NASDAQ-traded, Massachusetts-based Agrify Corporation (AGFY) calls itself a “vertically integrated provider of premium cultivation and extraction solutions for the cannabis and hemp industry,” but that description, apt as it may be, only tells part of the story of this multilayered company whose biggest moves of late are as lateral as they are vertical. As Agrify founder and CEO Raymond Chang explained during an interview with CBE in the aftermath of its successful sophomore appearance at MJBizCon, the company’s recent acquisition of Precision Extraction Solutions and Cascade Science, aka Sinclair Scientific, adds a unique combination of scale and opportunity to Agrify’s already disruptively tech-based, ancillary business model. It is a development that in a way was presaged by Chang’s entrance into the cannabis industry three years ago.
“I got into the cannabis space through first-hand witness of the medicinal benefits of cannabis for one of my family members, and that got me fascinated with the plant,” he recalled. “I went to MJBizCon in 2018, not knowing anybody in the industry – I just decided to visit the show – and while I was there, I realized that everybody was selling piecemeal solutions. What I mean by that is that I think that year probably had like 50 or 60 light vendors. This year, there were definitely much less, but that year LED lights were one of the major pushes, and the solutions were all very similar. Obviously, you had the big brands like Fluence and Gavita, but at the same time there was not much differentiation. But when you talk to the operators, you realize that lighting, for example, is just one of the maybe 12 factors that matter to the plant. In fact, people will overemphasize lighting and ignore everything else, but it’s probably harder to control the [plant] environment – the humidity, temperature, and environmental control – than it is the LED lighting. And so, what I realized from that was that you really need to solve cultivation in a holistic way. When you talk to the cultivators, they want to be able to have precise control over the entire process, but there were no tools available to them to do exactly that. As a result, people treat this more as an art rather than a science, and that’s why you have so much inconsistency in the industry today.”
A serial entrepreneur, Chang’s first venture in the mid-90s revealed a talent for business if not the best timing. “We essentially created the first broadband telecom company in Asia,” he said. “We took the company public on NASDAQ, Microsoft invested in [it], and in fact in 2000, we had the biggest IPO of a foreign company on NASDAQ to date. We raised about $300 million, but two months after we went public, the dot com bubble just kind of evaporated everything. The company is still around and still trades on NASDAQ, but 30 years later it is obviously very different from what it used to be. Nevertheless, we were one of the few survivors.”
Despite not having much of a tech background, technology underpins all of Chang’s ventures. “I obviously know enough to be dangerous, but I really tackle problem-solving and being a leader and innovator ahead of the curve,” he said. “So, in 2004, I went to China. I had seen the fast rise of consumer spending there, and I wanted to basically tackle the remote tier-three, tier-four cities of China, because I thought at the time that they were the fastest growing part of the economy. What I actually realized was that television was ubiquitous, even back then, because the Chinese government used it as a propaganda tool. So, I thought, okay, this is interesting, and I launched the first 24-hour television home shopping network in China. We had a joint venture with a state-owned television company, and we launched it and it was an immediate success. The first year, we did over $150 million, and it kind of took off from there. In any event, I did a bunch of interesting startups like that, but what I learned throughout my career is solving big problems, using technology and data to disrupt, and I kind of rolled on that success.”
It also was no accident that Chang targeted cultivation as the first place to focus his energies. “The reason why you start with cultivation is because the quality of the biomass is what actually determines what gets on the shelf, and you need to start from the basics, from the ground level,” he explained. “Without being able to control the quality of the biomass coming in, you wouldn’t be able to elevate this industry.
“I got attached to Agrify because the predecessor to Agrify, a company called TriGrow, had a small booth [at MJBizCon], and they had these interesting grow racks that were able to automate and allow you to control the environment better,” he continued. “I thought that was a very interesting approach, and so basically I started having conversations with them. Later, I realized that they did not own the [grow rack] IP, which belonged to another company, and they were the exclusive distributor. So, we went to the original IP holder and essentially bought the company, subsequently folded TriGrow in so we would own the IP and distribution rights, renamed it Agrify, and recruited a bunch of engineering and software talent.”
