Good morning, and thank you for standing by. Welcome to the Agrify fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anna Kate Heller, Investor Relations. Please go ahead.
Good morning, and welcome to Agrify's fourth quarter fiscal year 2021 earnings call. With us on today's call are Raymond Chang, Chief Executive Officer, and Timothy Oakes, Chief Financial Officer. Today, management will review the highlights and financial results for the fourth quarter and provide a business and operational update. Following management's remarks, there will be a question-and-answer session. A reminder that today's conference call is being recorded and a replay will be available on Agrify's investor relations website at ir.agrify.com. Please note that we will be referring to information that's contained within our press release and slides, which can be accessed on the website as well. Before we begin, we like to remind everyone that management's remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions.
Such statements involve a number of known or unknown risks and uncertainties, many of which are outside the company's control that could cause its future results, performance, or achievements to differ significantly from the results, performance or achievements expressed or implied by any such forward-looking statements. Important factors that could cause or contribute to such differences include the risks detailed in our public filings with the Securities and Exchange Commission and that is mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements therein, whether as a result of new information, future events, or otherwise. I will now turn it over to Raymond.
Thanks, Anna Kate, and thank you everyone for joining us on the call today. We are looking forward to providing you with an update on our business as there are many accomplishments and opportunities we would like to bring to your attention. I will begin by highlighting our 2021 performance and some recent company developments, and Tim will review our financial results, and we will also give you the outlook for 2022. During 2021, we drove explosive year-over-year growth. We launched our total turnkey solution for cannabis cultivators. We created a significant backlog of future high-margin recurring revenues. We drove tremendous pipeline velocity. We implemented innovative technological advancements to our vertical farming units, VFUs, and we established ourselves as the leader in premium extraction solution through a series of well-executed acquisitions. Let's first discuss our growth.
I'm pleased to report that in fiscal year 2021, our annual revenue grew 395% to $59.9 million. This is up from $12.1 million in 2020. It's important to note in the fourth quarter of 2021, our quarterly revenue was $25.3 million. This represents a 481% year-over-year increase when compared to $4.4 million in Q4 2020. In 2021, Agrify generated over $377 million in new bookings. This is an increase of 919% from $37 million of new bookings in 2020. A tenfold increase. In addition, we are pleased to make you aware that we currently have a total qualified pipeline of over $570 million.
It's important to note when it comes to our bookings and pipeline numbers, Agrify only includes the first 3 years of the expected revenue for the TTK deals and from the total value of extraction product sales. Even though our TTK arrangements have a 10-year term, from a bookings and pipeline perspective, once again, we only include the facility construction costs and the first two years of the SaaS and estimated production success fees. I would like to now discuss our total turnkey solution, TTK. The Agrify TTK program is the only solution of its kind in the cannabis industry, whereby Agrify forges long-term partnerships with qualified customers and provides them with ingredients needed to launch and operate world-class cultivation and extraction facilities.
This includes design and build-out of their cultivation and extraction facility, the installation and implementation of our state-of-the-art cultivation extraction products, process design, training, grow recipes, product formulations, data analytics, and consumer branding. Let me assure you that this program addresses some of the biggest pain points in the industry. Since launching our TTK solution only 10 months ago, we have secured 6 customers. These customers include successful entrepreneurs who are very passionate about the cannabis industry, a social equity applicant, a minority female entrepreneur, and proven serial cannabis executives who have successfully built and exited a billion-dollar cannabis enterprise. The strongest validation to this TTK is that we currently have 3,729 VFUs under contract from our 6 TTK and non-TTK VFU customers. We believe each VFU deployed will conservatively produce 35 pounds per year of production.
Once all 3,729 VFUs are commissioned, we expect our customers to cumulatively produce approximately 130,000 pounds of dry flower on an annual basis, which will, in return, create $76 million of high margin recurring revenue annually for Agrify. Again, that's $76 million of high recurring SaaS and production revenues to Agrify on an annual basis. Over the life of all these engagements, the estimated total cumulative revenue to be generated by Agrify will be approximately $837 million, of which we project $750 million will be from very high margin production success fees, SaaS fees, and interest fees, all providing a significant return on investment for our value shareholders. Our current TTK engagements are at different stages of developments.
