Ep 357 – Fully Automated Cannabis Cultivation Is Here Thanks to Vertical Farming Co.

raymond chang agrify

What happens when vertical farming meets cannabis? The highest quality, consistency, and yield at the lowest possible cost.​ Here to tell us more is Raymond Chang of Agrify, a developer of highly advanced grow solutions for the indoor agriculture marketplace.

Learn more at https://www.agrify.com 

Key Takeaways:

[1:01] An inside look at Agrify and its proprietary vertical farming solutions

[1:53] Raymond’s background as a serial entrepreneur and how he came to be CEO of Agrify

[4:17] The different components that make up Agrify’s automated cannabis grows, from vertical farmings units (VFUs) to advanced cultivation software  

[9:25] The ROI per square foot for a facility with vertical farming units versus one without

[11:45] The price range for Agrify’s vertical farming units and how they pay for themselves in less than a few months

[16:08] Agrify’s fine-tuned SaaS component and the insights growers are loving most

[19:45] Agrify University, a 3,500 square foot vertical farming facility in MA that offers extensive hands-on training for new Agrify growers

[20:27] Opportunities for cultivators to license their grow recipes to other cultivators through Agrify’s platform

[24:49] Where Raymond sees the cannabis’ grow tech and automation space heading over the next 3-5 years

Click Here to Read Full Transcript

Matthew Kind: Hi, I'm Matthew Kind. Every Monday, look for a fresh new episode where I'll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at cannainsider.com. That's C-A-N-N-A insider dot com. Now here's your program. What happens when vertical farming meets cannabis? Raymond Chang, CEO of Agrify is here to tell us. Raymond, welcome to CannaInsider.

Raymond Chang: Thank you so much, Matt, for inviting me to your show. Very much appreciate it.

Matthew: Give us a sense of geography. Where are you in the world today?

Raymond: I'm actually in Illinois visiting a few customers. As you know. Illinois is one of the most exciting states, and I'm here to see some of our potential partners and customers.

Matthew: Revenue is up big time in Illinois, tax revenue, all kinds of cannabis revenue is up. I want to hear more about that. Give us an idea of what Agrify is on a high level.

Raymond: Matt, who we are, we are an indoor events cultivation partner. We offer vertical farming solutions that help our customers to achieve fundamentally four things, higher yield per square foot, higher consistency, higher quality, but doing so at the lowest cost of production. Our solution is uniquely designed. It's a very holistic approach that involves both the hardware and software. It's a fully integrated solutions to, again, help our customers to achieve the highest consistency, quality, yield, but doing so at the lowest possible cost.

Matthew: Raymond, can you share a bit about your background and journey and how you got into the cannabis space and came into Agrify?

Raymond: I've always been a serial entrepreneur. This is actually the fourth company that I got involved with. I started my career actually in the mid-'90s, essentially created the first broadband telecom service company in Asia that I took public on NASDAQ before dot com bubble. Afterwards I went out to China and created the first home shopping or TV shopping network in China. I had another listed company in Hong Kong in the automobile space. My career has always been using disruptive technology to really advance what I call a big opportunity.

How I got into Agrify, the cannabis industry, is that, first of all, I had firsthand witness of the medicinal benefits of cannabis through one of my family members. That's what really fascinated me to look more into the industry. Afterwards I went out to MJBizCon in 2018, and while there, what I saw was that there were a lot of solution providers, but everybody was what I call it looking at the solution from a silo perspective. For example, you got the lighting fixture companies, but they only care about the impact of lights on the plants, or you have people that only care about, for example, dehumidification.

When you actually talk to the growers and the cultivators, what I realize is that they're looking for a total integrated solution that just works. They don't want to worry about all these things. Thus providing them with an integrated solution is what I believe will be driving the future. That's what Agrify is all about.

Matthew: Paint a picture of what someone would see if they walked into a cannabis grow and there is Agrify VFUs or vertical farming units and a software installed, and the whole package is there. What would they see?

Raymond: They would see a fully automated solution that takes advantage of every inch of that square footage inside of any facility. If you actually walk into a typical cannabis grow facility today, you would immediately notice few things. One is that half of that vertical space is not being utilized. Most of the time the lights are hung from the ceiling. What that does is basically forces the plants to grow the stems because plants actually stretch towards the lights. Instead of actually using the energy to grow the nice flowers and buds, oftentimes he actually ends up growing the plants, in the stems and that's basically waste of energy resources.

