Business Planning and Development for Extraction Operations

Show Notes

• The terminology varies depending on the market. Frequently used terms include processing, extraction, manufacturing, and infusion, but what we are talking about in this episode is taking raw plant material, extracting certain oils, formulating those into products, and making gummies, edibles, vape cartridges, and other products. 
• Efficiency
• I've seen 1,800 square-foot facilities doing $54 million in revenue annually. It doesn't have to be big, but you'll need to use the space efficiently. 
• Some of the Most Commonly Used Methodologies
• Water Extraction
• Rosin Presses
• Solvent-less using heat and pressure.
• Hydrocarbon Extraction
• Propane
• Hexane
• Butane
• Ethanol
• CO2 Extraction
• Using pressurized gases
• There is a grand debate over what extraction methods are best. Determine what is best for you and the products that you seek to make. As you know, there are many different forms of extracts, and they each have unique qualities and market appeal. Not everyone is dabbing. 
• We recommend honing in the SKUs that you are producing. We see many extractors with too many products, and their energy is spread too thin. Focus on specializing a particular product and creating brand recognition around it.
• Companies with high-quality products that provide a consistent experience and are always available at the dispensary will capture significant market share. 
• Before you launch a product line, make sure that you have a surplus created, and you are prepared to keep your distributors fully stocked. Each time a customer returns for your product to find it sold out, you lose long-term brand value. 
• The extraction landscape will continue to get more sophisticated and will closely resemble pharmaceutical production facilities. 
• There is a lot of room for margin in manufactured products. If you have one gram of hash that is 50% THC, you have 500 available milligrams of THC. Here's a comparison:
• You could sell the gram of hash wholesale for $20 - $40.
• Or you could make 50 edible products with 10 milligrams of THC per serving. If these products had a margin of $5 each, you make $250 from the same gram of hash. 
• Use market data to select the right product categories that you would like to target. Data companies like BDSA, Cannabis Benchmarks and Headset are a great place to start. 
• Also, consider if there are other revenue streams that you can create through the same extraction process. An example would be if you're doing ethanol extraction, you could take out some of the product, make tinctures, and then refine it into distillates that can be formulated into other products. 
• We recommend avoiding selling bulk concentrates. If you utilize your concentrates to create your product lines, you'll have a much higher margin. Depending on the market, avoiding this is not always feasible.
• Controlling the supply chain from soil to oil is the best way to create a consistent and reliable raw plant material source for extraction. But being able to make vaporizer cartridges, beverages, edibles, or topicals will set you up for success. 
• Raw Plant Material (RPM)
• Suppose you are sourcing your RPM from other producers, it's going to take some time to assess each supplier's quality and consistency. Take your time to do the research and determine the best operators to work with. 
• If you find a good supplier, consider pre-purchasing your RPM to ensure that you have enough supply for your needs. Pre-purchasing may also give you leverage to negotiate the price of the materials. 

Business Planning and Licensing

• There are significant differences between license applications for volatile and non-volatile extraction.
• Budget more for R&D at the start. Before you start mass-producing anything, make sure it is of outstanding quality and consistency. Invest in creating standardized processes, formulas, and recipes. 
• Before you start marketing your products, make sure they are worth marketing. Conduct trials and make sure that you can make the products over and over again. 
• Conduct market research on what products are selling, what branding, packaging, and marketing strategies. Seek out expert opinions and emulate the successes from other cannabis markets. Be sure to verify everything through the lens of regulatory compliance. Some products and practices don't translate between markets. 
• When selecting your extraction equipment, do your homework. What equipment is going to create significant efficiencies in your process?
• Most processing facilities have two shifts of workers preparing, cleaning, manufacturing, and making products according to specific timelines for each product.
• To design your facility, you first need to understand what methodologies you'll use to create your products. 
• Everything that you touch in your facility needs to be food grade.
• If you're applying for a license, work with a variety of experts. Be wary of a single person providing all of the advice. 
• For equipment, get quotes and opinions from multiple vendors. 
• If you are going CO2 extraction, for example, talk to Eden Labs and Apeks Supercritical.
• Educate yourself on botanical extraction, not just cannabis. There are methodologies and equipment used for other plants that can be helpful for your operation. Don't reinvent the wheel. 
• Determine the equipment that you will need for every step of the process, from milling to processing, weighing, vape cartridge filling, and much more. The more you can customize it to your specific needs, the better. 
• Create your daily checklist for cleaning and equipment inspection. 
• Create a replacement schedule for all gaskets or other parts. Order a surplus of replacement parts, especially amid COVID-19. If your equipment goes down, you need to get back up and running as quickly as possible, not waiting for a back-ordered part from overseas. 
• Don't let your ego dictate your decisions; there is much more to learn. Be open to outside insights and guidance. 
• You'll also need to have brand ambassadors that can help educate local regulators about your production methods and needs. Regulators will always be more critical of volatile extraction facilities. Invest time in educating stakeholders and regulators. 

