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Prodigy Processing Solution could be seen as the cannabis second act for founder and CEO Marc Beginin, an attorney and entrepreneur who founded a similar company, Precision Extraction Solutions, in 2014 before it was sold to Agrify in October 2021 against his wishes. Discontented with the deal and wary of Precision’s future under Agrify’s direction, Beginin attempted a hostile takeover of Precision in November of last year. But he also had begun the arduous process of raising a new company from the ashes of his previous venture, and last month, nearly two years after the sale of Precision to Agrify, Beginin announced the official launch of Miami, Florida-based Prodigy Processing Solutions. As he explained during a recent call with Cannabis Business Executive, Prodigy is taking the success he created at Precision to a whole new level.
“I have eight years of lessons learned with Precision,” said Beginin when asked if the experience with Agrify was relevant to the operation of Prodigy. “Just don’t do what Agrify is doing. We built a successful company, and we were very customer-centric with Precision, just like we will be with Prodigy. That’s the most important thing and being good to your customers and your employees.”
In terms of its effect going forward, however, Beginin expressed little concern. “It impacts me and my company because it’s a competitor,” he said, “but even as a competitor, they’ve basically damaged their own business to our benefit, so as competitor, they’re not being very competitive.”
There was one last hitch, he added.. “Currently, we’re in litigation with Agrify over the holdback from the acquisition,” he added. “I don’t think anybody knows about it yet, but that’s what’s happening.
The suit was filed about four months ago, he said. “There was an 18-month holdback of 15 percent of the consideration for the acquisition, which was October 1, 2021,” he explained. “That put it on April 1 of 2023, and it’s a lot of money. $5.1 million cash. So, the saga continues.”
But whatever the outcome of that action, Prodigy has opened its doors with two additional announcements that it believes will profoundly differentiate it in the market: the unveiling of its flagship product, the ProX Hydrocarbon Extractor, and in associated news, its manufacturing partnership with Mitchell, an Ohio-based “leader in fabrication and modularization of process piping, pressure vessels, and structural steel.”
These are not the only advantages Prodigy has over its predecessor and its competition, said Beginin, whose experience paved the way for today. “We are so lean,” he said of Prodigy. “It’s essentially a rinse repeat of the last business but with better technology; some of the same people and also brand-new ones that are amazing; plus, some old suppliers and some brand-new ones.
“So, when I say eight years of lessons learned,” he added, “it’s really a thing. Getting into the business back in 2014, I didn’t really know much of anything about manufacturing or managing a large number of people or dealing with suppliers, or pretty much anything that is required for this business in this industry. So, coming in now, it’s a lot less tedious and a lot less expensive. We have a very lean, efficient operation, which makes us highly competitive.”
The most significant difference was the new partnership with Mitchell Fabricators, which is owned by industry veteran Scott Mitchell, and was instrumental in the design and manufacturing of the ProX extraction system, which Beginin called “an evolution and a massive step forward in technology.’
There is, he added, nothing like it on the market. “The ease of use, the materials used, the quality of manufacturing,” he enthused. “The fact that this is rated to negative 300 degrees is a testament to what went into it. Nothing is rated that low. Our recommended operational temperature is negative 100 degrees Fahrenheit, and that eliminates the need for winterization, which will add 12 to 24 hours-plus to the process. So, the machine is much faster, much more efficient, with a much quicker ROI for our customers. It’s also rated to use 10 different solvents, I believe. (The actual number is 14 solvents.) And it’s certified by PSI (Pressure Safety Inspectors), a third-party engineering firm that certifies these machines for use in the United States, so it’s certified in all 50 states.
Staying Connected
“The theme here is everything is connected,” added Beginin. “Mitchell is a partner of Prodigy, so we don’t need a warehouse. They’re doing all the final assembly tests, so we don’t need a warehouse manager, or assistant warehouse manager, or shipping and receiving, and we don’t need 10 guys in the warehouse putting everything together or doing quality control. They have all of that built into their operations with 50-plus years of experience, which means our operational expenses are lower than they ever were with Precision or any of our competitors. We are far more competitive because we are so efficient.”