What you also would notice is that typically you have multiple environmental pockets. Temperature, humidity are not going to be the same. There's also a huge [unintelligible [00:05:38] security risks. You're also going to see that people have to move the plants around a multiple number of times. Now with Agrify solution, first of all, every inch of that facility is stacked up with what we call, the vertical farming units. We take advantage of every single inch inside of our facility.

What's even more impressive is that each of these vertical farming unit, it's like a LEGO piece, but it's a customized LEGO piece so that, for example, temperature, humidity, light intensity, light spectrum, could be customized depending on the specific strain that you have inside of each of the VFUs, and also depending on the growth cycle. It's like allowing the growers to really dial it in so that they can produce the highest consistent crops, the highest quality crops at all time. That's really what you will see. It's an automated system that basically use less labor, but achieve higher yield, higher efficiency, and obviously better consistency and quality.

Matthew: What are the rough dimensions of a VFU or vertical farming unit?

Raymond: It's a four by eight by nine feet tall. It would take up, for example, a 32-square footprint. Given that there are actually two levels of grow space inside of each of VFUs, immediately it would turn 32-square footage to 64-square footage. However, these vertical farming units are actually stackable. A stall is actually three units. Literally, you could turn from a 32-square foot floor space to as much as six times the amount of grow spaces by stacking them up 3X. Three times two is six. That's essentially what excites most of the growers is that vertical extension going from as much as 6X, the amount of the grow space.

To be frank, we're not the first company to actually attempt to go vertical. Where I think most of the people make mistake are the followings. Number one is, when they go vertical, they forget that the environment changes. You're going to end up with stratification. Basically normally at the top, temperature is higher, airflow is probably better. What we basically do is we ensure that when we go vertical, we can still dial in the environment so that if you want it at, for example, 72 degree precisely, that's what we would deliver to you, 72 degrees.

The other big issue with going vertical is being able to provide a very productive, but safe working environment. Most of the people when they go vertical, they end up having to work with these [unintelligible [00:08:52] that frankly speaking are just not very safe and not very productive. We have a very unique solution so that when we go vertical, it's still a very safe and productive work environment. We introduce what we call a peripheral catwalk. These are all basically proprietary designed so that we solve the typical problems of environmental stratification productivity and also safety issues with going vertical.

Matthew: A lot of advantages there. Tell me, can you give an example of the return on an investment per square foot and how much more that would be than say a typical grow with just one tier that's just a big open space instead of a VFU?

Raymond: Basically, we have a customer here and this is a perfect case study. The customer had a 50,000 square feet facility. If they're doing one-tier grow obviously, you also need to have the back end, the dry room, the administrative offices and all that. Typically for a 50,000 square feet of facility, you probably only have about 16,000 or 18,000 square feet of cannabis grow space. You look at that, 50,000, but only 16 to 18 of the grow space is not very efficient use of that space.

Same with that customer, 50,000 square feet, by going vertical, we can actually increase the amount of cannabis square footage by as much as 3X to 4X. All of a sudden, you get 3X to 4X, the amount of grow space. What's even more impressive is even on a square foot basis, we can actually have as much as 1.6 to 1.7 times yield. All of a sudden, you go from 4X the amount of grow space, and then you multiply that by 1.6, 1.7, then you're looking at 6X to 7X return.

On top of that, because of the automation that we introduce into the system, actually, you get to have much lower OPEX. Overall, you get as much as 7X to 8X higher return on investment by using Agrify solutions. It's basically, just stack it up. It's first of all, 4X the amount of growth space, and then even on that square footage basis, you get 1.6X, 1.7X better yield, and then on top of that you get a much lower cost due to automation and, all of a sudden, your ROI is as much as 7X to 8X. It's a very, very impressive system.

Matthew: What's the range for a vertical farming unit? What do those go for if it's loaded with all your solutions in it?

Raymond: The hardware, we're selling it, it's about 20,000 per piece, but each of these vertical farming units could probably produce somewhere around 40 pounds of flowers on an annual basis. Let's call it $2,000 per pound, which is not on the high side, you would basically get $80,000 of production out of each of the VFUs. 20,000 investment and you get $80,000 back. That's a very, very good ROI.

Matthew: Are you seeing leaseback situations where companies are buying your units, and then they want to have someone buy the units from them and they can lease them back? Does that happen? Or not seeing that?

Raymond: No, we're actually financing some of our customers ourselves because we're a public-listed company, and we do have pretty decent balance sheets. Very recently, we launched what we call a total turnkey solution program, whereby essentially, we're leasing our units to our customers in return for-- we have a fixed software SAS component, but we also get a revenue share arrangement, so it's basically complete interest alignment. The more they produce, the better they are, and the better we are. That's the complete interest alignment there.