I'm pleased to report that we expect to start generating high margin recurring SaaS and production fees in the third quarter of this fiscal year. I would like to now shift to our extraction division. Cannabis represents a potential cornucopia of medicinal and pharmaceutical advancements. Cannabis products produces over 550 different phytochemicals, over 120 of which are cannabinoids like THC and CBD, which are well known. Other cannabinoid variants like CBGV, THCV, CBN, CBDV are less well known, but potentially could offer just as much, if not more, significant value. As we continue to learn more about complex chemical compositions of cannabis, the need for quality extraction and distillation solution is clear. Distillation enables the identification, isolation, and separation of valuable cannabis metabolites.
The ability to take cannabis compounds distilled into their pure forms, and then recombine them into specific, purposeful end products for both medicinal and recreational needs is super exciting. Having extraction and post-processing capability presented a great opportunity for Agrify to become far more vertically integrated with our customers while increasing our wallet share of each. Given this opportunity, Agrify decided to strategically expand its reach by establishing itself as the leader in the cannabis extraction industry. In the last six months, we have acquired four of the top brands in the industry. Precision Extraction Solutions, Cascade Sciences, PurePressure, and Lab Society. Combined, these four acquisitions provide Agrify with, one, the most comprehensive extraction solution from a single provider. Second, the best product brand names in the extraction industry with highly complementary solutions. Third, the most innovative and high-quality products. Fourth, over 7,000 customers, including the majority of MSOs.
Lastly, the addition of some of the best and brightest cannabis minds in the industry. The extraction market is currently one of the fastest-growing segments in cannabis. In 2022, we expect our extraction division to be accretive and produce annual revenues of $62 million-$65 million, with gross profit margins of 30% or greater. We also look forward to launching our new extraction TTK program, and we hope to announce our first extraction TTK engagement shortly. At this point, I would like to turn the call over to Agrify's CFO, Timothy Oakes.
Thank you, Raymond. Good morning, everyone, and thank you for joining us on today's earnings call. I'll speak to our financial results for the fourth quarter and full year of 2021. Then Raymond will provide guidance and closing remarks, and then we'll open up the call for analyst questions. Overall, it's been a very active and exciting twelve months for the company. In the fourth quarter, certainly no different. Our fourth quarter and full year results are reflective of the strategic investments and the changes we have made to our business model. Specifically, our fourth quarter financial performance has been positively influenced by our total turnkey solution, which I will refer to as TTK, a TTK arrangement, and the positive effects of our recent acquisition activity, which we successfully leveraged to expand our top-line revenue and improve our gross margin and other operating metrics.
Moving on to specific commentary on our financial results. Revenue in the fourth quarter of 2021 was $25.3 million, compared to revenue of $4.4 million in the fourth quarter of 2020. This represents a 481% year-over-year increase in quarterly revenue. On a full year basis, revenue for fiscal 2021 totaled $59.9 million, compared to full year 2020 revenue of $12.1 million, representing a year-over-year increase of 395%.
The primary drivers of the revenue increase in both the fourth quarter and full-year periods of 2021 are related to an increase in the construction-related revenues, as well as the incremental revenue contribution associated with the company's October 1, 2021 acquisition of Precision Extraction Solutions and Cascade Sciences, which contributed $12.3 million of extraction-related equipment revenue in the fourth quarter of 2021. Bookings in the fourth quarter of 2021 were in excess of $250 million. The $250 million bookings includes TTK-related bookings as well as our equipment-related bookings, which includes both cultivation and extraction equipment revenues. We enter the first quarter of fiscal 2022 with approximately $837 million in backlog, compared to $59 million in backlog entering fiscal 2021.
As stated earlier by Raymond, it is important to note that for the TTK arrangements portion of both our reported bookings and backlog amounts, we only include the first three years of expected future revenue, which is typically the construction in the first two years of SaaS and estimated production fee revenues, even though these are five to 10-year partnerships that could offer as much as 3.5x-4 x more revenue potential. Total gross margin for the fourth quarter of 2021 was $5.6 million, or 22% of total revenue, compared to a negative gross margin of $290,000, or 7% of total revenue in the year ago quarter.
