with early adoption allowed. The adoption of this new accounting guidance had no impact on the Company’s consolidated financial position.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard requires capitalized costs to be amortized on a straight-line basis generally over the term of the arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements. The Company adopted this standard effective January 1, 2020, using a prospective approach. The adoption of this new standard did not have a material impact on the Company’s consolidated financial statements. Subsequent impact will depend on the magnitude of implementation costs to be incurred. Implementation costs capitalized subsequent to adoption will be recognized in operating expenses in the statements of operations over the noncancelable period of the hosting arrangement plus any renewal periods reasonably certain to be taken.

Note 4 — Revenue Recognition

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 the Company such as Agrify Vertical Farming Units (“AVFUs”), 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.

Disaggregation of Revenue — The following table provides revenue disaggregated by timing of revenue recognition:

	Three Months ended June 30,				Six Months ended June 30,
	2021		2020		2021		2020
Transferred at a point in time	$	1,124	$	3,558	$	1,353	$	4,571
Transferred over time		10,701		350		17,480		350
	$	11,825	$	3,908	$	18,833	$	4,921

The Company generally provides 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, the Company accrues for product warranties when the loss is probable and can be reasonably estimated. At June 30, 2021, the Company has no product warranty accrual given the Company’s de minimis historical financial warranty experience.

Note 5 — Fair Value

Fair Values of Assets and Liabilities

We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows:

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.

Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active.

Level 3: Unobservable inputs for which there is little or no market data which require us to develop our own assumptions about how market participants would price the asset or liability.

Valuation techniques for assets and liabilities include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

At June 30, 2021 and December 30, 2020, our assets and liabilities measured at fair value on a recurring basis were as follows:



	June 30, 2021								December 30, 2020
	Fair Value Measurements Using Input Types								Fair Value Measurements Using Input Types
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Mutual funds (included in cash and cash equivalents)	$	72,612	$	-	$	-	$	72,612	$	-	$	-	$	-	$	-
Held to maturity securities-current
Municipal bonds		14,960		-		-		14,960		-		-		-		-
Corporate bonds		20,970		-		-		20,970		-		-		-		-
Total held to maturity securities- current	$	35,930	$	-	$	-	$	35,930	$	-	$	-	$	-	$	-
Held to maturity securities-non-current
Municipal bonds		6,478		-		-		6,478		-		-		-		-
Corporate bonds		7,882		-		-		7,882		-		-		-		-
Total held to maturity securities- non -current	$	14,360	$	-	$	-	$	14,360	$	-	$	-	$	-	$	-
Loan receivable	$	-	$	-	$	886	$	886	$	-	$	-	$	-	$	-
Total assets	$	122,902	$	-	$	886	$	123,788	$	-	$	-	$	-	$	-
Liabilities
Notes payables, net of discount	$	-	$	-	$	-	$	-	$	-	$	-	$	12,493	$	12,493
Derivative liabilities	$	-	$	-	$	-	$	-	$	-	$	-	$	7,141	$	7,141
Long term debt	$	-	$	-	$	833	$	833	$	-	$	-	$	829	$	829
Total liabilities	$	-	$	-	$	833	$	833	$	-	$	-	$	20,463	$	20,463

Fair Value of Financial Instruments

We have certain financial instruments which consist of cash and cash equivalents, marketable securities, accounts receivable, loan receivable, accounts payable, notes payable, derivative liabilities, deferred revenue and long-term debt. Fair value information for each of these instruments is as follows:

	•	Cash and cash equivalents, accounts receivable, accounts payable and deferred revenue liabilities fair values approximate their carrying values, due to the expected duration of these instruments.
	•	Marketable securities classified as held to maturity, both current and non-current, are recorded at amortized cost, which at June 30, 2021, approximated fair value.
	•	Loan receivable is recorded at amounts borrowed, which at June 30, 2021, approximated fair value.
	•	We had certain derivative instruments accounted for at fair value. We held a convertible promissory note with a preferential conversion feature which qualifies as a derivative instrument. The fair value assumptions consider the nature of the conversion feature and the expected timeline to a qualifying conversion event.
	•	We have borrowings of $833 and $829 as of June 30, 2021 and December 30, 2020, respectively. The fair value of these borrowings, which are classified as Level 3, approximates their carrying value at June 30, 2021 as the instrument carries a fixed rate of interest.

Marketable Securities

As of June 30, 2021, the Company held investments in mutual funds, municipal bonds and corporate bonds. The mutual funds are recorded at fair value in the accompanying consolidated balance sheet as part of cash and cash equivalents. The municipal and corporate bonds are considered held-to-maturity and are recorded at amortized cost in the accompanying consolidated balance sheet. The fair values of these investments were estimated using recently executed transactions and market price quotations. We consider as current assets those investments which will mature in the next 12 months including interest receivable on the long-term bonds. The remaining investments are considered non-current assets we intend to hold longer than 12 months.