Matthew: That's a great business model, Raymond.

Raymond: Thank you.

Matthew: Good thing that you thought that out. Now, what is the SAS component there? We went over the cost for VFU, but what's the SAS component cost?

Raymond: We're only charging about $200 per VFU per month. Now, this is actually what we call the Agrify Insight, which is our complete suite of software and is really a ERP solution. What comes with it, first of all, basically, are these unique, proprietary, what we call the grow recipes so that it basically automatically sets the temperature, humidity, the entire environmental setting, throughout the entire growth cycle. It basically has AI to help you to continue to optimize that. That's basically is on the grow side.

It's also for example, for task management. Every day you show up at the facility, the manager would have, for example, 10 or 15 different plant-touching tasks already identified, and they will automatically assign these tasks to the workers. In fact, we have motion study that shows you that, "Hey, you know what? worker A is more productive in, for example, doing trimming, worker B may be better at doing, for example, task in the dry room, et cetera.

You would actually basically assign these tasks to the available worker of that day, and basically continue to do monitoring and also measure productivity. It's really a very, very advanced workflow management solutions, and it also has all kinds of business intelligence built in so that, for example, it helps you to meet all the compliance requirements on metrics, as well as getting third-party test results back from places like Confident Cannabis so that you know basically how good the production of the flowers are. It's a complete ERP solution that just basically makes the management of any cultivation facility that much easier.

Matthew: You think with the Agrify Insights-- All the variables are important because they work together in concert so you know the complete picture, but is there one or two variables that cultivators say, "Oh, now that I have this, this is so helpful to me"?

Raymond: Yes. In the past, a lot of these master growers, supposedly, they have these special grow recipes. It just happens by chance. Maybe one out of 10, or two out of 10, they get really this amazing harvest, but it's hard for them to really pinpoint exactly what happened during that growth cycle. We actually record everything going on inside of each vertical farming unit on a minute-by-minute basis.

You can actually go back and say, "Wow, this particular batch has basically 2% higher THC. Well, on day 57, I basically decided to increase the light intensity," or, "We actually increased the temperature and lowered the humidity between day 56 to day 59, and as a result of that little tweak, we got 2% higher THC." You could actually say, "Oh, wow, then, in that case, we should adopt this new growth plan for future production." Basically, it would produce the same exact result every single time because now you're putting the plans through a different grow plan.

It's basically a continuous optimization using AI, and to help the master growers to basically be better at what they're doing and also be able to go back and understand exactly what happened. That's really what makes the Agrify Insights so special.

Matthew: Were you surprised at all how your clients have adapted the units or your technology at all to their specific needs?

Raymond: Well, obviously, there's a learning curve, but for those that actually really embrace this technology, and appreciate the automation and the robustness of the data available. They continue to thrive, in fact, even more. We have a customer in Nevada, WhiteCloud Botanicals, and their flowers continue to be one of the best in the industry. They sell higher than basically average wholesale price in Nevada, and basically at a premium and getting into some of the highest-ranked dispensaries and have one of the highest sale force.

It's really beneficial for our customers to take advantage of everything that we offer to them and being able to repeat the same consistency and quality every single time. Ultimately, it's all about building brands. What you don't want to give customers is just volatility. You want them to basically enjoy your products and be able to basically come back for a repeat three peak purchases.

Matthew: Do you offer training? How do people get up to speed after they buy the VFUs?

Raymond: Yes, we have a training center in Massachusetts, we call it the Agrify University. Basically, every single customer of ours will go through basically a training, and that's a very intense three to four weeks training that we teach them everything about the hardware, everything about the software, basically, workflow, SOP, et cetera. It's a very comprehensive training to get people with a good jump-start.

Matthew: You can create a grow recipe that you can repeat over and over again, control the lighting, CO2 levels, all these different variables you can control so you get the same output over and over again, which is very helpful. Is there an opportunity to share recipes between clients? Or is everybody saying, "Hey, that's my special sauce, I'm not going to reveal that"?

Raymond: We column the data with our customers, but obviously, we respect the intellectual property behind it. What we encourage our customers to do is basically consider licensing opportunities. For example, if you are a single-estate operator in a state of let's take Massachusetts, and if you do really have a very special grow recipe, why not license it to a non-competing cultivation facility in let's call it New York, or Connecticut? Basically, we encourage our customers to consider these cross-licensing opportunities. We facilitate that, in fact, but we don't ever share the data with other customers because we have to respect the intellectual property and that's how we can grow.

