Few business sectors are growing as fast as the cannabis industry. After the 2014 midterm election, the recreational market expanded from two states to four; and many expect marijuana to become legal nationwide within the next decade. When discussing the cannabis industry, cannabis testing is often overlooked. While growers, dispensaries, and edibles certainly deserve attention, it’s important to shift some of it to companies running cannabis testing operations.
In the early days of cannabis testing, there was very little demand for the service and even then it was to just measure and test potency. However, as we begin to roll back prohibition, more states are adopting cannabis testing laws and testing standards are becoming more stringent by the day.
One company hoping to situate themselves at the forefront of the cannabis testing industry is the Colorado-based company CannLabs. Although the company only went public back in June, CannLabs has been in operation for the past four years and is the first state certified cannabis testing lab in Colorado.
Earlier this month, CannLabs became one of the founding members of the Association for Responsible Public Cannabis Companies, which is a self-regulatory organization dedicated to assisting cannabis companies with regulatory compliance and exercising higher industry standards.
The ARCPC Board of Directors is comprised of leading forces in the cannabis industry such as Douglas Leighton of Dutchess Capital, Alan Brochstein of 420 Investor, and Morgan and Emily Paxhia of Poseidon Asset Management.
“We are pleased that CannLabs has been selected as a founding member of the ARCPC,” said Mark Mirken, CEO of CannLabs, in a statement. “We recognize that it is crucial for our industry’s future to develop and support organizations that promote transparency and good corporate citizenship,” he added.
On December 15, 2014, Mark Mirken conducted CannLabs’ first corporate investor update about current and pending business developments and we were lucky enough to sit in on the call.
The meeting opened with Mirken going over some basic facts and statistics about the company. CannLabs’ market cap is $60 million and the stock price is hovering just below $1. Total shares are 64.5 million, float shares at 13.1 million and 79 percent of the company’s stock is held by insiders.
Within the industry, CannLabs sees itself as the “Health and Safety checkpoint in the seed to sale supply chain.” Mirken claims that CannLabs has become the “gold standard for cannabis testing” and points to its involvement “in the development of testing legislation in multiple jurisdictions.”
CannLabs has recently acquired new equipment to expand its testing capacity. The new Polymerase Chain Reaction (PCR) microbiological testing service allows test results to be returned in less than 48 hours and the new Microwave Accelerated Reactor System (MARS) Extractor will allow the company to test for heavy metals like arsenic or lead. This recent acquisition is important for two reasons.
The first reason is that CannLabs believes the United States is at the “proverbial end of prohibition” and that the industry will likely experience “exponential growth.” The company believes that this will lead medical and recreational marijuana to most likely “merge into one substantially larger market.”
By 2020 the company expects retail marijuana sales to reach $35 billion annually. It is projected that “testing will be approximately 2-3 percent of gross marijuana sales” or roughly $1 Billion.
Mirken highlighted the next vital consideration is that what “we are seeing is more and more states write their laws … driven by the concern of the health and safety towards consumers. These states are leaning even further towards … stricter testing guidelines.”
Many of these states are adopting testing guidelines set forth by the American Herbal Pharmacopoeia association. Those guidelines require a whole slew of tests which, as noted earlier, CannLabs has recently become able to accommodate. This brings us to CannLabs’ business plan for the future.
The first step in CannLabs’ plan is to essentially continue what it is doing now: achieving immediate revenue growth through testing. The company plans on using the testing as a “lead generator into higher margin revenue streams such as consulting and product reformation.”
The next step is to push its consultation service. CannLabs will offer guidance to growers who fail their tests by “solving production, cultivation and formulation challenges.” The company’s industry knowledge will also be “supplemented by data and analytics” via the data it has collected through the thousands of tests it has already conducted and those it plans on performing.
CannLabs expects the market for “Marijuana Infused Products” and “Custom Formulations” to expand exponentially. CannLabs hopes to provide guidance in the creation of these products.
Finally, as Mirken put it, “the value of our data, and what can be gained from that data, will only become more useful in the future.” The information gained through hundreds of thousands of tests will be valuable not only to growers, but consumers as well. In this digital age, big data is big business.
CannLabs has an ambitious business plan, but how well is it doing? Currently, CannLabs operates in Colorado and Connecticut, but plans on expanding into Nevada.
- In Colorado, CannLabs has a 4,000 sq. ft. facility and it services 112 out of 225 recreational growers, giving them a 49 percent share of the market. The company also anticipates that at the start of 2015, the Colorado Legislature will introduce and pass a bill that mandates cannabis testing for medical marijuana, effectively doubling its market.
- In Connecticut, as reported by Mirken, “CannLabs has secured multi-year testing contracts with two out of only four growers in Connecticut.”
- In Nevada, CannLabs expects to open an 8,000 sq. ft testing facility that is “located in the Nevada Cannabis Greenbelt neighboring 1.5 million sq. ft. of cannabis production.”
Mirken closed the presentation by stating, “We are expanding into markets with experience, know how, and contracts in our hand.” Although doubts still remain over the volatility of CannLabs’ stock price, the company seems dedicated to pushing forward to corner the cannabis testing market.
We may not know what the future holds for CannLabs, but judging from its current reports and plans, projections appear positive.