A cannabis testing company is gearing up for regulatory changes in California and looking ahead into the Canadian market as the lab industry appears poised for growth alongside the overall space.
On Monday (April 30), EVIO (OTCQB:EVIO), a cannabis testing company, expanded its presence in California thanks to the acquisition of Leaf Detective, a testing lab company based in Humboldt County.
William Waldrop, CEO of EVIO, said in a statement that Leaf Detective’s facilities will be upgraded to meet new testing standards, and are set to be operational by the end of the third quarter.
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This acquisition was key for EVIO as Leaf Detective holds one of the 28 testing facility licenses from the Bureau of Cannabis Control in California.
The license is even more critical given that California is about to change its marijuana laws, making it mandatory for all legal cannabis sold in the state to be tested and approved by these specific labs.
“What’s happening is as of July 1, any [cannabis] product that’s sold in California dispensaries is supposed to be tested, and they should have [a] certificate of analysis confirming that,” Waldrop told the Investing News Network (INN).
He said exceptions have been given to any product grown before December 31 last year, during the first six months of 2018, but that will disappear in July.
The executive told INN that EVIO is attempting to encourage the cannabis industry in California to start testing or seeking retests for products currently on the shelf to guarantee full compliance in the state.
Waldrop added that part of the goal of the Leaf Detective acquisition was to secure a footprint in the Northern California area. While the company will have to update the facilities of the acquisition before the July 1 date, EVIO will still be able to conduct its testing despite the planned upgrades.
Cannabis testing business model
When asked how much an ancillary business like lab testing co-relates to growth in the overall cannabis business, Waldrop said he sees a US$200-million opportunity just in California for testing.
“In California right now there is about a $2.5-billion medical economy … testing will be about [a] $100-million opportunity just in California just for the medical side,” he said.
In terms of the Canadian market, for which EVIO prepared an acquisition for half of Alberta-based Keystone Labs, Waldrop sees an opportunity for $250 to $300 million per year for lab testers, based on data from business research firm Deloitte.
Waldrop told INN there is potential for EVIO to list on a Canadian exchange. He believes the Canadian Securities Exchange is the only legal option the company has after an examination.
“We’ve known that there’s been a need for multiple labs throughout the US, specifically for EVIO and targeting immediate opportunities, the majority of our growth is targeted to be in California,” he said.
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Testing standards in California and Canada
Waldrop explained these tests are made to find deficiencies in cannabis products with examinations of cannabinoids, moisture content, full scale for residual solid and pesticides.
He told INN the company is expecting Health Canada, the agency tasked with regulating cannabis in the country, to affirm which pesticides will be mandated to test in all cannabis.
“What we are hearing [is] they are probably going to be very similar to California as it relates to the breadth and the scope of the types of pesticides that will be required to be tested in Canada,” he said.
So far in 2018, EVIO’s share price has seen a dip of 22.9 percent. Wednesday (May 2) at the end of the trading session, EVIO was valued at $1.63 per share on the OTCQB, based on a 1.21-percent reduction.
In his initial research report on the company, Jim Marrone, analyst with Singular Research, gave the company a “buy” rating and set a 12-month price target of $2.
“We believe EVIO is positioned to benefit as more states look to legalize cannabis and mandate testing of products from accredited laboratories,” Marrone wrote in his report.
The analyst warned investors of delays in EVIO’s execution of its currently proposed expansion plans, and of the potential for regulations to affect the growth trajectory of the cannabis testing market.
Waldrop told INN that EVIO is on pace to operate 18 modern cannabis testing facilities by the end of 2018, with the majority in California.
“Our recommendation is based on an expectation that regulatory environment continues to remain favorable and the management can execute on the growth plan it has outlined,” Marrone wrote.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.