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Imagine walking into your local liquor store to pick up a bottle of wine.
You have a few favorite varietals in mind, but you don’t trust the alcohol
percentages you see on the labels. Last week you bought a Cabernet-Sauvignon
from Chile, supposedly 14% alcohol by volume (“ABV”), but it took three
glasses to feel anything. The week earlier though, another brand of
Cab-Sauv from Chile packed such a punch, you fell asleep after two
glasses. Both claimed to be 14% ABV. What gives?
Of course, this is an imagined scenario; standardization of ABVs for all
types of alcohol has been in place since the end of Prohibition. Not so for
the burgeoning cannabis industry.
Nine months into legalization, the potency variability of both marijuana
and hemp plants is a problem associated with legalized cannabis in Canada and
half a dozen US states.
Indeed the “cross-variability” of a particular strain, or batch, is
an issue that affects everyone from the grower to the consumer.
Canadian start-up FluroTech (TSX-V:TEST, OTCQB:FLURF) is offering a
solution to the problem. The Calgary-based Company has an extremely accurate
means of measuring both the strength of cannabis and its purity - the latter
referring to a product’s low or non-existent levels of impurities like mold,
pesticides and heavy metals.
Need for testing
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 as compared to the United States - and $2.75 billion worldwide.
FluroTech is the first mover in this space with portable spectroscopy
analytical testing devices.
The testing device, called CompleTest™, uses spectroscopy and
fluorescence to measure the content of a given attribute including CBDA and
THCA, which are the acid forms of THC and CBD present in cannabis plants
before combustion or vaporization. The Company will be releasing a test for
mold, pesticides and heavy metals as well as THC and CBD for extracts and
processed products. The device has been commercialized.
TEST’s revenue model involves selling testing devices to licensed
cultivator’s cannabis producers, retailers, extractors and companies that do
drug testing. The buyer would
purchase a testing device plus a “scope” that slots into the device for each
type of test – THCA/CBDA, pesticides, heavy metals, etc. Each test or assay
(“lab kit”) would be priced individually or bundled per month.
The Company is also pursuing the use of CompleTest™ in workplace
testing, law enforcement, the hemp market for CBD products, and “biomarking”
- whereby a compound is placed into every plant grown by a licensed producer
(“LP”) that can be tracked throughout the plant’s life, all the way from
processing to the end product that is consumed.
Of great interest to the dispensary and consumer is the THC level in
cannabis. Or, in the case of CBD products, the amount of cannabidiol. Some
cannabis consumers want high THC content in their bud, while others prefer
something less potent. This is mirrored with buyers of CBD products.
But early testing has its advantages far before the final test for potency
is conducted on the strain that is distributed to dispensaries.
Unlike getting a sample tested in a standard, third party 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 growth
cycle instead of only at the final stage when the product must be tested to
meet government regulations before being sold.
Frequent, regular testing enables growers to identify pests or
contaminants (heavy metals, insecticides, herbicides, mold), early on, and to
optimize their crops, making them more profitable. It also gives consumers
more confidence that the company they are buying from, delivers a quality,
contaminant-free product that also offers consistent dosing (potency). The
worst kind of publicity for an LP is the discovery of a tainted crop
that has to be pulled from shelves.
The need for testing has become even more relevant in Canada's run-up to
the legalization of cannabis edibles in December. The new regulations will
include inhalable extracts, foods, beverages and topical applications like
lotions. Ottawa is reportedly
restricting the potency of edibles to 10 milligrams of THC - the low
limit has invited criticism from those who say it won’t do away with the
black market, where pot-infused foods can contain up to 80 mg. THC.
Over-precaution aside, the edibles market is large enough to make an LP
salivate. According to a report
from BDS Analytics, North American consumers spent $1 billion USD on
edibles in 2017. The market is expected to grow to $4.1 billion USD by 2022.
Cross-variability; an industry problem
As previously mentioned, the current state of cannabis testing is
unreliable, with different testing laboratories failing to produce consistent
results. Even if labs use the same technology (e.g. high-performance liquid
chromatography (HPLC)), which separates and evaluates a mix of chemicals in a
liquid solution - the results can vary wildly, discrediting the cannabis
testing sector.
The same batch of cannabis tested by different test labs will also produce
significant variability. Labs have various protocols and calibration
techniques, resulting in different recorded potencies.