Matthew: That's a great way for additional revenue streams especially if you don't plan on expanding to that stage or something like that. That's pretty cool.

Raymond: I think basically, our customers are taking advantage of that. Like this customer in Nevada, they could definitely license to, for example, another customer in Washington State or California. Actually, in fact, some of these MSOs, the advantage that we're giving them is they have a facility in Massachusetts that are really just doing excellently with, call it, purple punch, then basically, we'll replicate that recipe for basically their facility in Colorado, and it would have the exact same result because everything has gone through that same 75 or 80 days of grow cycle under the same grow environment.

Matthew: It's crazy. This is crazy how much this has changed over the years. You probably hire a lot of people. It sounds like you have a growing company. I get emails every day, people saying, "How do I get into this industry? I want to get in. I'm passionate about it." What are the skills you think are the most important to you when you're going out making hiring decisions now?

Raymond: I completely agree with you. In order for Agrify to continue to be successful, we need to really hire the best and train the best. We typically work with recruiters. We like to especially get people with industry knowledge, industry contacts, et cetera. Obviously, that comes with a huge advantage, but it's not a must. Obviously, if you already have industry contact, industry knowledge, that's a big plus. We also have seen basically, talents that had zero cannabis industry knowledge in the past but they're just still motivated to learn. It turned out to be [unintelligible [00:24:01] for example, top sales.

I think it's very important also internally to develop very, very good training programs. For example, we do training once a month on our latest VFUs. Basically, it's not just training the salespeople, the marketing people but even our finance, legal, et cetera because I want to build a culture where basically customers come first. Being able to relate to some of the challenges that our customers are facing is just so important. That's the mindset that I like to make sure that every single one of our employees has, which is customers are always right and they always come first.

Matthew: How do you think the growing tech in automation space in cannabis is going to change over the next three to five years?

Raymond: I think we're still, I would say, at the ground level. Obviously, what Agrify is doing it's on the cultivation site. There's still a lot more automation that we can bring to the table. As we collect more data, we're going to become even more intelligent and perhaps we're going to know that, "Hey, you know what? besides airflow, temperature, and humidity, light spectrum, light intensity, there's other things that we have not considered that are actually super important to the plants." We need to basically just continue to use data to get smarter.

Beyond just the cultivation site, if you look at any facility, right now, I think there's still a lot of inefficiency in the post-production. For example, a lot of space has been dedicated to drying. To me, it's a big, huge waste of space and it takes two weeks, 14 days. Can we use technology to shorten that? Can we improve the curing process? Can we improve the trimming, et cetera?

I think that we will still see more automation and more technology being developed to basically make this a more efficient process end-to-end. I also think that on the front end there may be some new breakthrough on the genetic side. For example, if you look at other crops like corn crossbreeding. Corn basically, there's been so much work that's been done on the genetic site that makes the corn grow cycle reduce as much as 60 days but tastes sweeter and more flavorful, and all that.

I think we're going to see something very similar with cannabis. I really believe that there's just been still very little research going into this beautiful plant species and I'd like to see more. We're going to see basically, new technology, new breakthrough, across the entire vertical chain.

Matthew: You mentioned there's a hardware component and a software component to your business. We just got an inflation print of 5.4%, I think, from the FEDS estimates today. We know there's a bifurcation between things that are getting cheaper and things that are getting more expensive. Do you see any kind of supply chain stresses or distortions causing price increases?

Raymond: Oh, yes. It's definitely also hitting the industry as well. I knew this was coming so we actually bought a lot of the key components ahead of time but some of the things that we did not expect, for example, right now, extrusion metals, because our vertical farming units are made of aluminum frame. Aluminum prices have gone out the roof. Even PVC pipings, everything, it is actually impacting everybody.

I think in the long run those things will eventually subside. What is actually most important is to help our cultivation partners to use automation to have lower production costs because right now, the industry is still looking at $450 to $500 per pound, obviously depending on what's included, but typically, it's around $450 to $500 per pound. I really believe that price needs to come down to maybe in the sub $250, $300 range because obviously, we're going to see price depression. Overall for this industry to thrive, I really think that the price per pound needs to get down to the 200, maybe even sub 200 range to have long-term sustainability.

Matthew: Raymond, I'd like to ask a few personal development questions to help the listeners get a better sense of who you are personally. Is there a book that's had a big impact on your life or way of thinking that you'd like to share?

