RYTHM, Inc. Q1 FY2021 earnings call

• CEO Raymond Chang mentioned continued successful execution of growth strategy, record revenue, customer backlog increase, 100% reengagement with customers, launch of Agrify TTK Solution, and operational updates on manufacturing with Mack Moldings and joint venture partner Valiant-America.
• Chief Science Officer David Kessler detailed customer successes with VFU solution showing high consistency and quality, and discussed research and development partnerships with Atlantis Hydroponics and Front Range Biosciences.
• CFO Niv Krikov reviewed financial results showing total revenue increased to $7 million from $1 million in Q1 2020, gross loss, SG&A and R&D expenses, net loss, and adjusted EBITDA loss.

For Q1 2021, Agrify achieved record quarterly company revenue of $7 million, representing a 600% increase over Q1 2020 revenue and a 60% consecutive quarterly increase from $4.4 million in Q4 2020. During the quarter, the customer backlog was successfully increased by more than 38% to over $82 million from $59 million at the end of Q4 2020. The revenue contribution comes from facility build-out, hardware revenue including VFU delivery, and is expected to shift towards higher margin SaaS and production fees in the future.

• Increased full year revenue guidance to $48 million to $50 million, which is a 25% increase from prior guidance of $40 million. - Focus on driving top line and installed user base in 2021, with an accelerated move to higher margin SaaS and production fees revenue starting from 2022 and beyond.

Important factors that could cause future results to differ significantly from forward-looking statements include known and unknown risks and uncertainties outside the company’s control, as detailed in public filings with the Securities and Exchange Commission and mentioned in the earnings release.

Q: Good morning, congrats on a great quarter. And thanks for the questions. Real quick, on the raised guidance from $40 million to $48 million to $50 million, can you provide a little more detail on the revenue mix in that guidance between facility projects, VFU installs and the TTK software and service segment. And then kind of since the margin outlook from a gross margin side, which was in guidance potentially?

A: Sure, Scott, happy to. As mentioned 2021, we are focusing on driving our top line, as well as the installed user base. So for this year, it will still be leaning more towards the facility constructions. However, what I want to say is that we are seeing an accelerated move to higher margin SaaS revenue, as well as production fees revenue. And I believe that mix is going to start to kick in a big way, starting from 2022 and beyond. Just to kind of give you an example, right, the re-engagements with the four existing customers, had originally only been a hardware sales, and just recurring SaaS revenue. However, we have moved every single one of them to not only hardware sales, plus recurring, and on top, very exciting propound based production success fees. So we believe that in 2022, and beyond, we are going to see an accelerated high margin recurring SaaS and production fees. And it’s going to basically dramatically shift our margins in the long run. 2021, we will continue to focus on our top line growth. And as you know, in this industry, there is always a 6 months to 9 months sort of lead on the facility built out. And that’s where we are focusing on today is building the install base. But starting from 2022, we are going to see a very exciting shift to the high margin recurring revenues.

Q: Thank you. Our next question is from the line of Anthony Vendetti from Maxim Group. Please go ahead.

A: Thank you. Thanks, Raymond. Thanks, Niv and David for the commentary, it’s very helpful. Just to follow-up on the TTK solution, this program that you introduced. It’s been a well thrown out program from what I recall. And when you mentioned about the return on investment, I believe the IRR you calculated for most of these will be somewhere in the 40% to 50%. If you take into account the interest rate that they would pay on the loan as well as the annual SaaS revenue, and a percentage of the production this becomes an incredibly financially attractive partnership. And these are 10 year partnerships. Is that correct? Am I missing anything?

A: No. Anthony, you are absolutely correct. And the 40% to 50% IRR is kind of like our minimum threshold for these type of partnerships. And here is the key, Anthony, is not, when we talk to our partners, is not that, they are only looking for financial support. And in fact, a lot of them could have built out the facility on their own. The truth of the matter is what they are looking for to magnify. It’s really this turn-key aspect, right. We come and basically help them to build the facility, construct the facility correctly. Right, select the right design firm, the architectural firm, the engineering firm, and the general contractor, right. On top of that, we provide them with an integrated hardware and software solution that’s proven to work. And as you heard it earlier from David, we are seeing some really, really incredible results coming out of our customers. We have now data that shows that we can produce high quality flowers consistently and are allowing our customers to actually switch at a premium in the market, right. So, it’s not just looking for financial support, frankly speaking, if they are just looking for financial support, they could have just basically raised the money in equity or other debt instruments. But they are interested in partnering with Agrify, going into a 10 year partnership, because they know that our interests are completely aligned. They know that they have a partner that they can depend on. That will basically bring them to a complete success. And that’s the reason why they are willing to basically share this upside with us, because they figure what Agrify’s involvement, they can probably produce better quality, consistently, and probably have higher yield. And naturally, they are happy to share part of the upside with us. So, it’s indeed a mutually beneficial relationship that basically is set for 10 years.