Consider a study done by the Washington Cannabis Farmers Council. A
cannabis sample was sent to eight labs in the state, which legalized
recreational weed in 2012. The THC
potency results varied from 13.37% on the low side to a
high of 26.9% - showing a variability of approximately 100%!
The cannabis industry is well aware of the problems with HPLC
testing.
“There are a tremendous number of questions around the reliability of the
data that’s being generated by cannabis laboratories,” said Jeremy
Applen, owner of New Mexico’s first state-approved testing laboratory.
“If you don’t have robust standards around cultivation, manufacturing, or
distribution, you don’t really know what chain of events occurred prior to
that product being identified as potentially adulterated.”
Therefore, as the cannabis industry continues to grow, with more and more
states legalizing and even the US federal government mulling it, there is an
increasing demand for testing labs to perform potency, safety and quality
tests on ever-increasing quantities of product.
To do that, the industry will need to come up with more reliable testing
methods, regulations and standards. And solve the cross-variability puzzle.
There are several aspects to the problem, which we will aim to summarize
here.
The first thing to understand is that the plant being tested is not in
itself homogenous. That means when cannabinoids are extracted into a liquid
for analysis, it’s difficult to find a batch where all the ingredients are
the same. For example, the trichomes - small hair-like crystals on the
marijuana bud - may be distributed differently from one batch to another.
Second, while Health Canada-approved labs may use the same HPLC technology
and instrumentation, their testing methods may differ, producing different
results.
And third, there may be variation between testers, with some employees of
test labs lacking training or experience or the testing equipment may not be
used properly. The old saying “garbage in, garbage out” is relevant here.
The end result is the plant sample sent by the grower may come back
with an unexpectedly high or low level of THCA or CBDA, which can be
frustrating to the grower, especially since standard wait times for results
range from a week to 10 days. It may even result in a crop being destroyed
other case of finding contaminants, at great expense to the grower.
Another issue present is variable “cannabinoid standards”. In Canada, when
a new lab wants to get certified by Health Canada to conduct cannabis
testing, it must first go to a certified lab to obtain standards of testing,
such as how high of a concentration they are allowed to test (e.g. 1 mg/mL).
The new lab will then develop its own method of testing based on the
certified lab’s cannabinoid standards. Different labs use standards that
differ slightly in concentration, thereby allowing for variability in test
results as compared to other labs.
Then there are the problems with the labs themselves. Forbes
mentions this in an article where it pithily headlines ‘Cannabis lab
testing is the industry’s dirty little secret’. In the United States this
means that “not all labs are created equal”, meaning that some labs are more
“industry-friendly” than others, by rejecting few batches. This is
facilitated by a lack of government oversight. Forbes states:
The labs themselves aren't inspected or graded by any agencies and
customers have no idea whether or not products were tested at a
reputable lab.
Some believe that the problem is standardization, but there are plenty
of state standards -- the real problem is enforcement.
Marijuana with a higher THC content is generally considered by consumers
to be of higher quality, therefore it commands a higher price. This can
affect how a batch is tested. The higher price incentivizes growers to
produce marijuana with more THCA, and some unscrupulous labs can help the
grower to achieve its goal. Or, an unethical LP could send in another batch
for testing, higher in THCA, than its own, without the lab knowing it.
Tightening up the math
As a first mover in the cannabis testing space with a disruptive testing
technology, FluroTech has taken it upon themselves to run a battery
of tests in order to show cross-variability and the consistency/
repeatability of its testing protocol.
The company has gone out to multiple LP’s and tested, so far, about 60
marijuana strains. It ran the tests internally using several testers on different CompleTest™
machines. FluroTech also sent its samples to an outside lab to
confirm the results were the same as the “listing” (potency) of
that particular strain.
“Rather than just relying on the standard that came in we run a test the
same way every time, we double check by looking to outside sources, and by
comparing different producers to different producers' listings, we're
tightening up our math,” says FluroTech COO Rex Kary.
Cross-variability experiment
The company also compared its own internal testing to that of third-party
laboratories. TEST first obtained two marijuana samples from a dispensary. It
divided the samples into ground-up plant material, the whole flower/bud, and
an extract. Those samples were then sent to five different labs, which
measured the potency (THCA and CBDA) of the samples according to their
testing methodology.