For full year fiscal 2021, the company is reporting gross margin of $5.2 million or approximately 9% of total revenue, compared to gross margin of $570,000 or 5% of total revenue in fiscal year 2020. Gross margin improvements in the comparative year-over-year, quarterly and fiscal year periods is primarily the result of two specific fourth quarter of 2021 activities. First, the company recorded a VFU sale of older VFU models, which resulted in a gross margin well above the company's historical gross margin on standalone VFU equipment sales. Second was the positive lift in gross margin associated with our extraction equipment revenue, which is expected to generate gross margin of approximately 30%, which is also well above the company's historical gross margin performance.
While we are certainly pleased with our gross profit margin performance in the fourth quarter of 2021, we would like to highlight that that performance isn't necessarily reflective of our expected near-term quarterly gross margin performance. Until such time as we are able to report meaningful SaaS software and production fee revenues, which we currently expect to begin in the late third or early fourth quarter of 2022, we anticipate that our quarterly gross margin performance, aided by our extraction-related equipment sales, to be in roughly a mid-teens range. Moving on to SG&A expense. This is gonna be a bit complicated, so I'm gonna ask you to bear with me for a minute. I think SG&A in the fourth quarter requires a little deeper dive compared to some of our other financial statement line items.
SG&A expense in the fourth quarter of 2021, which excludes charges associated with changes in the fair value of contingent consideration, which is associated with our October 1, 2021 acquisition of Precision and Cascade, totaled $16.1 million, compared to $2.9 million in the fourth quarter of 2020. As it relates to the increase in SG&A in the fourth quarter of 2021, the company has significantly increased in scale during 2021, and that's in terms of headcount, professional fees, public company fees, et cetera, compared to 2020, and has also added incremental SG&A expense in connection with both certain one-time charges, which we'll discuss in a minute, in the 2021 acquisition of Precision and Cascade.
Maybe a more meaningful review of fourth quarter 2021 SG&A expenses would be to compare them on a sequential basis to the third quarter of 2021. Fourth quarter 2021 SG&A expenses, again which totaled $16.1 million, increased by $7.5 million compared to SG&A expenses of $8.6 million in the third quarter of 2021. Breaking down the $7.5 million increase in sequential quarterly SG&A expense, we note that fourth quarter of 2021 SG&A expense includes, an order of magnitude, the following. Acquisition-related expenses, which are associated with both the Precision, Cascade and PurePressure acquisitions.
An incremental increase in SG&A expenses related to the operations of Precision and Cascade, which began in October 1, 2021 and did not impact the third quarter of 2021. Expenses related to the establishment of reserves against our outstanding accounts receivable balances, an increase in depreciation and amortization, which is essentially related to the amortization now being recorded against the identified intangible assets associated with our acquisitions, and an increase in stock-based compensation. On a full-year basis, fiscal 2021 SG&A expense totaled $35 million, compared to SG&A expense of $9.8 million in the year-ago full-year period. The primary drivers of the year-over-year increase in full-year SG&A expense are essentially reflective of the previously described fourth quarter items, which are driven in large part by the company's February 2021 initial public offering, growth in the scale of business, and our fourth quarter acquisitions.
Moving on to research and development. Fourth quarter 2021 research and development expenses totaled $1.4 million, compared to $1 million in the fourth quarter of 2020. On a full-year basis, fiscal 2021 research and development expenses totaled $3.9 million, compared to $3.4 million in the full-year fiscal 2020 period. In both periods, the overall increase in research and development expense is attributable to the company's investments in the continued development of both its vertical farming units as well as the continued development enhancement of our SaaS-based software, Agrify Insights. A standalone operating expense that we carved out of SG&A expense this quarter relates to $1.4 million in expense involved to a change in our originally estimated fair value of contingent consideration to be earned by the former members of Precision and Cascade.
From an accounting perspective, ASC 805, which specifically relates to accounting for business combinations, requires the company to determine an initial estimate as the amount of potential contingent consideration to be earned as part of an acquisition as of the date of the acquisition. The former members of Precision and Cascade could have earned up to a capped amount of $15 million in additional consideration based upon the achievement of certain revenue thresholds ending December 31st, 2021. Based on their fourth quarter revenue performance, the former members of Precision and Cascade earned additional contingent consideration of $5.4 million during the quarter. This amount exceeded the company's initial estimate at the time of the acquisition by approximately $1.4 million.