The composition of the Company’s cash and cash equivalents and marketable securities are as follows:

	June 30, 2021		December 31, 2020
Cash and cash equivalents:
Cash deposits	$	7,229	$	8,111
Mutual funds		72,612		—
Total cash and cash equivalents	$	79,841	$	8,111

Current marketable securities:
Municipal bonds	$	14,960	$	—
Corporate bonds		20,970		—
Total current marketable securities	$	35,930	$	—

Non-current marketable securities:
Municipal bonds	$	6,478	$	—
Corporate bonds		7,882		—
Total non-current marketable securities	$	14,360	$	—

The amortized cost and estimated fair value of held-to-maturity securities as of June 30, 2021, are as follows:

	Amortized cost		Unrealized loss			Estimated fair value
Current marketable securities (due within 1 year)
Municipal bonds	$	14,960	$	(5	)	$	14,955
Corporate bonds		20,970		(28	)		20,942
	$	35,930	$	(33	)	$	35,897

Non-current marketable securities (due in 1 year through 5 years)
Municipal bonds	$	6,478	$	(6	)	$	6,472
Corporate bonds		7,882		(19	)		7,863
	$	14,360	$	(25	)	$	14,335

Note 6 — Loan Receivable

On May 6, 2021, the Company entered into definitive agreements with a customer to provide a secured bridge loan to that customer for working capital purposes in an amount of up to $820 at an interest rate of 18% per annum with maturity date of August 13, 2021. The bridge loan is secured by all of the customer’s assets. On June 30, 2021, the outstanding balance of the bridge loan was rolled into a Construction Loan (as discussed below).

On May 10, 2021, the Company entered into several definitive agreements with the customer for (1) facility build-out services in the amount of up to $2,500, (2) leasing of 60 AVFUs and other cultivation equipment, (3) subscription to Agrify Insights software, and (4) other business consultation services. The facility build-out is financed through construction loan advances which bear interest at a rate of 18% per annum, has a maturity date of 24 months from the date the customer commences commercial sales of its products from the AVFUs and is secured by a lien on all of the customer’s assets (“Construction Loan”). The equipment lease was for a term of 10 years. The customer will pay monthly rent based on production from the Company’s AVFUs. The subscription for Agrify Insights software and consultation services will be provided for a term of 10 years, for monthly fixed fees. As of June 30, 2021, the Company has not commenced any lease, subscription or consultation services with the customer.

As of June 30, 2021, the customer’s draw-down of principal amount plus accrued interest under the bridge loan of $748 was rolled into the Construction Loan. In addition, on June 30, 2021, the Company agreed to make subsequent construction loans to the customer on similar terms to the existing Construction Loan for future construction needs subject to completion of planning and finalization of definitive documentation, which loans will bear interest at a rate of 12% per annum and have a maturity date of 36 months from the commencement of commercial sale of products harvested from the AVFUs to be installed in connection with the new construction phase.

As of June 30, 2021, the amount drawn under the Construction Loan is $955 (including the rolled over bridge loan) and is offset by deferred revenue related to the same customer. Amount receivable from the customer presented in the consolidated balance sheet as non-current loan receivable, net of an allowance for $69, amounted to $886.

Two of the Company’s employees own 36.6% of the customer’s equity. The Company analyzed whether the customer is a variable interest entity (a “VIE”) in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. Based on the Company’s analysis, the Company has determined that the customer is a VIE but since the Company is not the primary beneficiary of the customer, the Company is not required to consolidate the customer.

Note 7 — Prepaid Expenses and Other Receivables

Prepaid Expenses and Other Receivables consisted of the following as of June 30, 2021 and December 31, 2020:

	June 30, 2021		December 31, 2020
Other Receivables	$	85	$	168
Prepaid software		76		48
Prepaid insurance		1,587		—
Construction deposits		1,143		—
Prepaid expenses		183		148
	$	3,074	$	364

Note 8 — Property and Equipment, Net

Property and equipment, net consisted of the following as of June 30, 2021 and December 31, 2020:

	June 30, 2021			December 31, 2020
Computer equipment	$	240		$	128
Furniture and fixture		83			16
Leasehold Improvements		264			10
Machinery		866			868
Vehicle		62			62
Leased equipment at customer		700			—
Total property and equipment		2,215			1,084
Less accumulated depreciation		(379	)		(211

SEC Form 10-Q filed by Agrify Corporation