The legalization of cannabis in Canada - only the second country after
Uruguay to do so - presents a huge business opportunity here and elsewhere.
The global cannabis market is expected to hit $146 billion by the end of
2025. Most of the action is expected to be centered in North America.
For more on the blue-sky potential of the US cannabis market, read our
‘For Canadian cannabis companies, the US is the prize.’
Along with the sale of marijuana/ cannabidiol (CBD) products including
dried material for smoking, paraphernalia and edibles, cannabis testing will
be a key, and extremely lucrative, sub-market.
Currently there is no universal method for testing cannabis products. But
as regulated cannabis markets continue to emerge in North America (Canada and
11 US states now have legal marijuana, sold for medicinal and recreational
purposes), there is a growing need for a system of rapid and effective
cannabis testing. The testing market is pegged at $300 million in Canada,
just over double that in the United States, and $2.75 billion worldwide.
FluroTech
One company aiming to grab a piece of this lucrative trade is
FluroTech (TSX-V:TEST, OTCQB:FLURF).
The Calgary-based company started about two and half years ago through a
collaboration between the CEO, Danny Dalla-Longa, and the CTO, Dr.
Elmar Prenner, a biochemistry professor at the University of Calgary who
had been researching a drug testing device using fluorescence spectroscopy.
This technology employs a beam of ultraviolet light to excite the
molecules of the compounds being tested, causing them to emit light.
Eyeing the marijuana and hemp markets in Canada that would spring forth
from legalization, the pair decided to focus the development of the device on
cannabis testing.
Together with Curtis Smith, the CFO, and Gary Jones, VP Business
Development, the four brought the company public through a $9 million
financing that closed in March. COO, Rex Kary, is the latest addition to the
team.
FluroTech is the first-mover in this space with disruptive
spectroscopy analytical testing devices. There are currently no public or
private companies with similar technologies for cannabis testing.
The company’s revenue model involves selling testing devices to licensed
cannabis producers, retailers, companies that do drug testing, and law
enforcement agencies. The buyer would purchase a testing device plus a “scope”
that slots into the device for each type of test – THC/CBD, pesticides, heavy
metals, etc. Each test (“lab kit”) would be priced individually or bundled
per month.
Why is testing important?
Like any food or beverage, the most important consideration in conducting
commerce in that product is that it’s safe to consume. Cannabis products are
no different, and the fact that one of those product families, marijuana,
gives the user a high, adds an extra layer of responsibility on the part of
growers and dispensaries to ensure that the product inside is a true
representation of the packaging.
The whole point of legalization is to remove the black market in cannabis
products, and while the illegal market has not yet been eliminated, a
regulated market where products must be tested for sale is a marked
improvement.
However, according to Kary the biggest problem with testing cannabis in
Canada right now is the lack of consistency across testing laboratories. The
country’s plus 150 licensed producers (LPs) must have their cannabis products
tested by one of the 42 independent labs approved by Health Canada prior to
sale. The labs screen for THC, CBD, pesticides and chemicals, heavy
metals and mold.
The trouble is, each laboratory has its own testing protocol, meaning that
the results between labs can differ significantly. That isn’t good for the
grower, the dispensary or the user. Growers want assurance tests are
accurate, dispensaries want a reputation for consistency and quality. Users
of course, need that same assurance that what they think they are buying is
what they’re getting.
FluroTech’s idea was to come to market with a testing kit that would
provide consistency of results - something the whole cannabis industry could
benefit from. But there’s another type of testing that wasn’t being done,
that the company wanted to capitalize on: in-house testing.
Currently growers that want to test a crop as it’s being grown are only
able to do so by sending samples to a licensed
laboratory. FluroTech wanted to bring testing “in-house” to growers
who could test frequently, thus improving the quality of the product and the
LP’s operation.
“In-house testing is needed to perfect the craft, to put some precision
around the agriculture. That’s the target market that we’re in,” said
Kary, FluroTech’s CTO.
CompleTest™
The testing device developed by Dr. Prenner is
called CompleTest™. It uses spectroscopy and fluorescence to measure the
content of a given attribute including CBD, THC, pesticides and heavy metals.
The device was recently commercialized.
A sample is liquified through a reagent solution, then run through the
device. The sample can also be saliva, used for drug-testing motorists or
employees, one of FluroTech’s four revenue streams discussed below.
Current cannabis testing equipment employs high performance liquid
chromatography (HPLC). The often bulky device tests many molecules
at once, versus CompleTest™ which functions by testing each variable
separately. That makes it more accurate, reliable and repeatable than HPLC
says Dalla-Longa, FluroTech’s CEO, noting it’s the
one-size-fits-all HPLC testing protocol that leads to “cross-lab variability”
in results.