FluroTech ran its own in-house testing of the samples then compared
the results to those of the five third-party labs. It expected to prove both
cross-lab variability and the better accuracy of its own testing. The Company
was also hoping to prove that its results are repeatable, by comparing
samples tested at FluroTech’s facilities over the course of several
weeks. The results (above) speak for themselves – besides being
cheaper FluroTech’s CompleTest™ was faster as it’s done in house in
a matter of minutes and showed superior consistency between tests.
Earlier, a THCA standard tested 25 times by CompleTestTM showed
the device’s capability of delivering the same results time and again, with
very low variance. The ability to replicate results provides LP’s the ability
to know the potency and purity of their product before harvesting.
 
Low barrier to entry
As a company, FluroTech isn’t only about the science behind
cannabis testing; while the lab techs pour over samples and test results, its
sales team is taking CompleTest™ on the road.
FluroTech’s beta program involves leaving several CompleTest™
units at LP’s for them to try out. The hope is for all of those “betas” to
convert into sales. The sales territory begins in Western Canada, to be
followed by a pivot to Eastern Canada, before spreading stateside for hemp
testing - and even into the Caribbean.
Good old-fashioned networking has proved fruitful. The sales team has
attended all the major conventions, including the recent C-45 Quality Summit
in Winnipeg. They won best new technology at a Vancouver conference in
January debuting the testing device.
“Most people in the industry already have a fairly strong understanding of
the problems within cross-lab variability, so it’s very refreshing for them
to hear something so accurate like our machine can be brought into their
facility,” said Zack Kary.
“The ability to test plants throughout the growth cycle is also well
received. This gives them the ability to really rein in on the exact point of
harvest that would benefit them. So, keeping the highest potency, not wasting
any energy on nutrients, water, light, that sort of thing, and just
optimizing crops. That’s the main thing I've been seeing LPs get really
excited about.”
Eric Entzsaid while talking to LPs, informing them of CompleTest™’s
ability to reduce bottlenecks, time constraints and loads on QA staff, “it’s
not even a matter of sales”, meaning the conversation is more about filling a
need:
“It’s very low barrier to entry in terms of getting in with these LPs
because they all, like Zach said, understand it. They say it’s lab one versus
lab two,” in terms of getting variable results.
He noted that some LPs tell him a 1% bump in plant potency represents a 9%
increase in revenue from that crop. “So, when they hear that what we have can
save them time, money, and effort, well, it’s very simple.”
Matt Gibsonchose consistency of results as an important attribute
of CompleTest™ that LPs are looking for: “To be able to have that in
your own hands gives you as a LP much more confidence in the product that
you’re going to eventually sell.”
Finally, Mauricio Airias,
who leads the FluroTech team of R&D scientists,noted
the flexibility of having a simple to operate testing instrument in-house,
that can quickly test several samples, in different growing periods and
conditions, without reliance on an outside lab, is a real game-changer for
growers he has spoken with.
“It is perfect for them to have something on hand that is easily available
that pretty much any person with limited training can start using the
equipment and get reproducible and accurate data. I think that's the most
important aspect of the instrument.”
CompleTest™ enables continuous
testing - croptimization - which means a plant’s peak potency
period is more easily identified. A 1% increase in THC potency = 8.3%
increase in revenue
Of course, cost saving is a key part of the value proposition. Out of a 55
to 60 day grow cycle, having an in-house testing device and testing protocol
can potentially knock five days off the harvest cycle. That can significantly
cut a producer’s costs, because they are not wasting nutrients, electricity,
or taking up space in their grow room with plants that could be harvested.
Conclusion
FluroTech (TSX-V:TEST, OTCQB:FLURF) has a disruptive testing
technology, CompleTest™, with the ability to transform the cannabis
sector, through a marked improvement in the reliability and repeatability of
cannabis testing. If successful, the Company could be the first to create a
standardized testing regime for marijuana and hemp plant material, that could
one day equal the alcohol industry.
I am following developments at TEST with interest as it continues to prove
its game-changing technology in a blooming industry that appears to be the
perfect fit.
FluroTech
TSX-V:TEST, OTCQB:FLURF
Cdn$0.35 June 28th
Shares Outstanding 54.2m
Market cap Cdn$18.9m
FluroTech website
*****
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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.
Richard does not own shares of FluroTech (TSX.V:TEST). TEST is
an advertiser on Richards site, aheadoftheherd.com
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