The ProX itself is also a differentiated product, insisted Beginin. “The system was designed by operators for operators,” he explained. “A lot of other systems were designed like a NASCAR racing car where the engineers build a car, but they don’t talk to the driver. We have the drivers involved in this, so there are things as simple as connections or wires to increase the flow of the solvent through the material, which is a massive advancement. Inline chromatography has been done, but we have it on all of our material columns.
“We’re also doing what’s called recovery of the solvent,” he added. “In layman’s terms, there is passive operation and active; the only difference being that active requires the use of a recovery pumper gas compressor. Without that, you’re doing 7.5 pounds a minute of solvent recovery, which is faster than most active recovery. You can also tack-on the recovery pump to our system, and then you’re doing over 12.5 pounds per minute of solvent recovery. It’s a big step forward in terms of technology, and it’s designed as batch, meaning you have to fill these columns, but it’s continuous batch, so while you’re using some, you’re replacing the others, and keep switching, switching, switching. It’s the speed of the operation, and it’s easy to use because it was designed by operators.”
I asked Beginin if the fabricators sit around with their big brains thinking about ways to improve existing machines and also ideas for new machines? “We’re constantly innovating,” he replied excitedly. “We are on our way to a fully automated continuous system. That’s where you put in a hopper on one end and the liquid comes out on the other side.”
It occurred to me that artificial intelligence could come in handy here. “AI would have a place in the development of the technology,” agreed Beginin, “but it’s not going to build it. A lot of the information out there on how these things operate is not in the public domain, so we’d have to feed it that information. But ultimately, operating it in a continuous fashion that’s automated, you need to input the chemical composition of the input material for the cannabis. How much THC and CBD, terpene profile, this and that, and then the machine would know, ‘Hey, we need this much solvent-to-biomass ratio, we need this much pressure, and this temperature; all of that would be automated and AI can make that happen faster than you can code it in advance.”
Was such software work part of the Prodigy business? “It’s definitely part of Prodigy’s business model, and we would also work with third parties to facilitate that,” said Beginin. “I love AI, but we’re not experts at it. Mitchell is an expert fabricator, designer, and builder, but they’re not AI either.”
Working with third parties is one of the big changes from the previous go-round. “We have 20 employees,” said Beginin. “Precision had 66, and we’re good in terms of marketing, sales, and tech support.”
A perusal of Prodigy’s website and the services it provides shows a list that, in addition to sales of extraction equipment, includes such things as lab planning and design, installation and training, and ROI optimization and support, which sounded hands-on and labor-intensive.
“With lab planning and design,” explained Beginin, “we had an in-house architectural design team with Precision, whereas now we partner with third-party architectural and MEP firms that handle this for us, and with a construction company that works in all 48 contiguous states. These are all third parties that we supervise and work with for our clients’ benefit. So, it’s not internal.”
Neither is the company hiring, for now. “We anticipate another growth spurt in approximately six to nine months,” he said. “That’s when we’ll be doing more hiring. Some of our current people are independent contractors that work just with us, so we would also be bringing in these people full-time as well.”
Prodigy also offers a slew of ancillary parts and equipment as a distributor. “We have our flagship product – the Pro X – which is very versatile and scalable,” said Beginin. “You can do 80 pounds a run – eight of these columns, each one 10 pounds – but somebody that wants to start with 40 pounds can just get four columns, save some money, and grow into the 80 pounds. So, Prodigy will have a handful of proprietary goods, and then we will work with quality suppliers on the other things. Now, if somebody wants an ethanol system, for example, we know how to do that. We work with ethanol suppliers, and we integrate it for the customer.”
Extraction Experts
Think of Prodigy as your friendly extraction expert who outsources when necessary. “There are labs out there that are just patently inefficient,” said Beginin. “I know this from my history, so we come in for free, do an assessment on their lab, say, ‘This is how you can make it better.’ If they want to get into other products, we come back with a report that says, ‘This is what you need to do. Can we help you do it?’”