“We’ve literally done thousands of tests where we’re getting the same
result time and time again,” he explained. “The reason why HPLC has this
variability factory is all of the inputs and calibration that are involved
change from operator to operator, and the machines change. If you change a
part in the machine, the result changes. That’s the issue that they have.”
Kary said because CompleTest™ tests each variable one at a time
versus HPLC which tests everything at once, it is much more precise.
“Because we’re detecting one thing, we can do one thing very, very well
and very, very accurately because that’s all we’re measuring,” he said. “When
the user is using our device, the test is done and it says three parts per
billion cadmium, or it says 19.82% THC. There is no interpretation. It’s a
number that comes out that is mathematically produced within the software. It
is extremely accurate.”
4 revenue streams
Cannabis growers
Unlike getting a sample tested in a lab, CompleTest™ can return a
result within minutes, versus days or weeks. This is a big advantage to
cannabis growers because it vastly reduces wait times. It also allows growers
to test plants at any time during the growing cycle, not only the final stage
when the product must be tested to meet Health Canada regulations before
being sold. Frequent, regular testing enables growers to identify pests or
contaminants early on, and to optimize their crops, making them more
profitable.
Harvesting a marijuana batch at the perfect time increases the yield (the
amount of crop compared to the amount seeded) by around 10%; missing that
“sweet spot” costs the grower more in processing costs and revenues, because
THC potency begins to drop quickly if left beyond the optimal harvest time
and the plant is left in the flowering room longer than necessary. Customers
generally pay more for a high-THC strain.
Hemp growers
These days it isn’t only marijuana for sale at dispensaries. A higher
percentage of the cannabis market is being taken by CBD, the part of a
cannabis plant’s extract that does not produce the “high”, but is rather used
to treat anxiety, movement disorders, pain, etc. Of great interest to the
dispensary and the CBD user is the ratio of THC to CBD - hence its importance
for testing. CBD is often extracted from hemp.
The 2018 Farm Bill legalized hemp, opening up a large new market
in the United States to Canadian cannabis/ CBD firms. Currently, TSX-listed
firms are prohibited from setting up operations in the US, because cannabis
is still illegal under federal statute. But the legalization of hemp also
legalized CBD, meaning companies like FluroTech can now do it’s CBD
testing business state-side. Nearly 7% of Americans are reportedly using CBD,
used for its health benefits in everything from drops and oils, to creams,
and even pet food.
“We can’t currently supply to what is the biggest market in the world,
which is the US,” said Dalla-Longa. “With the Hemp Bill, we can go and start
penetrating those markets. From our standpoint, hemp could very well be
bigger than cannabis.”
Large-cap companies like Aurora Cannabis are reportedly buying up tracks
of land to grow hemp.
Even better for FluroTech, there currently isn’t a test for CBD
outside of laboratories; the company plans to target hemp growers for having
the same in-house testing needs as cannabis producers - that is, for
optimizing their crops.
CBD is a valuable hemp by-product. Hemp growers are motivated to produce
CBD, but in doing so, the fibers also contain THC. The level of THC in a hemp
crop is critical, because if it’s over 0.3% THC, the hemp is considered
illegal. Ergo, hemp growers are a captive market for testing equipment.
“They want to use our test, first to determine what is the CBD level and
what is the optimum time for growing and what is the best place to grow. But
second, they want to prove that it is actually hemp,” Kary said.
He added that the company is currently researching how to refine its THC
test to an accuracy level of under 0.3% THC.
Roadside/ workplace testing
One of the greatest concerns about cannabis legalization, from a public
safety point of view, is consumers driving under the influence of THC.
The portability of CompleTest™ makes it ideal for law enforcement
agencies looking for a means of roadside testing. While the Canadian
government has approved one roadside drug testing unit that screens saliva,
it is up to individual police forces to decide what kind of testing equipment
they want to use.
One thing is for sure: the testing units will not be breathalyzers like
the machines police officers carry to screen for impaired drivers. The
federal government has mandated that the testing equipment must be
saliva-based. The equipment must also be able to measure THC, cocaine, and
methamphetamines.
But here’s where technology is running slightly behind law enforcement.
The current saliva-based roadside test only has the capability of
determining whether or not a driver has consumed THC. It can’t
measure the amount of THC in a person’s system. FluroTech’s test
can. The police officer would take a swab from a driver’s mouth, then the
sample would be run through CompleTest™ to determine the amount of the
drug that has been consumed. FluroTech is working towards getting a
result within five minutes, making the device appropriate for roadside
testing.
“We're looking at being the guys in the van who quantify the THC, cocaine,
methamphetamines,” said Dalla-Longa, adding that the government will likely
approve up to five different roadside testing devices.
He also said that FluroTech sees its saliva-screening test as
particularly applicable to worksites, that do drug testing and need to get
the results quickly. Examples could include construction sites, forestry operations
and oil exploration camps.
