Steep Hill Labs
Steep Hill Labs, based in Berkeley, California, opened its doors in 2008 and since then has become the largest cannabis lab in not just the nation, but the world. Currently operating in seven states, Steep Hill also has a global footprint, according to Tony Daniel, a gregarious, articulate man who serves as chief revenue officer for the company.
“We are the largest testing network in the world, and we have the largest cannabis brain-trust in the world,” he said. “Canada, Mexico, Israel, and we just finished our deal with Spain yesterday.”
But Steep Hill was founded in California, and it intends to remain a dominant California player, no matter the cost. “We have an interesting situation here in California,” noted Daniel. “When you look at the regulations and requirements for field testing, the state is asking labs to take on an enormous infrastructure burden to do this. Labs are already the most cost-intensive in terms of equipment and staff and the level of expertise required, and the barrier to entry is extremely high. When you add in ISO certification for every method and every location, it becomes even higher.
“That’s good on the one hand, because we want competent, qualified experts in this field,” he continued, “but in a state as large as California, it’s also a bit problematic. When you factor in that you need to have sampling staff in the field with a certain level of expertise about both cannabis and science, collecting samples with tongs and gloves, fully suited up, it could take fifteen to thirty minutes to do one sample of a fifty-pound batch in the field. Considering growers are harvesting four, eight, and ten thousand pounds, suddenly you need an army of people.
“There are only a few labs I know of that are taking a run at the entire state,” he added, “and we are one of them. We will service from San Diego to Redding.”
One of Daniel’s main concerns is the ability of smaller, regional labs to keep pace with demand. “One of the things that will manifest here is, because of the barriers to entry, you’ll have regional players who are simply limited by geography,” he said. “This will produce players of middling potential competence that can only grow to a certain degree, which will give [Steep Hill] an advantage. In terms of the overall pool of knowledge to draw from—methods, R&D, product development—it’s very difficult to be a world-class lab.”
Achieving such an advantage is not cheap. “It costs me about a million dollars to process fifty samples a day,” said Daniel. “That’s not necessarily proprietary information, but do the math and sort of let that detonate in your head. Here’s where we’re going: We will be hands down the single largest cannabis testing lab on the planet, and will be for years to come, because we are scaling to several thousand samples a day.”
Like SC Labs’s Santa Cruz facility, Steep Hill’s main lab in Berkeley is undergoing profound changes. “We are full-steam ahead, doors open, doing business, and scaling at the same time,” said Daniel. “We’re maximizing every square foot of this facility and will be moving into a 40,000- to 50,000-square-foot lab facility, and there also is a third administrative facility we’re moving into this week. This will be the largest cannabis lab in the world.”
In addition to the main labs, Steep Hill Express locations offer clients access to limited services closer to home. “Steep Hill Express aren’t just remote locations,” explained Daniel. “We call them field offices and will have some level of testing capacity, potency and perhaps microbial, depending on the needs of the area.
“Here’s what will happen,” he continued. “We’ll be moving our office from Van Nuys to Long Beach and opening Palm Springs and San Diego, as well. So, we will either send someone to you, or if you are non-regulatory or you can possibly come to the location, you can drop offyour sample and in twelve hours it’s going to be [in Berkeley]. Turnaround will not be affected. We will have a statewide same-day transport system.”
In terms of anticipated demand, Daniel said, “We’re scaling our capacity to address the need we see. We’re basically looking at what is being grown and how the market is going to evolve and shooting to have the largest lab-testing capacity in California. We will be servicing clients large and small.”
On that last point, Daniel opined scale is the solution. “Remember that million dollars for the fifty samples? That requires two or three highly educated people. So, if you are a lab sitting somewhere with two or three people, you’ve got no redundancy, you’re cranking through your fifty samples a day, something breaks down, and suddenly your turnaround time goes to twenty days. And, on the back end, you have to analyze these results, which takes hours. I just don’t know how they can do it. I wish them success, because there’s a need for more than one player in the state, but at a certain point it becomes onerous.”
Daniel sees the types of services people need also evolving. “The customer pool is shifting, and the thing people will quickly realize is the importance of non-regulatory—or, let’s call it upstream preregulatory—testing throughout the harvest cycle to make sure there are no pesticides. Once something’s been harvested, making sure there’s no microbial contamination. As it goes through the manufacturing process, making sure no other contaminants are being introduced, like residual solvents and things like that. With what’s at stake in each regulatory test, upstream testing becomes incredibly valuable. I anticipate as we see start to see the first crop of failures, we will see the perceived value of upstream testing increase.”
Likewise, many people may opt to test smaller batches. “We’re a state with a fifty-pound batch potential, but you have to be pretty confident in your product to test all fifty pounds,” opined Daniel. “Let’s say it’s $2,000 a pound. You’re putting $100,000 worth of product on the line for one test. If you’re willing to roll the dice like that, you need to make sure that when you do roll the dice the odds are stacked in your favor.
