The cannabis sector has been under considerable pressure after Canada’s recreational cannabis market opened. Many investors were surprised by this pullback and we are monitoring this decline.

Demand for legal cannabis continues to increase as new markets open and existing markets mature. This trend is just getting started and has created countless opportunities for ancillary businesses.

As demand for legal cannabis continues to increase, the need for lab testing services will increase as well. Cannabis must be tested by a third-party laboratory before being approved to sell to consumers and this has created a significant opportunity for companies that provide testing services.

Although many investors have been focused on the Canadian cannabis market, the opportunity in the United States is significant. Cannabis legalization has accelerated in the United States and currently, some form of cannabis is legal in 46 states.

One company positioned to capitalize on the cannabis lab testing market is EVIO Inc. (EVIO), a life science company that provides accredited analytical testing services and scientific research to the regulated cannabis industry. We have been monitoring EVIO since the company entered the cannabis industry and are favorable on the recent developments.

EVIO Labs is focused on the cannabis lab testing opportunity and is in the middle of a major expansion. Over the last year, the cannabis lab testing company has been executing flawlessly on a coast-to-coast expansion in North America and has operations in Oregon, California, Massachusetts, and licensee labs in Colorado and Florida. EVIO Labs is also levered to the Canadian cannabis market via Keystone Labs, and we are favorable on this.

Although the cannabis lab testing company has significantly advanced its fundamental story, the shares have been under considerable pressure and have been trading lower with the market. We are favorable on EVIO’s growth prospects heading into 2019 and believe that the recent pressure is overdone.

Capitalizing on the California Cannabis Opportunity

EVIO Labs is highly levered to the California cannabis market and we are favorable on this opportunity. Earlier this year, California’s recreational cannabis market opened and is the largest legal cannabis market in the world.

On July 1st, the California cannabis market drastically changed and new legislation has required retailers to only sell cannabis products that have been tested by a licensed third party. This is a significant transition for a multi-billion-dollar legal cannabis market and we are monitoring how this change benefits EVIO.

Earlier this year, EVIO Labs acquired a cannabis laboratory in Berkley and this facility is expected to be a major growth driver in future quarters. This asset provides significant leverage to the California market and we will monitor how the team executes on this opportunity. Last month, the cannabis lab testing company increased its ownership interest in the Berkley lab to 90% from 60% and we are favorable on the larger ownership interest.

We are most excited by the leverage to California and view this as a major growth driver going forward. In late June, EVIO Labs Northern California laboratory in Berkeley announced a major milestone after attaining the ISO 17025 accreditation, the world’s highest recognized quality standard for calibration and testing laboratories. Following the change in regulations, EVIO Labs Berkeley is well-positioned to meet the increase demand for analytical testing services for regulated cannabis and is prepared for these heightened regulations.

Announces a Major Milestone in Canada

Last month, EVIO Canada announced a major development and received an approval from Health Canada on an amendment of its Dealer License that will expand the product and service offering for EVIO Canada’s Keystone Labs in Edmonton. The focus on the Canadian cannabis market is very important and we expect this asset to add significant value to the company in 2019.

In May, EVIO Canada acquired 50% stake in Keystone Labs and we are favorable on the leverage to the Canadian cannabis market. The amendment allows Keystone Labs to support product innovation in the cannabis industry. Keystone Labs can now manufacture, process, package, label, and sell cannabis related products to Licensed Producers and Licensed Distributors.

Last week, EVIO reported to have invested $1,100,000 to expand the facility and to upgrade equipment to prepare for the legalization of recreational cannabis in Canada. The laboratory expanded its footprint from 3,000 to 6,000 square feet to be able to put in new instruments needed for the required regulated pesticides testing for adult cannabis required by Health Canada. The laboratory has also purchased state-of-the-art equipment that will be instrumental to the requirements required for adult cannabis compliance testing.

This is a significant development and enhances the value proposition of the entire company. The amendment is a game-changer and will allow Keystone Labs to work with Canadian Licensed Producers as a contract manufacturer of approved cannabis products as well as to perform research and development activities to develop novel extraction methods and product formulations.

Keystone Labs will also be able to send, transport and deliver legal cannabis throughout Canada. The ability to send and transport is important, as it will allow Keystone Labs to partner with other third-party test labs to outsource testing that we currently offer our clients and vice versa. We are favorable on the leverage to Canada and believe that this significant enhances the company’s value proposition.

Executing on All Cylinders

During the last year, EVIO has raised capital and has been putting this money to work in ways that will prove to be accretive to the business. The company has been focused on growth and has been executing on all cylinders. The company has significantly improved its capital position and we are monitoring how the team executes from here.

We are favorable on entrance into new markets and these developments are in-line with EVIO’s growth strategy. The California, Colorado, Florida, and Massachusetts marijuana markets are attractive due to their growth potential and diverse geographic location. As demand for legal marijuana continues to increase, EVIO will benefit from the increased demand for testing services.

During the last month, EVIO has plunged lower and momentum is trading near oversold levels. The shares have fallen more than 50% from its recent highs and we are monitoring how the shares trade from here. EVIO is an undervalued and underappreciated opportunity with a market cap that is below $15 million. With the attractive leverage to states like California and Florida, we consider EVIO to be an opportunity worth watching and are closely monitoring the shares from here.