As per the guidelines of ASC 805, the company is required to record this increase as an operating expense in the period incurred and not as an increase to goodwill. The company's December 31st, 2021, acquisition of PurePressure contains two consecutive 12-month earnouts. The potential additional consideration that can be earned under each of the two earnout periods is capped at $1.5 million per year. The company has made an initial estimate with respect to the probability of achievement of the additional consideration and recorded it as part of our initial purchase price accounting. We will continue to evaluate PurePressure's future performance against our initial estimates on a quarterly basis. Any identified changes to our original assumptions that generate a change in our estimates will result in either an increase or reduction in our future periodic operating expenses.
Lightly touching upon other income and expenses, the company is reporting total other income of $98 ,000 for the fourth quarter of 2021, compared to total other expense of $8.9 million in the fourth quarter of 2020. For the full-year fiscal 2021 period, the company is reporting total other income of $2.8 million, compared to total other expense of $9 million in the full-year fiscal 2020 period. In all periods, the changes in other income and expense are directly related to the convertible promissory notes entered into between the company and certain investors in fiscal 2020, which were subsequently amended by the company's board of directors in January 2021.
During the fourth quarter of 2020 and the full-year fiscal 2020, the company recognized an aggregate loss on the extinguishment of convertible promissory notes in the amount of $5.6 million, which represented the difference between the net carrying amount of the notes and the reacquisition price of the notes. During the year ended December 31st, 2021, the company recognized a gain on extinguishment of $2.7 million in connection with the derecognition of the net carrying amount of the extinguished debt. During the fourth quarter of 2020, the company recognized other expense of $2.9 million in connection with a change in fair value of derivative liabilities associated with the fair value of the variable share settlement features. The company did not have any derivative liabilities during the portion of fiscal 2021 as a result of the extinguishment of the original convertible promissory notes.
As it relates to income taxes, the company is reporting a provision of income taxes of $25,000 during the fourth quarter and full-year fiscal 2021 periods. No provision for income taxes was recorded by the company in the comparative 2020 quarterly fiscal year periods. The company has historically generated losses from operations and is currently in a cumulative loss position. Accordingly, the company has established a full valuation allowance against the carrying value of its deferred tax assets. We recognize net income and/or net loss attributable to controlling interests in our financial statements. We consolidate the results of operations of two less than wholly owned entities into our consolidated results of operations, Agrify Valiant LLC, a joint venture limited liability company in which we are 60% majority owner, and Valiant-America LLC, which owns 40% of Agrify Valiant LLC.
The reported net income or loss in each of the presented quarterly and fiscal year periods ended December 31st, 2021 and 2020 represents the portion of the periodic income or loss attributable to the non-controlling parties. Finally, the net results of the previously discussed changes in revenue, gross margin, operating expenses resulted in a net loss during the fourth quarter of 2021 of $13.3 million or $0.60 per diluted share. Net loss during the fourth quarter of 2020 was $13.1 million or $2.23 per diluted share. Similarly, the previously described changes in our operations resulted in a net loss of $32.5 million or $1.69 per share in fiscal 2021, compared to a net loss of $21.6 million or $5.32 per share in fiscal year 2020.
Adjusted EBITDA amounted to a loss of $5.5 million during the fourth quarter of 2021, compared to an adjusted EBITDA loss of $2.8 million in the year-ago quarter. For the full year fiscal 2021 period, adjusted EBITDA was a loss of $20 million, compared to an adjusted EBITDA loss of $8.4 million in the full year fiscal 2020 period. Additional information regarding our use of non-GAAP measures includes including a reconciliation to the most comparable GAAP measures can be found in the press release we issued earlier this morning, which is also available on the investor relations section of our website at www.agrify.com. Finally, I wanna provide some color on our combined cash and marketable securities balances as we exit 2021. As of December 31, 2021, the company is reporting a combined cash and marketable securities balance of $56.6 million.
This represents a decrease of $56.7 million from a combined balance of $113.3 million as of September 30, 2021. The biggest drivers of the change in our periodic balances are primarily associated with our two 2021 acquisitions, of which we paid aggregate upfront cash consideration and other expenses of approximately $42 million. Our inventory build related to the production of VFU units to be deployed under our TTK arrangements, as well as funding our operating expenses like payroll and other such operating types. Obviously, given the upfront investment nature of our TTK arrangements, which require significant investment by the company in both construction and VFU equipment costs, near-term access to capital is critical to the company. In the first quarter of 2022, we announced two separate capital raising activities.
