5 Key Things to Know About the Cannabis Testing Laboratory Business in California

Starting a Cannabis Testing Lab? Read This First

Background

July 1, 2018 marked a true test for California’s burgeoning cannabis industry.  Since recreational marijuana became legal this year, the State Bureau of Cannabis Control is requiring all marijuana growers and processors to send products to distributors to get tested before they arrive at dispensaries.  However, as of July 1, 2018, retailers will no longer be able to sell a product that hasn’t passed testing lab standards mandated by regulators.

State officials have already released the laundry list of contaminants that cannabis products are expected to be tested for.  Certain tests were required as of January 1, 2018, additional requirements are required now, as of July 1st, and the final set become mandatory for all products produced on or after December 31, 2018.  All cannabis and cannabis products will need to be tested for cannabinoids, foreign material, heavy metals, microbial impurities, mycotoxins, moisture content and water activity, residual pesticides, residual solvents and processing chemicals, terpenoids, and homogeneity.

While this created panic amongst unprepared retailers due to failures to stock up on lab-tested product in advance of July 1, for the cannabis testing laboratories in California, business has been booming.

With only 31 licensed cannabis testing laboratories within the state as of mid-July, labs have been flooded with work and people are starting to pay more attention to the industry as a solid investment opportunity.  Here’s what you need to know before setting up shop.

Does Your Cannabis Lab Meet the Standards?

Regulators are requiring certain accreditation measures for labs to be licensed, a challenge in a nascent industry with splintered regulations across different markets. Current regulations require testing laboratories to obtain and maintain ISO/IEC accreditation.  ISO/IEC accreditation is the highest recognized quality standard in the world for calibration and testing laboratories, ensuring technical competence and ability to produce precise and accurate test and calibration data.  California cannabis testing labs will be required to sign up for this third-party review process.

However, the expenses related to ISO/IEC accreditation are not minimal.  Laboratories are responsible for contracting with an accrediting body to assess their conformance to the ISO/IEC 17025.  These bodies charge a fee for their auditors to assess the lab against the requirements in the ISO/IEC 17025 standard.  The lab pays an initial fee when they apply for accreditation, and either a yearly or bi-yearly fee for reassessment.  Based on a 2017 survey, the median cost for assessment for labs to acquire and maintain ISO/IEC 17025 accreditation was $7,250 for the initial expense and $6,000 post-initial.  The average training costs came in at $12,715.

Meanwhile, all laboratories are required to calibrate their instruments and equipment used during testing.  This task, along with preventative maintenance required by the ISO/IEC 17025, isn’t cheap either.

Additionally, it is important to create a timeline for ISO/IEC 17025 accreditation assessment preparation. Typically, it takes a lab about six months to a year to prepare to the accreditation assessment. However, the assessment itself, from the day of closure of any applicable nonconformances to the issuance of a certificate, takes approximately 8 weeks to complete.

Funding Requirements/Raising Capital

Besides the mandatory licensing fees submitted upon completion of local and state cannabis testing laboratory applications, the upfront costs of setting up a fully functional lab can be high as well. Initial costs include purchasing equipment, retrofitting a space for lab work, hiring personnel and wading through red tape.  The average lab requires about $2 million to $4 million in equipment alone.  Additionally, testing is highly scientific, unlike most other marijuana related businesses.  In order to have a reputable lab, highly trained staff is required.  That type of talent is not cheap.

On top of that, federal law restricting canna-businesses from using their financial services creates various problems. Cannabis labs do not benefit from the banking services such as checking and lines of credit that are offered to other industries.  This forces labs to operate with large sums of cash, which can be dangerous.  While California has proposed the idea of state cannabis limited charter banks and credit unions to address this problem, the next steps are unclear.

Lack of Diversification

If you are setting up a California cannabis testing laboratory, it is important to know that this will drastically limit your ability to invest in other canna-businesses.  According to California Business and Professions Code Chapter 5, Section 26053, “a person that holds a state testing laboratory license…is prohibited from licensure for any other activity, except testing, as authorized under this division.” Therefore, if you want to start up a testing facility or work for one, make sure cannabis testing is the singular cannabis business venture you want to pursue.

Local Authorization Pushback

Without local authorization, facilities can’t legally begin testing.  Due to classic local-government stagnation and the following state licensing requirements, testing facilities that are ready and able to start testing and have the funding to do so, simply can’t force or speed up local city approval to meet the demand in the market. Many labs take months to obtain state certifications, even after receiving local approval, due to inspections to ensure practices are up to code and training requirements.

Trend Alert

With the need for cannabis testing laboratories only increasing as the adult-use cannabis industry shifts from strict black market to legalization, the biggest and most obvious trend is the increase in testing facilities around the country.  Matthew Haskin, Director of Business Development at CannaSafe Analytics in Los Angeles, the world’s number one certified cannabis testing laboratory, predicts that while the new regulations will initially create a lot of growth in the cannabis laboratory sector within California, consolidation is inevitable. Haskin foresees that,

“Ultimately, 10 years out, there will be a few big brands servicing the entire industry.”

Kramer Holcomb & Sheik represents clients in a variety of matters including cannabis, intellectual property, and entertainment litigation.  If you have any questions about investing in or opening up a cannabis testing laboratory, please contact us to set up an appointment.

Stay tuned for “Top 5 Things to Know About the Cannabis Manufacturing Business in California.”

The materials presented are for informational purposes only and not for the purpose of providing legal advice.  You should contact your attorney to obtain advice with respect to any particular issue or problem you may have.  The opinions expressed within this article are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney. 

Cannabis Testing Lab Laws in California