The TriGrow team had “good ideas and had solved maybe 10 or 20 percent of the puzzles, and we were able to very quickly kind of build from there,” added Chang. “By the end of 2019, early 2020, we went out to the markets with our early prototype, got feedback from the customers, and have continued to improve ever since.”
In addition to hiring the right people and gathering the resources necessary to build on the work TriGrow had already accomplished, Chang set to work incorporating a business model designed to drive the company forward. “A lot of times, with a lot of young entrepreneurs, their mistake is that they try to perfect the technology without thinking about the importance of having the right business model and go-to-market strategy,” he explained. “For example, when TriGrow was distributing these products, the way that it tried to position it was, ‘Okay, you can go to market quicker and cheaper,’ and as a result they did have some early traction, but the truth is that that is not the real value proposition of our solutions. We are not necessarily cheaper to roll out, but we have the ability to provide you with higher yield on a square foot basis. We can help any facility go from square-foot calculations to cubic-feet calculation, thus increasing the amount of square footage, and more importantly, we can help you to produce the highest quality products consistently at the lowest possible cost. Again, it’s all about understanding what problems you’re addressing, making sure to deliver on that, and having a sustainable and robust business model behind it, and those are the teams who execute. And I think that’s where I add value. Was I the original inventor of the ideas? I was not. They had the bones. But what I was able to do is to take that 20 percent of the puzzle and bring it to 90-100% percent, and then actually scale and build a sustainable business from there.”
Agrify exemplifies an evolving type of ancillary service that provides so much more than picks and shovels (or lights and HVAC). Now, it’s all about end-to-end solutions that are mechanical, digital, and sometimes financial. I asked Chang how he sees the evolution of the ancillary cannabis industry, and his role in that evolution. “Obviously, the industry was illegal for the longest period of time, and people were growing at a small scale in the basement, garages, and all that, and for the people that were involved in industry very early on, frankly speaking, it was more of an art form rather than using science or data or tech to grow at scale,” he responded. “When the industry started to realize that lighting is important, LED immediately became the hot topic, but later on people learned that we’re dealing with plants and that lighting alone doesn’t solve it. Environmental issues are also super important; it’s impossible to control the temperature, they thought humidity was important, which it is, and then they realized that it’s not just about temperature and humidity. There’s also airflow, Co2, and nutrients; there’s also the fertigation schedule, and it’s not just lights, but light spectrum, light intensity. And these are not regular plants; these are plants with several hundred chemical cannabinoids, and depending on the environment, genetics determines what is possible, but it’s really the environment that determines the outcome. You could have the same exact cuts from the same mother plant, and if you put them in two different environments, they’ll come up completely different. One has 17 percent THC, and the other one has 23-24-25 percent THC. It’s very important to understand what the plants need, and deliver that high level of consistency and quality, because in the end, what consumers look for is the same exact experience every time.
“Look at the industry today,” he continued. “My chief science officer was [speaking on a panel] up in Michigan, and one of the questions posed to the panelists was, ‘Why is it that we get a lot of repeat customers, but very rarely three- or four-peats?’ And the reason is that consumers try the product once, they like it, and when they go back for a second try it tastes completely different, and guess what happens? They switch. It’s kind of like if I want to drink wine, and I really like Opus One. I have that [Opus One] experience, and I expect to have a very similar feel and taste the second, third, and fourth time around. But right now, in the cannabis industry, consistency is a huge problem, and it’s more about how you grow the plant and less about the genetics. And again, the genetics determines what is possible, but if you put the plants through different growth cycles every single time, you’re going to have huge variability in the results. So, our system is kind of like a vending machine. With one push of a button, the plants will go through the same growth cycle. For example, if you’re growing Purple Punch and you want to intensify the red spectrum five percent per day from day 57 to day 75, because that is what brings out the nice purple color, but you only want to do it at increments of five percent per day at a temperature of 74-75 degrees and humidity of, say, 60 percent, we will deliver that every single time on a repeatable process.
