There are two distinct classes in the cannabinoid extraction industry: extracting cannabis, which focuses on tetrahydrocannabinol (THC), and extracting hemp, which predominantly focuses on cannabidiol (CBD). At the core of this distinction is the fact THC is intoxicating and requires a separate set of regulations, while CBD is non-intoxicating but offers various wellness benefits. Based on this distinction, the businesses in these sectors operate differently based on the rules they need to follow.
The options for extraction equipment can be overwhelming, each one having its pros and cons, but all are often marketed as though “if you’re not doing [insert extraction method here], you’re not doing it correctly.” If you are interested in cannabinoid-derived product manufacturing, you will need to navigate six-figure price tags to start your journey. This article outlines some of the variables that can be the most challenging as well as provides a general framework for navigating the process from concept to finished product.
With surging demand for cannabinoids and cannabinoid-infused products, it is vital to remember this industry is still in its infancy stages. The current market conditions demonstrate the extreme volatility in wholesale prices, particularly on the hemp/CBD side of the cannabinoid industry. While there are opportunities to build a profitable company in the cannabinoid space, there have been countless horror stories that can be attributed to the lack of understanding of what is required to successfully start and operate an extraction company. From our experience working with startups and established companies in both the cannabis and hemp industries, several key factors need to be thought through to set the company up for success.
Why? Defining the Mission
When starting a company in the extraction/manufacturing space, the first place to start is with why, and work backwards from there. The mission statement of the company needs to permeate every decision made going forward. Suppose the goal of the company is to create high-quality products. In that case, small-batch cannabinoid concentrates follow a certain roadmap which will differ significantly from the roadmap of a company whose goal is to operate a large-volume, low-margin business. Following the proper outline when building the roadmap assures success in both cases.
Choosing an Extraction Method
With the extraction industry being, in essence, chemical refinement processes, the why that dictates the roadmap will influence this choice. If your company is driven by sustainability, then you are less likely to choose a solvent derived from fossil fuels. When choosing a solvent method to extract cannabinoids, there are three methods dominating the industry. The difference in methods boils down to employing various solvents that strip plant material of target chemicals, predominantly cannabinoids and terpenes. The primary solvents are cold ethanol, liquid hydrocarbon gases like butane and propane, and carbon dioxide (CO2). Each one of these methods requires different equipment and entails unique processes to produce a finished product.
Choosing Equipment Based on Functionality and Economics
At this juncture, the company knows why it is going to extract cannabinoids and what type of solvent it will use. The next phase is to compile a list of vendors manufacturing the equipment for the nominated solvent. By far, this is the most critical step in the roadmap regarding decisions, and there are several variables to consider. We group these variables into two distinct categories: functionality and economics. The system’s functionality includes the viability of the equipment for your company’s short- and long-term goals, which includes throughput, certifications by third-party companies, previous client experience, as well as meeting established governmental requirements for manufacturing nutraceutical or pharmaceutical grade product. The economic factors to consider include upfront and ongoing costs, required maintenance, and facility requirements to house the system.
Successful extraction companies tend to have realistic expectations for manufacturing concentrates. This is rooted in understanding the facility will not run 24/7, which is one of the biggest mistakes we have seen in the industry. Companies purchase equipment and think they can triple production within the first 12 months by implementing A, B, and C shifts. As a thought exercise, this works; however, in practice, a startup will not have enough skilled labor to operate a 24/7 factory. With that in mind, if your company needs to produce X kilograms of oil per day to be in the black, then spec out a system that achieves throughput for a 6-hour workday. Extraction equipment is not like a computer that is turned on and seconds later, is working. These systems take considerable time to start up and shut down, with several problems likely to arise during the production run. This is typically not factored into the cash flow statement by most companies struggling in the industry. Understanding the throughput each vendor’s system can reach is only one piece of the equation.
