The cannabis testing space should be on every investor's radar. The industry is growing exponentially and is expected to reach $850 million by 2020. The reason for this growth is simple: As cannabis becomes legal, it must be regulated and tested like any other consumer product. With four operating EVIO cannabis testing laboratories, Signal Bay, a Life Science Company, is poised to capture a significant share of this growing market.
"The meat you purchase in the grocery store must be USDA approved to ensure safety and quality," explained CEO of Signal Bay, Inc., William Waldrop. "Cannabis is no different, and consumers and state regulators understand this. We are in a transitional period in which a formerly illegal substance is now becoming a legal consumer product. And like all consumer products, there is a need to ensure the product is safe for consumption."
Waldrop further likened the need to test cannabis to seat belts in cars or skateboarders wearing helmets, safety measures that were once thought unnecessary and are now not only the norm, but more often the law. And the law is on Signal Bay's side. As more states look to mandate thorough testing of cannabis at accredited testing laboratories, Signal Bay's EVIO Testing Laboratories are fast becoming the standard in the industry. But what is cannabis testing anyway?
Batch Math: How Cannabis Testing Translates to Dollars
There are two series of tests that Signal Bay's EVIO testing laboratories perform on the Cannabis they receive from growers. In Oregon, where the Company is located and whose EVIO laboratories currently serve 95% of the state's cannabis testing market, cannabis is harvested and divided into random 10 pound "batches" pursuant to state regulations. A small sample is taken from each batch of raw cannabis flower or "bud" for testing.
These samples then undergo two series of tests depending on what will be the final cannabis product and where the product ends up being sold. If it's just going to be sold as good old fashioned marijuana ready to smoke then only the "cannabis flower"-will be tested for pesticides, mold, Ecoli, moisture, and potency. If the cannabis product will reach the shelf in the form of an oil or an edible, additional tests are required.
Edibles need to be tested for homogeneity, solvents, and once again for pesticides and potency. For the first test, the cannabis flower test, Signal Bay's EVIO labs bring in $370 per ten pound batch. The additional tests for edibles typically generate around $300 per batch (some of these tests are optional, some are not, which accounts for a nominal variation). This second round of tests translates into a doubling of revenue for Signal Bay. Double the tests, double the revenue. Simple batch math. With an anticipated 100 ton annual Oregon cannabis harvest, the math gets even better.
Next Stop, California…
With four cannabis testing currently operating in Oregon, the next stop for Signal Bay is the new "Green Rush" state California, where Signal Bay has signed a Letter of Intent to acquire another testing laboratory.
In 2015, Governor of California, Jerry Brown, signed the Marijuana Regulation and Safety Act which will give the state some of the most comprehensive regulations in the nation.
"This key move in California will provide us a solid foundation in what is virtually a wide open market," added Waldrop.
A wide open market, indeed. The Golden State boasts a $100 million market for cannabis testing. With only 5% of the cannabis in California tested, there is essentially a $95 million in testing revenue up for grabs. Fast forward two weeks to November 8, and the cannabis testing market is expected to triple to $300 million. In an election that is often called the most important of our lifetime, it is even more important to the cannabis industry. If the proposition to legalize marijuana passes, which is most likely considering polling results, California will become the largest single legal cannabis market on Earth. Signal Bay plans to add 18 of its EVIO labs in California by the end of 2018.
The first California acquisition, to be announced in the coming weeks, will be the fifth operating Signal Bay EVIO Laboratory. The Company expects to generate $1.4 million for 2016, more than doubling its revenue in 2015. By 2020, Mr. Waldrop expects the Company to be doing over $45 million in annual revenues operating 30 EVIO Labs. The key to this kind of rapid growth is Signal Bay's business model, a model that management compares to Quest Diagnostics (NYSE: DGX) an industry leader in clinical laboratory services.
The Quest Diagnostics of Cannabis Testing?
There are only a handful of companies trying to capture the growing cannabis compliance testing market. However, these companies are mostly in the business of owning and operating independent labs, each of which provides core testing services. In simpler terms, each lab is its own centralized entity, operating as basically its own business. But the experienced management team at Signal Bay has developed a business model they liken to Quest Diagnostics (NYSE: DGX), an industry leader in clinical laboratory services.
"It's the hub and spokes model," simplifies Waldrop. "In each state we have one centralized testing laboratory with other ancillary testing facilities in local markets statewide. The core centralized lab handles the bigger, high dollar testing functions while the smaller localized labs handle collection, sampling, and other testing services. Couriers move back and forth between locations and the hub, maximizing efficiency. This enables us to develop networks of testing laboratories that operate efficiently within each state."
Signal Bay isn't in the business of building laboratories or acquiring an empty lab and setting up shop. Rather, the Company acquires currently operating cannabis testing laboratories, along with the existing client base. Once acquired, Signal Bay ensures that the laboratory is operating up to its reputable EVIO Labs standard. The Company educates existing personnel as needed on how to improve quality and efficiency as well as how the lab will operate within the broader "hub and spokes" model.
Signal Bay initially began as a consulting and research company, providing data collection and industry research as well as assisting entrepreneurs in the cannabis space get licenses and find capital.
"To date, our consulting and research expertise has been responsible for the generation of over $80 million in deal flow," adds Waldrop. While its EVIO Labs division remains Company's focus, its two other divisions, Signal Bay Research and Signal Bay Consulting, continue to generate revenue and provide a network of critical relationships—from California to Massachusetts--that fuel growth.
With years of expertise, solid industry relationships, and a business model that has proven successful, Waldrop believes that the Company is uniquely positioned to achieve economies of scale and become the Quest Diagnostics of the cannabis testing industry.
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