Q: Excellent. And then just, you mentioned about the low variability, and I think you had some data to show that in terms of your harvest, it’s very – they are very, very consistent because of all the systems you have in place to ensure that not just the success of the harvest and the yield, but the low variability, right. And it’s dramatically lower than the average cannabis grower, right. So, I was wondering if you can just give us a little bit of color of in terms of that data and how that differentiates you from the average grower?

A: Sure. And I will also ask David to jump in here, as well. But what we are seeing in the industry is that volatility and inconsistencies. These things are just killing the brands. Because consumers, what we are seeing, in fact David was at a Michigan conference earlier, whereby the question was asked, why is it that we get a lot of repeat customers, very rarely three key customers. And the answer is obvious, right. Consumers like the product the first time, they tried it again. And if you don’t give them the same consistency and quality, they switch, right. So Dave, do you want to come in here and basically talk about the level of consistency that we are seeing, and also the high quality and why is it that our customers switching higher price than most of the other operators? David Kessler: I would be happy to Raymond and thank you for the question, everybody, understanding that Cannabis is an incredibly diverse phytochemical manufacturing plant. It produces over 545 different chemical compounds, and environment influences how much of each compound is actually produced. So, when 25 different growers were giving a genetically identical cutting, the results varied tremendously, the cannabinoid levels from 15% to 28%, and the terpene profile from less than 1% to over 5%. This exhibit and typifies how impactful the environment is actually influencing the chemo typic, or chemical output and expression. So, Agrify’s technology, which records almost 1 million data points per chamber per year, and has the ability to granularly reproduce those cultivation environments, essentially, minimize the level of chemical variation by controlling and recreating the exact perfect environment time and time again. And because every individual vertical farm unit or VFU is independent from all the others. Our operators are able to do iterative experiments, and gradually, but continuously and quickly improve their cultivation best practices to elicit the best results. And then they have the ability because of that data collection to repeat the exact environments time and time again. This is what leads to and drives that level of consistency, but also the iterative process that allows our customers to increase the quality and consistency of their flower more quickly than traditional cultivators that have very few limited rooms to learn about how to optimize their crop.

Q: Thank you. That was very helpful Raymond and David. Just to follow-up a little bit on being able to charge a higher price, obviously, if you can produce a particular flower or particular cannabinoid with very, very low variability that seems to indicate you will obviously be able to get a higher price and particularly as this industry evolves, and brands try to compete with one another. It seems like that that would be a differentiating or competitive advantage for a company like Agrify that can provide that high consistency or low variability is that correct?

A: Anthony, you are absolutely correct. What we are doing and this is what I tell our customers, is we are helping them to pacify this industry. And what I mean by that is, consumers expect that every time they open a tin Pepsi, it tastes the same, it has the same effect. And this actually isn’t the whole true for the Cannabis industries as well. And our unique technology and solution offering that allow them to build strong brands that to have very loyal customer base, and to be able to deliver that level of consistency and quality, every single time. And this is not just a dream. This is something that as we have shown through our data, third-party validated data, that we are delivering this type of consistency and quality in such an early day of our development. And we believe that the quality and consistency are only going to improve over time.

Q: Okay, it makes sense. And then just a question on the MSOs, it seems like this would be even more important to the larger operators. Can you talk about your discussions with the MSOs? And I know it’s a longer sales process. But can you give us a little bit of an idea of how those discussions are proceeding at this point?

A: The discussions are proceeding very, very well. And we are expecting to cement partnership, not so long future. The MSOs are excited about what we offer. And obviously they do have a more vigorous qualifying process. But however, the data that we are showing them is extremely, extremely compelling. And we are confident that we will be announcing partnership with the MSOs in not so long future. This is really kind of the technology, the Holy Grail for this industry, especially for the MSOs, because if they really want to build their brands, across different states. This is the technology that will help them to ensure that they can deliver the highest quality and consistency and yield across different state territories. So, we are very confident that we will be cementing these partnerships and look forward to announcing them in not so long distance future.

Q: Okay, excellent. Just last question on the backlog, you mentioned the backlog increased to $82 million, it’s up 38%. Can you increase the guidance for this year from $48 million to $50 million? Can you just talk about the backlog number of $82 million, approximately what percent of that backlog should be recognized or expected to be recognized in the next 12 months?

A: Yes. So Anthony, we expect the majority of that backlog to be recognized in the next 12 months. As you know, the industry typically leads with a 9 months to 12 months construction period, and then installation of equipment. And then obviously the recurring – high margin recurring SaaS and production fees thereafter. We are very pleased to be able to say that we are increasing our guidance from $40 million to now $48 million to $50 million for 2021. And we do expect that the majority of the $83 million backlog that we share will also be recognized in the next 12 months.