Issues We've Seen

• We've seen companies mix batches during the manufacturing process, which can lead to a much more significant recall than necessary if there are any issues with a batch of products. 
• You need to develop a good recall control policy. If a product is recalled, how can you trace it back to the extraction batch, the harvest batches, and the producers to isolate an issue? 
• Make sure that you have procedures for testing throughout the production process. Test the RPM, test distillates, and test any ingredients that you are using. 
• We've seen an operator that had tested their RPM and their isolates, which both had no issues, but once they made the final brownies, they failed pesticide tests. It turns out that there were residual pesticides in the flour used to make the brownies. 
• Standards for acceptable residual pesticide levels are much higher for cannabis than food products, so you need to carefully source your ingredients and test them consistently. 

Volatile Extraction

• If you are using any volatile solvents in your extraction process, you need to take it seriously. 
• Before you get started, you need to discuss your operation with the local municipality, understand the fire codes, safe storage protocols, and all applicable regulations for designing and operating a business with volatile solvents.
• Facility designs will need to include extensive fire planning, spark-proof materials, and must meet Class 1 Div 1 explosion proof standards. Planning and building out these operations is pricey. 

Domestic vs. International Extraction Operations

• Keep in mind that the products that are being made in the United States are not feasible internationally. International markets treat medicinal cannabis products as standardized Active Pharmaceutical Ingredients (APIs) and compounded products, like vaporizers or transdermal patches.
• International production requires much higher standards. RPM will need to be produced using Good Agricultural Practices (GAP) and/or Good Agricultural and Collection Practices (GACP). Manufacturing operations will need to adhere to Good Manufacturing Practices (GMP). 
• There are also specific ISO certifications required for your processes. 
• To establish a business in international markets, you need to know what you are getting into. These certifications require rigorous documentation, inspections, and facility audits. 
• These things take time and money to do correctly, but it's worth it if you produce a standardized, certified product allowed into other markets. 
• Know what each license type allows. 
• For example, if you have a non-psychoactive medical cannabis license and think you can sell your products anywhere, it's just not true. It's still considered a medical cannabis product, and you need to follow protocols from the United Nations and the International Narcotics Control Board. 
• A tremendous long-term opportunity is to grow and extract high-quality oils under international standards in a market with low production costs. Then export the oils as APIs to target markets around the world. 
• To get into the large-scale international opportunities, you need to know the specific regulations and how they apply to each market, also, how your production methods fit in the broader global drug development market. 
• If you take the United States mentality of extraction and apply that to international extraction projects, you'll get burned every time.
• If you're in the United States, consider the following questions:
• Are you in a jurisdiction that can provide you with long-term access to bulk RPM? 
• Are the local taxes favorable? 
• What would your business look like if interstate commerce were legalized? 
• What is the unique advantage of your products? 
• What intellectual property can you protect? 
• Asking those questions early on will give you a leg up in the extraction game. 

Other Considerations

• Work with multiple labs, not to see who will give you the highest THC test results but to keep them and you accountable to a higher standard of quality. This transparency goes a long way with customers as well. 
• The most significant long term upside potential is in standardized products. Remember, people aren't buying your products, they're buying the experience that they're going to get from using those products. It's a lot easier to achieve a consistent experience with standardized products. 
• Keep in mind that it's not the raw materials like corn syrup or cane sugar that will capture the most market share; it's the brands with great products. 
• The pandemic has created issues for manufacturers that didn't fully understand their supply chains for solvents, instruments, packaging, extraction equipment, and devices. Those who sourced items from China and India have faced disruptions that have stalled their production. 
• Usually, excessive inventory can kill companies, but purchasing mission-critical items in bulk at wholesale prices right now can insulate your operations from any potential supply chain disruptions.

Resources Mentioned

• BDSA
• Cannabis Benchmarks 
• Headset 
• Apeks Supercritical  
• Eden Labs   
• International Organization for Standardization (ISO)