Raymond: Yes. Some of my favorite books include the Three Kingdoms, The Art of War, and also even, for example, Lean Startup. The Three Kindgoms was very interesting because it talks about human nature. [chuckles] It also talks about what happens when you get into a conflict situation, not only on a one-to-one basis but one-to-many. That was something that I really, really enjoyed.

The Art of War, obviously, again, dealing with human nature, talks about how to have these personal relations and also just in a conflict situation, how you get into a negotiation, most prepare, and et cetera. Obviously, Lean Startup because what I actually enjoy is basically building company from scratch. All of these things actually have made a huge impact in my life.

Matthew: Now, one of the big themes of The Lean Startup is this idea of a minimum viable product or MVP. Did you create an MVP for Agrify to test or see if customers would buy?

Raymond: Yes. Obviously, I would say the 3-6 is probably the reiteration of multiple rounds of MVP products. Every time we want to introduce a new feature, we go into MVP first, we test it out, we make sure that it delivers what it promises to deliver. Sometimes maybe it's an overkill, maybe sometimes it's not sufficient. The only thing you're going to know is basically put it out there, get customers' feedback.

The other thing is that you also have to be completely transparent with the customer, you got to build the right expectation from day one. You don't want to over-promise. You want to let them know that, "Hey, this is an early MVP. We'd like to get your feedback. Don't expect it to work perfectly from day one. This is continuous investment, continuous reiteration towards excellence."

Matthew: Build, measure, learn, that's the attitude with your MVP. That's how you make it better, better. Do I have that right? Build, measure, learn, I think that's the MVP-

Raymond: You're absolutely right. You're absolutely right.

Matthew: Second question. What is your favorite unhealthy comfort food, Raymond?

Raymond: Unhealthy.

[laughter]

I love ice cream. My children always tease me about it as well. I have very sweet teeth. Sometimes I just can't help it, but I especially love ice cream.

Matthew: What flavor and brand? Let's get specific here.

Raymond: Oh, everything, trust me. Typically, sometimes when we go on these road trips, I would look it up and say, "Hey, what are some of the local best favorite restaurant, best shops are?" I would drive miles and just to have a taste.

[laughter]

Matthew: What is one aspect of the cannabis industry that you feel is really important but perhaps the public is not appreciating how big or important it's going to be?

Raymond: I really believe that this industry just like all the other consumer stable industry, it's going to-- Consistency and quality, it's going to really make a difference in the future. As I typically like to say, we're hoping to Pepsify this industry. What that means is every time when you open up a can of Pepsi, it tastes exactly the same, and that's what we're hoping to deliver. It's just that once you figured out the optimal grow recipe, let's repeat it so that consumers can expect to have the same results every single time.

Matthew: That is a huge expectation because once a consumer finds something that really scratches their itch, they'll bolt to a different brand if you can't deliver that over and over.

Raymond: You're absolutely right. For any brands to thrive, it's especially important to pay attention to just being able to deliver consistency and quality over and over and over. That's what we want to focus on.

Matthew: Awesome. Raymond, thanks so much for coming on the show today. We really appreciate it. You're a publicly listed company. How can people find your stock ticker, and how can they connect with you if they're interested in learning more about what you do?

Raymond: Our ticker is AGFY. We're listed on National Stock Exchange, again, under the symbol of AGFY. If any investor or customer has any questions, basically you can just reach us at info@agrify.com or investor@agrify.com and we're always here to help. Matt, thank you so much for inviting me to your show. I enjoy it so much and I look forward to stay in touch.

[music]

Matthew: If you enjoyed the show today, please consider leaving us a review on iTunes, Stitcher, or whatever app you might be using to listen to the show. Every five-star review helps us to bring the best guests to you. Learn more at cannainsider.com/itunes. What are the five disruptive trends that will impact the cannabis industry in the next five years? Find out with your free report at cannainsider.com/trends.

Have a suggestion for an awesome guest on CannaInsider? Simply send us an email at feedback@cannainsider.com. We'd love to hear from you. Please do not take any information from CannaInsider or its guests as medical advice. Contact your licensed physician before taking cannabis or using it for medical treatments. Emotional consideration may be provided by select guests, advertisers, or companies featured in CannaInsider.

Lastly, the host or guest on CannaInsider may or may not invest in the companies entrepreneurs profiled on the show. Please consult your licensed financial advisor before making any investment decisions. Final disclosure to see if you're still paying attention, this little whistle jingle you're listening to we'll get stuck in your head for the rest of the day. Thanks for listening and look for another CannaInsider episode soon. Take care. Bye-bye.

[00:36:44] [END OF AUDIO]