In January, we announced the closing of a $27.3 million private placement. Additionally, last week, we announced the finalization of a debt facility, which will enable the company, subject to certain performance requirements, to access up to $135 million in additional debt financing. Both of these transactions have served to strengthen our balance sheet and enable us to continue to execute our goal of driving top-line growth in generating sustainable long-term shareholder value. With that, I'd now like to turn the call back to Raymond to provide 2020 guidance in his final comments.
Thank you, Tim. Now that we have covered our accomplishments and financial results for 2021, I would like to share our revenue guidance for Q1 2022 and for the fiscal year of 2022. In Q1, we expect our revenue to be $25.5 million. This will be an increase of approximately 264% from the $7 million we generated in Q1 of 2021. For the full year of 2022, we expect revenue to be $140 million-$142 million, reflecting an increase of approximately 134% when compared to $59.9 million we generated in 2021. In the second half of fiscal 2022, we anticipate our revenue mix will move towards more favorable high margin extraction, SaaS, and production success fees. Lastly, we want to reiterate to our value shareholders that Agrify's demand has never been stronger.
Currently, we have over $570 million of qualified pipeline opportunities, and that number continues to grow at a rapid rate. We believe it is prudent to respond to our current high demand and seize the opportunity to gain additional market share to further separate Agrify from any potential competitors. With the recent equity financing and debt facility in place, Agrify is in a position to drive continued accelerated growth. In addition, we are exploring partnerships with large REITs for construction financing and equipment financing companies for our VFUs. These type of financing structure will provide Agrify with significant scale while maximizing shareholders' values. At this point, I would like to open up the call to questions from our audience. Operator, please go ahead.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Our first question comes from Aaron Grey with Alliance Global Partners. Your line is open.
Hi, good morning, and thank you for the questions and for the commentary there, guys. First question for me, Raymond, just on the guide you gave for Q1 $25.5 million. Just could you offer some commentary in terms of how that relates to kind of Q4, specifically because of some, you know, added acquisitions, you know, within there, you know, roughly flat up slightly a little bit. Was there some seasonality in there? Because I know the legacy, you know, extraction, you know, is kind of more one-time purchases, so not sure whether or not there was some buying habits that create some seasonality or just some color there in terms of the sequential growth you're looking for. Thank you.
Yes, there is a slight seasonality effect in the extraction side of the business. In addition to that, actually we have a couple of large bookings for our VFU units, cash deals, in the state of Illinois. Unfortunately, as you know, there's been kind of a social equity legal lawsuits involving some of the licensees, license applicants, sorry. So it's actually pushed back our shipment of the VFUs by, you know, one to two quarters. You know, we booked these deals in fourth quarter. We were originally expecting to ship in fourth quarter and in Q1, but the legal lawsuit is dragging out a little bit.
As soon as we get the clarification of that, you know, we do expect to ship those units, you know, very shortly. They have actually already finished the production. A little bit of seasonality, and I do believe that the business will pick up in Q2. As I mentioned earlier, we're not seeing any slowdown in the momentum, and we will continue to execute.
All right, great. Thanks so much for that detail. Then obviously you've had a number of acquisitions, in terms of the extraction side. Those had historically been more, you know, kind of one-time purchases. You guys are looking to add in some more recurring sales through the TTK that you alluded to earlier in the call. Just wondering in terms of how you're looking to bring on that recurring model to those legacy, more one-time purchase businesses, both for legacy customers who already have that extraction equipment, as well as for newer ones who might be, you know, buying the equipment or entering the TTK programs. Thank you.
Yeah. As I mentioned earlier, Aaron, we are expecting to start receiving recurring revenues on the cultivation side, in fact, in Q3, towards the end of Q3, of this year. This is obviously super exciting because that's really the biggest sort of you know potential for the company. Obviously the number will be ramping up. It'll be small initially, but the significant flow will start coming in probably by Q2, Q3 of 2023 as we bring on more facilities. On the extraction side, as you know, and you know, up to this point, it's been more of a one time you know transactional type of sales. We just sell the hardware, and there's very, very little recurring aspect of it.