“The end result, and this is this is really quite amazing…if you look at one of our customers, the cannabinoid variability is less than 1 percent; terpene is actually less than 1/10 of a percent, and we’re talking about multiple strains, multiple genetics over multiple harvest batches,” he summed up. “In a lot of the industry today, you will easily see a 15 to 29 percent swing in THC, and the terpenes could be as low as 1 percent to as much as 5 percent, depending on whether the master grower just happened to be tweaking something by accident. We remove that entire variability out of the equation. That’s really what it is, bringing the next level of consistency and quality to the industry. That’s solving problem number one, and then on top of that we also help them to increase productivity and yield. Instead of being able to grow at one level on a square-foot basis, on pounds per square foot, we say, first of all, you’re in the building, so let’s turn the calculation into cubic-feet calculation, and let’s go vertical, and by doing so we increase the amount of grow spaces and maximize the yield on the square-foot basis, so you get the maximum output. But, in preparation for eventual federal deregulation, you also have to be able to produce at the lowest possible cost, and how you do that is through automation that helps you reduce human error, and that is what the system does; it increases yield on a square foot basis. Because it’s stackable, it becomes a cubic-feet calculation, and because of all the automation that we’re introducing, we are able to help our customers produce at scale, but also at the lowest possible cost.”
Music to MSO Ears
I realized Chang was listing off all of the key words cited by the CEOs of the MSOs in our interviews as being the Holy Grail of their brand strategy: consistency, lowest cost, highest quality. It was all there, and I asked Chang if that explained the spate of deals Agrify had closed in a relatively short period of time. “When I took over the company in 2019, we had early adopters, and early customers in 2020, ” he said. “By the end of 2020, early-2021, we had some pretty amazing data from those earlier projects that we were able to show to other potential prospects.
“For example,” he continued, “the consistency results I just mentioned – within a one percent swing over 10 or 12 harvest batches – is unheard of in the industry today. To be able to control and dial-in terpenes so that it is less than 1/10 of a point over 10-12 harvest batches? Unheard of. But we have that data, and we also now have data that shows that if you double-stack, and, if you have high enough ceilings, you triple stack, you can actually get as much as five or six times the amount of yield. And we now also have data to show that while the industry is probably around $450 to $500 per pound, with our system it’s hitting $320 per pound. We have very robust data, and we are now able to sit in front of our customers, run these models, and we prove it to them, especially with the MSOs. You’re absolutely correct, but nobody wants to be the first, and that’s why I went straight to the top, to Curaleaf, one of the biggest MSOs. It’s instant credibility. We went there and we convinced the hardest one because they’re one of the biggest, and once you have the first one, I can tell you the floodgates open. Right now, I am in conversations with close to 20 different MSOs, and simultaneously, we’re solving one of the biggest problems in the industry today, which is access to capital. Now that we have strong balances, we have the ability to not only give our customers a turnkey solution, but also help them to creatively finance each project build-out. How can you say no?”
The turnkey solution basically involves becoming partners with other plant-touching companies in the space but staying away from the plants themselves.” First of all, we’re very careful to be completely non-plant-touching,” said Chang. “Essentially, we empower our customers and give them all the tools – all the analytical tools and as well as the cultivation tools – to do their business well, and we help them monitor everything that’s going on inside that facility, even as far as when to have plant-touching tasks. Who’s doing it? Is the person being productive? For example, for the same plant-touching task, if one of your workers actually finishes in 30 minutes, and the other person takes two hours, we immediately come up with a report and tell you that there’s a big discrepancy between the two.
“It’s part of our Agrify Insight [software],” he continued. “To further that example, the next time around, we basically classify your workers and assign them to what they actually specialize in, to increase your overall productivity, versus right now, where in most cultivation facilities the managers tell somebody to go and do something on pretty much an ad hoc basis. So, again, it’s using tech, science, and data, to push it to the next level, and we bring the capital to help our customers build out very quickly and give them the complete turnkey solution. As a result, we share part of the upside, and we get paid by the pound.”