Of course, the realities of the marketplace determine the health of the sector, and in extraction, demand is not what it was or apparently what it will be as conditions improve. “Demand is slow because there was this big shakeout depending on the state,” said Beginin. “In Oklahoma and Michigan, for example, competition was fierce because of the number of licenses, and prices tanked for cannabis. That was actually a windfall for a lot of processors because they bought their input material very cheap. It’s like if the price of chocolate goes down, the price of a Snickers bar stays about the same. That said, in any industry there are people who outcompete the other guy, so there’s been somewhat of a shakeup because of that on the processing side, which also resulted in a lot of used equipment on the market.
“But more states are coming online in terms of medicinal recreational,” he added, “so there are more purchasers out there, and technology is getting better, particularly for us with this 316L, pharmaceutical-grade, stainless steel, made in the USA. You want to use that because the quality of the material and the workmanship isn’t just for the safety of the operator, people, and property, but also for the safety of the consumer. If you don’t have the right metal and you’re using caustic substances, you could have metal leaching. We don’t have issues with that because of the steel. The quality doesn’t get any higher, so as the industry has gotten more sophisticated, it’s less like running a garage and buying whatever is needed to fix the ‘67 Chevy.
“This is a business,” he continued, “and people who are serious about the business are buying the right equipment. In terms of quantity, large processing is not designed for hobbyists or for small operators. It’s designed for sophisticated operators who are serious about the business and intend on growing, and that’s what it does. So, as we launched the business a few months ago with a website and a soft launch, we ended up getting a lot of leads. And the thing was, it wasn’t let’s just chat, because we were offering a product that is needed. Nobody else has it, and people are frustrated with the current offerings that are out there.”
With credit tight or too expensive, were people increasingly unable to afford this equipment? We had noticed that here was a lot of used extraction equipment for sale. “It’s not high quality,” he said of the alternatives. “It’s Chinese. You don’t know the quality of the metal, and you’d have to recertify it if you’re going to run a legal operation. Everything needs to be certified for every regulated state and jurisdiction, and for any nation that I’m aware of.”
Was this a regular conversation being had with operators tempted to cut corners? “The customer that’s going to cut corners is not our customer,” responded Beginin. “They’re somebody else’s customer, or they can buy used equipment, which they’ll need to certify anyway. But for the people that are our customers, we offer a buyback program. We’ll buy it back, so they don’t have to throw it in the dumpster or try to sell it, because it’s really hard to sell that stuff. We’ll also buy competitors’ equipment as an incentive for the customer to replace it with Prodigy equipment. In addition, we also offer financing through third parties, but we will directly buy back existing equipment, which means we can lower their entry costs into better equipment.”
As far as how many machines Prodigy plans to sell in a given period, its expectations are commensurate with the product. “A lot of equipment companies that are in this space have 10-pound and 20-pound extractors, and ours is 80 pounds, and runs almost twice as fast as any competitor,” said Beginin. “So, it just doesn’t exist, and we’re going to sell a lot fewer than the 10-pound machines.”
I noted that a BCC Research article from October had predicted that the global cannabis extraction market will reach $3.7 billion by 2027, with compound annual growth of 16 percent between 2022 and 2027. I asked Beginin where that growth will come from.
“Additional states are being brought online, more people are learning about the benefits of cannabis, and the market is growing for lots of reasons,” he replied. And the illegal market is also thriving, certainly in states like California that over-tax and over-regulate, but also in places that are coming online, like New York.
“It’s huge,” he added. “What a massive market we’re looking at coming online right now, and they have some of the experience of the other states, so we’re going to see a lot of really big growth coming into New York.”
Considering a market like that, I asked Beginin if Prodigy’s future customers will be a mix of expanding MSOs and large independent producers new to the industry. “You nailed it,” he said. “It’s the publicly traded MSOs and new entrants that are operating a business like a business, so sophisticated, committed businesspeople. And you can only have so many dispensaries without any product, so it’s coming, and it has to because they need the supply. But there are thousands of processors out there, so thousands of people who use this kind of equipment are growing. But Prodigy is not selling a bunch of monitors and widgets to thousands of customers. We’re selling a handful to scores. So, those thousands are not all our customers. We will have lower volume, but higher-quality customers.”
