The U.S. cannabis industry could reach between $21 billion and $35 billion by 2020, according to GreenWave Advisors, depending on the number of states that successfully legalize the drug over the coming years. As more states implement their own programs, there is a growing need for high-quality testing services in order to ensure high-quality and safe products for both medical and recreational users.
In this article, we’ll take a look at a company that aims to corner the laboratory niche with its unique vertically integrated operations.
Cannabis Health & Safety
Cannabis has now been legalized, either recreationally or medicinally, in 23 U.S. states and the District of Columbia following full legalization votes in Oregon, Alaska, and Washington D.C. during the mid-term elections. Each state must decide how to come up with their own frameworks to ensure that cannabis products are properly tested before being sold to end users from both a medical and safety perspective.
States like Colorado and Washington have already implemented their own testing standards, handing out a limited number of licenses to laboratories to ensure that companies meet those standards. These licenses have created high barriers to entry when it comes to competition, while clients likely prefer to keep all of their business concentrated in a single lab rather than switching between them.
These dynamics have created a unique opportunity for companies like CannLabs Inc. [stockquote symbol=CANL], which already has a fully operational laboratory that serves about half of Colorado’s cannabis testing market. Management plans to grow this market share to about 75% by the end of the year, while opening additional laboratories in states like Connecticut where it has approvals.
Sticky Business Model
CannLabs differentiates itself from many other cannabis testing providers, such as Pazoo Inc. [stockquote symbol=PZOO], by incorporating consulting and analytics services designed to provide incremental value. In addition to providing basic certifications, the company develops detailed analytical portfolios for each client and helps them meet regulations and develop a go-to-market strategy.
If clients decide to disengage with the company, they would lose the ongoing learning from analytics, the familiarity in place from consulting, and the logistics that already exist from the laboratory services. The transactional-style of business – even without contracts – essentially locks in clients over the long-term, providing investors with a long-term stable and growing revenue base.
These dynamics have already led to early signs of revenue growth. Between the first and second quarter of this year, revenue grew from $112,273 to $270,220 due to organic growth at its existing facilities. These numbers don’t include new facilities or the expansion of services that management has in the works. With the build-out largely completed, much of the capex is also already out of the way.
CannLabs recently opened a new 4,000 square foot facility in Connecticut, with full capacity expected to be reached within the next 180 days. The medical-only cannabis testing facility has secured multi-year exclusive testing contracts with two of the four licensed growers in the state. With a cost of $1 million to build out, the lab is expected to generate $2-3 million during the first year at capacity.
Moving forward, the company anticipates a 12-18 month payback period of each 4,000 square foot lab, with about six months to ramp up to full production and 12 months of netting approximately $1 million. These timelines could shorten in the future when factoring in higher margins from additional product formulations and other consulting services that it offers in addition to lab testing services.
Investors should look beyond the laboratory business toward the long-term potential from its proprietary analytics, new product development, formulation, consultancy, and compliance business units. Management aims to leverage its existing expertise in Colorado to expand into Connecticut and beyond with its sticky business model capable of generating high-margin revenue.
In addition to companies like GW Pharmaceuticals plc [stockquote symbol = GWPH] who is sponsoring the first worldwide clinical trial testing for its Epidiolex product, and Terra Tech Corp. [stockquote symbol=TRTC] who recently announced that their three subsidiaries have all received provisional licenses from the state of Nevada, investors may want to take a look at the rapidly growing cannabis testing market. With a high barrier to entry and strong demand potential as legalization spreads, CannLabs could see some upside ahead.
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Disclaimer: Except for the historical information presented herein, matters discussed in this article contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Emerging Growth LLC dba TDM Financial, which owns CannabisFN, is not registered with any financial or securities regulatory authority, and does not provide nor claims to provide investment advice or recommendations to readers of this release. Emerging Growth LLC dba TDM Financial, which owns CannabisFN, may from time to time have a position in the securities mentioned herein and may increase or decrease such positions without notice. For making specific investment decisions, readers should seek their own advice. Emerging Growth LLC dba TDM Financial, which owns CannabisFN, may be compensated for its services in the form of cash-based compensation or equity securities in the companies it writes about, or a combination of the two. For full disclosure please visit: http://www.cannabisfn.com/legal-disclaimer/.