It seems to be a rather ingenious arrangement. “It’s a complete interest alignment,” Chang added, “because we get paid by the pound, so we’re incentivized to help them to increase yield, because ultimately that’s how you get measured. It’s how much production you can generate out of that facility and being able to sell it at the highest possible prices. But we give you all tools. For example, when we ship it comes with hundreds of grow recipes. We basically tell you, look, you can put 95 to 98 percent of your varietals into production right away. If you want to grow Lemon Haze, we already have the growth optimized with one push of a button, and it will give you this type of result. But we can also empower the master grower, so if he or she wants to tweak the formula, they can. But you shouldn’t have to devote the entire room to R&D. If you have 100 varieties, maybe play around only with five, but the rest of it should just be left alone.”
Master growers are not essential for success, however, and could even get in the way. “One thing that we are confident that we bring to the table is that we can help you produce maximum high-quality cannabis products,” explained Chang. “So, I don’t need you to have the best master grower. In fact, we’d rather train somebody from scratch, somebody that doesn’t come with prior baggage, because doing it our way, frankly, is very different from doing it the traditional way. Producing good quality cannabis flowers using our solution is kind of like a given, so when we actually select our partners, we sit down with them and ask, ‘Do you have a sales and marketing and distribution strategy? You don’t have to worry about not having enough good-quality flower to sell, but you need to prove to us that you have a strategy.’ I’ll take an agreement that you can unload flower at an attractive price, otherwise we’re going to get stuck. And when you have a situation where demand is more than supply, it’s not a problem, but eventually we will need to know if you can build your brand. Do you have dispensaries? Do you have a distribution network? It’s no longer about production, but sales and marketing and distribution.”
Holding a license also would seem to be a prerequisite for partnership. “Exactly,” said Chang. “When we select our partners, that is the first question we ask. What are your sales and marketing and distribution strategies? If they can’t really articulate that, then frankly, they’re not the right partner for us. We know we can take care of cultivation, but we have to make sure that they can actually sell these products.
“With the MSOs, they have the dispensaries, the distributions, their own marketing experts in-house, and all that,” he continued. “For them, it’s all about what products do they want to make, and that’s why we’re getting into the extraction processing side as well. It’s like, okay, how do you plan to fill your shelf space? Are you only selling dried flower, or are you looking at cannabis 2.0 products? How can we help you to basically go beyond dry flower into extraction so that ultimately you’re going to be able to stock your shelves with the right amount of cannabis 1.0 product as well 2.0 products?”
I mentioned that these rev-share partnerships still seem to have Agrify tiptoeing up to the line of plant touching without going over it, a neat trick as long as it meets with regulatory approval. “We’re basically coming as close as we possibly can [to the line], and we obviously double-check with NASDAQ and all the regulators,” said Chang. “Basically, we said, how we can draw the fine line? We cannot be doing any of the plant touching activities directly. Fine, I said; none of our employees is allowed to touch any plants. How far can we get involved with the business of our partners? You cannot be an equity owner, you cannot control the operations, and you have to leave decisions to them. But we did challenge them, and asked, can we enjoy part of the upside as a solution provider? Of course, anyone can do that! So, it’s really understanding what is the maximum involvement that we could get to without crossing the line, and we worked backwards and said to ourselves, based on this what can we bring to the table?”