We are very, very close to signing our first extraction TTK deals, and our team is also working very hard to basically put the control software on top. I believe we will begin to recognize recurring extraction revenue in 2022 as well. We remain confident that we will have extraction-based TTK deals announced shortly, and you will be able to see nice recurring revenues out of the extraction division in 2022 as well.
All right. Thank you very much. I'll jump back in the queue and good luck in 2022.
Thank you, Aaron.
Thank you. Our next question comes from Eric Des Lauriers with Craig-Hallum Capital. Your line is open.
Great. Thank you for taking my question. Regarding the recurring revenues coming in in Q3, that was one quarter ahead of what we were looking for. Assuming that's coming from Bud & Mary's, I was just wondering if you could kind of give us an update on where that project is right now, and then sort of what other regulatory approvals are required there, and sort of what you guys are expecting from Massachusetts regulators. I know they have kind of been notoriously slow for approvals, so just wondering, you know, what kind of sort of sensitivity you've baked into that or just, you know, how to think about the remaining steps required for Bud & Mary's until these revenues start coming in. Thank you.
Hi, Eric. Actually the third quarter recurring revenue is not coming from Bud & Mary's, but is coming from some of the legacy customers that we have converted into the TTK programs, such as the facility in Vegas, the facility in Washington, and also the facility in Colorado that we will be bringing to fruition in the next you know quarter or two. Bud & Mary's is still on schedule to have its completion in fourth quarter. The recurring revenue, as I stated in Q3, is actually not coming from Bud & Mary's.
Bud & Mary's is still pretty much on schedule for fourth quarter completion, and production will start going in in Q1 of next year. It's really coming in from some of the legacy customers that we were able to accelerate the deployments, and we will start seeing those projects coming to fruition and recurring revenues to kick in from those facilities.
Okay, that's very helpful, and that makes sense. Could you provide any additional color around the either number of VFUs from these legacy customers that'll be switching to the sort of, you know, TTK recurring revenue or just any numbers that might help us frame the expectations for recurring revenues from these legacy customers? Thank you.
Yeah. As I stated earlier, the total number of VFUs under contract is 3,729. These legacy customers that we're flipping on probably sort of in the 400 aggregate, in probably the 400 VFU range. Those will be the first ones, you know, that we bring on board. Obviously, Bud & Mary's, you know, will be 592. You know, obviously we have other larger programs behind that. The legacy customers you can roughly estimate to be around 400 units in total.
Thank you.
Thank you. Our next question comes from Scott Fortune with Roth Capital Partners. Your line is open.
Good morning, and thanks for the questions. Just a real quick follow-up on that, Raymond, as far as the VFUs. You know, you have a number of TTK under contract, but you had some legacy projects, construction projects coming on board that were going to require non-TTK VFUs. What % or numbers of that 3,729 total VFUs is just coming from one time, non-TTK VFUs being added to the pipeline here?
The 3,729 VFUs are primarily all TTKs and probably around, I would say, 300 in aggregate. It's non-TTK customers, cash customers. And as I've mentioned earlier, we actually have other additional cash customers, particularly you know several from state of Illinois, from Michigan. But because of the licensing issue, the ship-out date got a little bit delayed. But we actually just heard very very favorable sort of legal decisions for the state of Illinois, so we are hopeful that the units will get shipped very shortly.
Got it. No, I appreciate that. Follow up on your demands being strong. You have $570 million qualified pipeline to continue to gain market share here, obviously. Can you unpack that a little bit on kind of number of MSOs you're looking at talking to, kind of one-time versus kind of TTK in that qualified pipeline? Just kind of validate the quality MSOs that they're still looking at your technology moving forward here.
Yes, Scott. We are, in addition to obviously Curaleaf, we are in a number of discussions with the MSOs. We are confident that we will probably be announcing at least another partnership very, very shortly. Out of that $571 million pipeline that we mentioned, approximately $45 million is actually extraction related, $313 million is TTK arrangement, and the rest of it is basically, you know, our extraction VFU equipment, non-TTK. So again, the breakdown is $44 million for extraction, about $313 million for TTK, and the rest of it is basically the VFU units, but non-TTK arrangements.
That perfect, that color. If I can fit one more in on that, on the extraction side, can you provide a little more color where the growth is coming from in that business? Is this new MSOs adding capacity? Is this looking at new states that they're gonna come on board that will add to the growth? Or how do you value the new customers? What's kind of driving the growth on the extraction side as you look at the core business there?