Will revenue growth for Prodigy come from new customers or maintaining remunerative long-term relationships with producers? “We look on all of our customers as long-term relationships, so we’ll grow with them,” said Beginin. “Our success is built on their success, period. We need them to succeed, and obviously, they need to succeed themselves, so these are long, long-term relationships.”
I am reminded that as much of an industry veteran as Beginin may be, Prodigy is a new company just getting off the ground. “Everything is brand new, so we’re doing nothing but growing,” he said. “It’s not like we’re expanding on an existing business that’s been operating for years, so our main focus now is to get the Pro X into processing businesses and work with customers initially on that, and then add more of the services moving forward.”
That said, did Beginin not have existing industry relationships to build upon? “Absolutely,” he said. “The industry is very personal. People know each other and they talk. Reputations matter. Whether it’s me directly, or former employees, or friends in the industry – everything from venture capital to private equity all the way to publicly traded MSOs, and just MSOs, and the OGs in the extraction world who helped assist us on these designs, and their friends – it all matters.
“So, we do have an advantage because of these relationships, and we particularly like having them for this business, because people have to trust you. Your investment is worth north of half a million dollars, which is a nice house or a Rolls Royce, so you’ve got to trust who built it, and you’ve got to trust that they’re going to be around in a number of years when you need them.”
If the ProX is faster than other extraction machines, does that mean it can be paid off sooner? “Yes,” said Beginin. “We have a customer in Oklahoma, and based on their estimates, they were looking at a 60-day ROI, which is just ridiculous. But depending on how much you’re processing, and the price of distillate, which changes, you’re looking at a matter of months. Normally, it will take a year and a half to pay off any large piece of equipment. We’re talking weeks or months here.”
Market Catalysts
In terms of potential catalysts that could impact the market, was a possible Schedule 3 on the list? “Banking will impact everything substantially,” responded Beginin. “Once that comes through, however it happens, either through some banking act or descheduling or rescheduling, it would certainly help, because there are industries that will not get involved in this. My hope is more for descheduling, and leave it up to the states, like alcohol. We have businesses like Waters, Danaher, Thermo Fisher – large publicly traded companies in the life sciences industry and laboratory equipment supply – that won’t touch it. Once that changes, they’re going to come in, because they obviously have brand new market, but until then they won’t risk their banking relationships amongst other things. So, we’re a prime candidate to work with.”
Does that mean that when the time is right, these large companies will come in and buy 10 machines as opposed to one or two? “Yes, but it’s even a bigger move than that,” said Beginin. “Let’s put it like this: Altria owns Marlboro, and they bought about half of Cronos Group, the largest grower of cannabis in Canada. They also bought half of PAX, which designed the Juul electric cigarette technology. So, here’s a publicly traded company that did this five years ago. What do you think their plan is?
“And there are other ones like that,” he continued. “So, you’re going to have publicly traded companies, like Thermo Fisher, that want to be in the business, and need to learn the business and understand the business, so they’re going to pay-to-play. Why not get a six-month education rather than five years, so that’s where a Prodigy will come in. We work with them, become part of that on the actual supplier side, and on the customer side, here comes companies like Altria that need a continuous automated system, and a large system. We’re talking about something that’s half as long as a New York city block. That’s where we’re going, and everything that we’re designing now are pilot units for them.”
I assumed there are no geographic restrictions to this either, and that companies of this size and ambition exist around the globe. “Absolutely,” concurred Beginin. “By being positioned as a sophisticated business that understands the industry and has the best quality and technology in this space, we will be a target for large customers looking to build and develop these operations as well as suppliers that would come in, be more agile, and want to capitalize on this industry.”
Would an Altria just purchase Prodigy? “I don’t think Altria would, just because they’re a manufacturer,” he responded. “Why would they have a processor? They’re not an equipment company. The electronic device makes sense because that’s like a cigarette for the customer, and they’re selling that retail. I guess they could do it to prevent us from working with their competitors. That would be a smart move. It’s not their business directly, but it would slow down the competitors, that’s for sure.”