The answer to that question goes to the core of Agrify’s ambitions for itself and for the industry. The Precision Extraction Solutions and Cascade Science acquisition may point the way, but Chang sees no limit to the opportunities before him. “I realized that cannabis 2.0 products are gaining traction in popularity, and in fact, a lot of the new adopters don’t want to smoke flower,” he explained. “They don’t like the experience, but they don’t mind having a little bit of tincture or some gummies. It’s a much easier sort of adoption versus the traditional smoking of flower. That said, the industry today has huge problems, because if you think about it, extraction is nothing but a more concentrated process. If you’re actually starting out buying biomass, or not being able to produce consistent biomass, guess what happens? The extraction process makes the problem ten times worse, and depending on who is operating the extraction machine, it’s going to come up very different every time. And that’s the reason why we want to turn every single extraction hardware into what I call intelligent hardware that we can monetize in a monitor and standardize, so that ultimately, we can say, look, based on the quality of this input, the setting should be at Y, and you should do it for only 23 minutes using this type of solvent at a pressure of Z, and that’s how you’re going to get the best quality and most consistent result.
I asked about the competition, including other ancillary companies that start out from totally different places but are now headed in the same full-service, if not turnkey, direction as Agrify. “It’s becoming obvious that this is the trend, but I think we are all starting from a very different level,” he said. “Frankly, I would say that right now, we have the most vertically integrated and holistic solution offering out there. I believe we are maybe 24 months ahead of everyone else, but obviously we can’t stand still, and that’s the reason why we said that being the best in cultivation is nice, but we have to get into the extraction side. And it’s not just extraction; we need to get into product manufacturing, we need to potentially get into packaging, and that’s going downstream. What about our upstream? Drying and curing. We need to look at maybe doing a partnership with a genetics company, because ultimately what we want to do is to own that grow recipe. Again, I think it’s everybody’s job to figure out what the industry or the customers need and the best way to provide the solutions, and hopefully vertically integrated solutions, so it makes it easy and delivers on what the consumers want.”
Wall Street also is high on the Agrify business model and its performance of late, rewarding the company with a relatively enviable price point and very favorable projections. I asked Chang how he plans to handle his balance sheet over the next year or so. “Obviously, we need to continue to invest money in R&D, and also new solutions offerings, but I think we have 80 or 90 percent of the pieces of the puzzle already in place, and we will probably fill the gap internally, but maybe also through acquisitions,” he replied. “I’m not worried on the MSO side, because they typically show up with cash and purchase our equipment. Where we actually need to use our balance sheet is when we help customers build out their facilities, but what is actually very encouraging is the fact that now that we have one or two of these deals signed, if we can actually prove out that these models really work, the returns are phenomenal. So already, just this morning, for example, I had a huge financing company in my office, and they said, ‘Look, how much of a credit line do you need? We’re happy to finance every single Agrify build out.’
“So, I think we’re going to be able to essentially provide debt financing, and we won’t even always carry that on our balance sheet, because the REITs will most likely take care of the construction aspects of it,” he added. “And in fact, for our hardware I could apply those to any of the commercial banks and basically say, give me a line of credit against these boxes because the cash generation out of them is just incredible. So, I think we’ve gotten to a point now that we don’t really need to raise a lot of capital, because we should be able to tap into debt and other financing options to really grow.”
A Q3 2021 earnings call held after our phone call underscored that point, as well as the industry’s continued embrace of Agrify. Highlights included 460 percent annual revenue growth, 33 percent quarter-over-quarter revenue growth, $118 million in backlog orders, and the culmination of important partnerships, including a signed TTK (Total Turnkey) agreement with Massachusetts-based True House Cannabis, a multi-year R&D agreement with Curaleaf, an expanded engagement with Nevada-based WhiteCloud Botanicals, and obtaining a hemp license and opening a new cultivation and production R&D facility, product showcase, and corporate office in Billerica, Massachusetts, as well as the launch of Agrify University, “a state-of-the-art indoor vertical farming facility and project-based learning program featuring Agrify’s latest technology and advanced cultivation methods for in-classroom and on-demand learning options.”
Before we ended our call, I asked Chang if he is open to being acquired, because his would seem to be the type of surefooted cannabis venture that would be first in line for a record offer from some conservative mega-corp. “My goal is to deliver the maximum long-term shareholder value, and I believe we have all the pieces to do that,” he said. “I don’t want to talk Agrify up too much, but I am confident that we will be one of the most domineering and best-performing cannabis companies in the industry.”