Industry: Cannabis & Hemp
Products: Vape products and cannabis-infused beverages
Co-founder and CTO Niccolo Aieta has catalyzed growth with an innovative extraction method and a diverse portfolio of products.
"I was personally enamored with the startup process, how you can take an idea, write it out on paper, get your friends and family to fund you, and build a real business that gives people jobs," says Aieta. "We thought we had a real opportunity in Colorado."
The Colorado School of Mines graduate met his co-founder and "expert in supercritical fluids," Laura Rovetto, while working on his Ph.D at the Golden university. (Rovetto has since left the company as Aieta partnered with Michael Green in 2017.)
Seeing no "clear winner in the marketplace," Aieta helped launch Spherex as an extraction service provider in 2015. "We looked at it from a chemical engineering perspective and said, 'There's really a better way to do this,'" he says.
"The CO2 processors at the time were only getting about half of the THC that's available in the plant out into the extract," says Aieta. "We said, 'We know we can do this better.'"
Spherex utilizes compressed carbon dioxide heated to a supercritical state in the extraction process. Supercritical carbon dioxide is not only denser, it's more soluble, so it makes for more efficient extraction.
"It's not actual rocket science," says Aieta. "Supercritical fluid is just another state of matter." He likens it to the "spritz of carbon dioxide" when you open a can of soda. "It becomes dense like a liquid, but really diffusive like a gas."
Capable of processing about 4,000 pounds of cannabis a month, Spherex's supercritical reactor came online in late 2016. The output is oil that's 90 percent THC after winterization and distillation, says Aieta, and the process is eminently scalable.
But the innovative extraction process wasn't as strong a selling point to the target cannabis brands as Aita anticipated. "We made a pretty big misstep," he says. "Being engineers, we thought it was a technical problem to be solved: How can you process a lot of weed at high efficiency and make a really pure product?"
But that turned out not to be the case: "Customers wanted to capture the upsides themselves -- they didn't want to share them with us."
As a result, Spherex pivoted to manufacturing consumer packaged goods in-house and building its brands in mid-2017. The company now has a catalog of about 40 SKUs, including several lines of vape products and a new beverage in Phyx Sparkling Water made with a nano-emulsification process. "In that process, we're basically using pressure to create really small droplets of oil in water," says Aieta. "The droplets are so small -- they're like 70 nanometers in diameter -- they readily dissolve through the mucosal surfaces in the mouth and throat, so you get this rapid onset effect."
Spherex's vape products still drive the business, and Aieta touts a second-best market share in Colorado. Cartridges and PAX Era Pods are available with five proprietary strains and different THC-to-CBD ratios, and the company also makes a line of oil syringes.
The payoff of the pivot has been 400 percent growth in the 18 months since as extraction services declined to just 10 percent to the business, says Aieta.
As the cannabis market evolves, third-party certifications are increasingly important to manufacturers, and Spherex is no exception. "The big one is GMP [Good Manufacturing Practice]," says Aieta. "We are not formally GMP-certified, but we do have pretty clear pathways to get there should it be required. Our Canadian partner does have a GMP program in place we helped them install. It's not required in the United States yet."
The high-pressure equipment for supercritical extraction meets ASTM standards and the food preparation for Phyx meets all requirements of a commercial kitchen. "We manage our quality based on state regulations," says Aieta. "We have batch traceability . . . We test for pesticides, we test for mold, we test for potency, we test for the presence of any residual solvent.
Challenges: "The $10 billion question is: How do we normalize cannabis use?" says Aieta. "If we can solve that problem, the market opportunity is just exceptional. . . . Once people are exposed to it and they know about it and they feel comfortable using it, it's an amazing product. But there's a lot of challenges getting them to that point."
He sees beverages like the LaCroix-like Phyx -- with no cannabis taste or smell -- are a good bet. "There's no cannabis taste, you're up in five minutes, and you're down in about an hour," says Aieta. "We think it makes for a really great alcohol replacement."
He says the recent vape health scare led to "a little bit of a slump," but sales have since recovered. "It is pretty much all the way back," says Aieta. "It actually helps us in the long run, because we are a clean facility. Everything is tested when it enters our facility and when it leaves, and we have transparency we can show to our clients."
Opportunities: Aieta says he has high hopes for the coming year. "2020 for us is really all about expansion," he says.
The top three targets are California, Oklahoma, and Canada. While Spherex launched in California in spring 2019, he says the company is making a big marketing push in Q1. The company is set to launch in Oklahoma in the spring and Canada in the summer. Aieta says he likes Oklahoma for its manufacturer-friendly regulations, lack of competition, and solid local partners. "It's good for a company our size," he notes.
He says Spherex's future growth will be largely tied to "new delivery methods" like Phyx, where the market "is the White Claw crowd. . . . affluent, soccer-mom types."
That said, he adds, "I don't think vapes are going away. They are a wonderful product and they're effective. That's what will lead us into L.A. stores, that's what will lead us into Oklahoma stores, and that's what will lead us into Canada."
Needs: Aieta identifies a need to maintain Spherex's product quality and corporate culture as the company continues to scale. "You can't write a check and solve that problem," he says. "You can't work extra hours and solve that problem."