Is the equipment safe for the employees to operate? This issue significantly decreased over the years as the industry matured. However, with an influx of cheap options for equipment, several regulations need to be considered before making purchases. The main item for licensing that municipalities and fire marshals stress is the Occupational Safety & Health Administration (OSHA) National Recognized Testing Laboratory (NRTL) program. The conversation with the equipment manufacturer should be cut and dry. When you mention NRTL certification, a company with experience can provide the necessary documents to prove the electronic components have NRTL certification. If the company cannot produce the documents, then it’s a red flag. From our experience, the most common certification is the Underwriters Laboratory or UL certification program. One of the easiest ways to identify if a company has NRTL certified components is to look them up on UL certification database product iQ. It is important to note that some vendors outsource their electrical components, so the UL certification might be listed under another company. Additionally, UL certification only applies to the electronic components, not the entire system. For example, if you purchase an ethanol extraction system, you will not find a UL listing for the system but should be able to locate a UL listing for any electronic components used in the system.
Once the vendor list has been reduced based on these filters, the next consideration is future-proofing the system from a regulatory standpoint. Eventually, all cannabinoid manufacturing will have to follow the established regulations that nutraceutical and pharmaceutical companies already must follow, such as the US current Good Manufacturing Practice (cGMP) guidelines or European Union GMP guidelines. Additionally, if your why includes exporting products to Europe, then you will have to obey EU-GMP guidelines, which are more stringent than US-cGMP guidelines. These guidelines are extensive and can be tackled through due diligence on the company’s part as well as implementing the use of good consultants with experience in the industry.
When factoring costs into the equation, you’ll need to consider equipment system costs and facility buildout costs. It is vital to understand what additional equipment needs to be paired with your extractions system to produce a finished product because no extraction system by itself produces finished goods. For liquid natural gas extraction, the material needs to be milled before extraction and the extract placed in a vacuum oven to remove the residual solvent. For ethanol extraction, the tincture containing the cannabinoids is cleaned through a series of filters. The ethanol is removed with a falling film evaporator, the crude oil is decarboxylated in a reactor, and finally, the crude decarboxylated oil is distilled through a wiped film distillation system. For carbon dioxide extraction, the crude extract from the CO2 system is dissolved in cold ethanol, chilled, purified through filtration, then the solvent is removed with a rotary evaporator. The resulting winterized oil then must be decarboxylated and finally distilled.
Each process described above requires unique pieces of equipment that should be factored into the cost of the system. Finally, because each solvent has different chemical properties, there are rules to be followed to be compliant with the local building departments and fire marshals. For instance, because liquid natural gas is classified as explosive, the equipment must be placed in a C1D1 facility which is significantly more expensive to build than a normal building. For ethanol, the equipment must be placed in a C1D2 facility based on the flammability of the solvent. Lastly, CO2 has the least amount of safety hazards from a fire standpoint. When you standardize for throughput across the board for systems, we would price each solvent method as follows:
- Carbon Dioxide – Most expensive
- Ethanol – Second most expensive
- Liquid Natural Gas – Cheapest option
Ongoing Maintenance Costs
The last variable to consider when understanding the economics would be the maintenance costs. Everything breaks — it’s normal wear and tear in manufacturing. However, some equipment maintenance can be more costly than others. Through our experience, the most expensive equipment to maintain is CO2 equipment. Due to the high pressures the systems must reach, the parts are significantly more expensive. A close second is the solvent recovery systems in ethanol extraction facilities which regularly experience pump issues based on sheer volume.
Word of Mouth
There are other variables to consider when shopping for equipment. One of the best ways to understand how the equipment works for the long run is to speak with companies using the equipment. These companies will share with you how the customer service aspect of the vendor is as well as other abstract variables to consider. We strongly encourage anyone looking to start an extraction facility to spend considerable time and energy in the due diligence phase of the process. The industry isn’t going to disappear overnight, but if you don’t do your homework, your company might. We hope to this helps to shed light on the items to consider on your roadmap to success.