Who are the potential acquirers of Prodigy? “Agilent, Waters, Thermo Fisher, any one of those,” replied Beginin. “And this is important. Every financial trade and investment transaction with Precision was always at 2.5x revenue. But the Agrify transaction was at 1.3x, which was one of the many reasons I was like, ‘Why are we devaluing our company here? What is this massive discount for?’ That’s why I didn’t vote for the transaction, and why I had no non-compete.
“And those three companies – Agilent, Waters, Thermo Fisher – if you look at their valuation, it’s 6x revenue and 20x EBITA,” he continued. “So, it’s massive for us in that event. And these will be potential acquirers, because they make lab equipment, and we make lab equipment. They don’t make lab equipment in the cannabis space because they can’t, but we do, and we have the knowledge and relationships. When the customers get bigger, the acquirers get bigger, and the valuations explode. Right now, for us, without them being involved, great. We don’t have really fierce competition from companies with billions of dollars.”
Will increasing competition among these companies force their hand in terms of grabbing up a company that’s positioned like yours? “They would need us, and we would need them, because they need the experience, know-how, and the technology, and we need the muscle, the money,” said Beginin. “We need each other, because now they’re competing with each other, so now we as well as all the current competitors of Prodigy would be competing with these massive publicly traded companies. We don’t have that kind of competition now, which is great, because we have free rein to grab market share. But when it does happen, that will be great, too, because we’ll be playing on a much larger playing field with much larger players and much larger technology.”
As far as what sort of catalyst will bring that to pass, “It has to be at the federal level,” said Beginin. “None of these publicly traded companies will get involved because of the banking. It needs to be legal. They will not get involved until federal legalization or decriminalization or banking. Something has to happen for them to step in, and for sure they’re looking at it. Altria is one example. They’ve been looking at it for years because they see the writing on the wall.”
Making Prodigy even a tastier target is the fact that it will engage in expansion with essentially no capex burden. “Based on our partnership with Mitchell Fabricators, we anticipate zero capex costs,” said Beginin. “We don’t run manufacturing, our partner does. This is what they have done for 50 years. We have zero capex costs coming into this, so it’s really all operational expenses, and investment in the research and development of technology.”
I asked Beginin what he thinks are the biggest mistakes extraction companies in cannabis make. “This is not limited to this industry,” he answered. “It’s more of a pervasive issue, but hubris. Because they think it’s good, everybody else must think it’s good, and they don’t listen to their customers, and they don’t pivot with the marketplace because of arrogance and stubbornness. It boils down to hubris. I think you need to be humble and understanding, and you have to have good relations with the suppliers and some just don’t. The ones that are successful in the face of competition are the ones who have the right qualities and get the customers what they want. Their customer is the consumer.”
I noted that the market speaks loud and clear. “It certainly does,” agreed Beginin. “The customer speaks with their wallets and their feet, so those are the ones that are generally interested in how we can improve our operations, how we can increase their bottom line, and how we can supply them with what they want. And for them, that can be very diverse, because there’s a difference between, for example, creating fine wine from rare grape in Sonoma, California versus the wine that I would buy at Walgreens.”
Did that mean his machines can be used for craft as well as mass-produced product? “Ours are built for mass craft, and for high quality,” he clarified. “Just check out our website to see what we’ve got and call us to talk to us. We love to engage and talk about making the industry better and businesses better.”
And to be clear, you don’t have to be an MSO to call and have that conversation? “Absolutely not,” said Beginin. “We work with all sides. Again, for operators, our equipment scales, but if they don’t grow in this industry, they will die. They have to grow, they have to scale, and we’re here to help. It’s the same for Prodigy. We have to do this right in order for us to survive, so for any of the smaller operators that see the writing on the wall, we are ready to take that next step and work with them, and that really goes back to us making it possible for them to get into this financially right with financing as well as the buyback.”
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