Scott, what's most exciting is that we're seeing growth from pretty much everywhere. We're seeing customers responding to shifting of consumer demands, adding additional extraction equipments. We are, you know, seeing basically interest from, you know, large MSOs to large single state operators, to even, you know, some of the smaller guys. Obviously, with the newer states coming online, there's really a lot of demands for some of these new cultivation facilities as well. I think it's primarily driven by kind of a shifting of consumer preferences. Obviously dry flowers are still commanding, you know, 50% or so market share across every single state.
You know, other farm products are really gaining traction, huge momentum, and we expect that trend to continue. This is something that I believe we'll continue to see kind of a 25%-30% CAGR, you know, on a going forward basis, and we're very, you know, excited about that.
Thanks for the color. I will jump back in the queue. Congrats.
Thank you. Our next question comes from Anthony Vendetti with Maxim Group. Your line is open.
Sure. Thanks. Just a couple quick questions. On Raymond, on the Bud & Mary's, right, those are owned by Frozen Four, that's the holding company. Has there been any expansion with Frozen Four's other facility in terms of a new contract or TTK arrangement? Then I have a follow-up question.
Yes, Anthony, thank you for that. Yes, we obviously have the partnership with Bud & Mary's. Bud & Mary's, as you said, is the subsidiary of Frozen Four. Frozen Four is the parent company. Phase one is obviously Bud & Mary's, and I've kinda shared the update on that, and that's 592 VFUs. We basically have an LOI executed with Frozen Four for phase two expansion, which also will include the extraction manufacturing capacity as well. That will be added to kind of a phase one at another location in Massachusetts. We are super excited to expand our relationship with this particular group.
I think in total, we could see as much as, you know, 1,200, you know, VFUs. We are still doing the concept layouts for phase two expansion. There's a possibility that, you know, this could actually be our first triple stack VFU facility, so we're super excited about that possibility.
Okay. Just on, in general, on the TTK projects, I think you have six, but if that number has changed a little bit, let me know. In terms of generating recurring revenues from TTK, is that still expected to happen, at least for the first one, by the end of this year, either late 3Q or sometime in 4Q 2022?
Anthony, as you know, we actually converted some of the old legacy customers to become a TTK partner as well. Actually the generation of SaaS and production revenues, you know, it's going to happen starting from Q3 of this year. It's basically accelerated to what we had previously forecasted. You will start seeing some, you know, production and SaaS revenue flowing in in Q3 of 2022. Obviously that number is going to ramp up over time. We believe that there's more significant flow will probably be Q2 and Q3 of 2023 as we bring, you know, additional facilities, you know, online. The initial generation of SaaS and production is now basically accelerated to Q3 of 2022.
Okay, great. Just, I know Tim mentioned this, you know, gross margin was, you know, much higher. I know that's not indicative of where or reflective of where it's gonna be in the near term. Was that because there wasn't as much construction revenue this quarter? Is there any kind of guidance you could provide in terms of expectation for gross margin at the beginning of the year? Should that revert back more towards the single digits in the beginning of the year or how should we look at that?
Yeah, Anthony, I'll jump on that one. Q4's gross margin at 22%, as you said, is abnormally high based upon where we've been. It is a combination, right? We recognize $12.3 million of revenue from the extraction equipment sales. That revenue comes at a 30% gross margin. By default, right out of the gate, that introduction to that mix of revenue automatically lifts our gross margin. We also had a TTK equipment sale in the quarter of which we sold older model VFUs to a customer, of which came resulting in a higher gross margin than, as you mentioned, the low single digit gross margin that we've historically recorded. That's what drives us to 22%.
Clearly, based upon the singular sale of the VFU equipment, that is not sustainable go forward. As we look at it, the mix of extraction revenue at a 30% gross margin will continue obviously into 2022. If we normalize that against the historical margin of Agrify, you're looking at, you know, the potential of a gross margin to be, as we said in the call, on the script call, about 18%-ish, right? It's gonna be mid-teens from an expectation point of view because of that beneficial lift from the extraction equipment.
Okay, great. Yeah, that's helpful. Excellent. I'll jump back in the queue.
Thank you. Our next question comes from Gerald Pascarelli with Cowen. Your line is open.