“Say I was a collective with 200 outdoor growers flowing into my system,” he continued. “I would be testing ten-pound batches, which was the size originally prescribed. The costs would be great, but the risks would be exponentially higher than if you were an indoor operation that was contained, where you know all your inputs and outputs.”
The point, added Daniel, is Steep Hill developed an entire department of cultivation scientists for exactly those reasons. “If you’re a distributor, we can go in early to all your vendors and growers and test the air, the soil,” he explained. “We can test the product to make sure you’re good with all your environmental factors, even make sure you’re Cal/OSHA compliant, so that you have the very best chance when it comes to passing the regulatory test.”
Steep Hill has no illusions about the challenges facing California, especially the readiness of growers to adapt to the realities of regulation. “We have an industry that’s been medicinally legal for twenty years, totally unregulated,” said Daniel. “You have growers in the black market, the gray market, and the medical market with a product that is more valuable than gold. The incentive is to maximize yield, which has created an ironic situation where you are maximizing yield on a medicine using terrible growing practices. That has led to a ubiquitously tainted supply in California. And the growers, who have thus far resisted change rather than going, ‘Okay, we know regulation is coming, so we’re going to change our ways two years out,’were harvesting to the maximum up until this December. Now they think they’ve got a year to get their stuff together. However, regulations started January 1. There is a misconception out there that there is a grace period for testing, but everything after January 1 must be tested and the results have to be reported. The farmers can adapt, but it’s going to be a rough re-entry into the atmosphere here.”
Other challenges face the state’s farmers. “What we’re seeing play out, especially in Northern California, is a drama,” Daniel said. “Let’s just take Salinas and Northern California. You’ve got your Pabst Blue Ribbon of weed and your Lagunitas IPA. What we will watch play out over the next year is whether the collective model in Northern California will survive. Let’s say you’re a collective like Flow Kana, which has hundreds of growers filtering to a central brand. Can that panoply of growers in all their variety of growing conditions survive the gauntlet of a fairly rigorous testing process? I think that remains to be seen, but I believe the fate of the small grower rests in the success or failure of the collective strategy.”
In California cannabis, it seems readiness is a fluid concept. “Readiness means all sorts of things,” said Daniel. “There’s lab capacity, the fitness of the products as they go through the process, and there are the brands getting relationships into place with distributors who are only just now getting their act together in terms of testing. We’re all stretched for real estate, for instance. Many distributors I am speaking with tell me they have one facility here and two more pending elsewhere, but they can’t get the process going. They’re just looking for warehouse space they thought they’d have nailed down six months ago.”
Another concern is potential lack of enforcement by the state. “When we look at other states, where you had regulation without enforcement, it was a recipe for total chaos. If those situations emerge and the state is not enforcing the regulations, what you will have is massive corruption. You’ll have labs with a huge incentive to falsify results to keep their clients or to reduce their cost of goods by simply not testing product and just generating results.”
Washington state proved one such example. “They massively over-licensed the sector,” explained Daniel. “There are about twenty-two labs for a state a fraction the size of California, and you have had no enforcement up until recently. This has allowed the percentages of THC to be massively inflated and contaminants to be underreported. You can walk into any dispensary in the state and get 32-percent weed, which is virtually impossible to produce.”
In that regard, Daniel is optimistic about California, despite what he calls its “patchwork of confusion that will slowly resolve itself over time,” with “sales pushed by the winds of tax revenue. We have the pains, lumps, and bruises from these other jurisdictions, but it’s going to be different in California,” he said. “In other states, the industry has grown with regulations. Here, we are layering regulations on top of the largest cannabis industry in the world.”
What does concern Daniel are the pinch points all labs are experiencing. “One is the longer testing cycle necessary to go through the full set of regulations,” he said. “I’m thinking about a year from now. Other agricultural industries have turnaround times right around ten business days, but in cannabis no one wants to sit on cannabis for more than 10 days. The cost of inventory per day is potentially tens of thousands of dollars, and we’re sitting on that money. The best you can do is have redundancies so that if anything goes down, you are never offline [because] you’re working three shifts. I do not know how a regional boutique lab is going to do it, unless we have this big ecosystem of R&D labs just doing science projects.
“We will be all right,” he added, “because we are staffing up, bringing in another 150 people here. We were at about thirty-five in June, we went to about sixty by November, now we’re around seventy, and by the end of the year we will be at 200 or 250 employees.”
Steep Hill Labs should be more than all right, even when Big Lab comes calling. “There are other labs eyeing the marketplace, but we’ve been around for ten years,” said Daniel. “We’re the first cannabis lab in the world, we developed the original methods for analyzing this stuff, and we have the deepest well, with 500 million data points on every genetic data stream in the world. If you’re a big player, you have to look at someone like us and say, ‘Well, rather than steamroll you, we’d like to play together.”