Biomarkers
Besides applications for growers, law enforcement and industrial drug
testing, FluroTech is also envisioning CompleTest™ being used
for “biomarking” whereby an attribute is placed into every plant grown by a licensed
producer, that can be tracked throughout the plant’s life. Biomarking would
allow customs agents and police to determine whether a plant was produced
legally or on the black market.
Kary noted that biomarking could prove useful especially in situations
like the current cannabis market where there’s a shortage of supply. An
under-supply of cannabis means some illegal producers, and unscrupulous
retailers, may try to pass off the illegal product as legal cannabis. If the
product has been biomarked, it will show up in a test.
A biomarker can be visualized as a kind of “barcode” for cannabis
products. The biomarker allows the plant to be tracked, all the way from a
seedling to the point of consumption.
“We put a unique signature onto the plant or into the extract,” said Kary.
“This signature is what could be purchased by any grower or any processor and
it's unique to them.”
Biomarking would help dispensaries to determine if the cannabis products
they’re selling are legitimate - thus making them safer for consumers and
taking away the liability of licensed producers should an illegal, harmful
product be consumed. Law enforcement agencies - customs and police - could
use biomarkers to enforce the Cannabis Act.
Importantly for the government, biomarking could also help to prevent
missed revenue, from illegal cannabis that is not taxed.
FluroTech has successfully tested the biomarker in laboratories in up
to 30 plants, and is looking at scaling up to see if it works in
bunches of 150, 200, even 2,000 plants. At that point it will be ready for
commercialization.
Catalysts
Getting into TEST at this early stage could prove to be a timely decision.
The company has a number of targets it is planning to hit this year
- all of which, in our opinion, could result in a significant stock
re-rating.
FluroTech has ordered its first production run of 80 units, 70 of
which will soon be ready for sale. The first 70 CompleTest™ devices will
be sold to licensed producers in Western Canada the first half of the year.
The plan is then to scale up to 200 units in the secondhalf, for sale to
Eastern Canada, followed by the rest of Canada and a blitz of smaller “craft”
growers that should take the company to the end of the year. After
that, FluroTech will be looking state-side, in
particular the lucrative California market; where all of Canada has +150 LPs,
California has over 10,000!
Other catalysts include the launch of the pesticides test and the
biomarker test, both expected later this year.
Conclusion
FluroTech is a start-up company with a disruptive cannabis testing
technology. CompleTest™ promises to shake up the way the industry has
conducted its testing, by offering growers the opportunity to test “in-house”
rather than sending samples to a laboratory. This will not only return
results much sooner, it will allow growers to test their crops frequently, at
every stage of the growing cycle, thereby optimizing efficiency and
maximizing profits.
I like the four revenue models. Diversity in a start-up or any company
really, is a smart strategy. Here we have four ways to make money: cannabis
growers, hemp growers, roadside testing and biomarkers. If one revenue stream
is underperforming, there are three others that can make up for it.
I like that FluroTech offers a solution for roadside testing,
which goes a step further than current technology, to measure a driver’s drug
levels. This will help law enforcement to get convictions for those who
foolishly “toke and drive”.
And I really like the biomarkers. This is an extremely clever way to track
a cannabis product from seedling to the point of consumption. Just about all
industry players can benefit from biomarking: licensed producers, retailers,
consumers, police, and even the government, which represents (or is supposed
to) Canadian citizens on which tax revenue from cannabis will be spent (or
should be).
Finally, I notice that compared to its peers, TEST is undervalued. While a
direct comparison is difficult, since there do not appear to be other
companies that offer similar technology, the closest would
be Cannabix (CNSX: BLO). Its signature product is a THC
breathalyzer, which as mentioned above, is not permitted by the government
for roadside testing. BLO has a current market capitalization of $150 million
and trades at $1.48 a share (Monday close). Stock in TEST can be purchased
for a third of BLO, $0.52 on Monday, and it has a market cap of $27 million.
This suggests to me that TEST
might be undervalued by the market right now, considering its four
revenue models and sophisticated testing technology, versus BLO’s one revenue
model and a technology that cannot even be sold in Canada.
For all of these reasons I have TEST on my radar screen.
Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or
the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained from sources he
believes to be reliable but which has not been independently
verified. Richard Mills makes no guarantee, representation or warranty and
accepts no responsibility or liability as
to its accuracy or completeness. Expressions of opinion are those of
Richard Mills only and are subject to change without notice. Richard Mills
assumes no warranty, liability or guarantee for the current relevance,
correctness or completeness of any information provided within this Report
and will not be held liable for the consequence of reliance upon any opinion
or statement contained herein or any omission. Furthermore, I, Richard Mills,
assume no liability for any direct or indirect loss or damage or, in
particular, for lost profit, which you may incur as a result of the use
and existence of the information provided within this Report.
FluroTech (TSX-V:TEST, OTCQB:FLURF) is an advertiser on
Richard’s site aheadoftheherd.com.
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