Thanks for taking the questions. As a follow-up to the gross margin question, I guess just sort of a housekeeping item, does your kind of mid-teens target contemplate the 10% reduction in LED lighting costs that are gonna be associated with your new VFUs, which I believe were slated to come on, like, at the end of Q1 2022? If so, and again, not looking for guidance, but just from a cadence perspective, is it fair to assume that sequentially your gross margin should improve as we progress throughout the course of 2022? Thanks.
Gerald, as you think about the cost reduction initiatives that we've implemented for the VFUs, you know, as we balance VFU production and revenue based upon what portion is TTK, what portion is standalone VFU equipment, right? The VFUs that are part of TTK are on a lease model, so they are not point in time sale, so you don't see them manifest themselves into our revenue stream as an individual equipment sale. The standalone cash-based, I'll refer to it as a cash-based VFU equipment sale that is not under a TTK arrangement. Yes, we will have or we have modeled and expected a lift in that standalone unit gross margin that is improved from the historical margin.
However, given the weight of the revenue and the contribution to revenue of those standalone VFU equipment sales, it's not going to have a meaningful or result in a substantial lift in that gross margin. Again, near term gross margin, we expect to be mid-teens as we move through Q1, Q2, Q3. Thinking about gross margin as you asked in the latter part on a full year one for 2022. Obviously, with the introduction of SaaS-based revenue and production fee revenue in, I'll call it the latter part of Q3 and into Q4, that recurring revenue stream is highly leverageable from a margin contribution point of view. Anywhere between 80%-100% of that revenue stream will drop to the gross margin line. However, it is not a significant or meaningful component of the projected revenue for 2022.
However, again, you will start to see an incremental lift as that revenue starts to bleed in in the latter part of the year. Q4, probably more of a lift in Q4 than Q3, just due to timing of when we expect to receive it in the middle of the quarter. Yes, you should start to see gross margin contribution sequentially lift on a quarterly basis as we move through the year.
Understood. That's super helpful color. Thank you for the explanation. My second question is just on capital allocation. You've been highly acquisitive with within extraction, just raised $135 million. As we look out to 2022, can you maybe just provide a brief or a high level level set, I guess, on your capital allocation priorities? Do you expect any more M&A? And if so, in what areas? Or, you know, are the use of your proceeds largely gonna be, you know, used for building out your TTK partnerships and integration and cost associated with that? Any color you could provide there would be great. Thank you.
Yeah.
Gerald, go ahead, Tim.
No, no, Raymond. That's all right. Go ahead.
Okay. Gerald, in terms of the acquisition, we're pretty much done when it comes to the extraction piece. We're very proud of the four companies that we acquired, and we believe we have pretty much everything we need. Yes, there are still additional product developments that we're gonna do internally to further enhance our overall offering. With the acquisition of these four companies, we pretty much have everything we need. In terms of M&As, we will always be, you know, looking for strategic and accretive opportunities. As of now, you know, we have not yet identified, and so we think we're gonna be probably focusing more on just kind of internal integration for now. That's on the acquisition side.
In terms of how we're gonna deploy the capital, yes, it will primarily be for the TTK projects, because we believe that's the area that is going to give you know all the shareholders the biggest long-term values. As you know, every dollar that we deploy on the VFU side, you could potentially get as much as 10x return over the life of that partnership. That's gonna be the primary focus of our deployment. You know, as mentioned, you know, even as of today, you know, we have close to $370 million of that opportunity in our pipeline. That's gonna be the primary focus.
The other thing that I do want to mention is that obviously the TTK deployment has two components, right? It has the upfront construction, and then the VFU hardware, you know, lease program that Tim mentioned. You know, our goal is to continue to basically gain leverage, you know, by talking to REITs and other equipment financing partners. We will be able to find shareholder-friendly instruments to help build leverage on our business. That's kinda what we are focusing on for the moment.
Understood. Thank you very much for the color. I will hop back into the queue.
Thank you. I'm showing no further questions. I'd like to turn the call back to Raymond Chang for closing remarks.
I wanna thank everybody for attending the call today. We remain super excited about the prospect of shares of Agrify short-term and long-term, and we will stay focused to continue to execute our exciting business plan and look forward to updating you guys in our next earnings call. Thank you. Have a nice day.